Administrative Code

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Virginia Administrative Code
Title 23. Taxation
Agency 10. Department of Taxation
Chapter 120. Corporation Income Tax
7/20/2019

23VAC10-120-320. Consolidated and Combined Returns; General.

A. [Reserved.]

B. Overview. In the first year two or more members of an affiliated group of corporations, as defined in § 58.1-302 of the Code of Virginia, are required to file Virginia returns, the group may elect to file separate returns, a consolidated return or a combined return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department of Taxation. The group may elect to file on a basis different from its federal return(s). Other members of the affiliated group of corporations which become subject to Virginia income tax in subsequent years must conform to the initial election made by the group unless permission to change is granted by the department.

C. Affiliate. Corporations actually included in a consolidated federal return shall be presumed to satisfy the ownership criteria of the definition of "affiliated" in § 58.1-302 of the Code of Virginia and 23VAC10-120-20. A corporation included in a federal consolidated return but which is not subject to Virginia income tax is not an affiliate for Virginia purposes.

D. Federal taxable income.

1. When the affiliated group files federal and Virginia returns on a different basis, or files a federal consolidated return including corporations which are not subject to Virginia income tax, the "federal taxable income" for Virginia purposes of the affiliated group and of each member of the group shall be computed in accordance with the following principles:

a. If the affiliated group files a consolidated Virginia return:

(1) The federal taxable income (before and after deductions for net operating losses, net capital losses, and charitable contributions) of the affiliated group shall be computed as if a federal consolidated return had been prepared that included only the members included in the Virginia consolidated return for the current year. If a federal deduction for a net operating loss, net capital loss or charitable contribution in the current year affects or is affected by another taxable year, then a similar computation shall be made for every such taxable year beginning on and after the year for which an election was made, or permission granted, to file a consolidated Virginia return, and federal taxable income shall be computed on a separate basis for every such taxable year before consolidated Virginia returns were filed.

(2) The federal taxable income shall be computed without giving effect to the deferral of any gain, loss, or deduction arising from a transaction with a corporation not subject to Virginia income tax.

(3) Any deferred gain, loss or deduction arising from a prior transaction with an affiliate shall be recognized for Virginia purposes when the affiliate subsequently ceases to be an affiliate or when the asset involved is transferred to a corporation which is not an affiliate.

(4) The group's federal taxable income for Virginia purposes shall be computed as if each affiliate's losses incurred before joining the Virginia consolidated return had been incurred in a separate return year. This provision shall not operate to create a separate return limitation year within the meaning of U.S. Treasury Reg. § 1.1502-21 or § 1.1502-22 if all three of the following conditions are satisfied with respect to the taxable year of the loss: the affiliate was subject to Virginia income tax and its loss was reported on a timely filed Virginia return; the affiliate satisfied the ownership requirements of the definition of "affiliated" in § 58.1-302 of the Code of Virginia on every day of the taxable year with respect to the group to which the loss will be carried; and either the affiliate was prohibited from being included in a consolidated Virginia return filed by other affiliates solely because of its apportionment factor, or permission to file a consolidated return was granted pursuant to the provisions of 23VAC10-120-324 A 3.

b. If the group files separate Virginia returns or a combined Virginia return, then the federal taxable income (before and after deductions for net operating losses, net capital losses, and charitable contributions) of each member of the group shall be computed as if separate federal returns had been filed. A similar computation shall be made for every other year which affects or is affected by a federal deduction for a net operating loss, net capital loss or charitable contribution in the current year.

c. A group filing a combined Virginia return cannot claim a combined or consolidated deduction for federal net operating losses, net capital losses, or charitable contributions. Each affiliate must compute its separate federal taxable income (including its separate net operating loss deduction) pursuant to this subdivision, together with its separate Virginia NOLD modification pursuant to 23VAC10-120-100 B 5.

d. Whenever the computation of federal taxable income includes a federal net operating loss deduction, the Virginia return for such deduction year shall include an addition or subtraction, as the case may be, that is in such proportion to each loss year's net Virginia NOLD modification as the loss absorbed in the deduction year bears to the total federal net operating loss for the loss year. The loss absorbed in the deduction year taxable income shall be the amount that would be subtracted from the federal net operating loss pursuant to IRC § 172(b)(2) to compute the amount of the loss available in subsequent years, assuming that separate federal returns were filed pursuant to this subsection of this regulation. For example, assume that a 1990 federal net operating loss of $1,000 is carried back and offsets income in 1987 and 1988. The loss absorbed in 1988 is determined by computing the amount of the loss available in 1990 pursuant to IRC § 172(b)(2). If federal rules require that 1988 taxable income of $300 be subtracted from the loss, then 30% ($300 ÷ $1,000) of the net Virginia NOLD modification associated with the 1990 loss must be reported in the 1988 Virginia return.

2. If an election under Internal Revenue Code § 338(h)(10) is made (allowing a sale of stock in a subsidiary to be treated as a sale of the subsidiary's assets), then the Virginia returns of any members of the selling group that are affected by such election shall reflect the amount and character of income recognized in the federal consolidated return.

3. The details of the computation of federal taxable income shall be disclosed in the return together with copies of any federal returns filed.

Statutory Authority

§§ 58.1-203 and 58.1-442 of the Code of Virginia.

Historical Notes

Derived from VR630-3-442 § 1, eff. January 1, 1985; amended, eff. March 10, 1993.

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