Share Of Resident Estate, Trust, Or Beneficiary In West Virginia Fiduciary Adjustment

19.1. General. - Whenever a resident estate or trust realizes items of income or gain, or incurs items of loss or deduction, which give rise to one or more of the modifications described in Subsections 12.2 and 12.3 of these regulations, an adjustment must be made in order to determine the West Virginia taxable income of the resident estate or trust. An adjustment must also be made in order to determine the West Virginia adjusted gross income of a resident beneficiary of any estate or trust in the amount of the share of each in the West Virginia fiduciary adjustment. For example, where an estate or trust receives interest on obligations of the United States, such interest is includible in federal gross income but is not subject to West Virginia personal income tax by reason of the modification provided under W. Va. Code §11-21-12(c)(1). Where such modification is made, it becomes necessary to determine how much of the modification is to be taken into account in determining the West Virginia taxable income of the estate or trust taxable to the fiduciary and how much of the modification is to be allocated to the resident beneficiaries.

19.1.1. This regulation prescribes the methods to be employed in dividing among the fiduciary and the beneficiaries, on an equitable basis, the particular items of income, gain, loss and deduction which give rise to modifications for West Virginia personal income tax purposes.

19.1.2. These modifications are combined into a single net number. This number, which may be a negative or positive, is termed the "West Virginia Fiduciary Adjustment". After this number is computed, it is then divided among the fiduciary and the beneficiaries in the manner described in Subsection 19.3 of this regulation.

19.1.3. The share of a resident estate or trust in the West Virginia fiduciary adjustment is then added to or subtracted from the federal taxable income of the estate or trust in arriving at its West Virginia taxable income. Similarly, the share of a resident beneficiary in the West Virginia fiduciary adjustment is then added to or subtracted from his federal adjusted gross income in arriving at his West Virginia adjusted gross income.

19.1.4. A nonresident trust, estate or beneficiary must compute West Virginia taxable income in accordance with the provisions of W. Va. Code §11-21-39 and Section 39 of these regulations.

19.2. Definition Of West Virginia Fiduciary Adjustment. - The West Virginia fiduciary adjustment is the net amount of the modifications described in Subsections 12.2 and 12.3 of these regulations which relate to items of income, gain, loss or deduction of the estate or trust.

19.2.1. Example. - A resident trust had the following modifications for 1988:

Additions:

(1) Interest income on bonds of the State of California. (See Subsection 12.2.1)...$2,000
Total Additions Modification...$2,000

Subtractions: (1) Interest income on United States Series E Savings Bonds. (See Subsection 12.3.1)...$500

(2) Interest income on bonds of the State of West Virginia. (See Subsection 12.3.2)...$200

Total Subtractions Modification...$700

West Virginia Fiduciary Adjustment...$1,300

19.2.1.1. Because the additions are in excess of the subtractions, the West Virginia fiduciary adjustment is a "positive number" and is allocated between the trust and its beneficiaries as provided in Subsections 19.3 or 19.4 of this regulation.

19.2.1.2. If, in the example above, the subtractions had exceeded the additions, the West Virginia fiduciary adjustment would be a negative number and would be similarly allocated.

19.3. Allocation Of West Virginia Fiduciary Adjustment Between The Trust And Its Beneficiaries.

19.3.1. In General. - As a general rule, the percentage share of each beneficiary and of a fiduciary of an estate or trust in the West Virginia fiduciary adjustment is equal to the percentage share of the beneficiary of the fiduciary in the federal distributable net income of the estate or trust. Exceptions to this general rule are set forth under Subsections 19.3.2 and 19.4 of this regulation.

19.3.1.1. Example. - The West Virginia fiduciary adjustment with respect to an estate is a positive number which equals one thousand dollars ($1,000). The estate has federal distributable net income of five thousand dollars ($5,000) and makes distributions of three thousand dollars ($3,000) to A and fifteen hundred dollars ($1,500) to B, both of whom are resident beneficiaries. The foregoing distributions are considered to be made from distributable net income for federal income tax purposes. The estate makes no other distributions during the taxable year. Since the distributions to A represent sixty percent (60%) of federal distributable net income, A is required to report sixty percent (60%) of the West Virginia fiduciary adjustment of the estate, or six hundred dollars ($600) on his West Virginia Personal Income Tax Return. Similarly, B is required to report thirty percent (30%) of the West Virginia fiduciary adjustment, or three hundred dollars ($300), on his West Virginia return. The remaining ten percent (10%) of the West Virginia fiduciary adjustment, or one hundred dollars ($100), is required to be reported by the fiduciary on the West Virginia Fiduciary Income Tax Return for the estate.

19.3.1.1.a. If in the foregoing example, B was a nonresident beneficiary, the computation of the shares of the resident beneficiary A and of the fiduciary in the West Virginia fiduciary adjustment would remain the same, but the thirty percent (30%) allocated to B would be reported by him only to the extent provided in Section 39 of these regulations.

19.3.1.1.b. Where the separate shares of beneficiaries of a trust are to be treated, for federal income tax purposes, as separate trusts for the purpose of determining the amount of federal distributable net income allocable to the beneficiary and to the fiduciary, such separate shares of federal distributable net income shall determine the percentage shares of the beneficiaries and of the fiduciary in the West Virginia fiduciary adjustment.

19.3.2. Special Rule Where Estate Or Trust Has No Federal Distributable Net Income. - If the federal distributable net income of an estate or trust for the taxable year is zero or a negative number, the share of each beneficiary in the West Virginia fiduciary adjustment is in proportion to his share of the income of the estate or trust for the taxable year, determined under local law or the governing instrument. The beneficiary's share of such income consists of the amount thereof which is required to be distributed to him during the taxable year, or which is distributed to him during the taxable year although not required to be distributed currently. Any balance of the West Virginia fiduciary adjustment not so allocable to the beneficiary is allocable to the estate or trust.

19.3.2.1. Examples.
Example 1. - A trust has income for trust accounting purposes of ten thousand dollars ($10,000). The West Virginia fiduciary adjustment with respect to the trust is a "positive" number which equals five thousand dollars ($5,000). The trust pays trustee's commissions and other expenses of a formal accounting chargeable to principal which, for the purpose of this example, are deductible for federal and West Virginia income tax purposes and have the effect of reducing federal distributable net income exactly to zero.

Under the trust instrument, four thousand dollars ($4,000) of income is required to be distributed to A. An additional three thousand dollars ($3,000) is paid to A, pursuant to the discretionary authority of the trustee out of the balance of the total income of ten thousand dollars ($10,000), and the remaining three thousand dollars ($3,000) is accumulated by the trust. A's seven thousand dollar ($7,000) share is therefore seventy percent (70%) of the income for trust accounting purposes. Accordingly, A is required to add seventy percent (70%) of the West Virginia fiduciary adjustment of five thousand dollars ($5,000), or thirty-five hundred dollars ($3,500), to his federal adjusted gross income in determining his West Virginia adjusted gross income, as provided in Subsection 12.4. The remaining fifteen hundred dollars ($1,500) is the trust's share in the West Virginia fiduciary adjustment, which is required to be added to the federal taxable income of the trust in determining its West Virginia taxable income, as provided under Subsection 18.2.

Example 2. - The facts are the same as in Example 1 except that the West Virginia fiduciary adjustment is a "negative" number which equals five thousand dollars ($5,000). In computing his West Virginia adjusted gross income, the beneficiary is therefore permitted to subtract thirty-five hundred dollars ($3,500) which is his share in the West Virginia fiduciary adjustment, from his federal adjusted gross income. The trust is permitted to subtract fifteen hundred dollars ($1,500), which is its share in the West Virginia fiduciary adjustment, from its federal taxable income. In this particular case, the trust will derive no West Virginia taxable benefit from this subtraction except in a case where it has nondistributable capital gains or extraordinary dividends allocated to principal.

19.4. Alternative Apportionment Of West Virginia Fiduciary Adjustment Between The Estate Or Trust And Its Beneficiaries. - Where the methods provided under Subsection 19.3 will not result in a fair and equitable apportionment of the West Virginia fiduciary adjustment, the fiduciary may, upon application, adopt and use on a return for the taxable year of the estate or trust, any other method which is equitable, subject to such terms and conditions as the State Tax Commissioner may require.

19.4.1. No alternative method shall be approved which results in the inclusion in the West Virginia adjusted gross income of the beneficiary an amount greater than the amount of the trust income paid, credited, or required to be distributed to such beneficiary for the taxable year.

19.4.2. Any fiduciary whose alternative method of apportionment under W. Va. Code §11-21-19(d) and this regulation is approved, must attach to the West Virginia Fiduciary Income Tax Return for the particular year a signed statement containing a summary of the facts relied upon and used to support the position that the alternative allocation, rather than the allocation prescribed in Subsection 19.3 is fair and equitable.