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-4 - Reportable Transactions

Universal Citation: 110 WV Code of State Rules 110-10J-4

Current through Register Vol. XLI, No. 38, September 20, 2024

4.1. For each taxable year in which a taxpayer is required to make a disclosure statement under Treasury Regulations Section 1.6011-4 with respect to any reportable transaction in which the taxpayer participated in a taxable year for which a return is required, the taxpayer shall file a copy of the disclosure with the Tax Commissioner: Provided, That this disclosure requirement also applies to any taxpayer that is a member of a consolidated group that is required to make a disclosure.

4.1.1. Disclosure under this subsection is required to be made by any taxpayer that is a member of a unitary business group that includes any person required to make a disclosure statement under Treasury Regulations Section 1.6011-4.

4.1.2. Disclosure under this subsection is required with respect to any reportable transaction entered into after February 28, 2000, that becomes a listed transaction at any time, and shall be made in the manner prescribed in this rule.
4.1.2.1. If a taxpayer fails to disclose a listed transaction on either the taxpayer's state or federal income tax return, an assessment shall be made at any time not later than six years after the due date of the return required under W. Va. Code § 11-21-1 et seq., or W. Va. Code § 11-24-1 et seq., for the same taxable year or after the return was filed, or not later than three years after an amended return is filed, whichever is later.

4.1.3. With respect to reportable transactions in which the taxpayer participated for taxable years ending before December 31, 2004, disclosure shall be made by the due date of the first annual return due after June 8, 2006: Provided, That if the taxpayer has applied for and been granted an extension of time for filing the first annual return that is due after June 8, 2006, the extension of time shall apply in like manner to the disclosure statement required to be filed with the return.

4.1.4. With respect to reportable transactions in which the taxpayer participated for taxable years ending on and after December 31, 2004, disclosure shall be made in the time and manner prescribed in Treasury Regulations Section 1.6011-4(e).
4.1.4.1. The disclosure statement for a reportable transaction must be attached to the taxpayer's tax return for each taxable year for which a taxpayer participates in a reportable transaction. In addition, the disclosure statement for a reportable transaction must be attached to each amended return that reflects a taxpayer's participation in a reportable transaction. If a reportable transaction results in a loss which is carried back to a prior year, the disclosure statement for the reportable transaction must be attached to the taxpayer's application for tentative refund or amended tax return for that prior year. In the case of a taxpayer that is a partnership or S corporation, the disclosure statement for a reportable transaction must be attached to the partnership's or S corporation's tax return for each taxable year in which the partnership or S corporation participates in the transaction under the rules of section 5 of this rule.

4.1.4.2. If a transaction becomes a listed transaction after the filing of a taxpayer's tax return (including an amended return) reflecting either tax consequences or a tax strategy described in guidance published by the Internal Revenue Service listing the transaction (or a tax benefit derived from tax consequences or a tax strategy described in the publication) and before the end of the period of limitations for the final return (whether or not already filed) reflecting the tax consequences, tax strategy, or tax benefit, then a disclosure statement must be filed as an attachment to the taxpayer's tax return next filed after the date the transaction is listed regardless of whether the taxpayer participated in the transaction in that year.

4.1.5. Notwithstanding subdivisions 4.1.1 through 4.1.4 of this rule, no disclosure is required for transactions entered into after the February 28, 2000, and before January 1, 2004:
4.1.5.1. If the taxpayer has filed an amended West Virginia income tax return which reverses the tax benefits of the potential tax avoidance transaction; or

4.1.5.2. As a result of a federal audit the Internal Revenue Service has determined the tax treatment of the transaction and a West Virginia amended return has been filed to reflect the federal treatment.

4.1.6. If as a result of filing a disclosure required by W. Va. Code § 11-10E-5 and this rule a taxpayer's tax liability for any taxable year for tax imposed by W. Va. Code § 11-21-1 et seq., or W. Va. Code § 11-24-1 et seq. is changed, the appropriate amended tax return or returns for the affected tax year or years are required to be filed.

4.1.7. Any action by the Internal Revenue Service resulting in a reportable transaction being added to, modified or removed from the categories of reportable transactions identified and described in Treasury Regulations Section 1.6011-4, or identified and described in any other Treasury publication, will be treated in like manner by the Tax Department and considered to be incorporated in this section.

4.2. Reportable transaction understatement penalty. -- If a taxpayer has a reportable transaction understatement for any taxable year, there shall be added to the tax an amount equal to 20% of the amount of that understatement. This penalty shall be determined to be assessed upon the assessment of the tax to which the penalty relates and shall be collected and paid on notice and demand in the same manner as the tax.

4.2.1. This subsection 4.2 applies to any item which is attributable to either of the following:
4.2.1.1. Any listed transaction as defined in Treasury Regulations Section 1.6011-4 and section 3 of this rule; and

4.2.1.2. Any other reportable transaction as defined in Treasury Regulations Section 1.6011-4 and section 3 of this rule (other than a listed transaction) if a significant purpose of the transaction is the avoidance or evasion of federal income tax. Subparagraphs 4.2.1.2.a through 4.2.1.2.d of this rule relative to reportable transactions other than listed transactions are provided so as to assist in determining whether certain transactions are actually reportable transactions other than listed transactions.
4.2.1.2.a. Confidential transactions. - For confidential transactions, a transaction is considered to be offered to a taxpayer under conditions of confidentiality if the material advisor who is paid the minimum fee places a limitation on disclosure by the taxpayer of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of that material advisor's tax strategies. A transaction is treated as confidential even if the conditions of confidentiality are not legally binding on the taxpayer. A claim that a transaction is proprietary or exclusive is not treated as a limitation on disclosure if the material advisor confirms to the taxpayer that there is no limitation on disclosure of the tax treatment or tax structure of the transaction.
4.2.1.2.a.1. In order for a transaction to be considered a confidential transaction, the minimum amount of the minimum fee paid to a material advisor is:
4.2.1.2.a.1.A. $ 250,000 for a transaction if the taxpayer is a corporation; or,

4.2.1.2.a.1.B. $ 50,000 for all other transactions unless the taxpayer is a partnership or trust, all of the owners or beneficiaries of which are corporations (looking through any partners or beneficiaries that are themselves partnerships or trusts), in which case the minimum fee is $ 250,000.

4.2.1.2.a.2. A minimum fee includes all fees for a tax strategy, for services for advice (whether or not tax advice), or for the implementation of a transaction. These fees include consideration in whatever form paid, whether in cash or in kind, for services to analyze the transaction (whether or not related to the tax consequences of the transaction), for services to implement the transaction, for services to document the transaction, and for services to prepare tax returns to the extent that the fees exceed the fees customary for return preparation. A taxpayer is treated as paying fees to a material advisor if the taxpayer knows or should know that the amount it pays will be paid indirectly to the material advisor, such as through a referral fee or fee-sharing arrangement. A fee does not include amounts paid to a person, including a material advisor, in that person's capacity as a party to the transaction. For example, a fee does not include reasonable charges for the use of capital or the sale or use of property.

4.2.1.2.b. Transactions with contractual protections. - When determining whether the transaction has contractual protections, all the facts and circumstances relating to the transaction will be considered when determining whether a fee is refundable or contingent, including the right to reimbursements of amounts that the parties to the transaction have not designated as fees or any agreement to provide services without reasonable compensation.
4.2.1.2.b.1. Fees are required to have been paid by or on behalf of the taxpayer or a related party to any person who makes or provides a statement, oral or written, to the taxpayer or related party (or for whose benefit a statement is made or provided to the taxpayer or related party) as to the potential tax consequences that may result from the transaction.

4.2.1.2.b.2. Exceptions
4.2.1.2.b.2.A. Termination of transaction. A transaction is not considered to have contractual protection solely because a party to the transaction has the right to terminate the transaction upon the happening of an event affecting the taxation of one or more parties to the transaction.

4.2.1.2.b.2.B. Previously reported transaction. If a person makes or provides a statement to a taxpayer as to the potential tax consequences that may result from a transaction only after the taxpayer has entered into the transaction and reported the consequences of the transaction on a filed tax return, and the person has not previously received fees from the taxpayer relating to the transaction, then any refundable or contingent fees are not taken into account in determining whether the transaction has contractual protection.

4.2.1.2.c. Loss transactions. - In determining whether a transaction results in a taxpayer claiming a loss that meets the threshold amounts over a combination of taxable years, only losses claimed in the taxable year that the transaction is entered into and the five succeeding taxable years are combined.
4.2.1.2.c.1. Because a loss transaction is a transaction resulting in a loss being claimed under I.R.C. § 165, for purposes of loss transactions, an I.R.C. § 165 loss includes the following:
4.2.1.2.c.1.A. When determining the thresholds as stated in the definition of "loss transaction" in section 2 of this rule, the amount of an I.R.C. § 165 loss is adjusted for any salvage value and for any insurance or other compensation received. However, an I.R.C. § 165 loss does not take into account offsetting gains, or other income or limitations. The full amount of an I.R.C. § 165 loss is taken into account for the year in which the loss is sustained, regardless of whether all or part of the loss enters into the computation of a net operating loss under I.R.C. § 172 or a net capital loss under I.R.C. § 1212 that is a carryback or carryover to another year. An I.R.C. § 165 loss does not include any portion of a loss, attributable to a capital loss carryback or carryover from another year, that is treated as a deemed capital loss under I.R.C. § 1212.

4.2.1.2.c.1.B. An I.R.C. § 165 loss includes an amount deductible pursuant to a provision that treats a transaction as a sale or other disposition, or otherwise results in a deduction under I.R.C. § 165. An I.R.C. § 165 loss includes, for example, a loss resulting from a sale or exchange of a partnership interest under I.R.C. § 741 and a loss resulting from an I.R.C. § 988 transaction.

4.2.1.2.d. Transactions with a significant book-tax difference. - For purposes of determining whether the transaction is a transaction with a significant book-tax difference, offsetting items may not be netted for either tax or book purposes. The amount of an item for book purposes is determined by applying United States generally accepted accounting principles (U.S. GAAP) for worldwide income. However, if a taxpayer, in the ordinary course of its business, keeps books for reporting financial results to shareholders, creditors, or regulators on a basis other than U.S. GAAP, and does not maintain U.S. GAAP books for any purpose, then the taxpayer may determine the amount of a book item by using the books maintained by the taxpayer, provided the books are kept on the same basis consistently from year to year. Adjustments to any reserve for taxes are disregarded for purposes of determining the book-tax difference.
4.2.1.2.d.1. In general, this category of reportable transactions applies only to:
4.2.1.2.d.1.A.
(1) Taxpayers that are reporting companies under the Securities Exchange Act of 1934 and are related business; or

4.2.1.2.d.1.B. Business entities that have $ 250 million or more in gross assets for book purposes at the end of any financial accounting period that ends with or within the entity's taxable year in which the transaction occurs (for purposes of this determination, the assets of all related business entities) must be aggregated.

4.2.1.2.d.2. Consolidated returns. For purposes of this category of reportable transactions, in the case of taxpayers that are members of a group of affiliated corporations filing a consolidated return, transactions solely between or among members of the group will not be disregarded. Moreover, where two or more members of the group participate in a transaction that is not solely between or among members of the group, items shall be aggregated (as if the members were a single taxpayer), but any offsetting items shall not be netted.

4.2.1.2.d.3. Foreign persons. In the case of a taxpayer that is a foreign person (other than a foreign corporation that is treated as a domestic corporation for Federal tax purposes under I.R.C. § 269B, 953(d), 1504(d) or any other provision of the Internal Revenue Code), only assets that are U.S. assets under Treasury Regulation § 1.884-1(d) shall be taken into account for purposes of paragraph 4.2.1.2.d.2 of this rule, and only transactions that give rise to income that is effectively connected with the conduct of a trade or business within the United States (or to losses, expenses, or deductions allocated or apportioned to the income) shall be taken into account for purposes of this reportable transaction.

4.2.1.2.d.4. Owners of disregarded entities. In the case of an eligible entity that is disregarded as an entity separate from its owner for Federal tax purposes, items of income, gain, loss, or expense that otherwise are considered items of the entity for book purposes shall be treated as items of its owner, and items arising from transactions between the entity and its owner shall be disregarded, for purposes of this reportable transaction.

4.2.1.2.d.5. Partners of partnerships. In the case of a taxpayer that is a member or a partner of an entity that is treated as a partnership for Federal tax purposes, items of income, gain, loss, or expense that are allocable to the taxpayer for Federal tax purposes, but otherwise are considered items of the entity for book purposes, shall be treated as items of the taxpayer for purposes of this reportable transaction.

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