W. Va. Code R. § 110-10J-3

Current through Register Vol. XLI, No. 50, December 13, 2024

Section 110-10J-3 - Definitions

3.1. General rule. Terms used in this rule have the meaning ascribed to them in W. Va. Code § 11-10-4, unless the context in which the term is used clearly requires a different meaning, or the term is defined in subsection 3.2 of this rule.

3.2. Terms defined. For purposes of this rule, the additional term:

3.2.1. "Abusive tax schemes" means transactions promoted for the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets. These transactions typically have no economic purpose other than reducing taxes, or may involve the use of multiple layers of domestic and foreign pass-through entities including: partnerships, S corporations, limited liability companies, and trusts.

3.2.2. "Commissioner" or "Tax Commissioner" means the West Virginia State Tax Commissioner or his/her delegate.

3.2.3. "Confidential transactions" means a transaction that is offered to a taxpayer under conditions of confidentiality and for which the taxpayer has paid an advisor a minimum fee.

3.2.4. "Gross valuation overstatement" means any statement as to the value of any property or services if the value stated exceeds 200 percent of the amount determined to be the correct valuation, and the value of the property or services is directly related to the amount of any deduction or credit allowable under 26 U.S.C. §§ 1 et seq. to any participant.

3.2.5. "Investor lists" means any list required to be maintained under I.R.C. § 6112 and Treasury Regulations Section 301.6112-1 with respect to a potentially abusive tax shelter that, at a minimum, includes the following information:

3.2.5.1. The name of each transaction that is a potentially abusive tax shelter and the registration number, if any, obtained under I.R.C. § 6111;

3.2.5.2. The tax identification number, if any, of each transaction;

3.2.5.3. The name, address, and tax identification number of each person required to be on the list;

3.2.5.4. If applicable, the number of units (i.e., percentage of profits, number of shares, etc.) acquired by each person required to be included on the list;

3.2.5.5. The date on which each interest was acquired;

3.2.5.6. The amount invested in each transaction by each person required to be included on the list;

3.2.5.7. A detailed description of each transaction that describes both the structure and its expected tax consequences;

3.2.5.8. A summary or schedule of the tax consequences that each person is intended or expected to derive from participation in each transaction, if known by the material advisor;

3.2.5.9. Copies of any additional written materials, including tax analyses or opinions, relating to each transaction that have been shown or provided to any person who acquired an interest in the transaction, or his or her representatives, tax advisors, or agents, by the material advisor or any related party or agent of the material advisor; and

3.2.5.10. For each person, if the interest in the transaction was not acquired from the material advisor maintaining the list, the name of the person from whom the interest was acquired.

3.2.6. "Listed transaction" means a transaction that is the same as or substantially similar to one of the types of transactions that the Internal Revenue Service has determined to be a tax avoidance transaction and identified by notice, regulation, or other form of published guidance as a listed transaction.

3.2.7. "Loss transactions" mean any transaction resulting in the taxpayer claiming a loss under I.R.C. § 165 of at least:

3.2.7.1. $10,000,000 in any single taxable year or $20,000,000 in any combination of taxable years for corporations;

3.2.7.2. $10,000,000 in any single taxable year or $20,000,000 in any combination of taxable years for partnerships that have only corporations as partners (looking through any partners that are themselves partnerships), whether or not any losses flow through to one or more partners; or $2,000,000 in any single taxable year or $4,000,000 in any combination of taxable years for all other partnerships, whether or not any losses flow through to one or more partners;

3.2.7.3. $2,000,000 in any single taxable year or $4,000,000 in any combination of taxable years for individuals, S corporations, or trusts, whether or not any losses flow through to one or more shareholders or beneficiaries; or

3.2.7.4. $50,000 in any single taxable year for individuals or trusts, whether or not the loss flows through from an S corporation or partnership, if the loss arises with respect to a section 988 transaction (as defined in I.R.C. § 988(c)(1) relating to foreign currency transactions).

3.2.8. "Material Advisor" means any person who:

3.2.8.1. Must register the transaction as a tax shelter under federal law;

3.2.8.2. Receives, or expects to receive, at least a minimum fee in connection with a transaction that is a potentially abusive tax shelter: Provided, That the minimum fee is $250,000 if the acquiring entities are corporations, other than S corporations. For all other transactions, the minimum fee is $50,000. When calculating the minimum fee, each transaction is evaluated separately to determine whether the minimum fee threshold is satisfied; and

3.2.8.3. Makes or provides any oral or written statement to any person about the potential tax consequences of that transaction.

3.2.9. "Noneconomic substance transaction" means the disallowance of any loss, deduction or credit, or addition to income attributable to a determination that the transaction or arrangement lacks economic substance. A transaction lacks economic substance if the taxpayer cannot demonstrate a valid West Virginia business purpose other than tax savings.

3.2.10. "Organizer" means any person who discovers, creates, investigates, or initiates the tax shelter investment, devises the business or financial plans for the investment or carries out those plans through negotiations or transactions with others. This term also includes any other person who participates in the organization or management of the tax shelter.

3.2.11. "Potentially abusive tax shelter" means any tax shelter that is required to be registered under current federal law or is a reportable transaction under present federal law or West Virginia law.

3.2.12. "Promoter" means any person who, directly or indirectly, organizes or assists in the organization of a tax shelter or who participates in the sale of any interests in a shelter.

3.2.13. "Related business entities" and "related parties" are persons who bear a relationship to each other as described in I.R.C. § 267(b) or 707(b).

3.2.14. "Reportable transaction" means any transaction the Internal Revenue Service or this State determines as having a potential for tax avoidance or evasion, and includes the following transactions:

3.2.14.1. Listed transactions;

3.2.14.2. Confidential transactions;

3.2.14.3. Transactions with contractual protection;

3.2.14.4. Loss transactions;

3.2.14.5. Transactions with a significant book-tax difference: Provided, That significant book-tax difference transactions entered into on or after January 6, 2006 that do not also describe any other reportable transaction in Treasury Regulation Section 1.6011-4 will no longer be classified as reportable transactions: Provided, however, That this removal of significant book-tax difference transactions from the categories of reportable transactions does not relieve taxpayers, tax shelter organizers or material advisors of any disclosure, registration or list maintenance obligations for transactions that should have been disclosed or registered, or for transactions for which lists should have been prepared and maintained, prior to January 6, 2006; and

3.2.14.6. Transactions involving a brief asset holding period.

3.2.15. "Reportable transaction understatement" means the product of:

3.2.15.1. The amount of the increase (if any) in taxable income, as determined by reference to the amount of post-apportioned income that results from a difference between the proper tax treatment of an item to which this paragraph applies and the taxpayer's treatment of that item as shown on the taxpayer's return, including an amended return filed prior to the date the taxpayer is first contacted by the Tax Commissioner regarding the examination of the return; and

3.2.15.2. The applicable tax rates.

3.2.16. "Reporting shareholder" means a United States shareholder (as defined in I.R.C. § 551(a)) in a foreign personal holding company (as defined in I.R.C. § 552), a United States shareholder (as defined in I.R.C. § 951(b)) in a controlled foreign corporation (as defined in I.R.C. § 957), or a 10 percent shareholder (by vote or value) of a qualified electing fund (as defined in I.R.C. § 1295).

3.2.17. "Seller" for purposes of the list maintenance requirement, is:

3.2.17.1. Any organizer, underwriter, broker, or dealer (or other similar person) who transfers any interest in a tax shelter;

3.2.17.2. Any agent who negotiates the transfer of any interest in a tax shelter for the tax shelter, an organizer, or other person described in paragraph 3.2.13 of this rule;

3.2.17.3. Any investor (not described in subdivision 3.2.13 of this rule) who transfers any interest in a tax shelter; or

3.2.17.4. Any other person who receives consideration in connection with another person's right to participate in a tax shelter, for services necessary to the organization or structure of the tax shelter (other than services that do not constitute participation in the organization or management of a tax shelter under Treasury Regulation Section 301.6111-1T), or for information that is integral to the participation in the tax shelter.

3.2.18. "Substantially similar" means and includes any transaction that is expected to obtain the same or similar types of tax consequences and that is either factually similar or based on the same or similar tax strategy. Receipt of an opinion regarding the tax consequences of the transaction is not relevant to the determination of whether the transaction is the same as or substantially similar to another transaction. Further, the term substantially similar shall be broadly construed in favor of disclosure.

3.2.19. "Tax avoidance transaction" means a plan or arrangement devised for the principal purpose of avoiding federal or state income tax or both. Tax avoidance transactions include, but are not limited to, "listed transactions" as defined and/or described in Treasury Regulations Section 1.6011-4(b)(2).

3.2.20. "Tax benefit" means and includes deductions, exclusions from gross income, nonrecognition of gain, tax credits, adjustments (or the absence of adjustments) to the basis of property, status as an entity exempt from Federal income taxation, and any other tax consequences that may reduce a taxpayer's West Virginia income tax liability by affecting the amount, timing, character, or source of any item of income, gain, expense, loss, or credit.

3.2.21. "Tax shelter" means a tax avoidance transaction.

3.2.22. "Tax structure" means any fact that may be relevant to understanding the purported or claimed West Virginia Personal Income Tax treatment or West Virginia Corporation Net Income Tax treatment of the transaction.

3.2.23. "Tax treatment" means the tax treatment of a transaction that is the purported or claimed West Virginia Personal Income Tax treatment or West Virginia corporation Net Income Tax treatment of the transaction.

3.2.24. "Transaction" means and includes all of the factual elements relevant to the expected tax treatment of any investment, entity, plan, or arrangement, and includes any series of steps carried out as part of a plan.

3.2.25. "Transactions involving a brief holding period" means any transaction resulting in the taxpayer claiming a tax credit exceeding $ 250,000 (including a foreign tax credit) if the underlying asset giving rise to the credit is held by the taxpayer for 45 days or less. For purposes of determining the holding period, the principles of I.R.C. § 246(c)(3) and (c)(4) apply. Transactions resulting in a foreign tax credit for withholding taxes or other taxes imposed in respect of a dividend that are not disallowed under I.R.C. § 901(k) (including transactions eligible for the exception for securities dealers under I.R.C. § 901(k)(4)) are excluded from this term.

3.2.26. "Transaction with a significant book-tax difference" means a transaction where the amount for tax purposes of any item or items of income, gain, expense, or loss from the transaction differs by more than $ 10 million on a gross basis from the amount of the item or items for book purposes in any taxable year.

3.2.27. "Transaction with contractual protection" means a transaction for which the taxpayer or a related party (as described in I.R.C. § 267(b) or I.R.C. § 707(b)) has the right to a full or partial refund of fees if all or part of the intended tax consequences from the transaction are not sustained. A transaction with contractual protection also is a transaction for which fees are contingent on the taxpayer's realization of tax benefits from the transaction.

W. Va. Code R. § 110-10J-3