H. B. 4670
(By Delegates Michael, Doyle, Stalnaker, Boggs,
Hall, G. White and Border)
(Originating in the Committee on Finance)
[February 27, 2004]
A BILL to amend and reenact §11-24-3a of the code of West Virginia,
1931, as amended; and to amend said code by adding thereto
three new sections, designated §11-24-7c, §11-24-7d and 11-24-
13c, all relating generally to corporation net income tax;
requiring additional adjustments to federal taxable income by
certain corporations; authorizing tax commissioner to allocate
income and deductions among taxpayers when necessary to
properly reflect taxable income; allowing tax commissioner to
require certain additional information from members of
affiliated or controlled groups; and making technical changes
and corrections.
Be it enacted by the Legislature of West Virginia:
That §11-24-3a of the code of West Virginia, 1931, as amended,
be amended and reenacted; and that said code be amended by adding
thereto three new sections, designated §11-24-7c, §11-24-7d and 11-
24-13c, all to read as follows:
ARTICLE 24. CORPORATION NET INCOME TAX ACT.
§11-24-3a. Specific terms defined.
For purposes of this article:
(1)
Business income. - The term "business income" "Business
income" means income
of any type or class arising from transactions
and activity in the regular course of the taxpayer's trade or
business and includes income from tangible and intangible property
if the acquisition, management and disposition of the property or
the rendering of services in connection therewith constitute
integral parts of the taxpayer's regular trade or business
operations.
(2)
Commercial domicile. - The term "commercial domicile"
"Commercial domicile" means the principal place from which the
trade or business of the taxpayer is directed or managed:
Provided,
That the commercial domicile of a financial organization, which is
subject to regulation as such, shall be at the place designated as
its principal office with its regulating authority.
(3)
Compensation. -- The term "compensation" "Compensation"
means wages, salaries, commissions and any other form of
remuneration paid to employees for personal services.
(4)
Corporation. -- The term "corporation" "Corporation"
includes a joint-stock company and any association or other
organization which is taxable as a corporation under the federal
income tax law.
(5)
Delegate. -- The term "delegate" "Delegate" in the phrase
"or his delegate", when used in reference to the tax commissioner, means any officer or employee of the state tax department duly
authorized by the tax commissioner directly, or indirectly by one
or more redelegations of authority, to perform the functions
mentioned or described in this article or regulations promulgated
thereunder.
(6)
Domestic corporation. -- The term "domestic corporation"
"Domestic corporation" means any corporation organized under the
laws of West Virginia and certain corporations organized under the
laws of the state of Virginia before the twentieth day of June, one
thousand eight hundred sixty-three. Every other corporation is a
foreign corporation.
(7)
Engaging in business. -- The term "engaging in business"
"Engaging in business" or "doing business" means any activity of a
corporation which enjoys the benefits and protection of government
and laws in this state.
(8)
Federal Form 1120. -- The term "Federal Form 1120" means
the annual federal income tax return of any corporation made
pursuant to the United States Internal Revenue Code of 1986, as
amended, or in successor provisions of the laws of the United
States, in respect to the federal taxable income of a corporation,
and filed with the federal Internal Revenue Service. In the case of
a corporation that elects to file a federal income tax return as
part of an affiliated group, but files as a separate corporation
under this article, then as to such corporation Federal Form 1120
means its pro forma Federal Form 1120.
(9)
Fiduciary. -- The term "fiduciary" "Fiduciary" means, and includes, a guardian, trustee, executor, administrator, receiver,
conservator or any person acting in any fiduciary capacity for any
person.
(10)
Financial organization. -- The term "financial
organization" "Financial organization" means:
(A) A holding company or a subsidiary thereof. As used in
this section "holding company" means a corporation registered under
the federal bank holding company act of 1956 or registered as a
savings and loan holding company other than a diversified savings
and loan holding company (as defined in section 408(a)(1)(F) of the
federal national housing act (12 U.S.C. 1730(a)(1)(F));
(B) A regulated financial corporation or a subsidiary thereof.
As used in this section, "regulated financial corporation" means:
(1) (i) An institution, the deposits, shares or accounts of
which are insured under the federal deposit insurance act, or by
the federal savings and loan insurance corporation;
(2) (ii) An institution that is a member of a federal home
loan bank;
(3) (iii) Any other bank or thrift institution incorporated or
organized under the laws of a state that is engaged in the business
of receiving deposits;
(4) (iv) A credit union incorporated and organized under the
laws of this state;
(5) (v) A production credit association organized under 12
U.S.C. 2071;
(6) (vi) A corporation organized under 12 U.S.C. 611 through 631 (an edge act corporation); or
(7) (vii) A federal or state agency or branch of a foreign
bank (as defined in 12 U.S.C. 3101); or
(C) A corporation which derives more than fifty percent of its
gross business income from one or more of the following activities:
(1) (i) Making, acquiring, selling or servicing loans or
extensions of credit. Loans and extensions of credit include:
(I) Secured or unsecured consumer loans;
(II) Installment obligations;
(III) Mortgages or other loans secured by real estate or
tangible personal property;
(IV) Credit card loans;
(V) Secured and unsecured commercial loans of any type; and
(VI) Loans arising in factoring.
(2) (ii) Leasing or acting as an agent, broker or advisor in
connection with leasing real and personal property that is the
economic equivalent of an extension of credit (as defined by the
Federal Reserve Board in 12 C.F.R. 225.25(b)(5));
(3) (iii) Operating a credit card business;
(4) (iv) Rendering estate or trust services;
(5) (v) Receiving, maintaining or otherwise handling deposits;
or
(6) (vi) Engaging in any other activity with an economic
effect comparable to those activities described in
item (1), (2),
(3), (4) or (5) subparagraph (i), (ii), (iii), (iv) or (v) of this
subparagraph paragraph.
(11)
Fiscal year. -- The term "fiscal year" "Fiscal year"
means an accounting period of twelve months ending on any day other
than the last day of December, and on the basis of which the
taxpayer is required to report for federal income tax purposes.
(12)
Includes and including. -- The terms "includes"
"Includes" and "including" when used in a definition contained in
this article shall not be deemed to exclude other things otherwise
within the meaning of the term being defined.
(13) "Intangible expense" means:
(A) An expense, loss, or cost for, related to, or in
connection directly or indirectly with, the direct or indirect
acquisition, use, maintenance, management, ownership, sale,
exchange, or any other disposition of intangible property, to the
extent the expense, loss, or cost is allowed as a deduction or cost
in determining taxable income for the taxable year under the
Internal Revenue Code;
(B) A loss related to or incurred in connection directly or
indirectly with factoring transactions or discounting transactions;
(C) A royalty, patent, technical, or copyright fee;
(D) A licensing fee; and
(E) Any other similar expense or cost.
(14) "Intangible property" means patents, patent applications,
trade names, trademarks, service marks, copyrights, and similar
types of intangible assets.
(15) "Interest expense" means an amount directly or indirectly
allowed as a deduction under §163 of the Internal Revenue Code for purposes of determining taxable income under the Internal Revenue
Code.
(13) (16) Nonbusiness income. -- The term "nonbusiness income"
"Nonbusiness income" means all income other than business income.
(14) (17) Person. -- The term "person" "Person" is to be
deemed interchangeable with the term "corporation" in this section.
(15) (18) Pro forma return. -- The term "pro forma return"
"Pro forma return" when used in this article means the return which
the taxpayer would have filed with the Internal Revenue Service had
it not elected to file federally as part of an affiliated group.
(16) (19) Public utility. -- The term "public utility" "Public
utility" means any business activity to which the jurisdiction of
the public service commission of West Virginia extends under
section one, article two, chapter twenty-four of the code of West
Virginia.
(20) "Related member" means a person that, with respect to the
taxpayer during all or any portion of the taxable year, is:
(A) A related entity;
(B) A component member, as defined in §1563(b) of the Internal
Revenue Code; or
(C) A person to or from whom there is attribution of stock
ownership in accordance with §1563(e) of the Internal Revenue Code.
(21) "Related entity" means a person that, applying the
attribution rules of §318 of the Internal Revenue Code, is:
(A) A stockholder who is an individual, or a member of the
stockholder's family enumerated in §318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's
family own, directly, indirectly, beneficially, or constructively,
in the aggregate, at least fifty percent of the value of the
taxpayer's outstanding stock;
(B) A stockholder, or a stockholder's partnership, limited
liability company, estate, trust, or corporation, if the
stockholder and the stockholder's partnerships, limited liability
companies, estates, trusts, and corporations own, directly,
indirectly, beneficially, or constructively, in the aggregate, at
least fifty percent of the value of the taxpayer's outstanding
stock; or
(C) A corporation, or a party related to the corporation in a
manner that would require an attribution of stock from the
corporation to the party or from the party to the corporation under
the attribution rules of §318 of the Internal Revenue Code, if the
taxpayer owns, directly, indirectly, beneficially, or
constructively, at least fifty percent of the value of the
corporation's outstanding stock.
(17) (22) Sales. -- The term "sales" "Sales" means all gross
receipts of the taxpayer that are "business income", as defined in
this section.
(18) (23) State. -- The term "state" "State" means any state
of the United States, the District of Columbia, the Commonwealth of
Puerto Rico, any territory or possession of the United States, and
any foreign country or political subdivision thereof.
(19) (24) Taxable year. -- The term "taxable year" "Taxable year" means the taxable year for which the taxable income of the
taxpayer is computed under the federal income tax law.
(20) (25) Tax. -- The term "tax" "Tax" includes, within its
meaning, interest and additions to tax, unless the intention to
give it a more limited meaning is disclosed by the context.
(21) (26) Tax commissioner. -- The term "tax commissioner"
"Tax commissioner" means the tax commissioner of the state of West
Virginia or his delegate.
(22) (27) Taxpayer. -- The term "taxpayer" "Taxpayer" means a
corporation subject to the tax imposed by this article.
(23) (28) This code. -- The term "this code" "This code" means
the code of West Virginia, one thousand nine hundred thirty-one, as
amended.
(24) (29) This state. -- The term "this state" "This state"
means the state of West Virginia.
(25) (30) West Virginia taxable income. -- The term "West
Virginia taxable income" "West Virginia taxable income" means the
taxable income of a corporation as defined by the laws of the
United States for federal income tax purposes, adjusted, as
provided in section six of this article:
Provided, That in the case
of a corporation having income from business activity which is
taxable without this state, its "West Virginia taxable income"
shall be such portion of its taxable income as so defined and
adjusted as is allocated or apportioned to this state under the
provisions of sections seven and seven-b of this article.
§11-24-7c. Additional adjustments and modifications.
(a) In addition to the adjustments and modifications under
section six of this article, except as otherwise provided in this
section, the amounts under subsection (b) of this section are added
to the federal taxable income of a corporation to determine
adjusted federal taxable income.
(b) The addition under subsection (a) of this section includes
any otherwise deductible interest expense or intangible expense,
if the interest expense or intangible expense is directly or
indirectly paid, accrued, or incurred to, or in connection directly
or indirectly with one or more direct or indirect transactions with
one or more related members.
(c) The addition required under subsection (a) of this section
does not apply to any portion of an interest expense or intangible
expense to the extent that the corporation establishes by clear and
convincing evidence, as determined by the tax commissioner, that:
(1) The transaction giving rise to the payment of the interest
expense or the intangible expense between the corporation and the
related member did not have as a principal purpose the avoidance of
any portion of the tax due under this title;
(2) The interest expense or the intangible expense was paid
pursuant to arm's length contracts at an arm's length rate of
interest or price; and
(3) During the same taxable year:
(A) The related member directly or indirectly paid, accrued,
or incurred the interest expense or the intangible expense to a person who is not a related member;
(B) The related member was subject to a tax measured by its
net income or receipts in this state or other states or possessions
of the United States or in foreign nations;
(C) A measure of the tax imposed by this state and other
states or possessions of the United States or foreign nations
included the interest expense or the intangible expense received by
the related member from the corporation; and
(D) The effective rate of tax paid by the related member to
this state and other states or possessions of the United States or
foreign nations in the aggregate on the amounts received by the
related member from the corporation is equal to or greater than
nine percent; or
(E) In the case of an interest expense, the corporation and
the related member are financial organizations.
(d) This section may not be construed:
(1) To require a corporation to add to its federal taxable
income more than once any amount of interest expense or intangible
expense that the corporation pays, accrues, or incurs to a related
member; or
(2) To limit or negate any other authority provided to the tax
commissioner under this article or article ten of this chapter.
(e) The tax commissioner shall adopt any rules that are
necessary or appropriate to carry out this section.
§11-24-7d. Allocation of income and deductions among taxpayers.
(a) The tax commissioner may distribute, apportion, or allocate gross income, deductions, credits, or allowances between
and among two or more organizations, trades, or businesses, whether
or not incorporated, whether or not organized in the United States,
and whether or not affiliated, if:
(1) The organizations, trades, or businesses are owned or
controlled directly or indirectly by the same interests; and
(2) The tax commissioner determines that the distribution,
apportionment, or allocation is necessary in order to reflect an
arm's length standard, within the meaning of §1.482-1 of
regulations promulgated by the Internal Revenue Service, United
States department of the treasury, and to clearly reflect the
income of those organizations, trades, or businesses.
(b) The tax commissioner shall apply the administrative and
judicial interpretations of §482 of the Internal Revenue Code in
administering this section.
§11-24-13c. Additional requirements and information.
Each corporation that is a member of an affiliated group or a
controlled group under section 1504 or section 1563 of the Internal
Revenue Code shall, upon request of the tax commissioner, attach to
the annual return filed under this article, or otherwise file with
the tax commissioner as directed by the commissioner, a statement
of all inter-member costs or expenses and all inter-member sales,
exchanges, or other transactions involving tangible or intangible
property for the taxable year.