Could a corporation carry forward a federal 2011 net operating loss when Virginia fixed-date conformity adjustments eliminated the Virginia loss?

Plain-English summary

Virginia denied a corporation's claimed 2011 net operating loss carryforward. For Virginia purposes, federal taxable income had to be adjusted by fixed-date conformity additions and subtractions before determining whether a loss existed.

The corporation's additions exceeded its federal loss plus subtractions, leaving no Virginia NOL for 2011 and nothing to carry into 2012 or 2013. The 2013 assessment remained.

Citations and references

• Va. Code § 58.1-301
• 23 VAC 10-120-325
• I.R.C. § 172
• P.D. 16-22

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 18-127

Original ruling text

June 26, 2018

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek correction of the corporate income tax assessment issued to * (the “Taxpayer”) for the taxable year ended December 31, 2013. I apologize for the delay in responding to your appeal.

FACTS

The Taxpayer reported a net operating loss (NOL) for the 2011 taxable year. It carried the loss forward offsetting its federal taxable income for the 2012 and 2013 taxable years. The Department adjusted the 2011 NOL to reflect the balance of the fixed date conformity adjustments, resulting in an assessment for the 2013 taxable year. The Taxpayer appealed, contending that it properly calculated its net operating loss deduction (NOLD) carryforward.

DETERMINATION

Generally, Virginia income tax law does not address the NOLD. Nonetheless, Virginia Code § 58.1-301 provides, with certain exceptions, 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) unless a different meaning is clearly required. Because Virginia starts its computation of corporate income tax with federal taxable income (FTI), the Department allows an NOLD to the extent it is allowable in computing FTI as calculated for Virginia income tax purposes.

Title 23 of the Virginia Administrative Code (VAC) 10-120 325 provides the methodology that a corporation must use to calculate the NOLD carrybacks and carryforwards for purposes corporate income tax. Under this regulation, a Virginia NOLD modification must be determined for the taxable year in which an NOL occurred. This Virginia NOLD modification must be carried back and forward in the same manner as the NOLD.

Fixed date conformity additions (FDCA) and subtractions (FDCS) are not considered Virginia modifications. Rather, these exceptions identified in Virginia Code § 58.1-301 are added to or subtracted from FTI as computed under the IRC in order to determine a corporation's FTI for Virginia income tax purposes. See Public Document (P.D.) 16-22 (3/8/2016). A corporation's Virginia FTI is calculated by starting with FTI as reported on the federal income tax return, adding the FDCA, and then subtracting any FDCS. The formula for determining Virginia FTI would be as follows:

FTI + FDCA - FDCS = Virginia FTI

For Virginia income tax purposes, a corporation will have an NOL only if the formula results in a number that is less than zero. If FDCA exceeds the total of a loss reported on a federal return plus FDCS, the corporation will not have an NOL for Virginia income tax purposes. Conversely, if FDCS exceeds FTI plus FDCA, the taxpayer will have NOL for Virginia even if it does not report an NOL on its federal return. Such an NOL can be carried back and forward in accordance with the rules established under IRC § 172, except for the five year carryback allowed under IRC § 172(b)(1)(H). See Virginia Code § 58.1-301 B 2.

In this case, the Taxpayer carried its 2011 federal NOLD forward and offset the loss against its 2012 and 2013 FTI. However, the Taxpayer did not adjust its FTI by the fixed date conformity additions and subtractions in accordance with Virginia's conformity to the IRC. Because the Taxpayer's 2011 FDCA exceeded the total of FTI and FDCS, the Taxpayer would not have been considered to have an NOL for the 2011 taxable year. Accordingly, the Department's adjustment of the NOLD carryforward is upheld, and the Taxpayer's request for the abatement of the Virginia corporate income tax assessed for the taxable year ended December 31, 2013 is denied.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/1394.B