West Virginia Code of State Rules
Agency 110 - Tax
Title 110 - LEGISLATIVE RULE STATE TAX DEPARTMENT
Series 110-24 - Corporation Net Income Tax
Section 110-24-13a - Combined Reporting
Universal Citation: 110 WV Code of State Rules 110-24-13a
Current through Register Vol. XLI, No. 38, September 20, 2024
13a.1. For tax years beginning on and after the January 1, 2009, any taxpayer engaged in a unitary business with one or more other corporations shall file a combined report which includes the income, determined under W. Va. Code §§ 11-24-13c or 13d, and the allocation and apportionment of income provisions of W. Va. Code §§ 11-24-1, et seq., of all corporations that are members of the unitary business.
13a.1.a. The income of an insurance
company shall not be included in a combined report filed under W. Va. Code
§§
11-24-1,
et seq. and the allocation or apportionment of income related
to the insurance company shall not be included in and the apportionment factors
of an insurance company shall not be included in the combined report, unless
specifically required to be included by the Tax Commissioner.
13a.1.b. An insurance company, unless
otherwise exempt from or excluded from tax under W. Va. Code §§
11-24-1,
et seq. or other provisions of the W. Va. Code, shall file a
separate corporation net income tax return.
13a.2. Determination of unitary business. The term "unitary business" is defined in W. Va. Code §§ 11-24-1, et seq. as a single economic enterprise that is made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.
13a.2.a. For purposes of W. Va. Code
§§
11-24-1,
et seq. and W. Va. Code §§
11-23-1,
et seq. a partnership shall be treated as conducted by its
partners, whether directly held or indirectly held through a series of
partnerships, to the extent of the partner's distributive share of the
partnership's income, regardless of the percentage of the partner's ownership
interest or the percentage of its distributive or any other share of
partnership income. A business conducted directly or indirectly by one
corporation through its direct or indirect interest in a partnership is unitary
with that portion of a business conducted by one or more other corporations
through their direct or indirect interest in a partnership if there is a
synergy and mutual benefit that produces a sharing or exchange of value among
them and a significant flow of value to the separate parts and the corporations
are members of the same commonly controlled group.
13a.2.b. More than fifty percent ownership
rule -- For purposes of this rule, the term commonly controlled group, with
reference to any Taxpayer, means and includes all related entities as defined
in this rule, in the aggregate.
13a.2.b.1. The
term "related entity" means:
13a.2.b.1.1. An
individual, corporation, partnership, affiliate, association or trust or any
combination or group thereof controlled by the taxpayer;
13a.2.b.1.2. An individual, corporation,
partnership, affiliate, association or trust or any combination or group
thereof that is in control of the taxpayer;
13a.2.b.1.3. An individual, corporation,
partnership, affiliate, association or trust or any combination or group
thereof controlled by an individual, corporation, partnership, affiliate,
association or trust or any combination or group thereof that is in control of
the taxpayer; or
13a.2.b.1.4. A
member of the same controlled group as the taxpayer, as the term "controlled
group" is defined in Section 267 of the Internal Revenue Code of 1986, as
amended.
13a.2.b.2. For
purposes of this section, "control," with respect to a corporation, means
ownership, directly or indirectly, of stock possessing more than fifty percent
of the total combined voting power of all classes of the stock of the
corporation entitled to vote. "Control," with respect to a trust, means
ownership, directly or indirectly, of more than fifty percent of the beneficial
interest in the principal or income of the trust. The ownership of stock in a
corporation, of a capital or profits interest in a partnership or association
or of a beneficial interest in a trust shall be determined in accordance with
the rules for constructive ownership of stock provided in Section 267(c) of the
United States Internal Revenue Code of 1954, as amended, other than paragraph
(3) of that section.
13a.3. Unitary business.
13a.3.a. Determination of a unitary or
separate Business.
13a.3.a.1. A corporation
subject to taxation may be engaged in more than one "trade or business." In
those cases, it is necessary to determine the business income attributable to
each separate trade or business. The income of each business is then
apportioned by a formula which takes into consideration the in-state and
out-of-state factors which relate to the respective trade or business subject
to apportionment.
13a.3.a.2. In
addition, a corporation may be engaged in a single trade or business in
combination with another commonly owned and controlled corporation or
corporations. In those cases, it is necessary to determine the total business
income of all corporations attributable to the single trade or business. The
combined income of the single trade or business shall be apportioned by formula
which takes into consideration the in-state and out-of-state factors of each
corporation which relate to that single trade or business.
13a.3.a.3. When business segments of a single
corporation or the business activities of more than one corporation constitute
a single trade or business, the single trade or business is said to constitute
a "unitary business."
13a.3.a.4. A
unitary business exists when the operations of the business segments of a
corporation or group of commonly owned and controlled corporations contribute
to or depend on each other in such a way as to result in functional integration
between the segments. Functional integration refers to transfers between or
pooling among business segments of such items as products or services,
technical information, marketing information, distribution systems, purchasing
and intangibles (such as patents, copyrights, formulas, processes, trade
secrets, and the like) in a manner which substantially affects the segments'
business operations related to such activities as development, manufacture,
production, extraction, distribution or sale of its products or
services.
13a.3.a.5. Evidence of
functionally integrating factors. -- The determination of whether or not the
operations of business segments are functionally integrated will turn on the
facts and circumstances of the case. Several factors may evidence that the
operations of business segments are functionally integrated. A non-exclusive
list of those factors is found in subparagraph 13a.3.a.6.A. Generally, several
functionally integrating factors will exist in a unitary business, although a
unitary business may exist as a result of few factors or even one factor if the
factor or factors involved are particularly significant. In determining whether
a unitary business exists, factors should not be examined in isolation.
Instead, it should be determined whether the factors which are present, in
combination, result in a functionally integrated business. In addition, the
presence or absence of any one factor or any particular factors is not
necessarily determinative as to whether a unitary business exists, although
absence of all of the factors described in this subsection will generally
result in a finding that a unitary business does not exist.
13a.3.a.6. Functionally integrating factors.
-- A non-exclusive listing of factors to be considered in determining whether
business segments are functionally integrated appears in subparagraph
13a.3.a.6.A.
13a.3.a.6.A. The existence or
non-existence of the following factors will assist in the determination of
whether "unity of operations" exits with respect to an affiliated group. The
existence or non-existence of any one factor, by itself, is normally not
determinative of whether the element has or has not been satisfied. Nor is this
list a limitation on the factors that may be considered in determining whether
unity of operations exists:
13a.3.a.6.A.1.
Common or centralized purchasing;
13a.3.a.6.A.2. Common or centralized
advertising;
13a.3.a.6.A.3. Common
or centralized employees, including sales force;
13a.3.a.6.A.4. Common or centralized
accounting;
13a.3.a.6.A.5. Common
or centralized legal support;
13a.3.a.6.A.6. Common or centralized
retirement plan;
13a.3.a.6.A.7.
Common or centralized insurance coverage;
13a.3.a.6.A.8. Common or centralized
marketing;
13a.3.a.6.A.9. Common or
centralized cash management;
13a.3.a.6.A.10. Common or centralized
research and development;
13a.3.a.6.A.11. Common or centralized
offices;
13a.3.a.6.A.12. Common or
centralized manufacturing facilities;
13a.3.a.6.A.13. Common, centralized, or
intercompany financing;
13a.3.a.6.A.14. Common or centralized
computer systems and support;
13a.3.a.6.A.15. Common or centralized
management;
13a.3.a.6.A.16. Common
or centralized labor relations;
13a.3.a.6.A.17. Common or centralized pension
plans;
13a.3.a.6.A.18. Common or
centralized personnel recruitment;
13a.3.a.6.A.19. Intercompany sales,
exchanges, or transfers;
13a.3.a.6.A.20. Common, centralized, or
intercompany transfer or pooling of technical information;
13a.3.a.6.A.21. Common or centralized
distribution system, including but not limited to common or centralized
transportation facilities, or common or centralized warehousing facilities, or
common or centralized order fulfillment systems, inventory control systems or
other distribution systems or subsystems, or any combination
thereof.
13a.3.a.7. Intercompany sales, exchanges, or
transfers.
13a.3.a.7.A. Sales, exchanges, or
transfers (hereinafter "sales") of products, services, intangibles, or the like
between business segments are important indicia of functional integration. The
significance of intercompany sales will be a function of both the character of
the items sold and percentage of total sales or purchases represented by the
intercompany sales. Intercompany sales at a given level take on greater
significance if there is a limited sales or purchasing market for the items or
if valuable trade name or other intangibles are associated with the sales, or
both.
13a.3.a.7.B. The fact that
intercompany sales are at a readily determinable market price does not negate
the importance of the sales as a functionally integrating factor, because the
sales generally represent an assured market for the seller and a guaranteed
source of supply for the purchaser.
13a.3.a.7.C. As the percentage of
intercompany sales to the total sales of the selling segment increases or as
the percentage of intercompany purchases of the purchasing segment's total
purchases increases, the more important the purchases and sales become as a
unitary factor.
13a.3.a.7.C.1. For purposes of
this rule, where goods, services, or intangibles are transferred without
charge, percentages of cost (or cost of goods sold) may be used in lieu of
percentage of sales or purchases. For purposes of this rule, management
stewardship activities are not considered an intercompany sale or transfer of
services. Generally, intercompany sales or purchases in excess of 10% will be
considered a significant, although not necessarily determinative, unitary
factor. Sales of less than 10% become relatively less significant as the
percentage of sales declines, but a small percentage of sales may nevertheless
be considered significant if the sales represent goods or services which are
particularly important to the purchaser's operations.
13a.3.a.7.C.2. Example. - Business segments A
and B are commonly owned and controlled. Segment A grows citrus and other
fruit. Segment B manufactures soft drinks. A sells to B oils extracted from the
skin of a special variety of fruit for use in B's soft drinks. This oil is not
significantly available from other sources. The sales represent only a small
portion of A's total sales and B's total purchases. The unusual flavor produced
by the oil is a major factor in the character of the soft drink. Consumer taste
tests demonstrate a strong preference for the soft drink with this oil as an
ingredient. The intercompany sales between A and B would be considered a
significant unitary factor.
13a.3.a.7.D. Sales, exchanges, or transfers
between business segments may be disregarded where intercompany sales are used
as a device to assert unitary combination for tax avoidance purposes.
13a.3.a.7.D.1. Example: Company A is a West
Virginia corporation with operations in West Virginia and other states. These
operations are non-unitary with sister Corporations B and D, which operate
entirely outside of West Virginia. B and C have had significant net operating
losses for many years.
13a.3.a.7.D.1.(a). A's
apportionment factors cause 90% of A's net income to be apportioned to West
Virginia.
13a.3.a.7.D.1.(b). A
enters into a fraudulent collusive tax avoidance scheme with its sister
corporations to cause A to sell to B and C office supplies valued at less than
$500 that are simply purchased and resold by A. A, B and C are not in the
office supply business, and office supplies have nothing to do with A, B or C's
regular business operations, except as simple consumable items used in their
respective offices.
13a.3.a.7.D.1.(c). B and C each sell two used
office computers to A which would have otherwise been sold for salvage value.
A, B and C are not in the computer business, and computers have nothing to do
with A, B or C's regular business operations, except as simple consumable items
used in their respective offices. A does not use the computers and sells them
less than one week after receiving them for salvage value.
13a.3.a.7.D.1.(d). A, B and C falsely assert
that they are unitary businesses by reason of the intercompany sales. Because B
and C have no operations in West Virginia and no nexus with West Virginia, and
because of the dilutive effect of the inclusion of B's and C's denominator
numbers in A's apportionment factors for A's combined unitary tax return, A now
apportions less than 30% of A's income to West Virginia, thereby decreasing
taxable income for West Virginia tax purposes.
13a.3.a.8.
Common marketing.
13a.3.a.8.A. When business
segments share substantial common marketing features, the features can be an
important characteristic of functional integration when the marketing results
in significant mutual advantage. For this purpose, common marketing exists when
a substantial portion of the business segments' products, services,
intangibles, or the like are distributed or sold to a common customer, or the
business segments use a common trade name or other common identification, and
the common identification is a significant factor in purchasers' decisions to
purchase the respective products or services.
13a.3.a.8.A.1. Example. - Business segments A
and B are commonly owned and controlled. A manufactures small tools and garden
implements. B manufactures auto replacement parts and accessories. Both A and B
jointly sell a substantial portion of both segment's total production to
various hardware store chains, which then sell both product lines to the
public. As a result of the common sales, both segments are able to obtain
preference on shelf space and greater merchant participation in product
promotion of each segment. The common sales would be considered a functionally
integrating factor.
13a.3.a.8.A.2.
Example. - Commonly owned and controlled segments A, B, and C manufacture
furniture, carpeting, and household appliances, respectively. All three product
lines are sold under the name "Alpha" which is a nationally recognized trade
name. A, B and C jointly participate in advertising to portray the "Alpha" name
as a symbol of quality and value. Based on consumer studies, the "Alpha" name
is a significant factor in the consumer's decision to purchase the respective
products. The common use of the trade name "Alpha" would be considered a
functionally integrating factor.
13a.3.a.8.B. Common use of an advertising
agency does not constitute common marketing, absent circumstances described in
paragraph 13a.3.a.8.A. In addition, shared use of a commonly owned and
controlled business segment which provides advertising services is not common
marketing described by this subparagraph, absent circumstances described in
paragraph 13a.3.a.8.A.
13a.3.a.9. Common, centralized, or
intercompany transfer or pooling of technical information. -- Evidence of
functional integration may be indicated by transfers or pooling of technical
information, know-how, or research and development, if the transfer or pooling
represents a significant economy of scale or the information shared is
particularly important to the segments' operations.
13a.3.a.10. Common distribution system. --
Business segments may demonstrate evidence of functional integration by use of
a common distribution system, under which inventory control and accounting,
storage, trafficking, and transportation are controlled through a common
network.
13a.3.a.11. Common
purchasing. -- Evidence of functional integration may be indicated by common
purchasing of substantial quantities of products, services intangibles, or the
like from the same source, where the purchasing results in a significant
economy of scale, or where the products, services, intangibles, or the like are
not readily available from other sources and are particularly important to each
segment's operations or sales.
13a.3.a.12. Centralized management.
13a.3.a.12.A. Centralization of management
exists when directors, officers or management employees jointly participate in
management decisions which significantly affect the respective business
segments. Transfer of officers or management employees between business
segments may also provide evidence of centralization of management.
13a.3.a.12.B. The presence of centralized
management may support a finding that the operations of commonly owned and
controlled business segments are unitary.
13a.3.a.12.C. Centralization of management is
more significant as a unitary factor when business segments are engaged in the
same general line of business or constitute steps in a vertically integrated
enterprise than in other business contexts, because of the opportunity the
respective segments have in making use through the central management of
readily transferable knowledge and expertise of the operations of the other
segment and developing coordination between the business segments.
13a.3.a.12.D. Factors accorded little weight.
-- Factors such as common legal services, accounting, tax administration, and
financial reporting will generally be accorded little weight in the
determination of whether business segments are functionally
integrated.
13a.3.a.12.E. The
presence of a unitary business will be presumptively shown by the presence of
the following:
13a.3.a.12.E.1. Same general
line of business: There is a strong presumption that a corporation or a
commonly owned and controlled group of corporations is engaged in a unitary
business when its activities are in the same general line. For example, a
corporation which operates a chain of retail grocery stores will almost always
be engaged in a unitary business.
13a.3.a.12.E.2. Steps in a vertical process:
A corporation or a commonly owned or controlled group of corporations is almost
always engaged in a unitary business when its various divisions or segments are
engaged in different steps in a vertically structured enterprise. For example,
a corporation which explores for and mines copper ores; concentrates, smelts,
and refines the copper ores; fabricates the refined copper into consumer
products and distributes the products (whether by intercompany fee or purchase,
or without charge) is engaged in a unitary business, regardless of the fact
that the various steps in the process are operated substantially independently
of each other with only general supervision from the corporation's executive
offices.
13a.3.a.12.F.
Business segments which are neither in the same general line of business nor
steps in a vertical process are presumptively engaged in separate businesses,
absent a determination that the respective segments are functionally
integrated.
13a.3.a.12.F.1. In the event that
a business segment is functionally integrated with a second business segment
and the second business segment is functionally integrated with a third
business segment, the first, second and third business segments constitute a
unitary business notwithstanding the fact that the first and third business
segments are not functionally integrated with each other. In the event a second
business segment's functional integration is not substantially viewed from the
perspective of either a first or third business segment, the first, second and
third business segments shall not constitute a unitary business.
13a.3.a.12.F.1.(a). Example. -- Business
segments A, B, and C are commonly owned and controlled. A is an architectural
firm. B is a construction company which builds office and apartment buildings.
C is a manufacturer of finished steel. A provides architectural services to B,
representing half of the total architectural services it provides. C designs,
fabricates, and sells the superstructures used in the construction of B's
office and apartment buildings. The steel superstructures constitute 20% of B's
construction purchases. A and C have no intercompany sales, common marketing,
pooling of technical knowledge, common distribution system or common purchases.
Nevertheless, A, B, and C constitute a unitary business because B is
functionally integrated with both A and C.
13a.3.a.12.F.1.(b). Example. -- Business
segments A, B, and C are commonly owned and controlled. A is in the business of
oil exploration, extraction, and refining. B is a charter air transportation
company. C produces motion pictures. A and C have no intercompany sales, common
marketing, pooling of technical knowledge, or common distribution system. A
uses B's service for transporting oil executives, engineers and geologists to
remote oil exploration and drilling sites. C uses B's services for flying movie
executives and actors to movie locations and business meetings. A and C's
common purchases are limited to the transportation services provided by B. A's
use of B's service constitutes 20% of B's total charter sales. C's use of B's
service constitutes 40% of B's total charter sales. However, B's service
represents less than a hundredth of a percent of A's total purchases and only
two tenths of a percent of C's total purchases. Despite the fact that B is
functionally integrated with both A and C, A, B, and C do not constitute a
unitary business.
13a.3.a.12.G. Where the taxpayer asserts that
business segments are or are not unitary, the taxpayer has the burden of proof.
Failure by the taxpayer to produce requested evidence which lies within the
control of the taxpayer gives rise to a presumption that the evidence would be
unfavorable if provided.
13a.3.a.12.H. No divisional segregation or
separation for purposes of determining unitary group member status, income, or
attributes. The determining factor in designation of a unitary activity is the
character of the activity engaged in and not the organizational structure of
the business components engaging in the activity. If a corporation or other
entity is organized into divisions or other functional units or business
segments not constituting separate legal entities, the corporation or entity so
organized shall, as a whole, be presumed to be the unitary member if it is
engaged in unitary business activity. However, if the corporation is engaged in
more than one trade or business, then the determination of income attributable
to each separate trade or business, authorized under paragraph 13a.3.a.1. of
this rule shall be made, and the determination of income attributable to each
separate trade or business engaged in with another commonly owned and
controlled corporation or corporations, authorized under paragraph 13a.3.a.2.
of this rule shall be made. No operations, income, or apportionment factor
attributes of any such division, functional unit or business segment shall
otherwise be subtracted, segregated or separated from those of the combined
group.
13a.3.b.
Establishment of unity for acquired entities and newly formed entities.
13a.3.b.1. Newly Acquired Corporations. When
a corporation that is a member of a unitary group acquires another corporation,
a presumption exists against a finding of a unitary relationship during the
first reporting period unless a unitary relationship already existed at the
time of the acquisition. The presumption may be rebutted by proving that the
corporations are unitary. If the presumption is rebutted, then the corporations
shall be considered unitary as of the date of acquisition, unless the evidence
shows that unity was established as of another date.
13a.3.b.1.A. In the next succeeding reporting
period after the first reporting period subsequent to an acquisition whereby a
corporation that is a member of a unitary group acquires another corporation,
and for all reporting periods thereafter, a presumption of a unitary
relationship exists. The presumption may be rebutted by proving that the
corporations are not unitary.
13a.3.b.2. Newly Formed Corporations or
entities. When a corporation that is a member of a unitary group forms another
corporation, a presumption exists in favor of finding unity between the two
corporations or entities as of the date of formation. Any party may rebut the
presumption by proving that the corporations or entities are not unitary or
became unitary at a later date
13a.3.b.2.A.
For purposes of this rule, a newly formed corporation or entity includes but is
not limited to: a corporate reorganization whereby a corporate divestiture,
split-up or split off occurs, or one or more new subsidiaries is formed, or one
or more new subsidiaries is acquired and substantially all of the assets and
operations of an existing division or operation are placed into or under the
administrative or operational responsibility of the acquired entity, or a
partnership is created or formed, or an existing corporation changes its form
of doing business from one organizational structure to one or more new
organizational structures or merges several subsidiary entities into an
existing or newly formed entity.
13a.3.b.3. Unitary members compute their
liability relating to a year when a member is added to or departs from the
unitary group as follows:
13a.3.b.3.A. If a
corporation becomes a member of a unitary group during the group's common
accounting period, or ceases to be a member during that period, the other
members shall take into account the appropriate portion of the part year
member's income and the apportionment data of the part-year member in computing
their tax liabilities.
13a.3.b.3.A.1. A
part-year unitary member shall compute its liability as follows:
13a.3.b.3.A.1.(a). Business income
attributable to the portion of the year during which the part-year unitary
member was a unitary group member is combined with business income of the other
unitary group members for the same portion of the year, and the total income is
apportioned to West Virginia on a combined apportionment basis; and
13a.3.b.3.A.1.(b). Business income
attributable to the portion of the year during which the part-year unitary
member was not a unitary member is apportioned to West Virginia on the basis of
the part year member's separate apportionment data for the part of the year
during which the part-year unitary member was not a unitary member. The
corporation shall file a separate return for this portion of its
income.
13a.3.c. Holding Companies. A passive parent
holding company that directly or indirectly controls one or more operating
company subsidiaries engaged in a unitary business shall be considered to be
engaged in a unitary business and includable in a combined report with the
subsidiary or subsidiaries. An intermediate passive holding company shall be
considered to be engaged in a unitary business with the parent and subsidiary
or subsidiaries and includable in a combined report with them.
13a.3.d. Statute of limitations. If the
statute of limitations applicable to refund claims and assessments is open with
respect to a particular member of the combined group, the statute of
limitations is open with respect to that particular Taxpayer notwithstanding
the fact that the statute of limitations may have expired for one or more other
members of the combined group.
13a.3.d.1. The
statute of limitations applicable to refund claims and assessments for members
of a combined reporting group which have filed their tax return based on a
fiscalized reporting period matched to the accounting period of a principal
member shall be the statute of limitations determined and computed based on the
fiscalized accounting period.
13a.3.d.2. If a return is filed pursuant to a
combined report, the Tax Commissioner may examine and audit that return, and
collect any deficiency from a combined group member for whom the statute of
limitations for assessments has not expired, even if the statute of limitations
for other members which filed pursuant to the same combined report has expired.
Any deficiency assessed pursuant to the audit or examination will not cause a
reopening of the statute of limitations for those other members for which the
statute of limitations has expired who filed pursuant to the same combined
report.
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