Could taxpayers move a 2008 Virginia NOL deduction to 2007 because an other-state tax credit prevented a cash refund for 2006?

Plain-English summary

Virginia would not let the taxpayers move their 2008 net operating loss deduction to 2007 because it had already been fully absorbed in 2006. Federal law then generally carried an NOL back two years before carrying any remainder forward, unless the taxpayer elected to waive the carryback.

Virginia did not follow the temporary federal five-year carryback, so 2006 was the proper first Virginia year. The deduction reduced 2006 FAGI and Virginia tax liability to the extent required.

The taxpayers received no additional cash refund because an other-state tax credit had already eliminated their 2006 Virginia liability and all Virginia payments had been refunded or moved to 2007 estimates. That interaction did not mean the NOL was unused. A reduced liability was the tax benefit, even without another check.

What this means for you

• Follow the NOL carryback sequence in effect for the loss year.
• Distinguish use of a deduction from receipt of a cash refund.
• Other-state credits can eliminate payments without preserving the NOL.
• Track how amended returns affect FAGI, liability, credits, refunds, and estimates separately.

Common questions

Q: Why did Virginia use 2006 rather than the federal five-year period?
A: Virginia did not conform to that special five-year carryback rule.

Q: Was the NOL unused because no new refund issued?
A: No. It fully reduced 2006 FAGI and Virginia liability.

Q: Could the deduction then move to 2007?
A: No.

Citations and references

• Va. Code § 58.1-301(B)(2).
• 23 VAC 10-110-84.
• IRC § 172(b)(1)(A), § 172(b)(1)(H), and § 172(b)(3).

Subject

Carryover of a net operating loss deduction.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-150

Original ruling text

August 26, 2011

Re: Request for Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling concerning the carryover of a net operating loss deduction (NOLD) for individual income tax purposes. I apologize for the delay in the Department's response.

FACTS

* (the "Taxpayers") incurred a net operating loss (NOL) on their 2008 federal income tax return. For federal income tax purposes, the Taxpayers carried back the 2008 NOLD to their 2004 through 2006 income tax returns. Because Virginia does not conform to this federal five-year NOLD carryback rule, the Taxpayers carried back the 2008 NOLD to the 2006 taxable year.

The Department processed the 2006 amended return but could not issue a refund because the Taxpayers had claimed a credit for taxes paid to * (State A) on their original return and all taxes paid to Virginia had been refunded. The Taxpayers request permission to apply the 2008 NOLD to the 2007 taxable year.

RULING

Virginia income tax laws do not address the computation or application of NOLDs. Nonetheless, Va. Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC), with certain exceptions, unless a different meaning is clearly required. For individual income tax purposes, Virginia generally "conforms" to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI).

Under one of the conformity exceptions, Virginia does not allow the five-year carryback period permitted under IRC § 172(b)(1)(H). See Va. Code § 58.1-301 B 2. With the exception of this federal carryback provision, Virginia allows federal NOLDs to the extent that they are included in computing FAGI. See Title 23 of the Virginia Administrative Code (VAC) 10-110-84.

Generally, IRC § 172(b)(1)(A) permits NOLs to be carried back two years and carried forward 20 years from the year of loss. Taxpayers may, however, elect to forego the NOL carryback pursuant to IRC § 172(b)(3). Unless such an election is made, the NOL must first be carried back to the earliest of the carryback years. The resulting NOLD, to the extent it exceeds taxable income for the taxable year to which it is carried, is carried forward to the next earliest taxable year in chronological order until it is completely absorbed.

For the 2006 taxable year, the Taxpayers filed a Virginia individual income tax return as residents and a State A nonresident return. Based on State A's method of computing taxable income of nonresidents and higher tax rates, the out-of-state tax credit eliminated the Taxpayers' entire Virginia liability and all payments made toward the 2006 taxable year were either refunded or credited toward 2007 estimated payments. Consequently, when the Taxpayers filed the amended 2006 Virginia return, there were no tax payments left to be refunded.

Under Virginia's conformity with federal statutes, the Taxpayers properly carried the 2008 NOL back to the 2006 taxable year. The entire amount of the 2008 NOLD wars used to reduce the Taxpayers' 2006 FAGI. As a result, the Taxpayers' 2006 Virginia tax liability was reduced. Thus, the Taxpayers did receive the tax benefit of the 2008 NOLD.

The Taxpayers assert that the interaction between State A's tax laws and Virginia policy cause the Taxpayers to lose the tax benefit of the NOLD. Under State A's rules, nonresidents are required to make an addition for NOLs occurring in other states. Thus, the Taxpayers' 2006 State A tax liability was not reduced by the 2008 NOLD. Likewise, because the out-of-state tax credit offset their Virginia liability in its entirety, the Taxpayers were not able to claim a refund of Virginia income tax as a result of the 2008 NOLD carryback. Because they did not receive the tax benefit. from the 2008 NOLD, the Taxpayers assert that they should be able to carry the NOLD forward to the 2007 taxable year for Virginia income tax purposes.

Under the federal statutes to which Virginia conforms, however, the 2008 NOLD would not be permitted to be carried forward because it was used in its entirety to reduce FAGI for the 2006 taxable year. Further, as indicated above, the Taxpayers did receive the benefit of a reduced Virginia income tax liability for the 2006 taxable year even though they did not realize an additional refund as a result of the credit for taxes paid to State A. As such, the Taxpayers may not carry forward the 2008 NOLD to their 2007 Virginia income tax return.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia and regulation sections cited are! available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1-4784492147.o