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Tax 3.01(3)(e)1.m. m. Activities similar to those described in this subd. 1. a. to L.
Tax 3.01(3)(e)2. 2. Subdivision 1. a. to m. are in no way intended to and should not be construed as limiting the scope of the activities subject to this paragraph.
Tax 3.01(3)(f) (f) Intangible expenses.
Tax 3.01(3)(f)1.1. Intangible expenses include any of the following expenses to the extent they would otherwise be deductible in the computation of Wisconsin adjusted gross income or Wisconsin net income:
Tax 3.01(3)(f)1.a. a. Royalty, patent, technical, and copyright fees.
Tax 3.01(3)(f)1.b. b. Licensing fees.
Tax 3.01(3)(f)1.c. c. Losses related to, or incurred in connection directly or indirectly with, factoring transactions or discounting transactions.
Tax 3.01(3)(f)1.d. d. Amortization expenses.
Tax 3.01(3)(f)1.e. e. Other expenses, losses, or costs for, related to, or directly or indirectly in connection with acquiring, using, maintaining, managing, owning, selling, exchanging, or disposing of intangible property.
Tax 3.01(3)(f)2. 2. For a taxpayer purchasing amortizable intangible property from a related entity, the amortization expenses on that property are intangible expenses subject to the addition modification. This also applies to any other amortizable intangible expenses paid, accrued, or incurred between a taxpayer and a related entity.
Tax 3.01(4) (4)Subtraction modification.
Tax 3.01(4)(a)(a) General. Related entity expenses paid, accrued, or incurred to a related entity may be deducted to the extent such expenses meet the requirements of s. 71.80 (23) (a), Stats., and this subsection.
Tax 3.01(4)(b) (b) Requirements.
Tax 3.01(4)(b)1.1. Section 71.80 (23) (a), Stats., provides that if a taxpayer added back related entity expenses, the taxpayer may then deduct such expenses if the taxpayer meets the requirements under s. 71.80 (23) (a) 3., Stats. The taxpayer shall establish it meets the requirements under s. 71.80 (23) (a) 3., Stats., by clear and convincing evidence. The taxpayer shall meet all of the following requirements:
Tax 3.01(4)(b)1.a. a. The primary motivation for the transaction was one or more business purposes other than the avoidance or reduction of state income or franchise taxes.
Tax 3.01(4)(b)1.b. b. The transaction changed the economic position of the taxpayer in a meaningful way apart from tax effects.
Tax 3.01(4)(b)1.c. c. The expense was paid, accrued, or incurred using terms that reflect an arm's length relationship.
Tax 3.01(4)(b)2. 2. This paragraph is the primary test for establishing whether related entity expenses may be deducted. The tests in pars. (d) and (e) are indicators that the test under this paragraph may have been met.
Tax 3.01(4)(c) (c) Factors indicating requirements are not met. Factors indicating that the related entity expense does not meet the requirements under par. (b) include:
Tax 3.01(4)(c)1. 1. There was no actual transfer of funds from the taxpayer to the related entity.
Tax 3.01 Note Example: A book or journal entry alone is not considered an actual transfer of funds.
Tax 3.01(4)(c)2. 2. There was an actual transfer of funds, then the funds were substantially returned to the taxpayer, either directly or indirectly. Such return need not be immediate in order for this factor to be applicable.
Tax 3.01(4)(c)3. 3. If the transaction was entered into on the advice of a tax advisor, regardless of whether a client relationship exists or existed at the time of the advice, the advisor's fee was determined by reference to the tax savings. "Tax advisor" includes a "material advisor" under s. 71.81 (1) (b), Stats.
Tax 3.01(4)(c)4. 4. The related entity does not regularly engage in similar transactions with unrelated parties on terms substantially similar to those of the subject transaction.
Tax 3.01(4)(c)5. 5. The transaction was not entered into at terms comparable to an arm's length transaction as determined by Treas. Reg. section 1.482-1(b).
Tax 3.01(4)(c)6. 6. There was no reasonable expectation of profit from the transaction apart from the tax benefits.
Tax 3.01(4)(c)7. 7. The transaction resulted in the improper matching of income and expenses.
Tax 3.01(4)(c)8. 8. The expense for the transaction was accrued under Financial Accounting Standards Board Interpretation number 48. For purposes of this section, this factor applies to both income and franchise taxes.
Tax 3.01 Note Note: Financial Accounting Standards Board Interpretation number 48 is available on the Financial Accounting Standards Board's web site at http://www.fasb.org/pdf/fin%2048.pdf.
Tax 3.01(4)(c)9. 9. If the related entity expense is a rental expense, the rent was paid, accrued, or incurred to a captive real estate investment trust.
Tax 3.01(4)(c)10. 10. If the related entity expense is an interest expense, additional factors specific to interest expenses include any of the following:
Tax 3.01(4)(c)10.a. a. The taxpayer is not sufficiently capitalized or has no reasonable expectation to make payment on the debt underlying the interest expense.
Tax 3.01(4)(c)10.b. b. There is no written contract underlying the interest expense.
Tax 3.01(4)(c)10.c. c. There is a contract, but the contract does not reflect an interest obligation resulting from an arm's length transaction.
Tax 3.01(4)(c)10.d. d. The interest is attributable to an unpaid charge that is not an allowable expense, a loan from a captive insurance company, a dividend note, a loan from a related entity with net business loss carryforwards or net operating loss carryforwards, or a loan from a related entity that is an intermediary set up in a jurisdiction that imposes no corporate-level income or franchise tax.
Tax 3.01(4)(d) (d) Related entity acts as a conduit.
Tax 3.01(4)(d)1.1. `Requirements.' Section 71.80 (23) (a), Stats., provides that if a taxpayer added back related entity expenses, the taxpayer may then deduct such expenses if the taxpayer meets the requirements under s. 71.80 (23) (a) 1., Stats. The taxpayer shall establish it meets the requirements under s. 71.80 (23) (a) 1., Stats., by clear and convincing evidence. The taxpayer shall meet all of the following requirements:
Tax 3.01(4)(d)1.a. a. The related entity to which the taxpayer paid, accrued, or incurred related entity expenses during the taxable year directly or indirectly paid, accrued, or incurred such amounts in the same taxable year to a person who is not a related entity. In this subdivision, "taxable year" means the taxable year of the taxpayer claiming the deduction for related entity expenses paid, accrued, or incurred to the related entity. The department will consider such expenses the related entity pays, accrues, or incurs to an unrelated entity by the unextended due date of the taxpayer's income or franchise tax return to be paid, accrued, or incurred within the taxpayer's "taxable year." However, such expenses that occur after the end of the taxpayer's taxable year may not then be counted again as occurring in the subsequent taxable year.
Tax 3.01(4)(d)1.b. b. Except as provided in subd. 2., the related entity to which the taxpayer paid, accrued, or incurred such expenses is a holding company or a direct or indirect subsidiary of a holding company, as defined in 12 USC 1841(a) or (l) or 12 USC 1467a(a)(1)(D).
Tax 3.01(4)(d)2. 2. `Investments of a bank, subsidiary, or affiliate.' Related entity expenses may not satisfy the test in subd. 1. b. when such expenses are paid, accrued, or incurred directly or indirectly to an entity that is organized under the laws of another jurisdiction and that primarily holds and manages investments of a bank, subsidiary, or affiliate, unless the related entity expenses satisfy the provisions in subd. 1. a.
Tax 3.01(4)(d)3. 3. `Interest on acquisition of stock.' As specifically provided under s. 71.80 (23) (a) 1., Stats., interest expense paid, accrued, or incurred in connection with any debt incurred to acquire taxpayer's assets or stock under section 368 of the Internal Revenue Code may not satisfy the test under this paragraph.
Tax 3.01 Note Example: Corporation A borrows money from Corporation B. No portion of the debt was used to acquire A's own stock or assets under section 368 of the Internal Revenue Code. In order to obtain the funds to loan to A, B borrows money from Bank C. A is a calendar year taxpayer, while B is on a fiscal year beginning July 1 and ending June 30. During the calendar year 2008, A accrued $100,000 of interest expense attributable to the loan from B. In turn, B accrued $90,000 of interest expense attributable to the loan from C during that same time period of January 1, 2008, through December 31, 2008. During the period of January 1, 2009, through March 15, 2009, B accrued $10,000 of interest expense to C.
For purposes of determining if the test under subd. 1. a. applies to A's interest expense, B may be considered to have accrued $100,000 of interest expense ($90,000 + $10,000) to C in A's 2008 taxable year. However, in A's 2009 taxable year, A cannot consider the $10,000 of interest expense accrued by B to C during the period of January 1, 2009, through March 15, 2009, to be accrued during A's 2009 taxable year.
Tax 3.01(4)(d)4. 4. `Allocation of expense paid to unrelated entity.' If less than 100 percent of the total related entity expenses paid, accrued, or incurred to the related entity from the taxpayer and all other related entities is paid, accrued, or incurred to an unrelated entity, a pro rata share of the taxpayer's related entity expenses is considered to satisfy the test under subd. 1. a.
Tax 3.01 Note Example: Taxpayer A made a $200,000 interest payment to Taxpayer B. No portion of the underlying debt was used to acquire the taxpayer's own stock or assets under section 368 of the Internal Revenue Code. B received a total of $800,000 of related entity interest income during A's taxable year. Of this amount, $200,000 was from A and $600,000 from other related entities. In A's taxable year, B paid $400,000 of interest expense to unrelated entities. In this case, $100,000 (($200,000/$800,000) x $400,000) of the interest A paid to B would be considered paid, accrued, or incurred to unrelated entities in A's taxable year.
Tax 3.01(4)(e) (e) Related entity included income in tax base.
Tax 3.01(4)(e)1.1. `Requirements.' Section 71.80 (23) (a), Stats., provides that if a taxpayer added back related entity expenses, the taxpayer may then deduct such expenses if the taxpayer meets the requirements under s. 71.80 (23) (a) 2., Stats. The taxpayer shall establish it meets the requirements under s. 71.80 (23) (a) 2., Stats., by clear and convincing evidence. The taxpayer shall meet all of the following requirements:
Tax 3.01(4)(e)1.a. a. The related entity was subject to tax on, or measured by, its net income or receipts in this state or any state, U.S. possession, or foreign country.
Tax 3.01(4)(e)1.b. b. The related entity's tax base in such state, U.S. possession, or foreign country included the income received from the taxpayer corresponding to the related entity expenses.
Tax 3.01(4)(e)1.c. c. The related entity's aggregate effective tax rate applied to such income or receipts was at least 80 percent of the taxpayer's aggregate effective tax rate.
Tax 3.01(4)(e)1.d. d. The related entity is not a real estate investment trust under section 856 of the Internal Revenue Code, other than a qualified real estate investment trust.
Tax 3.01(4)(e)2. 2. `Differing taxable years.' For both the taxpayer and the related entity, compute the aggregate effective tax rate for the taxable year that included the transaction date. If the related entity is on a taxable year that ends after the taxpayer's taxable year, the aggregate effective tax rate shall be determined as follows:
Tax 3.01(4)(e)2.a. a. If in the related entity's most recently ended taxable year the related entity was subject to a tax on or measured by net income or receipts in a state, U.S. possession, or foreign country, the related entity's aggregate effective tax rate shall be computed based on the related entity's most recently ended taxable year.
Tax 3.01(4)(e)2.b. b. If the related entity was not subject to such tax for its most recently ended taxable year, the related entity shall modify the computation of the aggregate effective tax rate as provided in subd. 2. c.
Tax 3.01(4)(e)2.c. c. The related entity uses 100 percent as the related entity's apportionment percentage and the related entity uses the statutory tax rate of the state where the related entity is incorporated, organized, formed, or, if the related entity is an individual, where the individual resides.
Tax 3.01(4)(e)3. 3. `Items not includable in aggregate effective tax rate.' The following are not included in the computation of the aggregate effective tax rate:
Tax 3.01(4)(e)3.a. a. If the related entity expense was paid, accrued, or incurred to a pass-through entity, any tax rate that is imposed at the shareholder, partner, member, or beneficiary level rather than at the pass-through entity level for that state, U.S. possession, or foreign country.
Tax 3.01(4)(e)3.b. b. If the related entity is a pass-through entity, only taxes imposed at the entity level that are on or measured by net income or receipts may be included in the pass-through entity's effective tax rate for a particular jurisdiction. A pass-through entity's aggregate effective tax rate cannot include taxes imposed against the entity's shareholders, partners, members, or beneficiaries. If a pass-through entity elects to file a composite return in a jurisdiction on behalf of some or all of its shareholders, partners, members, or beneficiaries, the tax rate applicable to that composite return cannot be included in the entity's effective tax rate for that jurisdiction.
Tax 3.01(4)(e)3.c. c. The tax rate of any jurisdiction where the taxpayer files with the related entity or the related entity files with another entity a combined or consolidated report or return if the report or return results in eliminating the tax effects of transactions, directly or indirectly, between either the taxpayer and the related entity or between the related entity and another entity.
Tax 3.01(4)(e)4. 4. `Items includible in aggregate effective tax rate.' The following are included in the computation of the aggregate effective tax rate:
Tax 3.01(4)(e)4.a. a. Withholding taxes, such as the one imposed by s. 71.775, Stats., paid on income distributable to owners or beneficiaries of the pass-through entity, may be considered entity-level taxes if the state, U.S. possession, or foreign country imposes the withholding as a tax on the income of the pass-through entity.
Tax 3.01(4)(e)4.b. b. The Wisconsin economic development surcharge, which is imposed on partnerships and tax-option (S) corporations pursuant to s. 77.93 (1), (3), and (5), Stats.
Tax 3.01(4)(e)5. 5. `Dividends paid deduction.' If the related entity is not taxed on some or all of its income in a state, U.S. possession, or foreign country because the entity is eligible for a dividends paid deduction under the laws of that jurisdiction, the amount of income considered to be included in its tax base in that jurisdiction is the amount of income after applying the dividends paid deduction. If the dividends paid deduction is less than 100 percent of the related entity's total income, a pro rata share of its income from the transaction is deemed to be excluded from its tax base in that jurisdiction.
Tax 3.01(4)(e)6. 6. `Related entity has loss or credit carryforwards.' For purposes of applying the test under par. (e), the related entity's aggregate effective tax rate is computed without regard to loss carryforwards or credit carryforwards. If the related entity has no tax liability in a particular state, U.S. possession, or foreign country because of its loss or credit carryforwards, the related entity's effective tax rate in that jurisdiction still remains that jurisdiction's maximum statutory tax rate multiplied by the related entity's apportionment percentage in that jurisdiction.
Tax 3.01 Note Example: Taxpayer A makes a $500,000 interest payment to Corporation C, a related corporation. Corporation C has no other income and is engaged in business only in State X. Corporation C has a $1,000,000 loss carryforward in State X and uses this carryforward to offset the $500,000 related entity interest income from Taxpayer A. Therefore, Corporation C owes no tax to State X. State X has a maximum corporation income tax rate of 6.2%. Corporation C's aggregate effective tax rate would be 6.2%.
Tax 3.01(5) (5)Disallowed related entity expenses.
Tax 3.01(5)(a)(a) General. A related entity may subtract income that corresponds to related entity expenses if such expenses are disallowed to the taxpayer.
Tax 3.01(5)(b) (b) Subtraction for disallowed expenses. Except as provided in par. (f), if a taxpayer cannot deduct a related entity expense it paid, accrued, or incurred to a related entity because the expense did not meet one of the tests under sub. (4), the related entity may subtract the income that corresponds to the expense that was disallowed to the taxpayer.
Tax 3.01(5)(c) (c) Form required to substantiate income exclusion. Unless otherwise provided by the department, both the taxpayer and the related entity shall complete the form prescribed by the department to substantiate the income exclusion. The related entity shall file the completed form prescribed by the department with its Wisconsin income or franchise tax return on which it is claiming the subtraction from income. If the related entity is not doing business in Wisconsin, neither the taxpayer nor the related entity has to complete the form prescribed by the department to substantiate the income exclusion.
Tax 3.01(5)(d) (d) Expense below disclosure threshold. Except as provided in par. (e), the subtraction from income provided in this subsection may apply even if the disallowed related entity expense was below the threshold of $100,000 under sub. (7) (b) 3.
Tax 3.01(5)(e) (e) Related entity income exclusion limitation. A taxpayer may not use the form prescribed by the department to disallow related entity expenses to claim a related entity expense if all of the following conditions apply:
Tax 3.01(5)(e)1. 1. The primary motivation for the transaction was one or more business purposes other than the avoidance or reduction of state income or franchise taxes.
Tax 3.01(5)(e)2. 2. The transaction changed the economic position of the taxpayer in a meaningful way apart from tax effects.
Tax 3.01(5)(e)3. 3. The expenses were paid, accrued, or incurred using terms that reflect an arm's length relationship.
Tax 3.01(5)(f) (f) Evasion of taxes and distortion of income. A taxpayer meeting the criteria to deduct related entity expenses under s. 71.80 (23), Stats., but fails, whether intentionally or not, to disclose such related entity expenses as prescribed, the department at its discretion may disallow the corresponding income exclusion to the related entity and allow the expense to the taxpayer.
Tax 3.01 Note Example: Taxpayer A and Taxpayer B are related entities. A's net income for the year is $50,000 and B's net income is $750,000. A incurred $100,000 in interest expenses to B. Realizing there is a benefit to not disclosing the related entity expenses, A reports $150,000 in net income, and B reports $650,000 in net income. The department may disallow the interest income exclusion to B and allow the interest expense to A. As a result, A must report $50,000 of net income and B must report $750,000 of net income.
Tax 3.01(6) (6)Miscellaneous rules.
Tax 3.01(6)(a)(a) Combined groups.
Tax 3.01(6)(a)1.1. As provided in s. Tax 2.61 (6) (a) 6., for related entity expenses paid, accrued, or incurred between combined group members, including pass-through entities owned by those members to the extent of their distributive shares of income, the addition modifications for related entity expenses under ss. 71.26 (2) (a) 7. and 71.45 (2) (a) 16., Stats., are not required to the extent the recipient of the income includes the income in the combined unitary income. The provisions under s. Tax 2.61 (6) (a) 6. only apply to corporations that are combined group members at the time of the transactions resulting in related entity expenses.
Tax 3.01(6)(a)2. 2. The addition modifications for addbacks are required in cases where related entity expenses are included in combined unitary income but the corresponding income is or was not included in the combined unitary income. To illustrate, without limiting the application of this subdivision in any way, a related entity expense paid, accrued, or incurred to a related entity that is not a combined group member is subject to the addback provisions. Likewise, a related entity expense paid, accrued, or incurred to a combined group member that excluded the corresponding income from the combined unitary income is subject to the addback provisions.
Tax 3.01(6)(b) (b) Pass-through entities. Shareholders of a tax-option (S) corporation, members of a limited liability company treated as a partnership, partners of a general or limited partnership, and beneficiaries of trust and estates need not make an addition modification to their respective incomes in cases where their respective schedules K-1 report the related entity expenses as fully deductible.
Tax 3.01(6)(c) (c) Disregarded entities. Transactions resulting in related entity expenses between an entity that is disregarded for Wisconsin income and franchise tax purposes and its owner need not be reported and disclosed.
Tax 3.01(6)(d) (d) Individual itemized deduction credit. An individual who has paid, accrued, or incurred related entity expenses is not required to disclose such expenses on a form prescribed by the department if the individual reports the expenses as part of the individual's itemized deduction credit under s. 71.07 (5), Stats. An individual wishing to treat related entity expenses as business expenses shall disclose such expenses on a form prescribed by the department as applicable.
Tax 3.01(6)(e) (e) Taxpayers subject to apportionment. If a taxpayer is subject to apportionment, the taxpayer shall report and disclose the amounts that are required to be added back before apportionment. For purposes of determining the threshold amount of $100,000 under sub. (7) (b) 3., the taxpayer shall use the apportioned amounts. However, the taxpayer shall not multiply by the apportionment percentage those amounts of related entity expenses added back to income that are not attributable to apportionable income. The apportionment percentage shall be recomputed after any addbacks.
Tax 3.01(7) (7)Administration and compliance.
Tax 3.01(7)(a)(a) Authority to distribute or disregard. Notwithstanding the modifications provided under ss. 71.05 (6) (b) 45., 71.26 (2) (a) 8., 71.34 (1k) (k), and 71.45 (2) (a) 17., Stats., the department has express authority under ss. 71.30 (2) and 71.80 (1) (b), Stats., to distribute, apportion, or allocate income, deductions, credits, or allowances between or among related entities in order to prevent evasion of taxes or to clearly reflect the income of the entities. Additionally, the department has express authority under ss. 71.30 (2m) and 71.80 (1m), Stats., to disregard transactions between related entities if those transactions lack economic substance. This authority is also applicable to the modifications under ss. 71.05 (6) (b) 46., 71.26 (2) (a) 9., 71.34 (1k) (L), and 71.45 (2) (a) 18., Stats.
Tax 3.01(7)(b) (b) Timely disclosure.
Tax 3.01(7)(b)1.1. A taxpayer with related entity expenses shall disclose such expenses on or before the extended due date of return for the year in which the expenses are reported. The department is authorized to disallow related entity expenses, even if the expenses meet the conditions in s. 71.80 (23) (a), Stats., and sub. (4) for failure to timely disclose such expenses. The form prescribed by the department to disclose related entity expenses shall not be accepted by the department if filed with an amended return after the extended due date. Failure to disclose or untimely disclosure by a taxpayer subjects the taxpayer and related entities to the provisions of sub. (5) (e).
Tax 3.01(7)(b)2. 2. A pass-through entity is responsible for timely disclosing related entity expenses on a form prescribed by the department. The shareholder, partner, member, or beneficiary is not responsible for disclosing related entity expenses if such expenses are passed through to them. A shareholder, partner, member, or beneficiary having related entity expenses independent of those passed through to them shall disclose such expenses on a form prescribed by the department as applicable.
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