W. Va. Code R. § 110-21-17
Current through Register Vol. XLI, No. 50, December 13, 2024
Section 110-21-17 - Resident Partners17.1. Definition. - For purposes of Article 21, Chapter 11 of the Code of West Virginia, 1931, as amended, a resident partner with respect to a taxable year is an individual, trust, or estate which is domiciled in the State of West Virginia, and otherwise qualifies both as a resident individual under W. Va. Code '11-21-7 and is a partner in a partnership.17.2. Partner's Modifications. - In determining the West Virginia adjusted gross income of a resident partner, any modification referred to in W. Va. Code '11-21-12 and in Section 12 of these regulations which relates to a partnership item of income, gain, loss or deduction must be made with respect to the distributive share of the resident partner in such item as determined for federal tax purposes and filed upon such partner's federal income tax return for the tax year. Such modification, if applicable, must be made regardless of whether in the partner's federal return the partnership item is reflected on his distributive share of partnership income or is one of the items separately reported. 17.2.1. The modifications covered by this regulation do not apply to any item which, for federal income tax purposes, is not treated as a partnership item.17.2.2. In determining West Virginia adjusted gross income, a resident partner combines the modification relating to his share of any partnership item with the modification relating to any similar item from sources other than the partnership. For example, if a portion of the partnership income constitutes interest on bonds of another state, and the nonpartnership income of a resident member of the partnership also includes similar bond interest, the resident partner must make an increasing modification to his federal adjusted gross income for both his distributive share of the partnership income from such bonds and the interest from similar bonds which he received individually.17.2.3. If a modification relates to an item that is not taken into account for federal income tax purposes, and consequently does not appear in federal adjusted gross income, such as interest on bonds of another state, each partner's modification relating to that item is governed by the rules of this Subsection. In such cases, the partner's modification is determined by his distributive share of the partnership's ordinary income or loss. 17.2.3.1. Example. - X and Y are partners in a motorcycle sales and repair business. The Articles of Partnership provide that X is entitled to seventy-five percent (75%) and Y is entitled to twenty-five percent (25%) of the partnership profits or losses. In 1989, the partnership received four thousand dollars ($4,000) of interest income on United States obligations (Series E Bonds). This item is subject to a decreasing modification as such income is in federal adjusted gross income and is prohibited from being subjected to state income taxation by federal law. The amount of each partner's modification is computed by allowing seventy-five percent (75%) of the interest income to X and twenty-five percent (25%) to Y; therefore, the modification is to be distributed in the same proportion as is profit and loss. Each partner is entitled to his allocable share of the modification and claims the modification on his individual return. X will claim a three thousand (3,000) dollar decreasing modification on his West Virginia Personal Income Tax Return, and Y will claim a one thousand (1,000) dollar decreasing modification on his West Virginia Personal Income Tax Return.17.2.4. The West Virginia Personal Income Tax Return provides the appropriate spaces to make the applicable additions and subtractions of modification items to or from federal adjusted gross income to arrive at an individual's West Virginia adjusted gross income.17.3. Character Of Items. - In order that the modifications may be properly applied to partnership items of income, gain, loss or deduction, whenever applicable, each of such partnership items shall have the same character for a partner for purposes of the West Virginia Personal Income Tax Act as that item did for that partner for federal income tax purposes. Where an item is not characterized for federal income tax purposes but is reflected in the computation of the income of the partnership, such item, if a gain or a loss, shall have the same character for a partner as if realized directly from the source from which realized by the partnership or, if an expense, incurred in the same manner as incurred by the partnership. If a partnership item is not required to be taken into account for federal tax purposes (such as interest on bonds of a state or of Puerto Rico), the character of the item for a partner for West Virginia income tax purposes is the same as if he, or she, had individually realized or incurred the item directly.17.4. West Virginia Tax Avoidance Or Evasion Through Partnership Form Of Business. 17.4.1. If a partnership agreement provides for a special allocation among the partners of any item of partnership income, gain, loss or deduction, and federal law or regulations require that such provision with respect to partners' distributive shares be disregarded, for federal income tax purposes, because the principal purpose of such provision is the avoidance or evasion of federal income tax, as such special allocation otherwise lacks substantial economic effect as that term is defined and applied in Treasury Regulation 1.704-1, each partner's distributive share of such item must be determined in accordance with his share of the partnership's ordinary income or loss as is determined for federal income tax purposes. This treatment and distribution of the item is reflected in each partner's federal adjusted gross income and is therefore already in his or her West Virginia adjusted gross income, even though in a particular case no West Virginia tax avoidance or evasion may be involved.17.4.2. In certain cases, however, a provision for special allocation does not have as its principal purpose the avoidance or evasion of federal income tax, but has as its principal purpose the avoidance or evasion of West Virginia income tax. In such an instance, any such provision shall be disregarded and each partner's share of the pertinent item of partnership-income, gain, loss or deduction shall be determined in accordance with his share of the partnership's ordinary income or loss.17.4.3. Whether the principal purpose of a special allocation of an item is the avoidance or evasion of West Virginia income tax depends upon all surrounding facts and circumstances. Among the relevant circumstances to be considered are: whether the partnership, or a partner individually, has a business purpose for the allocation; whether the allocation has "substantial economic effect", that is, whether the allocation may actually affect the dollar amount of the partner's shares of the total partnership income or loss independently of West Virginia income tax consequences; whether the related items of income, gain, loss or deduction from the same source are subject to the same allocation; whether the allocation was made without recognition of normal business factors and only after the amount of the specially allocated item could reasonably be estimated; the duration of the allocation; and the overall tax consequences of the allocation and any other factors from Treasury Regulation 1.704-1.17.4.4. Example. - A and B are equal partners in a cleaning business. However, the partnership agreement allocates to A, who is in a higher West Virginia income tax bracket than B, all interest on bonds of the State of West Virginia held by the partnership and allocates to B all interest on bonds of other states. The partnership agreement also provides that any difference in the amounts of such interest allocated to each partner is to be equalized out of other partnership income. Since the purpose and effect of this allocation is solely to reduce the West Virginia income tax of A without actually affecting the shares of A and B in partnership income, such allocation is not recognized. Accordingly, in determining their West Virginia adjusted gross income, A and B will each add to his federal adjusted gross income one-half (1/2) of the interest from bonds of states other than West Virginia under Section 12 of these regulations.W. Va. Code R. § 110-21-17