West Virginia Code of State Rules › Agency 110 - Tax › Title 110 - LEGISLATIVE RULE STATE TAX DEPARTMENT › Series 110-10J - Abusive Tax Shelters › Section 110-10J-3 - Definitions

Current through Register Vol. XLI, No. 28, July 12, 2024
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.