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

Current through Register Vol. 40, No. 24, July 15, 2024
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.
1990 Federal Return
CONSOL
A
B
C
D
E
Line 28
(400)
50
(150)
(100)
50
(250)
Line 29a (NOLD)
(75)
0
0
(50)
(25)
0
Line 30
(475)
50
(150)
(150)
25
(250)
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.
1990 Virginia Return
CONSOL
A
B
C
D
E
Federal Taxable Income
(400)
50
(150)
(100)
50
(250)
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.
1990 Virginia Return
CONSOL
A
B
C
D
E
Federal Taxable Income
(425)
50
(150)
(100)
25
(250)
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.
1991 Federal Return
CONSOLIDATED
Line 28
600
Line 29a (Prior year NOLD)
(75)
Line 29a (1990 NOLD)
(400)
Line 30
125
1991 Virginia Return
CONSOLIDATED
Federal Taxable Income
125
Va. additions
125
Va. subtractions
(65)
Net Va. NOLD modification
(from prior loss year)
35
(from 1990 loss year)
47
Virginia taxable income
267
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.
1990 Virginia Return
CONSOL
A
B
C
D
E
Federal Taxable Income
(400)
50
(150)
(100)
50
(250)
Va. additions
133
0
0
52
31
50
Va subtractions
(86)
(56)
(30)
0
0
0
Net Va. NOLD modification
5
0
0
0
5
0
Virginia taxable income
(348)
(6)
(180)
(48)
86
(200)
Less allocable dividends
(32)
(4)
(6)
(12)
0
(10)
Apportionable income
(380)
(10)
(186)
(60)
86
(210)
Apportionable factor
50%
n/a
n/a
n/a
n/a
n/a
Income apportioned to Va.
(190)
n/a
n/a
n/a
n/a
n/a
Dividends allocated to Va.
22
n/a
n/a
n/a
n/a
n/a
Income of a multistate
(168)
n/a
n/a
n/a
n/a
n/a
n/a means not applicable.
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.
1990 Virginia Return
TOTAL
A
B
C
D
E
Federal Taxable Income
(400)
50
(150)
(100)
50
(250)
Virginia additions
133
0
0
52
31
50
Virginia subtractions
(86)
(56)
(30)
0
0
0
Net Va. NOLD modifications
5
0
0
0
5
0
Virginia Taxable Income
(348)
(6)
(180)
(48)
86
(200)
Less: allocable dividends
(32)
(4)
(6)
(12)
0
(10)
Apportionable income
(380)
(10)
(186)
(60)
86
(210)
Apportionment factor
n/a
40%
50%
15%
100%
30%
Income apportioned to Va.
(83)
(4)
(93)
(9)
86
(63)
Dividends allocated to Va.
22
0
0
12
0
10
Income of a Multistate
(61)
(4)
(93)
3
86
(53)
n/a means not applicable
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.
Income offset by B & E losses
TOTAL
A
B
C
D
E
B & E losses
(146)
(93)
(53)
Other affiliates income
85
(4)
3
86
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:
Net Va. NOLD modification
TOTAL
A
B
C
D
E
Income offset from above
85
54
31
Income allocated to Va.
10
0
10
Subtotal before gross up
95
54
41
Divide by App. factor
n/a
50%
30%
Subtotal after gross up
245
108
137
Less:allocable income
(16)
(6)
(10)
Addition equivalent
229
102
127
Separate Va. additions
50
0
50
Separate Va. subtractions
(30)
(30)
0
Net Va. NOLD modification
249
72
177
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:
F
G
Consolidated
Property
300
1,800
2,100
Payroll
100
250
350
Sales
400
900
1,300
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.
(000 omitted)
1990
1991
Federal consolidated return
A
B
CONSOL
A
B
CONSOL
Capital gain (loss)
(42)
2
(40)
0
50
50
Capital loss carryover
0
0
0
(40)
(0)
(40)
Net capital gain (loss)
(42)
2
(40)
(40)
50
10
Operating income (loss)
(30)
5
(25)
(20)
120
100
Line 28
(30)
5
(25)
(20)
130
110
Line 29a (NOLD)
(75)
0
(75)
(100)
0
(100)
Line 30
(105)
5
(100)
(120)
130
10
Virginia consolidated return
Federal Taxable Income
(30)
5
(25)
(120)
130
10
Current addition/subtraction
10
0
10
0
0
0
Net Va. NOLD modification
0
0
0
27
0
27
Virginia taxable income
(20)
5
(15)
(93)
130
37
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:
Source Year
Fed. NOLD
Va. Modif.
1987
25,000
5,000
1988
25,000
4,000
1989
25,000
8,000
1990
25,000
10,000
TOTAL FOR 1991
100,000
27,000
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.
(000 omitted)
1991
Federal consolidated return
A
B
CONSOL
Capital gain (loss)
0
50
50
Capital loss carryover
(40)
(0)
(40)
Net capital gain (loss)
(40)
50
10
Operating income (loss)
(20)
120
100
Line 28
n/a
n/a
110
Line 29a (NOLD)
n/a
n/a
(25)
Line 30
n/a
n/a
85
Virginia consolidated return
Federal Taxable Income
n/a
n/a
85
Current addition/subtraction
0
0
0
Net Va. NOLD modification
0
0
0
Virginia taxable income
n/a
n/a
85
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.