August 7, 2003 - Introduced by Representatives Black, Berceau, Pocan, Miller,
Hebl
and Plouff, cosponsored by Senators Carpenter, Risser and Chvala.
Referred to Committee on Ways and Means.
AB461,1,5 1An Act to renumber and amend 71.26 (2) (a); and to create 71.01 (5p), 71.01
2(9b), 71.05 (6) (a) 21., 71.22 (3m), 71.22 (9b), 71.26 (2) (a) 6., 71.34 (1) (j), 71.42
3(1p), 71.42 (4m), 71.45 (2) (a) 16., 71.738 (3m) and 71.80 (23) of the statutes;
4relating to: adding payments to related entities to federal taxable income for
5state income tax and franchise tax purposes.
Analysis by the Legislative Reference Bureau
For purposes of calculating a taxpayer's state income tax or franchise tax
liability, this bill requires a taxpayer to add the following amounts to the taxpayer's
federal taxable income: any amount that the taxpayer deducted or excluded under
the Internal Revenue Code for management and service fees, interest expenses and
costs, intangible expenses and costs, and any other expenses and costs directly or
indirectly paid, accrued, or incurred to, or in connection directly or indirectly with
one or more direct or indirect transactions with, one or more related entities.
This bill also authorizes the Department of Revenue (DOR) to allow the tax
consequences of a transaction, as asserted by a taxpayer, even if DOR initially
disallows the consequences by asserting the sham transaction doctrine or a related
doctrine, if a taxpayer meets certain conditions. The conditions include the
taxpayer's ability to demonstrate that the transaction had a valid, good faith
business purpose other than tax avoidance, that the business purpose is
commensurate with the transaction's tax benefit, and that the transaction had
economic substance apart from the taxpayer's asserted tax benefit.

Also under the bill, a taxpayer is not required to add to the taxpayer's federal
taxable income certain expenses or costs as specified in the bill if a number of
conditions apply. The conditions include the following:
1. The transaction to which the expenses and costs apply did not have as its
principal purpose tax avoidance.
2. The related entity to whom the taxpayer paid the expenses or costs paid,
accrued, or incurred such amounts to a person who is not a related entity.
3. The related entity was subject to tax on its net income, and a measure of the
tax included the expenses or costs received from the taxpayer.
For further information see the state fiscal estimate, which will be printed as
an appendix to this bill.
The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows:
AB461, s. 1 1Section 1. 71.01 (5p) of the statutes is created to read:
AB461,2,112 71.01 (5p) "Intangible expenses and costs" includes expenses, losses, and costs
3for, related to, or directly or indirectly in connection with the direct or indirect
4acquisition of, use of, maintenance or management of, ownership of, sale of, exchange
5of, or any other direct or indirect disposition of intangible property to the extent that
6such expenses, losses, and costs are allowed as deductions or costs to determine
7federal taxable income under the Internal Revenue Code. For purposes of this
8subsection, "expenses, losses, and costs" include losses related to or incurred directly
9or indirectly in connection with factoring transactions and discounting transactions;
10royalty, patent, technical, and copyright fees; licensing fees; and other similar
11expenses and costs.
AB461, s. 2 12Section 2. 71.01 (9b) of the statutes is created to read:
AB461,2,1513 71.01 (9b) "Related entity" means any person related to a taxpayer as provided
14under section 267, 318, or 1563 of the Internal Revenue Code during all or a portion
15of the taxpayer's taxable year.
AB461, s. 3 16Section 3. 71.05 (6) (a) 21. of the statutes is created to read:
AB461,3,5
171.05 (6) (a) 21. Any amount deducted or excluded under the Internal Revenue
2Code for management and service fees, interest expenses and costs, intangible
3expenses and costs, and any other expenses and costs directly or indirectly paid,
4accrued, or incurred to, or in connection directly or indirectly with one or more direct
5or indirect transactions with, one or more related entities.
AB461, s. 4 6Section 4. 71.22 (3m) of the statutes is created to read:
AB461,3,167 71.22 (3m) "Intangible expenses and costs" includes expenses, losses, and costs
8for, related to, or directly or indirectly in connection with the direct or indirect
9acquisition of, use of, maintenance or management of, ownership of, sale of, exchange
10of, or any other direct or indirect disposition of intangible property to the extent that
11such expenses, losses, and costs are allowed as deductions or costs to determine
12federal taxable income under the Internal Revenue Code. For purposes of this
13subsection, "expenses, losses, and costs" include losses related to or incurred directly
14or indirectly in connection with factoring transactions and discounting transactions;
15royalty, patent, technical, and copyright fees; licensing fees; and other similar
16expenses and costs.
AB461, s. 5 17Section 5. 71.22 (9b) of the statutes is created to read:
AB461,3,2018 71.22 (9b) "Related entity" means any person related to a taxpayer as provided
19under section 267, 318, or 1563 of the Internal Revenue Code during all or a portion
20of the taxpayer's taxable year.
AB461, s. 6 21Section 6. 71.26 (2) (a) of the statutes is renumbered 71.26 (2) (a) (intro.) and
22amended to read:
AB461,3,2523 71.26 (2) (a) Corporations in general. (intro.) The "net income" of a corporation
24means the gross income as computed under the Internal Revenue Code as modified
25under sub. (3) minus and modified as follows:
AB461,4,1
11. Minus the amount of recapture under s. 71.28 (1di) plus.
AB461,4,2 22. Plus the amount of credit computed under s. 71.28 (1), (3), (4), and (5) plus.
AB461,4,7 33. Plus the amount of the credit computed under s. 71.28 (1dd), (1de), (1di),
4(1dj), (1dL), (1dm), (1ds), (1dx), and (3g) and not passed through by a partnership,
5limited liability company, or tax-option corporation that has added that amount to
6the partnership's, limited liability company's, or tax-option corporation's income
7under s. 71.21 (4) or 71.34 (1) (g) plus.
AB461,4,11 84. Plus the amount of losses from the sale or other disposition of assets the gain
9from which would be wholly exempt income, as defined in sub. (3) (L), if the assets
10were sold or otherwise disposed of at a gain and minus deductions, as computed
11under the Internal Revenue Code as modified under sub. (3), plus.
AB461,4,15 125. Plus or minus, as appropriate, an amount equal to the difference between
13the federal basis and Wisconsin basis of any asset sold, exchanged, abandoned, or
14otherwise disposed of in a taxable transaction during the taxable year, except as
15provided in par. (b) and s. 71.45 (2) and (5).
AB461, s. 7 16Section 7. 71.26 (2) (a) 6. of the statutes is created to read:
AB461,4,2117 71.26 (2) (a) 6. Plus any amount deducted or excluded under the Internal
18Revenue Code for management and service fees, interest expenses and costs,
19intangible expenses and costs, and any other expenses and costs directly or indirectly
20paid, accrued, or incurred to, or in connection directly or indirectly with one or more
21direct or indirect transactions with, one or more related entities.
AB461, s. 8 22Section 8. 71.34 (1) (j) of the statutes is created to read:
AB461,5,323 71.34 (1) (j) An addition shall be made for any amount deducted or excluded
24under the Internal Revenue Code for management and service fees, interest
25expenses and costs, intangible expenses and costs, and any other expenses and costs

1directly or indirectly paid, accrued, or incurred to, or in connection directly or
2indirectly with one or more direct or indirect transactions with, one or more related
3entities.
AB461, s. 9 4Section 9. 71.42 (1p) of the statutes is created to read:
AB461,5,145 71.42 (1p) "Intangible expenses and costs" includes expenses, losses, and costs
6for, related to, or directly or indirectly in connection with the direct or indirect
7acquisition of, use of, maintenance or management of, ownership of, sale of, exchange
8of, or any other direct or indirect disposition of intangible property to the extent that
9such expenses, losses, and costs are allowed as deductions or costs to determine
10federal taxable income under the Internal Revenue Code. For purposes of this
11subsection, "expenses, losses, and costs" include losses related to or incurred directly
12or indirectly in connection with factoring transactions and discounting transactions;
13royalty, patent, technical, and copyright fees; licensing fees; and other similar
14expenses and costs.
AB461, s. 10 15Section 10. 71.42 (4m) of the statutes is created to read:
AB461,5,1816 71.42 (4m) "Related entity" means any person related to a taxpayer as provided
17under section 267, 318, or 1563 of the Internal Revenue Code during all or a portion
18of the taxpayer's taxable year.
AB461, s. 11 19Section 11. 71.45 (2) (a) 16. of the statutes is created to read:
AB461,5,2520 71.45 (2) (a) 16. By adding to federal taxable income any amount deducted or
21excluded under the Internal Revenue Code for management and service fees,
22interest expenses and costs, intangible expenses and costs, and any other expenses
23and costs directly or indirectly paid, accrued, or incurred to, or in connection directly
24or indirectly with one or more direct or indirect transactions with, one or more
25related entities.
AB461, s. 12
1Section 12. 71.738 (3m) of the statutes is created to read:
AB461,6,42 71.738 (3m) "Related entity" means any person related to a taxpayer as
3provided under section 267, 318, or 1563 of the Internal Revenue Code during all or
4a portion of the taxpayer's taxable year.
AB461, s. 13 5Section 13. 71.80 (23) of the statutes is created to read:
AB461,6,126 71.80 (23) Transactions. (a) Subject to par. (b), if the department asserts the
7sham transaction doctrine, or any other related tax doctrine, to disallow the tax
8consequences, as asserted by the taxpayer, of a transaction, the department may
9allow the tax consequences, as asserted by the taxpayer, of the transaction, if the
10taxpayer demonstrates by clear and convincing evidence that the transaction had a
11valid, good faith, business purpose other than tax avoidance and had economic
12substance apart from any tax benefit asserted by the taxpayer.
AB461,6,1813 (b) For all instances in which the department disallows the tax consequences,
14as asserted by the taxpayer, of a transaction, the department may allow the tax
15consequences, as asserted by the taxpayer, of the transaction, if the taxpayer
16demonstrates by clear and convincing evidence that the transaction's nontaxable
17business purpose, as asserted by the taxpayer, is commensurate with the
18transaction's tax benefit, as asserted by the taxpayer.
AB461,6,2119 (c) The adjustments under ss. 71.05 (6) (a) 21., 71.26 (2) (a) 6., 71.34 (1) (j), and
2071.45 (2) (a) 16. shall not apply to any expenses or costs if all of the following apply
21to the expenses or costs:
AB461,6,2322 1. The transaction to which the expenses or costs are related did not have tax
23avoidance as its principal purpose.
AB461,7,624 2. The related entity to whom the taxpayer paid interest expenses or costs,
25intangible expenses, or management or service fees during the taxable year directly

1or indirectly paid, accrued, or incurred such amounts to a person who is not a related
2entity. For purposes of this subdivision, "interest" means interest on a debt for which
3the taxpayer is the guarantor, if the interest rate is the market rate in effect at the
4time of the debt's origination, but excludes interest that is paid in connection with
5any debt that is incurred to acquire the taxpayer's assets or stock under section 368
6of the Internal Revenue Code.
AB461,7,207 3. The related entity was subject to tax on its net income in this state, or any
8state, U.S. possession, or foreign country; a measure of the tax paid included the
9interest income, intangible income, or management or service fees received from the
10taxpayer; and the tax rate applied to the interest income, intangible income, or
11management or service fees was not less than 3 percentage points below the tax rate
12that would have applied under s. 71.27. For purposes of this subdivision, "any state,
13U.S. possession, or foreign country" does not include any state, U.S. possession, or
14foreign country under the laws of which the taxpayer files or could have elected to
15file with the related entity, or the related entity files or could have elected to file with
16another entity, a combined income tax report or return, a consolidated income tax
17report or return, or any other report or return that is due because of the imposition
18of a tax that is measured on or by income, if the report of return results in eliminating
19the tax effects of transactions directly or indirectly between either the taxpayer and
20the related entity or between the related entity and another entity.
AB461, s. 14 21Section 14. Initial applicability.
AB461,8,222 (1) This act first applies to taxable years beginning on January 1 of the year
23in which this subsection takes effect, except that if this subsection takes effect after

1July 31 this act first applies to taxable years beginning on January 1 of the year
2following the year in which this subsection takes effect.
AB461,8,33 (End)
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