Virginia Administrative Code
Title 23 - TAXATION
Agency 10 - DEPARTMENT OF TAXATION
Chapter 120 - Corporation Income Tax
Section 23VAC10-120-327 - Consolidated and combined returns; examples

(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.T he 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: