If I forgot to attach a statement (or check the federal carryback-waiver box) electing to forgo my net operating loss carryback, can Virginia still let me carry the loss forward instead?

Plain-English summary

A corporation and its affiliates filed a consolidated federal return but separate Virginia corporate income tax returns. The company reported a net operating loss (NOL) for 2014 and later used it as a net operating loss deduction (NOLD) against its 2015 federal taxable income, which flows through to its Virginia return. On audit, the Department found the company hadn't properly elected to waive the normal two-year carryback of that loss -- so instead of letting the company apply the full loss to 2015, the Department carried it back to 2013 first, as federal and Virginia law both generally require unless a valid waiver election is made. That exhausted the entire loss in 2013, leaving nothing left to deduct in 2015, and the Department assessed additional 2015 tax.

The company raised three arguments on appeal, and lost on all three. First, it argued that Virginia's regulation requiring a carryback-waiver election statement (23 VAC 10-120-325(B)(2)) only applies to consolidated or combined returns, not to a company filing separately -- pointing to the regulation's "Consolidated and Combined" heading. The Department disagreed: the regulation's actual text requires the election from "a corporation or an affiliated group of corporations," language broad enough to cover a separately-filing corporation too.

Second, the company argued that Virginia's own return instructions never mention this election requirement, so it shouldn't be held to it. The Department responded that return instructions are meant to be helpful guidance, not an exhaustive statement of every nuance of the law -- taxpayers are still bound by the regulation itself even if the instructions don't spell it out.

Third, and most technically, federal law only requires a formal attached waiver statement from consolidated-group members; a corporation filing its own separate federal return instead just checks a box on federal Schedule K to elect out of the carryback. The Department has previously allowed Virginia taxpayers to rely on that same box-check (see P.D. 21-27). But here, the company hadn't checked that box on its separate federal pro forma return for 2014 either -- so it had no valid waiver under either the consolidated-statement rule or the separate-return box-check rule. Because no valid election existed at all, the mandatory carryback rule applied and the assessment stood.

Finally, the company asked for the interest on the assessment to be waived because it believed it had complied with the law. The Department explained that this particular assessment never included any penalty to waive in the first place -- and interest, unlike a penalty, isn't discretionary. Virginia Code § 58.1-1812 makes interest on tax underpayments mandatory; it's treated as the cost of having used the Commonwealth's money, not a punishment, so it can't be waived unless the underlying tax itself changes.

What this means for you

Corporations (whether filing separately or as part of a consolidated/affiliated group) with a Virginia net operating loss

If you want to skip the standard carryback and apply your NOL entirely to future years, make sure you actually complete the required election -- either the formal waiver statement for consolidated returns, or checking the box on federal Schedule K if you file separately -- and do it on the original return for the year the loss occurred. Don't rely on Virginia's own return instructions to flag this requirement; it comes from the regulation itself (23 VAC 10-120-325(B)(2)), which applies to separately-filing corporations too, not just consolidated or combined groups.

Anyone hoping a good-faith belief about the law will excuse a missed election or waive interest

A genuine, good-faith misunderstanding of the election requirement doesn't undo the carryback rule, and it doesn't help with interest either -- interest on an underpayment is mandatory once the tax is due and isn't treated as a punishment that can be waived for reasonable cause the way a penalty can.

Common questions

Q: Does the carryback-waiver election requirement only apply to consolidated or affiliated groups?
A: No. Even though the Virginia regulation appears under a "Consolidated and Combined" heading, its actual text requires the election statement from "a corporation or an affiliated group of corporations" -- so it applies to a separately-filing corporation too.

Q: If I file a separate federal return, do I need to attach a waiver statement like consolidated filers do?
A: No -- for a separate federal return, checking the box on federal Schedule K is enough to elect out of the carryback, and Virginia will honor that same election. But you still need to actually do it; nothing was checked here, so no valid election existed under either route.

Q: Can I get interest waived on an assessment if I acted in good faith?
A: Not on its own. Interest on tax underpayments is mandatory under Va. Code § 58.1-1812 and isn't a penalty -- it can only go away if the underlying tax assessment itself is reduced or eliminated, unlike a penalty, which the Department can waive for reasonable cause under Va. Code § 58.1-105.

Citations and references

• Va. Code § 58.1-301 (Virginia conformity to the IRC)
• IRC § 172 (NOL carryback/carryforward periods)
• Title 23 VAC 10-120-325(B)(2) (Virginia election statement to forgo the NOL carryback)
• Treas. Reg. § 1.1502-21(b)(3) (federal consolidated-return carryback waiver statement requirement)
• Va. Code § 58.1-105 (penalty waiver for reasonable cause)
• Va. Code § 58.1-1812 (mandatory interest on tax underpayments)
• P.D. 88-106 (5/12/1988), P.D. 93-83 (3/26/1993), P.D. 05-47 (4/6/2005) (election statement must be attached to the original return for the loss year)
• P.D. 13-149 (7/31/2013) (return instructions aren't a full statement of the law)
• P.D. 21-27 (3/2/2021) (separately-filing corporations may rely on the federal Schedule K box-check to forgo the carryback)

Subject

Net Operating Loss: Deduction (NOLD) - Election to Forego Carryback Administration: Offer in Compromise - Penalty and Interest Waiver

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-149

Original ruling text

October 11, 2022

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, 2015.

FACTS

The Taxpayer and its affiliates filed consolidated federal and separate Virginia corporate income tax returns for the taxable years at issue. The Taxpayer reported a separate net operating loss (NOL) in the 2014 taxable year that it carried forward and utilized to claim a net operating loss deduction (NOLD) against its federal taxable income (FTI) for the 2015 taxable year. Under audit, the Department concluded that the Taxpayer had failed to properly make an election to forgo the two year carryback. Accordingly, the Department carried back the NOL, resulting in the NOLD being fully exhausted in the 2013 taxable year. The result was that the Taxpayer no longer had the NOLD to use for the 2015 taxable year, and an assessment was issued for additional tax due. The Taxpayer appeals the assessment, contending that it satisfied Virginia’s regulatory requirements for forgoing the two-year carryback rule. The Taxpayer’s appeal also covered a separate assessment issued for the 2016 taxable year, but that assessment has been abated. This determination, therefore, will be limited to the assessment issued for the 2015 taxable year.

DETERMINATION

Net Operating Loss Carryback

In general, Virginia income tax laws do 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 the starting point in computing Virginia taxable income is FTI, Virginia allows a NOLD to the extent that it is allowable in computing FTI. For the taxable years at issue, IRC § 172 specifies that a NOLD can be carried to the two taxable years prior to and the 20 taxable years subsequent to the taxable year in which the loss is incurred.

Under Title 23 of the Virginia Administrative Code (VAC) 10 120 325 B 2, in order to forgo the carryback, taxpayers are required to file a statement with the Virginia return for the taxable year in which the NOL occurred “ . . . in the same manner as prescribed by federal law and regulations.” Further, the Department has consistently held that a statement must be attached to the original Virginia return for the taxable year in which the NOL was incurred. See Public Document (P.D.) 88-106 (5/12/1988), P.D. 93-83 (3/26/1993) and P.D. 05-47 (4/6/2005).

The Taxpayer contends that Title 23 VAC 10 120 325 B 2 only applies to consolidated and combined returns, not to a separately filing corporation because this regulation is under the heading of “Consolidated and Combined; Carryovers.” Title 23 VAC 10-120-325 B, however, specifically states that the election statement must be filed by “[a] corporation or an affiliated group of corporations . . . .” As such, the requirement to file an election to forgo the NOL carryback applies to separately filing corporations.

The Taxpayer further asserts that the Department’s instructions do not require an election to forego the carryback. The Department’s return instructions do not address this election. Nevertheless, information provided in Virginia’s tax return instructions is intended to provide helpful guidance to taxpayers. It is not intended to provide a detailed explanation of every provision or nuance of Virginia’s tax law. See P.D. 13-149 (7/31/2013).

For the taxable years in which there was an NOL, Treas. Reg. § 1.1502-21(b)(3) requires taxpayers that file a consolidated federal return and elect to waive the entire carryback period to attach a statement to its return in order for the election to be valid. Corporations filing a separate federal return are not required to attach this statement. Such corporations are merely required to check the box on the Federal Schedule K indicating that it will forgo the carryback period. In this situation, the Department has allowed corporations that check the box on the Schedule K to forego the carryback. See P.D. 21-27 (3/2/2021). As such, the Department has not imposed a requirement on corporations that file separately for Virginia income tax purposes beyond what is required for such corporations filing a separate federal return.

In this case, it does not appear that the Taxpayer checked the box on the Schedule K on the separate federal pro forma return it filed for the 2014 taxable year. Therefore, the Taxpayer did not make an election to forego the two year carryback as required by Title 23 VAC 10-120-325 B 2. Accordingly, the Taxpayer’s request for the abatement of the assessment issued for the taxable year ended December 31, 2015 cannot be granted.

Penalty Waiver

In the event that the Department determines that the assessment should be upheld, the Taxpayer asks for a waiver of any penalties applied to the assessment on the basis that the Taxpayer believed it had properly complied with the law. Virginia Code § 58.1-105 grants the Department the authority to waive penalty in cases where reasonable cause is demonstrated. The 2015 assessment, however, did not include penalties. Interest was also included on the assessment, but the application of interest to tax underpayments is mandatory under Virginia Code § 58.1-1812, and it cannot be waived unless the associated tax is adjusted. Interest is not assessed as a penalty, but represents a fee for the use of money that was properly due the Commonwealth. As such, the Department finds no basis for abating any portion of the assessed interest.

An updated bill will be issued shortly. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

The Code of Virginia sections, regulation and public documents 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/3764.B

Related Documents

88-106

93-83

05-47

13-149

21-27