Virginia Law

The principles of this regulation are illustrated by the following examples:

Example 1. Corporations A, B, C, D, E, F and G constitute a controlled group of corporations within the meaning of Section 1563 of the Internal Revenue Code. Corporations A, B, and C are manufacturing companies, subject to the Virginia income tax. Corporations D and E are motor carriers, subject to the Virginia income tax. Corporation F is a Virginia-based insurance company exempt from Virginia income tax under § 58.1-401 of the Code of Virginia. Corporation G is a manufacturing company exempt from the Virginia income tax under Public Law 86-272.

(a) Corporations A, B, C, D, and E may file a consolidated return. If corporations D and E were not included in consolidated returns filed prior to 1990 because they were not subject to the same three-factor apportionment formula, they must be included in the consolidated return for the group filed for years after 1989. Corporations F and G may not be included because they are not subject to the Virginia income tax.

(b) Corporations A, B, D, and E may not file a consolidated return without corporation C. All eligible corporations must be included in a consolidated return. If corporation C is on a different fiscal year than corporations A, B, D, and E, it must change its fiscal year in order for a consolidated return to be filed.

(c) If corporations D and E filed a consolidated return for years prior to 1990, although consolidation was not elected for corporations A, B, and C, then the consolidated return for years after 1989 must include corporations A, B, and C.

Example 2. Same facts as in example 1 above. Corporations A, B C, D, and E file consolidated Virginia returns for 1990 and 1991. In 1992 corporation G expands its activity within Virginia and becomes subject to Virginia income tax. Corporation G must be included in the 1992 consolidated Virginia return with corporations A, B C, D, and E. The corporations may not file separate returns unless they apply to the department for permission.

Example 3. An affiliated group of five corporations has filed a consolidated federal return the three preceding years, and for calendar year 1990 the group reported a consolidated net operating loss. All five corporations are subject to tax in Virginia in 1990, but none of the corporations were subject to tax in Virginia in prior years. The relevant lines of the federal return are shown below.

a. If the group elects to file a consolidated Virginia return the consolidated federal taxable income for Virginia purposes would be (400) because the group's net operating loss deduction cannot create or increase a federal net operating loss. Line 1 of the Virginia return is shown below.

Assuming that the group has no federal taxable income in the preceding taxable years to absorb net operating loss deductions, the group would carry the prior year losses of (75) and the 1990 loss of (400) to 1991 together with the appropriate portion of the net Virginia modification from the respective loss years (see examples 4 and 5).

b. If the group elects to file separate returns the sum of the separate federal taxable incomes for Virginia purposes would total (425). Corporation C's federal net operating loss deduction of (50) from prior years cannot increase C's 1990 federal net operating loss for Virginia purposes, while D's federal net operating loss deduction is absorbed to the extent of D's income. Line 1 of the Virginia return is shown below.

Each corporation must carry its 1990 loss back three years as if separate federal returns had been filed for those years. Thus, for Virginia purposes corporations B's and E's 1990 federal net operating losses will be deemed to have been absorbed by any separate federal taxable income in 1987, 1988, and 1989 (even though no Virginia returns were required to be filed for those years). Any loss not absorbed by the separate federal taxable income of the corporations would be available to carry forward to 1991 together with each corporation's net 1990 Virginia modification. Since C has a federal net operating loss deduction in 1990, there can be no federal taxable income in prior years against which to offset the loss. Therefore, the entire federal net operating loss deduction of (150) for 1990 and prior years may be carried forward to 1991.

c. If the group elects to file a combined Virginia return the amount reported as the separate federal taxable income for each affiliate (for purposes of the combined return) is deemed to be computed as if separate federal returns were filed. The years to which the federal net operating losses are carried and the amounts absorbed each year for Virginia purposes are deemed to be computed as if separate federal returns were filed, regardless of the type of federal returns actually filed in the carryback or carryover year. The portion of the combined net Virginia modification which follows each corporation's 1990 federal net operating loss would be computed as required by 23VAC10-120-325 D (see example 6).

Example 4. Same facts as in example 3 except that: (i) the group elects to file a consolidated Virginia return, (ii) there is no federal taxable income in prior years to absorb the 1990 federal net operating loss, and (iii) the group is subject to Virginia tax in years prior to 1990. The group would carry the 1990 federal net operating loss to 1991 along with unabsorbed losses from prior years. Both the losses from prior years and the 1990 loss carry with them the net Virginia modifications from each loss year. For 1990 the net Virginia modification is the sum of the consolidated additions of 133 and consolidated subtractions of (86) for a total modification of 47 that follows the 1990 consolidated federal net operating loss of (400). Assume that the (75) consolidated federal net operating loss from prior years carries with it a net Virginia modification of 35. The relevant lines of the 1991 federal and Virginia returns are shown below.

Example 5. Same facts as examples 3 and 4. The portion of the consolidated federal 1990 loss, and accompanying Virginia modification, attributable to each affiliate must be computed. The relevant lines of the consolidated 1990 Virginia return are shown below.

Federal net operating losses: The 1990 consolidated federal net operating loss must be divided among the loss corporations in proportion to their operating losses using the principles of U.S. Treasury Regulation § 1.1502-79. The amount reported for Virginia purposes by each loss corporation as a federal net operating loss deduction attributable to 1990 is computed as follows:

B: (120.00) = 150 ÷ (150 + 100 + 250) X (400)

C: (80.00) = 100 ÷ (150 + 100 + 250) X (400)

E: (200.00) = 250 ÷ (150 + 100 + 250) X (400)

Net Virginia modification: The amount of the 1990 net Virginia modifications that are associated with B's, C's, and E's portion of the consolidated 1990 federal net operating loss for Virginia purposes is computed by first computing a tentative Virginia loss as follows:

B: (146.36) = 180 ÷ (180 + 48 + 200) X (348)

C: (39.03) = 48 ÷ (180 + 48 + 200) X (348)

E: (162.61) = 200 ÷ (180 + 48 + 200) X (348)

The difference between each loss corporation's portion of the consolidated federal net operating loss and the tentative Virginia loss is the amount of consolidated income, additions and subtractions that was offset in the consolidated Virginia return by corporation's loss (the amount modifying the federal net operating loss). This amount is computed as follows:

B: (26.36) = (146.36) - (120.00) or a net subtraction of $26.36

C: 40.97 = (39.03) - (80.00) or a net addition of $40.97

E: 37.39 = (162.61) - (200.00) or a net addition of $37.39

Example 5.A. Same facts as Example 5, except that E is not subject to Virginia income tax in 1991. For the 1991 Virginia consolidated return, the group consisting of A, B, C, and D may claim a federal net operating loss deduction in computing federal taxable income for Virginia income tax purposes of 275.00, computed as follows:

(75.00) = Consolidated losses prior to 1990 (C and D)

(120.00) = B's portion of the 1990 consolidated loss

(80.00) = C's portion of the 1990 consolidated loss

(275.00) = Total consolidated net operating loss deduction

Assume that for federal purposes, the following amounts of net operating loss were utilized in 1991:

(90.00) = B's federal net operating loss utilized

A Virginia modification accompanies B's federal net operating loss utilized, computed as follows:

(19.77) = the net subtraction from 1990 of $26.36, multiplied by .75 ($90.00 federal loss utilized divided by $120.00 total loss available).

The total net Virginia modifications remaining for losses carried to 1992 are:

35.00 = Consolidated net Virginia modification associated with losses prior to 1990

(6.59) = B's portion of the 1990 consolidated net Virginia modification remaining after offsetting the portion of the 1990 federal net operating loss utilized in 1991, (26.36 original modification, less (19.77) utilized in 1991)

40.97 = C's portion of the 1990 consolidated net Virginia modification

69.38 = Total net Virginia modification that follows the total federal net operating losses of (275.00).

If E becomes subject to Virginia income tax in 1992, it will be deemed to have claimed a federal net operating loss deduction of (200.00) in computing its separate 1991 federal taxable income for Virginia purposes. To the extent any of the (200.00) was absorbed in 1991 for federal purposes, the same portion of E's consolidated net Virginia modification (37.39) will also be deemed to have been used.

Example 6. Same facts as in Example 3 except that the group elects to file a combined Virginia return. The relevant lines of the 1990 Virginia return are set out below.

Note that the totals in the "TOTAL" (combined) column are provided for convenience. The actual combination on a Virginia combined return takes place only on the line labeled "income of a multistate." When each corporation's income is computed separately, D's federal net operating loss from a prior year is absorbed; and, therefore, a net Virginia NOLD modification associated with it must be reported.

Federal net operating loss: The amount that will be carried back or over in computing federal taxable income for Virginia purposes is equal to the separate federal net operating loss for B, C, and E.

Net Virginia NOLD modification: Although C has a federal net operating loss, its separate income of a multistate is positive. Pursuant to 23VAC10-120-325 D 1 b of this regulation, C's federal net operating loss of $100 will carry with it a net Virginia NOLD modification equal to an addition of $100.

Affiliates B and E have both a federal net operating loss and a loss after allocation and apportionment. They must compute an addition pursuant to 23VAC10-120-325 D 1 c, utilizing the steps enumerated below.

Step 1: Compute the income offset in combination:

Because of filing in a combined return, the $85 income of A, C, and D offsets a portion of the $146 loss of B and E (A's loss is not attributable to a federal net operating loss). The income offset in combination ($85) is computed using the summation method:

$85 = (4) + 3 +86

Step 2: Allocate the income offset in combination between the appropriate affiliates:

The procedure outlined in U.S. Treasury Regulation § 1.1502- 79 is then used to divide the $85 income offset in combination among B and E in proportion to their loss after allocation and apportionment, ($93) and ($53), respectively.

B: $54.14 = $85 X ( 93 ÷ (93 + 53))

E: $30.86 = $85 X (53 ÷ (93 + 53))

Therefore, $54 of B's $93 loss, and $31 of E's $53 loss, respectively, are deemed to have offset the income, after allocation and apportionment, of other affiliates in the combined Virginia return.

Step 3: Compute the amount of B's and E's federal net operating loss deemed to offset the income of the other affiliates, and the Virginia modification accompanying B's and E's federal net operating loss.

In a combined return, B's and E's federal net operating loss offsets the income of other affiliates after allocation and apportionment. However, since B's and E's federal net operating loss is on a preapportionment basis, the Virginia modification must be on a preapportionment basis as well. This modification is computed by converting B's and E's post apportionment offsetting losses to an amount equivalent to an addition before allocation and apportionment, and adding B's and E's separate Virginia additions and subtractions. The conversion steps are summarized below:

Note that the totals in the "TOTAL" column are provided for convenience only and have no relevance to the actual computation of the separate net Virginia NOLD modification for B and C.

Explanation:

E's after apportionment loss was first used to offset all of E's income allocated to Virginia (B had no income allocated to Virginia). Therefore, E's portion of the income offset by combination is first increased by its income allocated to Virginia: 41 = 31 + 10. This amount is then "grossed up" by dividing by the apportionment factor. Both B and E had income allocable everywhere that increased the loss apportioned to Virginia. Since the Virginia modification should only account for the amount of federal net operating loss offsetting the income of other affiliates, the income allocable everywhere must be subtracted from the "grossed up" amount to compute the amount equivalent to an addition before allocation and apportionment. Note that this addition before allocation and apportionment represents the amount of federal net operating loss actually utilized by B and E in offsetting the income of other affiliates. B and E then add this equivalent addition to their own additions and subtractions for the loss year to arrive at the net Virginia NOLD modification. Note that the net Virginia NOLD modification may be either positive or negative. This modification would be negative if an affiliate's subtractions exceeded the addition equivalent computed above.

Example 6.A. Assume the same facts as in Example 6. This example is a combined Virginia return for A, B, C, D, and E for 1991. Assume that B and E had $100, and $50, respectively, of federal taxable income on Line 28, Form 1120, resulting in the utilization of $(100) and $(50), respectively, of B's and E's of B's federal net operating loss carryforward in computing 1991 federal taxable income. On a schedule attached to the affiliated group's combined Virginia income tax return, the amount of federal taxable income for Virginia purposes for B and E would be computed on an additional schedule in the following manner:

(i) Compute the percentage of federal net operating loss utilized:

B: 67% = $100 utilized ÷ $150 available

E: 20% = $ 50 utilized ÷ $250 available

(ii) Compute the amount of net Virginia NOLD modification following B's and E's federal net operating loss.

B: $48.24 = 67% * $72 (1990 net Virginia NOLD modification)

E: $35.40 = 20% * $177 (1990 net Virginia NOLD modification)

(iii) Compute the federal taxable income for Virginia tax purposes of B and E.

B: $48.24 = $100 Line 28, Form 1120 federal income - $(100) federal NOL carryforward + $48.24 net Virginia NOLD modification

E: $35.40 = $40 Line 28, Form 1120 federal income - $(40) federal NOL carryforward + $35.40 net Virginia NOLD modification

Example 7. Corporation F is a motor carrier and its Virginia vehicle mile factor under § 58.1-417 of the Code of Virginia is 25%. Corporation G is a railroad and its Virginia revenue car mile factor under § 58.1-420 is 10%. For 1990 the corporations have been granted permission to file a consolidated Virginia return. The consolidated denominators of the property, payroll, and sales factors are as follows:

A consolidated numerator for each of the factors would then be constructed. The consolidated property factor numerator would be the sum of F's vehicle mile factor times F's property and G's revenue car mile factor times G's property, or 255 (25% of 300 + 10% of 1,800). Similarly, the consolidated payroll factor numerator would be 50 (25% of 100 + 10% of 250), and the consolidated sales factor numerator would be 190 (25% of 400 + 10% of 900). The consolidated apportionment factor would be one-third of (255/2,100 + 50/350 + 190/1,300), or 13.6813%.

Example 8. For the 1990 return the group requests and is granted permission to file a consolidated Virginia return. The group previously filed a Virginia combined return. Pursuant to 23VAC10-120-320 D 1 a (4) the change in filing status will not create a separate return limitation year. Selected information from the federal and Virginia consolidated returns for 1990 and 1991 is shown below.

Although both federal and Virginia returns are filed on a consolidated basis, the federal information must be restated as if separate federal returns had been filed for years prior to 1990 except, in this case, the separate return limitation rules do not apply. When restating federal return information for 1991, the consolidated net capital loss and net operating loss from 1990 would be absorbed and, because separate return limitation rules do not apply, all of A's losses from 1987, 1988, and 1989 may also be absorbed together with all of their associated net Virginia NOLD modifications as shown below:

Example 9. Same facts as in example 8 except that B filed separate returns because A was not subject to Virginia tax until 1990 when the group elected to file a consolidated return. Under these circumstances the federal return information for Virginia purposes must be restated as if the group filed their first consolidated federal return in 1990 including any applicable separate return limitation year rules. Selected information from the 1991 return is shown below.

When federal return information is restated for Virginia purposes as if the first federal consolidated return was filed in 1990, all of the 1990 consolidated federal capital loss may be used to offset 1991 consolidated federal capital gain. Similarly, all of the 1990 consolidated net operating loss may be used to offset 1991 consolidated operating income. However, years prior to 1990 would be separate return limitation years. Therefore, A's net operating losses from years prior to 1990 may not offset income of other affiliates in the 1991 consolidated return.

For Virginia purposes all of the available net operating losses are deemed to be from A. For Virginia purposes B's separate 1987 federal net operating loss was entirely absorbed by B's separate 1988 and 1989 federal taxable income. On the actual 1988 federal return B's income reduced the consolidated net operating loss for 1988 instead of absorbing any of B's separate 1987 loss.