TECHNICAL ASSISTANCE ADVISORY 88-014 Re: Corporation NetIncome Tax -- Determination of West Virginia Net Operating LossDeduction for 1988 Calendar Year When Members of Affiliated GroupPreviously Filed Consolidated Federal Income Tax Returns. ThoseCorporations With Nexus Filing Separate West Virginia Corporation NetIncome Tax Returns and There is an Election to File a 1988Consolidated West Virginia Corporate Net Income Tax Return. ATechnical Assistance Advisory, as authorized by W. Va. Code §11-10-5r, has been requested with regard to the proper method for anaffiliated group of corporations filing a consolidated West Virginiacorporate net income tax return to utilize net operation loss (NOL)carryforwards generated during return years when those members of thegroup doing business in this State filed separate West Virginiacorporation net income tax returns. After discussion with staff ofthis Department, certain facts were further clarified. For purposesof this ruling, the following facts were submitted. Corporations A,B, C, D, E and F are affiliated and do business throughout the UnitedStates (the "affiliated group"). The affiliated group currently filesa consolidated return for federal income tax purposes. Thecorporations making up the affiliated group are organized in such away that those affiliates doing business in West Virginia do businessonly in West Virginia and those affiliates doing business outside ofthis State, do no business in West Virginia. Corporations A, B and Care doing business within West Virginia and in the past, filedseparate West Virginia corporate net income tax returns. CorporationD, E and F do no business in West Virginia. On its 1987 consolidatedfederal income tax return, the affiliated group showed $15 million inavailable federal net operation loss carryforwards. If these NOLcarryforwards are allocated to those members of the group whichgenerated the losses by multiplying the total carryforward by afraction, the numerator of which is the separate company loss of thecompany to which the NOL carryforward is to be allocated and thedenominator of which the total separate company losses of all membersof the affiliated group having losses, approximately $8 million ofthe federal NOL carryforward would be allocated to Corporation A, $4million to Corporation B and $3 million to Corporation F. Since theaffiliated group files a consolidated federal return, the losses ofthose members of the group which generated the losses are used tooffset the income of the profitable members of the group. Becausecorporation A, B and C have filed separate West Virginia corporationnet income tax returns, the net operating losses of the losscompanies have not been used to offset income of the profitablecompanies. For this reason, the amount of the NOL carryforwards ofthe West Virginia loss companies (as shown on their pro forma federalincome tax returns for West Virginia corporate net income taxpurposes) is somewhat in excess of the portion of the availablefederal NOL carryforward shown on the 1987 federal consolidatedreturn, that is allocable to them. On its separate pro forma federalreturn, as of the end of 1987, corporation A showed approximately $12million as its available NOL carryforward. Corporation A is notexpected to make a profit in the next several years. Corporation B'sseparate pro forma NOL carryforwards are approximately $7 million.Corporation B is expected to make a profit in the current year andfuture years. It is further assumed that Corporations A and B mustreduce their pro forma federal NOL carryforwards by $1 million each,as required by W. Va. Code § 11-24-6(d), to arrive at the WestVirginia NOL carryforward. If the affiliated group elects under W.Va. Code § 11-24-13a to file a consolidated West Virginiacorporate net income tax return, its apportionment factor under W.Va. Code § 11-24-7 will be approximately fifty percent (50%).For the tax year ending December 31, 1988, the affiliated group isexpected to have consolidated federal taxable income of $35 million,after application of the federal NOL carryforward and increasing W.Va. Code § 11-24-6 modifications of $6 million.Discussion. Prior to enactment of Com. Sub. for House Bill4475, which is effective for taxable years ending after July 1, 1988,a taxpayer that claimed a federal NOL deduction for the taxable yearwas required to modify the amount of its federal NOL deduction bymaking applicable section 11-24-6 adjustments thereto. W. Va. Code§ 11-24-6(d) (1987). If for federal income tax purposes thetaxpayer elected to file a consolidated federal income tax return forthe taxable year, then the federal NOL deduction which it would havebeen allowed had it filed a separate federal return must be shown onits pro forma separate federal return for that taxable year andadjusted as provided in W. Va. Code § 11-24-6(d) (1987).See West Virginia Tax Reports (CCH) para. 200-313,Administrative Decision 86-8-N. For taxable years ending after July1, 1988, the allowable West Virginia NOL deduction is no longer tiedto the amount of the federal NOL deduction taxpayer was allowed forthe taxable year. Instead, the amount of the taxpayer's federal NOLdeduction is an increasing modification to the amount of its federaltaxable income as shown on Line 30 of Federal Form 1120, W. Va. Code§ 11-24-6(b)(7) (1988), and a West Virginia NOL deduction isthen allowed as provided in W. Va. Code § 11-24-6(d) (1988).When a taxpayer apportions its business income under W. Va. Code§ 11-24-7, the allowable West Virginia NOL deduction issubtracted after the taxpayer's adjusted federal taxable income isallocated and apportioned under W. Va. Code § 11-24-7. W. Va.Code § 11&endash;24&endash;6(d)(1)(B) (1988). If corporations A,B and C continue filing separate West Virginia corporate net incometax returns, the January 1, 1988, balance of each corporation'spre-1988 NOL's, after modification to the West Virginia NOLcarryforward for pre-1988 NOL's, will be allowed as a W. Va. Code§ 11-24-6(d) decreasing modification for the 1988 taxable yearand the remaining loss carryforward period under I.R.C. § 172.To illustrate, Corporation X incurred a federal NOL of $10 million in1985. Its 1985 West Virginia corporate net income tax return showed aWest Virginia NOL of $8 million after the section 11-24-6 adjustmentswere made. The corporation elected under I.R.C. § 172 to notcarryback its federal NOL. This election was also controlling forWest Virginia corporate net income tax purposes. In 1986 and 1987 thecorporation's federal NOL deduction was $2 million and $3 millionrespectively, leaving a federal NOL carryforward of $5 million. Aftermaking the section 11-24-6(d) adjustments, the allowable NOLdeduction for West Virginia corporate net income tax purposes was$1.6 million in 1986 and $2.4 million in 1987. However, due to othersection 11-24-6 adjustments to federal taxable income, thecorporation effectively utilized only $1 million of the $1.6 millionadjusted West Virginia NOL deduction in 1986 and only $2 million ofthe $2.4 million adjusted West Virginia NOL deduction in 1987. Thedifference of $1 million ($0.6 million + $0.4 million) was forfeited.The corporation is able to utilize on its 1988 calendar year federalincome tax return the $5 million NOL carryforward remaining from its1985 federal NOL. ON its 1988 West Virginia corporate net income taxreturn, the $5 million federal NOL deduction is shown as anincreasing modification to the corporate net income tax return, the$5 million federal NOL deduction is shown as an increasingmodification to the corporation's federal taxable income shown onLine 30 of Federal Form 1120. Under amended section 11-24-6(d), thecorporation may claim a $4 million West Virginia NOL carryforwarddeduction, assuming its West Virginia taxable income is $4 million ormore for 1988. ($8 million less $1.6 million and $2.4 million.) 1. Ifits 1988 West Virginia taxable income before application of the WestVirginia NOL carryforward deduction is less than $4 million, thedifference is carried forward until used or the fifteen-year losscarryforward period expires. 2. If in 1988, the corporation is ableto use only $3 million of its $5 million federal NOL carryforward,the additional $2 million can be carried forward for federal incometax purposes until used or the fifteen-year loss carryforward periodexpires. If for West Virginia corporate net income tax purposes, thecorporation utilizes on its 1988 return all of its $4 million WestVirginia NOL carryforward deduction, it will have nothing to carryforward to 1989. If an affiliated group of corporations having NOLcarryforwards that heretofore filed a consolidated federal return butseparate West Virginia corporate net income tax returns elects tofile a consolidated West Virginia return for a taxable year endingafter July 1, 1988, some additional problems arise. When aconsolidated federal return is filed, a net operating loss incurredby one or more members of the group is offset by the net operatinggains, if any, of the other members of the group. Consequently, theaffiliated group may not have an NOL or may have a NOL that is equalto or less than the combined NOL's of the separate members of theaffiliated group. Additionally, when the affiliated group's NOL iscarried back and carried forward as provided in I.R.C. § 172,the extent to which it may be used depends on amount of federaltaxable income which the group has before application of the group'sfederal NOL carryback or carryforward deduction. When separate WestVirginia corporate net income tax returns are filed, the amount ofthe NOL and the extent to which it can be carried back or carriedforward depends on the federal taxable income or loss shown on a proforma federal tax return prepared on a separate corporation basis foreach taxable year involved. Consequently, when a affiliated groupelects to file a consolidated West Virginia corporate net income taxreturn for its taxable year ending December 31, 1988, after havingfiled separate returns for prior taxable years, the amount of thegroup's West Virginia net operating loss deduction allowable for the1988 taxable year is not tied to the amount of the affiliated group'sfederal NOL deduction for the 1988 taxable year. Rather, the WestVirginia NOL carryforward is the combined amount of the federal NOLcarryforwards determined from the separate pro forma federal returnof each member of the group carried forward to the 1988 taxable yearin which the election to file a consolidated West Virginia corporatenet income tax return is made, adjusted as required by W.
Va. Code § 11-24-6(d) (1987). If a corporation having a NOLcarryforward was required to apportion its income under W. Va. Code§ 11-24-7 for the prior year, then the adjusted federal NOLcarried forward must be further modified to determine thecorporation's West Virginia NOL carried forward to the 1988 taxableyear. The amount of the West Virginia NOL carryforwards that cannotbe used in 1988 is carried forward until used or the I.R.C. §172 loss carryforward period expires. In our example, Corporation X,after filing its 1987 federal income tax return, had a federal NOLcarryforward of $5 million. The section 11-24-6 adjustments requiredby section 11-24-6(d) prior to its amendment in 1988 results in aWest Virginia net operating loss carryforward to 1988 of $4 million,unless the corporation apportions its business income to this Stateunder section 11-24-7. If apportionment is required, then itsadjusted federal NOL carryforwards are further modified byapplication of the corporation's 1987 West Virginia apportionmentpercentage to determine the amount of West Virginia NOL's carriedforward to the 1988 taxable year. (This assumes that the 15-year losscarryforward period has not expired for any of the NOLcarryforwards.) Here, the affiliated group is a calendar yeartaxpayer. The amount of allowable NOL's carried forward and availablefor use ont he group's 1988 West Virginia consolidated corporationnet income tax return will be the aggregate of the amount of eachcorporation's separately determined federal NOL's carried forwardfrom the 1987 taxable years (to the extent allowed under I.R.C.§ 172), adjusted as required by W. Va. Code § 11-24-6(d)prior to its amendment in 1988, multiplied by each corporation's 1987West Virginia apportionment factor. More specifically, Corporation A,as shown by its 1987 separate pro forma federal tax return, haspre-1988 federal NOL carryforwards of $12 million available andCorporation B has separate pro forma pre-1988 NOL carryforwards of $7million. These federal NOL carryforwards must be adjusted as providedin W. Va. Code § 11-25-6(d) (prior to its amendment) todetermine the adjusted federal NOL carryforwards. After adding the $1million adjustment to Corporation A's and Corporation B's separatepro forma pre-1988 NOL carryforwards that are carried forward to1988, these amounts become $11 million and $6 million respectively.Since Corporations A and B do business solely in this State, theiradjusted federal NOL carryforward is their West Virginia NOLcarryforward. While Corporation F has $3 million of federal NOLcarryforwards to 1988 (determined from its 1988 pro forma federalreturn), it was not doing business in this State. Since its 1987 WestVirginia apportionment factor is zero, it has no West Virginia NOLcarryforward. Thus, if the affiliated group elects to file aconsolidated West Virginia corporate net income tax return for 1988,the amount of the West Virginia net operating losses to be carriedforward is $17 million, the total West Virginia NOL carryforwards ofcorporations A and B. Once the amount of the West Virginia netoperating losses to be carried forward is determined for each memberof the affiliated group, the aggregate thereof may generally be usedto reduce the West Virginia taxable income of the affiliated group.One exception is where the separate return limitation year (SYRL)rules apply. If the SYRL rules apply, then a member's NOL carriedforward from its separate year return can only offset that portion ofthe taxable income of the affiliated group which is attributable tothat member. The separate return limitation year rules are set forthin Treas. Reg. § 1.1502. That regulation specifies that the term"separate return limitation year" does not include: (1) A separatereturn year of the corporation which is the common parent of theaffiliated group for the taxable year to which the net operating lossis to be carried; (2) A subsidiary which was a member of theaffiliated group for each day of each loss year; or (3) A predecessor(of the common parent or of a subsidiary) which was a member of thegroup for each day of such loss year provided amultiple-surtax-exemption election under I.R.C. § 1502 was notin effect for any such separate return year. See
Treas. Reg. § 1.1502-1(f)(2). Under the facts presented, theNOL's carried forward are all attributable to loss years in which allmembers of the affiliated group were members of such group for eachday of the year. Accordingly, the loss years in issue are not"separate return limitations years" as defined in Treas. Reg. §1.1502(f). In summary: 1. The amount of NOL carryforwards availableto an affiliated group which elects for the first time to file aconsolidated West Virginia corporate net income tax return for ataxable year ending after July 1, 1988, is limited to the netoperating losses incurred by those members of the affiliated groupwhich did business in West Virginia and filed separate West Virginiacorporate net income tax returns in prior taxable years. 2. A WestVirginia NOL deduction will not be allowed for the net operating lossof those members of the affiliated group which did no business inthis State during prior taxable years and were not required to file aWest Virginia corporate net income tax return. 3. Since the membersof the affiliated group filed a consolidated federal income taxreturn for the loss years involved, aggregating their incomedeductions and losses, the amount of the Affiliated Group's federalNOL deductions carried forward to the 1988 taxable year attributableto those members of the affiliated group that incurred the losses andfiled in West Virginia on a separate return basis may be and probablyis an amount different from the remaining balance of the NOLcarryfowards based ont he pro forma federal return of each memberthat heretofore failed a separate West Virginia corporate net incometax return. It is the balance of federal NOL remaining, determinedfrom the separate pro forma returns, that must be adjusted todetermining the amount of the West Virginia NOL's carried forward tothe 1988 calendar year by those members of the affiliated group whichheretofore filed separate West Virginia corporation net income taxreturns. 4. when all members of the affiliated group were members ofthe group for every day of the taxable years in which the NOL's wereincurred, the separate return limitation year rules, Treas. Reg.§ 1.1502-21, do not apply. Therefore, the West Virginia NOL'scarried forward to 1988 may be applied to reduce the net income ofthe affiliated group allocated and apportioned to this State asprovided in W. Va. Code § 11&endash;24&endash;7. 5. Therefore,if the affiliated group elects to file a consolidated West Virginiaincome tax return for 1988, its West Virginia taxable income would becalculated as follows: Consolidated federal taxable income $35million Add: § 11-24-6 adjustments Federal NOL carryforward $15million Other increasing modifications 6 million +21 millionAdjusted consolidated federal taxable income 56 million WestVirginia apportionment percentage x 50% West Virginia taxableincome 28 million Less: West Virginia NOL carryforward -17million West Virginia taxable income $11 million Technical AssistanceAdvisories are binding on the parties based on the facts presentedand application of current law. A change in any of the material factsor a change in the applicable law may change the conclusions reachedin this letter. Michael E. Caryl State Tax Commissioner Issued:December 9, 1988