real property, (2) tangible personal property, and (3)

intangible personal property, such as stocks, bonds and other similar forms of investments. Shares of stock include shares of various S corporations. The real and tangible personal property generates rental income, royalties and gains (or losses) from the disposition of such properties. Beneficiaries of these trusts include nonresident individuals. Advice has been requested concerning the extent of your client's responsibility, under W. Va. Code §11-21-71a, for withholding West Virginia income tax from distributions to nonresident beneficiaries. The measure of the withholding tax is the "effectively connected taxable income" of a trust or other pass-through entity, which may be lawfully taxed by West Virginia and which is allocable to a nonresident distributee. W. Va. Code §11-21-71a(b)(1). The term "effectively connected taxable income" is defined in subsection 11-21-71a(e) to mean: "the taxable income or portion thereof of a partnership, S corporation, estate, or trust, as the case may be which is derived from or attributable to West Virginia sources as determined under section ... [11-21-32] and such regulations as the tax commissioners may prescribe, whether such amount is actually distributed or is deemed to have been distributed for federal income tax purposes." (emphasis added) Therefore, withholding is required on both actual and deemed distributions of effectively connected taxable income to a nonresident beneficiary of a trust. If a pass-through entity believes it will incur undue hardship by complying with the §11-21-71a withholding requirements, it may file with the Tax Commissioner a written petition for exemption from them based on undue hardship. Such a petition must be filed timely and must set forth, with particularity, the facts upon which the claim of undue hardship is based. A petition is filed timely if it is filed before the end of the taxable year of the pass­through entity for which relief from withholding is requested. Approval of a petition claiming undue hardship is discretionary. In analyzing an undue hardship claim, the Tax Commissioner will consider the ability of the pass-through entity to comply, at a reasonable cost, with the withholding requirements of §11-21-71a and the cost to the State of collecting the tax directly from a nonresident distributee who does not voluntarily file a return and pay timely the amount of West Virginia income tax due. Section 11-21-71a provides two means by which nonresident distributees may avoid withholding. First, a nonresident distributee may timely file Form WV/NRW-4, West Virginia Nonresident Income Tax Agreement, with the pass-through entity. Second, some or all of the nonresident distributees may authorize the pass-through entity to file a composite West Virginia personal income tax return on their behalf, under §11-21-51a. For calendar year distributees, the composite return is due April 15th of the succeeding year, at which time the composite amount of tax is also due. When a composite return is filed on behalf of nonresident distributees, the pass-through entity does not remit tax withheld from those distributees with its annual return to the Tax Commissioner, Form IT-141, IT-165, or WV/CNT-112S, as the case may be. Instead, the amount of tax withheld by the pass-through entity is the source of funds for paying the composite tax liability. However, since the composite return rate of tax is 6.5 percent and the §11-21-71a withholding tax rate is 4 percent, the pass-through entity is required to collect the additional tax (generally 2.5 percent) from the nonresident distributees included in the composite return. Whether the composite tax liability is paid from withheld tax or from payments to the pass-through entity by the nonresident beneficiaries, or some combination thereof, becomes a moot point, as to nonresidents included in the composite return, as long as the composite tax liability is paid timely. If the composite tax liability is not paid timely, the pass-through entity is liable for payment of the withholding tax, plus interest and applicable additions to tax and, as agent for the individuals included in the composite return, for payment of the remaining balance of composite tax liability, plus interest and applicable additions to tax. The West Virginia source income of a nonresident individual is limited by statute, W. Va. Code §11-21-32 (1992), to the net amount of income, gain, loss and deduction entering into the nonresident's federal adjusted gross income for the taxable year that is derived from or connected with West Virginia sources. W. Va. Code §11­21­32(a). West Virginia source income includes a nonresident individual's: 1. Distributive share of partnership income, gain, loss and deduction, determined under §11-21-37; 2. Pro-rata share of S corporation income, gain, loss and deduction, determined under §11-21-37, increased by the reductions for taxes described in IRC § 1366(f)(2) and (3); 3. Share of estate or trust income, gain, loss and deduction determined under §11­21-39; and 4. Items of income, gain, loss and deduction derived from or connected with: a. The ownership of any interest in real or tangible personal property located in West Virginia; b. A business, trade, profession or occupation carried on in West Virginia; or c. Disposition of stock in an S

corporation, to the extent determined under §11-21-37. Income from intangible personal property, including annuities, dividends, interest, and gains from the disposition of intangible personal property constitute income from West Virginia sources only to the extent that such income is from property employed in a business, trade, profession, or occupation carried on in West Virginia. W. Va. Code §11-21-32(b)(2). Accordingly, income of nonresident individuals from rents or royalties for the use of, or for the privilege of using in West Virginia, patents, copyrights, secret processes and formulas, good­will, trade-marks, trade brands, franchises, and other like property is taxable if such property has a business situs in West Virginia. Income of nonresidents from other intangible personal property such as shares of stock in C corporations, bonds, notes, bank deposits and other indebtedness is taxable if such property has a business situs in West Virginia. Intangible personal property has a business situs in West Virginia if it is employed as capital in West Virginia, or the possession and control of the property has been localized in connection with a business, trade, profession, or occupation carried on in West Virginia so that its substance and value attach to and become an asset of the business, trade, profession, or occupation carried on in West Virginia. Accordingly, your client is required to withhold §11-21-71a tax from distributions of trust income, whether actual or deemed, to a nonresident beneficiary if the income is derived from or attributable to: 1. The trust's ownership of any interest in real or tangible personal property located in West Virginia. 2. A business, trade, profession, or occupation of the trust carried on in West Virginia by its trustee; 3. The trust's pro rata share of S corporation income, gain, loss and deduction, to the extent determined under §11-21-37; 4. Disposition of shares of stock owed by a trust in an S corporation, to the extent determined under §11-21-37; 5. Intangible personal property used in a business, trade, profession, or occupation carried on in West Virginia. To illustrate, a trustee is required to withhold tax from income generated by the rental or sale of real or tangible personal property located in West Virginia, and from royalties attributable to a trust's interest in coal, oil, gas, or other natural resource in place if such property is located in West Virginia. Interest and dividend income derived from stock in C

corporations, bonds, notes and other forms of investments, generally characterized as portfolio income, will, as a general rule, not be subject to withholding under §11-21-71a. Income of a nonresident derived from intangible personal property is subject to withholding only when it is derived from intangible personal property which has a business situs in West Virginia, as above defined. Income generated through the ownership of shares of stock of an S corporation, or interest in a partnership, which owns real or tangible personal property located in West Virginia, or which is doing business in West Virginia, is subject to withholding under §11-21-71a. However, withholding is required only to the extent the income is taxable West Virginia source income. A more detailed analysis of the income is required when the S corporation, or partnership, has nonbusiness as well as business income, or is doing business in more than one State, necessitating division of income, whether it be business or nonbusiness income, in order to determine the portion thereof that is taxable West Virginia source income allocable to the nonresident distributees and, therefore, subject to withholding under §11-21-71a. In this regard, the character of items of income, gain, loss and deduction in the hands of the pass-through entity flow through to its distributees as if the distributee had directly earned the income, realized the gain, or incurred the loss or expense. W. Va. Code §11-21-37(d)(2) (character of partnership items determined under §11-21-17(a)); §11-21-37(e)(2) (character of S corporation items determined under §11-21-17a(b); §11-21-39(a)(2)(B) (character of estate and trust items). Additionally, deductions with respect to capital losses and net operating losses are allowed solely with respect to income, gain, loss and deduction derived from or connected with West Virginia sources, under regulations of the Tax Commissioner, but otherwise determined in the same manner as corresponding federal deductions for capital losses and net operating losses. W. Va. Code §11-21-32(b)(3). The preceding discussion answers specific questions raised in your request for a technical assistance advisory concerning trust income subject to withholding under §11-21-71a. To address your more general question regarding the responsibilities of your client under §11-21-71a, we are providing, in Appendix "A," a discussion of the requirements imposed on, and the liability of, withholding agents under §11-21-71a. The conclusions reached in this technical assistance advisory are based upon the facts submitted and application of current law. You are advised that the conclusions reached in this advisory may no longer apply should (1) there be a change of material fact, (2) the material facts be significantly different from those provided for purposes of this advisory, or (3) there be a material change in the applicable law. In the event there is a material change, your client may apply for clarification of this advisory. This technical assistance advisory is issued pursuant to W.

Va. Code §11-10-5r. In conformity therewith, a sanitized version of this advisory, designated TAA 92-005, will be filed in the West Virginia Register maintained by the Secretary of State and otherwise made available to the public. A technical assistance advisory has no precedential value except to the taxpayer who requests the advisory and then only for the specific transaction(s) addressed in the advisory, unless the contrary is clearly stated herein. Since the questions raised and answered in this advisory are general in nature, this advisory may be relied upon by other pass-through entities. Should you have any question about this advisory, please contact this office at you convenience. James H. Paige III, Secretary Department of Tax and Revenue Issued: December 9, 1992JHPIII:dsm APPENDIX A to TAA 92-005 The following is a general discussion of W. Va. Code §11­21­71a, as amended in 1992, which imposes on partnerships, S

corporations, trusts and estates a requirement to pay withholding tax on their West Virginia source income allocated to nonresident partners, shareholders, or beneficiaries, as the case may be. This requirement applies to taxable years of partnerships, S

corporations, estates, or trusts that begin after December 31, 1991.WHEN PAYMENT OF WITHHOLDING TAX IS REQUIRED A partnership, S corporation, trust, or estate treated as a pass-through entity for Federal income tax purposes for the taxable year (hereinafter "pass-through entity"), which is doing business in West Virginia or deriving rents or royalties from real or tangible personal property located in West Virginia, and which derives taxable income for the taxable year from or connected with West Virginia sources which is allocable to a partner, S

corporation shareholder, or beneficiary of a trust or estate, who is a nonresident of West Virginia (hereinafter "nonresident distributee"), is required to pay a withholding tax computed under W. Va. Code §11-21-71a(b), except as provided in subsection 11­21­71a(c) or (k). W. Va. Code §11-21-71a(a).AMOUNT OF WITHHOLDING TAX PAYABLE The amount of §11-21-71a withholding tax payable by a pass­through entity is equal to four percent (4%) of the "effectively connected taxable income" of the pass-through entity, which may be lawfully taxed by West Virginia, and which is allocable to a nonresident distributee. W. Va. Code §11­21­71a(b)(1). The term "effectively connected taxable income" is defined in subsection 11-21-71a(e) as follows: "For purposes of this section, the term 'effectively connected taxable income' means the taxable income or portion thereof of a ... [pass­through entity] which is derived from or attributable to West Virginia sources as determined under ... [§11-21-32] and such regulations as the tax commissioner may prescribe, whether such amount is actually distributed or is deemed to have been distributed for federal income tax purposes." When determining the amount of withholding tax due under §11­21-71a, the pass-through entity may apply any tax credits allowable, under chapter 11 of the West Virginia Code, to the pass­through entity which pass-through to nonresident distributees. In no event, however, may application of these credits reduce the tax liability of the distributee to less than zero. W. Va. Code §11­21-71a(b)(2).WHEN WITHHOLDING IS NOT REQUIRED A pass-through entity is not required to withhold tax under §11-21-71a in five (5) situations: 1. On distributions to a person, other than a corporation, who is exempt from payment of West Virginia personal income tax. A person is exempt from payment of West Virginia personal income tax only if such person is, by reason of such person's purpose or activities, exempt from paying Federal income taxes on such person's West Virginia source income. W.Va. Code §11-21-71a(c)(1). The pass-through entity may rely on the written statement of the person claiming to be exempt from the West Virginia personal income tax provided the pass-through entity discloses the name and federal taxpayer identification number of all persons who claim this exemption in the return filed by the pass-through entity for the taxable year under article 21 or 24, chapter 11 of the West Virginia Code. 2. On distributions to a corporation which is exempt from payment of West Virginia corporation net income tax. A corporation is exempt from paying West Virginia corporation net income tax only if the corporation is, by reason of its purpose or activities, exempt from paying Federal income taxes on the corporation's West Virginia source income. W.

Va. Code §11-21-71a(c)(2). It should be noted that even though a corporation is generally exempt from paying Federal income taxes by reason of its purpose or activities, it may nevertheless be taxable on its "unrelated business taxable income," as defined in the Internal Revenue Code of 1986, as amended, for both Federal and West Virginia corporation net income tax purposes. If, and to the extent the West Virginia source income is unrelated business taxable income in the hands of the nonresident distributee that is taxable by West Virginia, withholding is required with respect to that income. The pass-through entity may rely on the written statement of the person claiming to be exempt from the West Virginia corporation net income tax provided the pass-through entity discloses the name and federal taxpayer identification number of all corporations who claim this exemption in the return filed by the pass­through entity for the taxable year under article 24, chapter 11 of the West Virginia Code. 3. On distributions when compliance will cause undue hardship on the pass-through entity. W.

Va. Code §11-21-71a(c)(3). It should be observed, however, that this exemption is not automatic. No pass­through entity is exempt under subsection 11­21­71a(c)(3) unless the Tax Commissioner, in his or her discretion, approves, in writing, the pass­through entity's written petition for exemption from the withholding requirements of §11­21­71a based on undue hardship. In determining whether or not an undue hardship waiver will be granted two nonexclusive considerations are (1) the ability of the pass-through entity to comply with the withholding requirements, and (2) the cost to the State of collecting the tax directly from a nonresident distributee who does not voluntarily file a return and pay the tax due with respect to such distributions. Id. 4. On distributions by an unincorporated organization that has elected, under I.R.C. §

761, to not be treated as a partnership for Federal income tax purposes. However, such an organization is required to file with the Tax Commissioner a true and accurate return of information under §11­21­58(c) setting forth (1) the amount of fixed or determinable gains, profits and income of the unincorporated organization, and (2) the name, address and taxpayer identification numbers of persons receiving fixed or determinable gains, profits or income from such nonpartnership venture. W. Va. Code §11-21-71a(c)(4). 5. On distributions to a nonresident distributee who executed and timely filed with the pass-through entity a West Virginia Nonresident Income Tax Agreement, Form WV/NRW-4, that has not been revoked either by the maker or the Tax Commissioner.PAYMENT OF WITHHELD TAX As a general rule, each pass-through entity required to withhold tax under §11-21-71a must pay to the Tax Commissioner the amount required to be withheld no later than: 1. S Corporations. -- The fifteenth day of the third month following the close of the taxable year of the S corporation along with the annual information return, Form WV/CNT-112S, due under West Virginia Corporation Net Income Tax Act unless, and then only to the extent, a composite annual return is filed for such nonresident individuals under §11­21-51a. 2. Partnerships, Estates and Trusts. -- The fifteenth day of the fourth month following the close of the taxable year of the partnership, estate or trust, with the annual return of the partnership, Form IT­165, or of the estate or trust, Form IT-141, due under the West Virginia Personal Income Tax Act unless, and then only to the extent, a composite annual return is filed for such nonresidents individuals under §11-21-51a. Composite annual West Virginia personal income tax returns and the amount of tax due for the year are due on the fifteenth day of the fourth month after the close of the taxable year of the nonresident individuals included in the composite return, along with a $50 filing fee. W. Va. Code §11-21-51a(a)(3). In the event the pass-through entity withholds more tax than the amount required to be remitted with the composite return, the pass-through entity must return the excess withholding to the nonresident beneficiaries from which the excess amount was withheld. Filing a composite return is relatively straight forward when the taxable years of the pass-through entity and of the nonresident distributees included in the composite return are the same. When, however, the taxable year of the pass-through entity is a fiscal year but the taxable year of the nonresident distributees included in the composite return is the calendar year, the composite return is due April 15th for the preceding calendar year and is based upon the distributions, whether actual or deemed, for the taxable year of the pass-through entity that ends during the calendar year for which the composite return is filed. Three special rules may apply: 1. Where Extension of Time to File Return. -- An extension of time for filing any of the above-referenced returns does not extend the time for paying the amount of withholding tax due under §11-21-71a or the due date of the tax due with a composite return. In this situation, the pass-through entity must pay, by the original statutory due date, at least ninety percent (90%) of the withholding tax due for the taxable year, or one hundred percent (100%) of the tax paid under §11-21-71a for the prior taxable year, if such taxable year was a taxable year of twelve months and tax was paid under this section for that taxable year, and file Form WV/NRW-1, Extension Of Time To File Information Returns. The remaining balance of the tax due, if any, must be paid at the time the pass-through entity files its Form IT-141, IT-165, or WV/CNT-112S, as the case may be, for the taxable year, or the composite return is filed under §11-21-51a. If the balance due is paid by the last day of the extension period for filing such return and the amount of tax due with such return is ten percent or less of the tax due under §11-21-71a for the taxable year, or with the composite return for the taxable year, no additions to tax will be imposed under W. Va. Code §11-10-18 with respect to balance so remitted. 2. When there is over withholding under §11-21-71a. --If the amount of withholding tax due under §11-21-71a for the taxable year is less than the withholding taxes payable for the taxable year by the pass-through entity, the excess must be refunded to the pass-through entity or, at its election, paid over to the Tax Commissioner and established as a credit against withholding tax due under §11-21-71a for the then current taxable year of the pass-through entity. 3. Deposit in Trust for Tax Commissioner. -- The Tax Commissioner may, if the Commissioner believes such action is necessary for the protection of trust fund moneys due this State, require any pass-through entity to pay over to the Commissioner the tax deducted and withheld under §11-21-71a at any earlier time or times. W. Va. Code §11-21-71a(d)(2)(B).TREATMENT OF NONRESIDENT DISTRIBUTEES Allowance of Credit. -- Each nonresident partner, nonresident share holder, or nonresident beneficiary from whom tax is withheld under §11-21-71a, is allowed a credit for such partner's or shareholder's or beneficiary's share of the tax withheld by the partnership, S corporation, estate, or trust, under §11-21-71a: When the distribution is to a corporation taxable under the West Virginia Corporation Net Income Tax Act, the credit allowed by §11-21-71a is applied against the distributee corporation's liability for that tax. Credit Treated As Distributed to Nonresident Distributee. -- Except as provided in regulations, a nonresident partner's share, a nonresident shareholder's share or a nonresident beneficiary's share of any withholding tax paid by the partnership, S

corporation, estate, or trust under §11-21-71a is treated as distributed to such partner by such partnership, or to such shareholder by such S corporation, or to such beneficiary by such estate or trust, on the earlier of: 1. The day on which such tax was paid to the tax commissioner by the partnership, S corporation, estate or trust; or 2. The last day of the taxable year for which such tax was paid by the partnership, S corporation, estate or trust.INFORMATION STATEMENTS Every person required to deduct and withhold tax under §11­21­71a must furnish to each nonresident distributee a written statement, as prescribed by the Tax Commissioner, showing: 1. The amount of West Virginia effectively connected taxable income, whether distributed or not distributed for Federal income tax purposes by such partnership, S corporation, estate, or trust to such nonresident distributee; 2. The amount deducted and withheld as tax under §11­21-71a; and 3. Such other information as the Tax Commissioner may require. The Department has designed Form WV/NRW-2, Statement of West Virginia Income Tax Withheld For Nonresident Individual Or Organization, for use by pass-through entities for this purpose. This form need not be used by a pass-through entity, however, if the information required by Form WV/NRW-2 is clearly shown on the front page of Federal Schedule K-1 furnished to the nonresident. A copy of the information statements required by subsection 11-21-71a(h) must be filed with the West Virginia return, Form IT­165 or IT-141, filed under the West Virginia Personal Income Tax Act (or the West Virginia Corporation Net Income Tax Act, Form WV/CNT-112S, in the case of S corporations) by the pass-through entity for its taxable year to which the distribution relates. This information statement must be furnished to each nonresident distributee on or before the due date of the pass­through entity's return under the West Virginia Personal Income Tax Act, Form IT-141 or IT-165 (or the West Virginia Corporation Net Income Tax Act, Form WV/CNT-112S) for the taxable year, including extensions of time for filing such return, or such later date as may be allowed by the Tax Commissioner.LIABILITY FOR WITHHELD TAX Every person required to deduct and withhold tax under §11­21­71a is statutorily liable for payment of the amount of tax due under that section for taxable years of the pass-through entity beginning after December 31, 1991, except as otherwise provided in §11-21-71a. The amount of tax required to be withheld and paid over to the Tax Commissioner is deemed by statute to be the tax of the pass­through entity for purposes of the West Virginia Tax Procedure and Administration Act, W. Va. Code §11-10-1 et seq., and the West Virginia Tax Crimes and Penalties Act, W. Va. Code §11-9-1 et seq. Any amount of tax withheld under §11-21-71a is held in trust for the Tax Commissioner until it is paid over to the Commissioner. No partner, S corporation shareholder, or beneficiary of a trust or estate, has a right of action against the partnership, S

corporation, state or trust, in respect to any moneys withheld from such person's distributive share and paid over to the Tax Commissioner in compliance with, or intended compliance with, §11­21-71a.FAILURE TO WITHHOLD If any pass-through entity fails to deduct and withhold tax as required by §11-21-71a and, thereafter, the tax against which such tax may be credited is paid, in whole or in part, by the nonresident distributee(s), the Tax Commissioner may not collect the amount so paid from the pass-through entity. However, payment of West Virginia income taxes by nonresident distributee(s) from whom withholding was required, does not relieve the pass-through entity from liability for payment of any interest, penalties or additions to tax otherwise applicable in respect to its failure to withhold, or relieve the pass-through entity from liability for payment of delinquent withholding tax attributable to nonresidents from whom withholding was required when such nonresident does file a West Virginia income tax return and pay the amount of tax due.DISTRIBUTEE AGREEMENTS The Tax Commissioner will permit a nonresident distributee to avoid withholding under §11-21-71a by timely filing with the pass­through entity a West Virginia Nonresident Income Tax Agreement, Form WV/NRW-4. Under this Agreement, the nonresident distributee agrees: 1. To timely file returns and make timely payment of all taxes imposed by the West Virginia Personal Income Tax Act (or the West Virginia Corporation Net Income Tax Act in the case of a C corporation), on the distributee with respect to the effectively connected taxable income of the pass-through entity allocated to the distributee; and 2. To be subject to personal jurisdiction in West Virginia for purposes of collecting any unpaid West Virginia income tax, together with related interest, penalties, additional amounts and additions to tax, owed by the nonresident distributee, for taxable years during which the Agreement was in effect. A nonresident distributee electing to execute a West Virginia Nonresident Income Tax Agreement, Form WV/NRW-4, must file a complete and properly executed Agreement, on Form WV/NRW-4, with each pass-through entity for which this election is made, on or before the last day of taxable year of the pass-through entity in respect of which the agreement first applies. The pass-through entity must attach a copy of each such Agreement it receives to its annual West Virginia information return, Form IT-141, IT-165, or WV/CNT-112S, for the taxable year to which the Agreement first applies. After an Agreement is filed with the pass-through entity, it may be revoked by a distributee only in accordance with regulations promulgated by the Tax Commissioner. Upon receipt of a properly executed West Virginia Nonresident Income Tax Agreement, Form WV/NRW-4, the pass-through entity is not to withhold tax under § 11-21-71a for the taxable year of the pass­through entity during which the agreement was received by the pass-through entity, or for any taxable year subsequent thereto, until either (1) the nonresident distributee notifies the pass­through entity, in writing, to begin withholding tax under §11­21­71a, or (2) the Tax Commissioner directs the pass-through entity, in writing, to begin withholding tax under §11-21-71a due to the distributee's continuing failure to comply with the terms of the West Virginia Nonresident Income Tax Agreement, Form WV/NRW-4. The pass-through entity must attach a copy of all West Virginia Nonresident Income Tax Agreements received by the pass­through entity during a taxable year to its annual information return filed by the pass-through entity for that year under the West Virginia Personal Income Act, Form IT-141 or IT-165, or the West Virginia Corporation Net Income Tax Act, Form WV/CNT-112S. If the pass-through entity fails to timely file a copy of the West Virginia Nonresident Income Tax Agreement, Form WV/NRW-4, executed by a distributee and timely furnished to the pass-through entity, as provided in §11-21-71a, then the pass-through entity must remit to the Tax Commissioner an amount equal to the amount that should have been withheld under this §11-21-71a from the nonresident distributee. The pass-through entity may recover payment made pursuant to the preceding sentence from the distributee on whose behalf the payment was made. W. Va. Code §11­21-71a(k)(5).