Is a corporation's NOL carryback refund time-barred by a late-submitted federal Form 870 when the Department never finally denied the original, timely refund claim?

Plain-English summary

A corporation timely filed its 2008 Virginia return reporting a net operating loss (NOL) and, in October 2012, timely filed to carry the loss back to 2006 and 2007 and recover tax paid. Reviewing the claim, the Department found no 2007 Virginia return on file and asked the corporation to file one and to prove the IRS accepted the carrybacks. The corporation filed its 2007 return in February 2019 and, in April 2019, submitted a federal Form 870 (and a Form 4549B excerpt) confirming the IRS agreed. The Department then denied the refund, reasoning the Form 870 -- approved by the IRS in November 2015 -- reached the Department more than a year later, past the limitations period.

The Commissioner reversed and allowed the claim. The key is which limitations rule applied:

• Va. Code Sec. 58.1-311 requires reporting a federal change within one year of a final determination, and Va. Code Sec. 58.1-1823 A (ii) lets a taxpayer file an amended return within one year of a final federal change (a Form 870 agreement counts, per 23 VAC 10-20-180 B 2). Those rules govern refund claims triggered by a federal change.
• But this refund wasn't triggered by the Form 870. The corporation had already filed a timely 2012 carryback claim, and the Department never made a final determination on it before receiving the Form 870 -- the Form 870 came in only because the Department's own information requests stayed open. Because no final denial had issued, the refund limitations period remained open.

Only when the Department issued its denial did an appealable determination exist, which the corporation properly appealed under Va. Code Sec. 58.1-1821. The Commissioner held the 2012 carryback application was timely, sent it to compliance staff to adjust the 2006 and 2007 liabilities, and directed that a refund issue as warranted.

What this means for you

A timely refund/carryback claim stays alive until the Department finally acts

If you filed a timely claim and the Department keeps it open with information requests, the limitations clock doesn't quietly run out on you before a final determination. The federal-change one-year deadline is a separate track for claims that depend on a federal change.

Distinguish 'original claim' from 'federal-change claim'

The one-year-after-Form-870 rule (Va. Code Secs. 58.1-311, 58.1-1823) matters when the federal change is what creates your Virginia refund. It doesn't shorten a still-pending original claim you already filed on time.

Respond to information requests -- but keep proof of your original filing date

Here the timely October 2012 filing date carried the day. Document when you first filed.

Common questions

Wasn't the Form 870 submitted too late? It was submitted more than a year after the IRS approved it, but that deadline governs federal-change claims. The corporation's original 2012 carryback claim was already timely and still open.

Why did the SOL stay open? Because the Department never issued a final determination on the timely 2012 claim before receiving the Form 870; its open information requests kept the matter alive.

Does a Form 870 count as a federal change? Yes -- for Va. Code Secs. 58.1-311 and 58.1-1823 purposes, an agreed Form 870 is a change in federal tax liability (23 VAC 10-20-180 B 2). It just wasn't the trigger for this refund.

Citations and references

• Va. Code Sec. 58.1-311 -- one-year duty to report a final federal change by amended return.
• Va. Code Sec. 58.1-1823 -- limitations period for amended returns/refunds, including the one-year federal-change window.
• 23 VAC 10-20-180 -- an agreed federal Form 870 is a change in federal tax liability.
• Va. Code Sec. 58.1-1821 -- application to the Tax Commissioner following the denial.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 20-91

Original ruling text

May 27, 2020

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek a refund of corporate income tax paid by * (the “Taxpayer”) for the taxable years ended December 31, 2006 and 2007.

FACTS

The Taxpayer timely filed its 2008 Virginia corporate income tax return reporting a net operating loss (NOL). In October 2012, the Taxpayer filed an application for refund, carrying back the NOL and offsetting the Virginia income tax paid for the 2006 and 2007 taxable years. When reviewing the application, the Department determined that the Taxpayer had not filed a 2007 Virginia corporate income tax return.

The Department requested that the Taxpayer file a 2007 corporate income tax return and provide proof that the Internal Revenue Service (IRS) accepted the reported carrybacks. The Taxpayer filed its 2007 Virginia corporate income tax return in February 2019. It then submitted a federal Form 870 and excerpts of a federal Form 4549B to the Department in April 2019, confirming that the carrybacks were accepted by the IRS. The Department denied issuing the refund because the Form 870 was approved by the IRS in November 2015, but not received by the Department until after the limitations period for refunds expired. The Taxpayer appeals, contending the application for a refund was timely filed and no change in federal taxable income (FTI) occurred, making the filing date of the Form 870 irrelevant.

DETERMINATION

Virginia Code § 58.1-311 requires taxpayers to report a change or correction in federal taxable income within one year of a final determination of such change by filing an amended return with the Department. Under Virginia Code § 58.1-1823 A (ii), a taxpayer may timely file an amended return within one year from the final determination of any change or correction in the liability of the taxpayer for any federal tax upon which the state tax is based, provided that the refund does not exceed the amount of the decrease in Virginia tax attributable to such federal change or correction. For purposes of Virginia Code §§ 58.1-311 and 58.1-1823, a change in federal tax liability includes the receipt of an assessment or other notice that the amount of deficiency or overassessment stated on federal Form 870 or similar form has been agreed to by the IRS. See Title 23 of the Virginia Administrative Code (VAC) 10-20-180 B 2.

The Taxpayer signed a federal Form 870 with the IRS in November 2015 showing the IRS agreed to overassessments of federal income tax for taxable years encompassing the ones at issue in this appeal. It was submitted to the Department in April 2019, more than one year after the agreement with the IRS. The refund was denied because the Form 870 was received more than one year after it was entered into by the Taxpayer and the IRS.

The Taxpayer contends that the application for the carryback was timely filed in 2012. It asserts that there was no change in FTI because the IRS accepted the original federal carryback claims and, therefore, the Form 870 did not constitute a change that triggered the amended return filing deadline.

While the Department made requests for additional information and a return in 2013, no definitive decision was made to deny the refund until 2019. The Department’s receipt of the Form 870 resulted from open requests for additional information. There is no statute or regulation requiring the Department to request additional information; rather, the Department requests information when certain thresholds are met or there is reason to question the validity of a claim. Because a final determination was not made by the Department prior to receiving the Form 870, the statute of limitations for the refund request remained open. Once the denial was issued by the Department, a determination was created that the Taxpayer properly appealed under Virginia Code § 58.1-1821.

Accordingly, the Taxpayer timely filed its application to carryback the 2008 NOL to the 2006 and 2007 taxable years. As such, the application will be reviewed by the Department’s compliance staff and the Taxpayer’s liability for the 2006 and 2007 taxable year adjusted. A refund will be issued as warranted.

The Code of Virginia sections and regulation 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/2163.B