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.