AB893: Bill Text

LRB-4105/1

JK:wlj&jld:rs

2005 - 2006 LEGISLATURE

2005 Assembly BILL 893

December 29, 2005 - Introduced by Representative Black. Referred to Joint Survey Committee on Tax Exemptions.

AB893,1,5 An Act to renumber and amend 71.26 (2) (a); and to create 71.01 (5p), 71.01 (9b), 71.05 (6) (a) 21., 71.22 (3m), 71.22 (9b), 71.26 (2) (a) 6., 71.34 (1) (j), 71.42 (1p), 71.42 (4m), 71.45 (2) (a) 16., 71.738 (3m) and 71.80 (23) of the statutes; relating to: adding payments to related entities to federal taxable income for state 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.

This bill will be referred to the Joint Survey Committee on Tax Exemptions for a detailed analysis, which will be printed as an appendix to this bill.

For further information see the state and local 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:

AB893, s. 1 Section 1. 71.01 (5p) of the statutes is created to read:

AB893,2,11 71.01 (5p) "Intangible expenses and costs" includes expenses, losses, and costs for, related to, or directly or indirectly in connection with the direct or indirect acquisition of, use of, maintenance or management of, ownership of, sale of, exchange of, or any other direct or indirect disposition of intangible property to the extent that such expenses, losses, and costs are allowed as deductions or costs to determine federal taxable income under the Internal Revenue Code. For purposes of this subsection, "expenses, losses, and costs" include losses related to or incurred directly or indirectly in connection with factoring transactions and discounting transactions; royalty, patent, technical, and copyright fees; licensing fees; and other similar expenses and costs.

AB893, s. 2 Section 2. 71.01 (9b) of the statutes is created to read:

AB893,2,15 71.01 (9b) "Related entity" means any person related to a taxpayer as provided under section 267, 318, or 1563 of the Internal Revenue Code during all or a portion of the taxpayer's taxable year.

AB893, s. 3 Section 3. 71.05 (6) (a) 21. of the statutes is created to read:

AB893,3,6 71.05 (6) (a) 21. Any amount 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.

AB893, s. 4 Section 4. 71.22 (3m) of the statutes is created to read:

AB893,3,17 71.22 (3m) "Intangible expenses and costs" includes expenses, losses, and costs for, related to, or directly or indirectly in connection with the direct or indirect acquisition of, use of, maintenance or management of, ownership of, sale of, exchange of, or any other direct or indirect disposition of intangible property to the extent that such expenses, losses, and costs are allowed as deductions or costs to determine federal taxable income under the Internal Revenue Code. For purposes of this subsection, "expenses, losses, and costs" include losses related to or incurred directly or indirectly in connection with factoring transactions and discounting transactions; royalty, patent, technical, and copyright fees; licensing fees; and other similar expenses and costs.

AB893, s. 5 Section 5. 71.22 (9b) of the statutes is created to read:

AB893,3,21 71.22 (9b) "Related entity" means any person related to a taxpayer as provided under section 267, 318, or 1563 of the Internal Revenue Code during all or a portion of the taxpayer's taxable year.

AB893, s. 6 Section 6. 71.26 (2) (a) of the statutes is renumbered 71.26 (2) (a) (intro.) and amended to read:

AB893,4,3 71.26 (2) (a) (intro.) Corporations in general. The "net income" of a corporation means the gross income as computed under the Internal Revenue Code as modified under sub. (3) minus and modified as follows:

AB893,4,4 1. Minus the amount of recapture under s. 71.28 (1di) plus.

AB893,4,5 2. Plus the amount of credit computed under s. 71.28 (1), (3), (4), and (5) minus,.

AB893,4,8 3. Minus as provided under s. 71.28 (3) (c) 7., the amount of the credit under s. 71.28 (3) that the taxpayer added to income under this paragraph at the time that the taxpayer first claimed the credit plus.

AB893,4,13 4. Plus the amount of the credit computed under s. 71.28 (1dd), (1de), (1di), (1dj), (1dL), (1dm), (1ds), (1dx), (3g), (3n), (3t), and (5b) and not passed through by a partnership, limited liability company, or tax-option corporation that has added that amount to the partnership's, limited liability company's, or tax-option corporation's income under s. 71.21 (4) or 71.34 (1) (g) plus.

AB893,4,17 5. Plus the amount of losses from the sale or other disposition of assets the gain from which would be wholly exempt income, as defined in sub. (3) (L), if the assets were sold or otherwise disposed of at a gain and minus deductions, as computed under the Internal Revenue Code as modified under sub. (3), plus.

AB893,4,21 6. Plus or minus, as appropriate, an amount equal to the difference between the federal basis and Wisconsin basis of any asset sold, exchanged, abandoned, or otherwise disposed of in a taxable transaction during the taxable year, except as provided in par. (b) and s. 71.45 (2) and (5).

AB893, s. 7 Section 7. 71.26 (2) (a) 6. of the statutes is created to read:

AB893,5,2 71.26 (2) (a) 6. Plus any amount 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.

AB893, s. 8 Section 8. 71.34 (1) (j) of the statutes is created to read:

AB893,5,9 71.34 (1) (j) An addition shall be made for any amount 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.

AB893, s. 9 Section 9. 71.42 (1p) of the statutes is created to read:

AB893,5,20 71.42 (1p) "Intangible expenses and costs" includes expenses, losses, and costs for, related to, or directly or indirectly in connection with the direct or indirect acquisition of, use of, maintenance or management of, ownership of, sale of, exchange of, or any other direct or indirect disposition of intangible property to the extent that such expenses, losses, and costs are allowed as deductions or costs to determine federal taxable income under the Internal Revenue Code. For purposes of this subsection, "expenses, losses, and costs" include losses related to or incurred directly or indirectly in connection with factoring transactions and discounting transactions; royalty, patent, technical, and copyright fees; licensing fees; and other similar expenses and costs.

AB893, s. 10 Section 10. 71.42 (4m) of the statutes is created to read:

AB893,5,24 71.42 (4m) "Related entity" means any person related to a taxpayer as provided under section 267, 318, or 1563 of the Internal Revenue Code during all or a portion of the taxpayer's taxable year.

AB893, s. 11 Section 11. 71.45 (2) (a) 16. of the statutes is created to read:

AB893,6,6 71.45 (2) (a) 16. By adding to federal taxable income any amount 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.

AB893, s. 12 Section 12. 71.738 (3m) of the statutes is created to read:

AB893,6,10 71.738 (3m) "Related entity" means any person related to a taxpayer as provided under section 267, 318, or 1563 of the Internal Revenue Code during all or a portion of the taxpayer's taxable year.

AB893, s. 13 Section 13. 71.80 (23) of the statutes is created to read:

AB893,6,18 71.80 (23) Transactions. (a) Subject to par. (b), if the department asserts the sham transaction doctrine, or any other related tax doctrine, to disallow the tax consequences, as asserted by the taxpayer, of a transaction, the department may allow the tax consequences, as asserted by the taxpayer, of the transaction, if the taxpayer demonstrates by clear and convincing evidence that the transaction had a valid, good faith, business purpose other than tax avoidance and had economic substance apart from any tax benefit asserted by the taxpayer.

AB893,6,24 (b) For all instances in which the department disallows the tax consequences, as asserted by the taxpayer, of a transaction, the department may allow the tax consequences, as asserted by the taxpayer, of the transaction, if the taxpayer demonstrates by clear and convincing evidence that the transaction's nontaxable business purpose, as asserted by the taxpayer, is commensurate with the transaction's tax benefit, as asserted by the taxpayer.