Current through Register Vol. XLI, No. 38, September 20, 2024
17.1.
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.
