Tax 2.61 NoteExample: S and B are combined group members. S has land with a basis of $130,000 at the end Year 1. In Year 2, S sells the land to B for $100,000. B holds the land until Year 3, when it sells it to X, a person outside the combined group, for $110,000. Assume both sales are otherwise includable in the combined unitary income. Applying 26 CFR 1.1502-13 to S and B in the manner described in this paragraph, S would not recognize any gain or loss on the sale of the land to B in Year 2. However, in Year 3, S would recognize a $30,000 loss and B would recognize a simultaneous $10,000 gain. Thus, in Year 2, the combined group cannot include S’s $30,000 loss on sale of land in its combined unitary income, but in Year 3, the combined group can include a $20,000 loss on sale of land (the net amount of S’s Year 2 loss and B’s Year 3 gain) in its combined unitary income. However, the capital loss limitation may limit this loss, as described further in par. (c). Tax 2.61(6)(c)(c) Capital gains and losses. Compute the capital loss limitation so that it applies to the combined group as a whole, to the extent the capital gains and losses are derived from the unitary business and otherwise subject to combination. Rules to determine the capital loss limitation, the assignment of capital gains and losses to members, and the amounts available for carryover, are as follows: Tax 2.61(6)(c)1.1. For short-term capital gains or losses, long-term capital gains or losses, section 1231 gains or losses, and involuntary conversions, aggregate all combined group members’ amounts within each class of gain or loss. Except as provided in subd. 8., include sharable net capital loss carryovers as described in subd. 2. but not non-sharable net capital loss carryovers. Tax 2.61(6)(c)2.2. A combined group member’s sharable net capital loss carryover is any available net capital loss carryover which would be a sharable loss carryforward under sub. (9) (a) if it were a net business loss carryforward. A non-sharable net capital loss carryover is any available net capital loss carryover which would be a non-sharable loss carryforward under sub. (9) (b) if it were a net business loss carryforward. Net capital loss carryovers that are otherwise non-sharable may be included in the aggregation under subd. 1. if they were carryovers of a subgroup as described in sub. (9) (e) 1., but only in an amount not exceeding the net capital gain the subgroup would have if its amounts were not aggregated with those of the other combined group members. Tax 2.61(6)(c)3.3. Determine and apply the capital loss limitation under section 1211 of the Internal Revenue Code for the combined group based on the aggregate amounts computed in subd. 1. The provisions of 26 CFR 1.1502-22 and 1.1502-23, and the regulations which they reference, shall apply for this purpose, except that the separate return limitation year provisions are excluded and replaced with the provisions of this paragraph and except to the extent otherwise inconsistent with ss. 71.26 and 71.45, Stats., and the provisions of this section. Tax 2.61(6)(c)4.4. If the result is a net capital gain for the group, the net capital gain shall be apportioned to Wisconsin for the members in the same manner as all other combined unitary income as described in sub. (7), except that if the combined group is doing business solely in Wisconsin, the net capital gain is assigned to the members as described in sub. (8) (b). If the result is a net capital loss for the group, the net capital loss shall be assigned to the members that would have a net capital loss from the unitary business if their amounts were not aggregated with those of the other members of the combined group, in proportion to the amount of that net capital loss. Tax 2.61 NoteExamples: 1) Combined Group PQR consists of Member P, Member Q, and Member R. In Group PQR’s unitary combination for 2010, P, Q, and R aggregate their short term capital gains and losses (including sharable capital loss carryovers), long-term capital gains and losses, section 1231 gains and losses, and involuntary conversions, and compute a total of $20,000 in net capital gain for Group PQR. P’s Wisconsin apportionment percentage computed under sub. (7) is 10%; Q’s is 25%; and R’s is 50%. P’s apportioned share of this net capital gain is $2,000 (= $20,000 x 10%), Q’s apportioned share is $5,000 (= $20,000 x 25%) and R’s apportioned share is $10,000 (= $20,000 x 50%).
Tax 2.61 Note2) Combined Group STU consists of Member S, Member T, and Member U. In the taxable year 2010, S, T, and U have the following capital gains and losses and section 1231 gains and losses attributable to the unitary business and subject to combination:
Tax 2.61 NoteWhen S, T, and U aggregate each class of capital gains and losses and section 1231 gains and losses, Group STU has a net capital loss of $10,000. However, if S, T, and U’s capital gains and losses and section 1231 gains and losses were not aggregated with one another, S would have a net capital loss of $12,000 (its section 1231 loss would be treated as ordinary under section 1231(a)(2) of the Internal Revenue Code), T would have a net capital loss of $4,000, and U would have a net capital gain of $6,500. Thus, the amount of Group STU’s net capital loss that would be assigned to S is $7,500 (= ($12,000 / $16,000) x $10,000) and the amount that would be assigned to T is $2,500 (= ($4,000 / $16,000) x $10,000). None of the net capital loss would be assigned to U since it did not contribute to Group STU’s net capital loss. Tax 2.61(6)(c)5.5. After applying subd. 4., each member computes its net capital gain or loss from separate entity items without considering capital loss carryover amounts. If the result is a net capital loss, the loss may not be deducted except as provided in subd. 6. If the result is a net capital gain, the member may subtract from that amount, subject to the capital loss limitation, any current year net capital loss from the unitary business as computed in subd. 4. and any available net capital loss carryovers, whether they are sharable or non-sharable. The current year net capital loss from the unitary business shall be considered used before the net capital loss carryovers. Any remaining carryover may be used as provided in subd. 6. Tax 2.61 NoteExample: Assume the same facts as Example 2 in subd. 4. Assume also that S has a $10,000 long term capital gain from separate entity items in 2010 and a net capital loss carryover of $3,000 which was incurred in 2008. Since the current year net capital loss from the unitary business is considered used before the net capital loss carryover, at the end of 2010 S would have a remaining 2008 net capital loss carryover of $500 (= $10,000 - $7,500 current year net capital loss from unitary business - $3,000 net capital loss carryover).
Tax 2.61(6)(c)6.6. If a member has a share of net capital gain from the unitary business as computed in subd. 4., the member may use any available net capital loss, including current year net capital loss from separate entity items and net capital loss carryovers, to offset that net capital gain. If the group uses apportionment, the member uses the available net capital loss by claiming a deduction equal to the amount of the available net capital loss that does not exceed the group’s net capital gain from the unitary business, multiplied by the member’s apportionment percentage from the unitary combination. The current year net capital loss from separate entity items shall be considered used before the net capital loss carryovers. Tax 2.61 NoteExample: Assume the same facts as Example 1 in subd. 4. Assume that Q has a $5,000 long term capital gain from separate entity items and a net capital loss carryover of $6,000 which was incurred in 2008. Since the net capital loss carryover was incurred in a taxable year beginning before 2009, it is non-sharable and could not be used in computing the aggregate net capital gain or loss of the unitary business as described in subd. 1. However, Q may use the non-sharable loss carryover to offset its net capital gain from separate entity items. After doing this, Q has a $1,000 available net capital loss (= $5,000 - $6,000) to use against its share of the $20,000 net capital gain from the unitary business. To use the remaining carryover, Q may claim an additional capital loss deduction of $250 (= $1,000 available carryover x 25% apportionment percentage). After claiming this deduction, Q would have no remaining net capital loss carryover.
Tax 2.61(6)(c)7.7. After each member applies subds. 4. to 6., as applicable, the member may carry back or carry forward any remaining net capital loss carryover as provided in section 1212 of the Internal Revenue Code and may share that carryover to the extent it is a sharable carryover. The sharable carryovers available for use in the aggregation under subd. 1. are determined without regard to when any non-sharable carryovers were incurred and are applied in the order the underlying sharable loss was incurred. The carryovers available to offset the member’s net capital gain under subds. 5. and 6. are applied in the order the underlying loss was incurred. If the carryover available to offset the member’s net capital gain under subds. 5. and 6. consists of both a sharable and non-sharable amount incurred in the same taxable year, the carryover is applied from the sharable and non-sharable amounts on a pro rata basis according to the amount of each type of carryover available from that year. Tax 2.61 NoteExample: Member L is a member of Combined Group LM. Group LM uses a calendar year. At the beginning of 2012, L has the following available net capital loss carryovers:
Tax 2.61 NoteSince the sharable net capital loss carryovers available for use in the aggregation under subd. 1. are determined without regard to when any non-sharable carryovers were incurred, the total sharable carryover that L may include in Group LM’s computation of aggregate net capital gain or loss for the year 2012 is $14,000 (= $4,000 + $0 + $10,000). Assume $12,000 of this amount is absorbed in the aggregation. Since carryovers are applied in the order incurred, L’s remaining sharable carryover of $2,000 is from its 2011 net capital loss. This carryover is available to L to offset against its net capital gain from separate entity items for 2012.
Tax 2.61 NoteAssume L has a net capital gain from separate entity items of $4,000 and applies its available net capital loss carryover to offset this amount. Since carryovers are applied in the order incurred, $2,500 of the amount used is from its 2008 non-sharable carryover and $500 is from its 2010 non-sharable carryover. Since the remaining $1,000 carryover used is from 2011 where L has both a sharable and a non-sharable carryover, the amount of each carryover used is determined on a pro rata basis. Since L has $2,000 in sharable carryover from 2011 and $2,000 in non-sharable carryover from 2011, the remaining $1,000 carryover used is applied equally from the sharable and non-sharable carryovers. Thus, at the end of its 2012 taxable year, L has $1,500 in sharable carryovers and $1,500 in non-sharable carryovers available to carry forward or carry back.
Tax 2.61(6)(c)8.8. If a member has sharable net capital loss carryovers, that member may choose not to use them in the aggregation under subd. 1. If more than one member includes sharable net capital loss carryovers in the aggregation under subd. 1., the amount of each member’s carryover used shall be computed on a pro rata basis according to the amount of carryover each member included in the aggregation. Tax 2.61 NoteExample: Combined Group QR consists of Member Q and Member R. Group QR is on a calendar year. For 2010, Q and R have the following amounts:
Tax 2.61 NoteAssume the long term capital gains and section 1231 gains and losses are derived from Group QR’s unitary business and are subject to combination. Before applying the carryovers, Group QR has an aggregate net capital gain of $9,000 (= $6,000 + $2,000 + ($3,000 - $2,000)). Both Q and R use their sharable net capital loss carryovers to offset this amount. The amount used from Q’s sharable carryover is $6,000 (= $9,000 x ($10,000 / $15,000)) and the amount used from R’s sharable carryover is $3,000 (= $9,000 x ($5,000 / $15,000)). After applying these carryovers, Q’s remaining sharable carryover is $4,000 (= $10,000 - $6,000) and R’s remaining sharable carryover is $2,000 (= $5,000 - $3,000).
Tax 2.61(6)(d)(d) Charitable contributions. Compute the charitable contributions deduction limitation so that it applies to the combined group as a whole. Rules to determine the charitable contributions deduction limitation are as follows: Tax 2.61(6)(d)1.1. Compute the aggregate total deductions for charitable contributions for the taxable year, and any carryforwards of those deductions, for all combined group members. Tax 2.61(6)(d)2.2. Determine and apply the charitable contributions deduction under Internal Revenue Code section 170, before any Wisconsin modifications under ss. 71.26 or 71.45, Stats., as if the combined group were a consolidated group for federal purposes. The provisions of 26 CFR 1.1502-24, and the regulations which it references, shall apply for this purpose, except to the extent otherwise inconsistent with ss. 71.26 and 71.45, Stats., and the provisions of this section. Tax 2.61 NoteExample: Combined Group GH consists of Member G and Member H. G incurred $5,000 in charitable contribution deductions relating to the unitary business in Year 1, while H incurred $15,000 in charitable contribution deductions. Assume the federal taxable income upon which the charitable contribution limitation (10% of adjusted taxable income) would be based is $50,000 for G and $30,000 for H. Applying 26 CFR 1.1502-24 to Group GH in the manner described in this paragraph, Group GH would include a charitable contribution deduction of $8,000 (= lesser of ($5,000 + $15,000) or (($50,000 + $30,000) x 10%)) in its combined unitary income. Tax 2.61(6)(d)3.3. Any unused charitable contribution deduction after applying subd. 2. is assigned to the member that incurred the expense and is available to that member to offset its net income, if any, from separate entity items, subject to the limitation of section 170 of the Internal Revenue Code. Any of a member’s remaining unused charitable contribution may be carried over by that member and used in subsequent years, subject to the carryover period provided in section 170 of the Internal Revenue Code. The unused carryover may either be shared in a subsequent combined report in the manner described in subd. 2. or may be used by that member specifically. Tax 2.61 NoteExample: Assume the same facts as in the example for subd. 2. After the computation of Group GH’s combined unitary income for Year 1, the amount of unused charitable contribution deduction available to G would be $3,000 (= $12,000 unused deduction x ($5,000 / $20,000)) and the amount available to H would be $9,000 (= $12,000 x ($15,000 / $20,000)). Assume G has separate entity items in Year 1 and the adjusted federal taxable income from those items is $20,000. G may deduct $2,000 (= $20,000 x 10%) of its unused deduction against its income from separate entity items. Assume H does not have separate entity items in Year 1 and both G and H are in Group GH in Year 2. In Year 2, Group GH could include $10,000 of charitable contribution deduction carryover from Year 1 ($1,000 from G and $9,000 from H) in its combined unitary income, subject to the limitations of section 170 of the Internal Revenue Code. Tax 2.61(6)(e)(e) Dividends. Eliminate dividends paid between members of the same combined group, but only if the dividends were paid from earnings and profits attributable to net income or loss that was includable in that group’s combined unitary income in the current taxable year or a prior taxable year, and only to the extent the dividend does not exceed the payee’s basis in the payer’s stock. The following rules apply in determining the dividends that may be eliminated under this paragraph: Tax 2.61(6)(e)2.2. For purposes of this paragraph, dividends are treated as paid out of current earnings and profits, and if the dividends paid exceed current earnings and profits, then the dividends are treated as paid out of earnings and profits accumulated in preceding years, beginning with the year closest to the current year (LIFO rule). With respect to an individual taxable year, dividends are treated as paid from all earnings and profits earned in that taxable year on a pro rata basis according to the proportion of net income that was included in the combined unitary income for that taxable year (pro rata rule). Earnings and profits are determined as provided in par. (g). Tax 2.61 NoteNote: See the examples under subds. 4. and 5. for application of the LIFO and pro rata rules.
Tax 2.61(6)(e)3.3. A combined group member’s earnings and profits attributable to the unitary business that were generated in its taxable years beginning before January 1, 2009, shall be deemed to be earnings and profits attributable to combined unitary income if the corresponding net income would have been included in the group’s combined unitary income in those years had s. 71.255, Stats., been in effect and required combined reporting in those years. Tax 2.61(6)(e)4.4. To the extent that a dividend is paid out of earnings and profits that were generated while the payer was not, or in the case of subd. 3. would not have been, a member of the combined group, the dividend may not be eliminated. Tax 2.61 NoteExample: Combined Group MN consists of Member M and Member N. The combined group was formed when Corporation M acquired 60% of Corporation N on June 1, 2009. Group MN uses a calendar year. During 2010, N paid a dividend to M of $500,000. N’s current earnings and profits for 2010, before accounting for the distribution to M, are $100,000. N’s earnings and profits attributable to its 2009 calendar year are $1,000,000, of which $50,000 (5% of the total) were earned while N was a member of Group MN. Assume N had no separate entity items while it was a member of Group MN. Also assume M did not deduct any foreign taxes attributable to the dividend and N has sufficient stock basis. Applying the LIFO and pro rata rules of subd. 2., the amount of dividend that qualifies for elimination from Group MN’s combined unitary income in 2010 is $120,000 (= $100,000 + (5% x $400,000)). Under the pro rata rule, 95%, or $380,000, of dividends paid out of N’s 2009 earnings and profits are considered to be paid from pre-acquisition earnings and profits.
Tax 2.61(6)(e)5.5. To the extent that a dividend is paid out of earnings and profits that were generated in taxable years when the payer was, or in the case of subd. 3. would have been, a member of the combined group for all or a portion of the taxable year, any portion of the dividend attributable to separate entity items may not be eliminated. Tax 2.61 NoteExample: Combined Group GH consists of Member G and Member H. G owns 55% of H. Group GH is on a calendar year and both G and H were members of the group for the entire taxable year. During 2010, H paid a dividend of $1,000,000 to G. H’s current year earnings and profits are $2,500,000. Of these earnings and profits, $250,000 (10% of the total) is attributable to separate entity items of H. Assume G did not deduct any foreign taxes attributable to the dividend and H has sufficient stock basis. Applying the pro rata rule of subd. 2., the amount of dividend that qualifies for elimination from Group GH’s combined unitary income is $900,000 (= $1,000,000 x 90%). Under the pro rata rule, 10%, or $100,000, of dividends paid out of H’s current year earnings and profits are considered to be attributable to separate entity items.
Tax 2.61(6)(e)6.6. The amount of dividends eliminated under this paragraph may not exceed the payee’s basis in stock of the payer as determined under par. (f). Tax 2.61(6)(e)7.7. The amount of dividends eliminated under this paragraph shall be net of any taxes paid on the dividends to a foreign nation if those taxes were claimed as a deduction under ch. 71, Stats. Tax 2.61(6)(f)(f) Stock basis adjustments. A combined group member’s basis in stock of a subsidiary that is a member of the same combined group shall be adjusted to reflect the subsidiary’s distributions and items of income, gain, deduction and loss taken into account while the subsidiary was a member of the combined group. Except as provided in subds. 1. to 4. and except to the extent otherwise inconsistent with this section or ss. 71.26 or 71.45, Stats., the provisions of 26 CFR 1.1502-32, and the regulations which it references, shall apply in determining the amount of basis adjustment as if the Wisconsin combined group is a federal consolidated group: Tax 2.61(6)(f)1.1. A basis adjustment may not be made for the subsidiary’s distributions or items of income, gain, deduction, or loss taken into account for the subsidiary’s taxable years beginning before January 1, 2009. Tax 2.61(6)(f)2.2. A basis adjustment may not be made for the subsidiary’s items of income, gain, deduction, or loss to the extent those items were not included in the group’s combined unitary income. In the case of tax-exempt income, a basis adjustment may not be made to the extent the income is attributable to items that were not included in the combined unitary income. Tax 2.61(6)(f)3.3. An adjustment to reduce basis shall be made for the subsidiary’s distributions to the extent those distributions are from earnings and profits attributable to items that were included in the group’s combined unitary income, or from earnings and profits attributable to items deemed to be included in the group’s combined unitary income under par. (e) 3. for purposes of the dividend elimination under par. (e). For purposes of determining the amount of basis reduction under this subdivision, the LIFO and pro rata rules of par. (e) 2. apply. Tax 2.61 NoteExample: Combined Group CD consists of Member C and Member D. C owns 65% of D. Group CD is on a calendar year. At the beginning of taxable year 2009, C’s basis in the stock of D is $2,000,000. In the group’s taxable year 2009, D has $100,000 of net income, all of which is included in Group CD’s 2009 combined unitary income. During 2009, D pays a dividend of $300,000 to C. Assume the entire dividend from D to C qualifies for elimination under par. (e) 3. and is eliminated from Group CD’s combined unitary income in 2009. C’s basis in the stock of D as of the beginning of 2010 is $1,800,000 (= $2,000,000 + $100,000 – $300,000).
Tax 2.61(6)(f)4.4. A basis adjustment may not be attributed to a subsidiary from a lower-tier subsidiary’s items of income, gain, deduction, or loss, except to the extent that the lower-tier subsidiary’s items of income, gain, deduction, or loss originated in taxable years beginning on or after January 1, 2009 and were included in the combined unitary income of that same unitary business. Tax 2.61 NoteExample: Combined Group QRS consists of Member Q, Member R, and Member S. Q owns all the stock of R, and R owns all the stock of S. Group QRS is on a calendar year. As of the beginning of 2009, Q had an unadjusted basis of $500,000 in R stock, which includes R’s unadjusted basis of $200,000 in S stock under the rules of 26 CFR 1.1502-32. In the group’s 2009 taxable year, R had a total of $80,000 of net income and S had a total of $150,000 of net income. Of S’s net income, $20,000 was attributable to overseas operations, the income from which was not included in combined unitary income under the water’s edge rules. Neither R nor S made any distributions in 2009. At the end of 2009, Q’s basis in R stock is $710,000 (= $500,000 + $80,000 + $150,000 - $20,000). Q’s basis in R stock cannot include any amounts attributed from S that are attributable to separate entity items. Tax 2.61(6)(g)(g) Earnings and profits. A combined group member’s earnings and profits shall be adjusted to reflect the undistributed earnings and profits of any subsidiary that is a member of the same combined group, subject to the following rules and limitations: Tax 2.61(6)(g)1.1. Except as provided in subd. 2. and except to the extent otherwise inconsistent with this section or ss. 71.26 or 71.45, Stats., the provisions of 26 CFR 1.1502-33, and the regulations which it references, shall apply in determining earnings and profits as if the Wisconsin combined group is a federal consolidated group. Tax 2.61(6)(g)2.2. Undistributed earnings and profits attributed to a subsidiary of a combined group member from any lower-tier subsidiary may not be included in the combined group member’s earnings and profits or its subsidiary’s earnings and profits except to the extent the lower-tier subsidiary’s earnings and profits are attributable to net income that was, or in the case of par. (e) 3. would have been, included in the group’s combined unitary income. Tax 2.61 NoteExample: Combined Group EFG consists of Member E, Member F, and Member G. E owns all the stock of F, and F owns all the stock of G. Group EFG is on a calendar year. During the taxable year 2009, E has current year earnings and profits of $300,000 and F has current year earnings and profits of $500,000, both exclusive of any amounts attributed from subsidiaries. Assume these amounts are attributable entirely to items included in Group EFG’s 2009 combined unitary income. G has current year earnings and profits of $400,000. However, $50,000 of this amount is attributable to overseas operations, the income from which was not included in combined unitary income under the water’s edge rules. Assume none of the corporations made distributions in 2009. F’s total current year earnings and profits are $850,000 (= $500,000 + ($400,000 - $50,000 attributed from G)), and E’s current year earnings and profits are $1,150,000 (= $300,000 + $850,000 attributed from F).
Tax 2.61(6)(h)1.1. Combined unitary income shall exclude any expenses or deductions that are directly or indirectly related to income that is not subject to combination. If any expense or amount otherwise deductible is indirectly related both to income subject to combination and income not subject to combination, a reasonable proportion of the expense or amount shall be allocated to each type of income, in light of all the facts and circumstances. Tax 2.61(6)(h)2.2. The allocation in subd. 1. shall be made according to the methods required or allowed for federal income tax purposes under the applicable sections of the Internal Revenue Code, including their corresponding regulations, except that section 265 of the Internal Revenue Code and its corresponding regulations are modified as provided in s. 71.26 (3) (L), Stats. For example, and without limitation, the allocation may be required under section 482 of the Internal Revenue Code or, for an expense related to foreign source income, under sections 861 to 865 of the Internal Revenue Code. Tax 2.61(6)(h)3.3. For purposes of applying this paragraph, a combined group member’s income from outside the unitary business shall be treated as income of an affiliated corporation, and if a combined group member has U.S. source income excluded from the unitary combination under s. Tax 2.61 (4) (f), that U.S. source income shall be treated as foreign source income. Tax 2.61(7)(7) Apportionment of combined unitary income. A combined group is considered to be a single taxpayer for purposes of determining whether it is engaged in business both within and outside Wisconsin. For combined groups engaged in business both within and outside Wisconsin, the combined unitary income is apportioned to the combined group members as provided in s. 71.255 (5), Stats. Under this section, each member’s share of the combined unitary income is the product of the combined unitary income and the member’s modified sales factor ratio. The following rules apply to this computation: Tax 2.61(7)(a)1.1. For combined group members required to use the sales factor as provided in s. 71.25 (6) and (9), Stats., the numerator of the member’s modified sales factor ratio is the numerator of its sales factor as determined under s. 71.25 (9), Stats., and s. Tax 2.39 as if it were not a member of a combined group, except as provided in subd. 5. and pars. (c) to (e). Tax 2.61(7)(a)2.2. For combined group members that are insurers subject to tax under subch. VII of ch. 71, Stats., the numerator of the member’s modified sales factor is the numerator of its premiums factor as determined under s. 71.45 (3) (a), Stats., as if it were not a member of a combined group, except as provided in subd. 5. and pars. (d) and (e). Tax 2.61(7)(a)3.3. For combined group members that are “financial organizations” as defined in s. 71.25 (10), Stats., the numerator of the member’s modified sales factor is the numerator of its receipts factor as determined under ss. Tax 2.49 or 2.495, as applicable, as if it were not a member of a combined group, except as provided in subd. 5. and pars. (c) to (e). Tax 2.61(7)(a)5.5. The numerator of the modified sales factor may not include sales, premiums, or receipts which are not included in the combined unitary income as computed in sub. (6). Tax 2.61(7)(b)(b) Denominator of modified sales factor. The denominator of a combined group member’s modified sales factor ratio is the sum of the separate company denominators of each combined group member, so that each member of the combined group has the same modified sales factor denominator. Each combined group member’s separate company denominator is determined as follows: Tax 2.61(7)(b)1.1. For combined group members required to use the sales factor as provided in s. 71.25 (6) and (9), Stats., the member’s separate company denominator for purposes of the modified sales factor is the denominator of its sales factor as determined under s. 71.25 (9), Stats., and s. Tax 2.39 as if it were not a member of a combined group, except as provided in subd. 5. and pars. (d) and (e). Tax 2.61(7)(b)2.2. For combined group members that are insurers subject to tax under subch. VII of ch. 71, Stats., the member’s separate company denominator for purposes of the modified sales factor is the denominator of its premiums factor as determined under s. 71.45 (3) (a), Stats., as if it were not a member of a combined group, except as provided in subd. 5. and pars. (d) and (e). Tax 2.61(7)(b)3.3. For combined group members that are “financial organizations” as defined in s. 71.25 (10), Stats., the member’s separate company denominator for purposes of the modified sales factor is the denominator of its receipts factor as determined under ss. Tax 2.49 or 2.495, as applicable, as if it were not a member of a combined group, except as provided in subd. 5. and pars. (d) and (e). Tax 2.61(7)(b)4.4. For combined group members that are required to apportion their income using more than one factor under s. 71.25 (10), Stats., and ss. Tax 2.46, 2.465, 2.47, 2.475, 2.48, 2.50, or 2.502, the member’s separate company denominator for purposes of the modified sales factor is determined as provided in par. (g). Tax 2.61(7)(b)5.5. The separate company denominator for purposes of the modified sales factor may not include sales, premiums, or receipts which are not included in the combined unitary income as computed under sub. (6). Tax 2.61(7)(c)(c) Throwback sales. If a combined group member’s sale of tangible personal property is destined for a state in which any member of the combined group has nexus under the standards set forth in s. Tax 2.82, and that nexus relates to the unitary business, the sale may not be included in the numerator of the member’s modified sales factor. If a combined group member is subject to the controlled group election, that member’s numerator shall not include sales destined for a state in which any member of the combined group has nexus under the standards set forth in s. Tax 2.82. Tax 2.61(7)(d)1.1. Any transaction between members of the same combined group shall be excluded from the numerator and denominator of the modified sales factor. However, if the seller subsequently recognizes income or loss from the intercompany transaction under the provisions of s. 71.255 (4) (g), Stats., and sub. (6) (b), the seller’s modified sales factor shall include any factors corresponding to that income or loss in the year it recognizes the income or loss. Tax 2.61(7)(d)2.2. If a combined group member sells an item or service to another combined group member and the purchaser subsequently resells it to a third party outside of the combined group, the situs of the sale between the combined group members and the sale from the purchasing member to the third party shall both be determined based on the situs of the sale from the purchasing member to the third party, and the purchasing member shall exclude from the numerator and denominator of the modified sales factor the amount the selling member already included under subd. 1. attributable to the item or service that was resold. Tax 2.61 NoteExample: Combined Group YZ consists of Member Y and Member Z. Group YZ is on a calendar year. On December 30, 2009, Y sells a widget with a cost of $400 to Z, for $600. Y ships the widget to Z’s warehouse in Wisconsin. On January 30, 2010, Z resells the widget to Q, an unrelated third party, for $700. Z ships the widget to Q’s headquarters in Illinois. Assume both the sale by Y and the sale by Z are subject to combination, and assume that Z has nexus in Illinois. In 2009, Y did not recognize any gain on the sale to Z because the gain was deferred under the provisions of s. 71.255 (4) (g), Stats., and sub. (6) (b). Since the gain on the sale was not recognized, Y cannot include the $600 sale in its apportionment factors for 2009. In 2010, the year the widget was resold by Z, Y must include its $200 of gain on the sale to Z (= $600 - $400) in combined unitary income. Y must also include the sale amount of $600 in the modified sales factor denominator for 2010. Z must include its $100 gain on the sale to Q (= $700 - $600) in combined unitary income for 2010. However, since $600 of Z’s sales price has already been included in the combined group’s modified sales factor, Z may only include $100 of the sale amount in the modified sales factor denominator. Neither Y nor Z include these amounts in their modified sales factor numerators since both sales have a situs in Illinois where Z has nexus. Under the provisions of par. (c), Z’s nexus in Illinois applies to both itself and Y for purposes of applying the throwback rule. Tax 2.61(7)(d)3.3. If an item or service is sold between more than two combined group members before it is sold to a customer outside of the combined group, the situs of these intercompany sales shall be the situs of the ultimate sale to the customer outside of the combined group, and each purchasing combined group member shall exclude from the numerator and denominator of the modified sales factor the amount its selling member already included under subd. 1. Tax 2.61(7)(e)(e) Pass-through entities. A combined group member’s numerator and denominator for purposes of the modified sales factor generally includes the apportionment factors of pass-through entities owned directly or indirectly by the member, in proportion to the combined group member’s distributive share of the pass-through entity’s net income or loss included in the combined unitary income. However, a combined group member’s modified sales factor may not include apportionment factors of a real estate investment trust, regulated investment company, real estate mortgage investment conduit, or financial asset securitization investment trust. Additionally, subds. 1. and 2. apply in order to avoid duplication. For purposes of subds. 1. and 2., “sale” includes sales as defined in s. 71.25 (9), Stats., premiums under s. 71.45 (3) (a), Stats., or receipts under ss. Tax 2.49 or 2.495, as applicable, which would otherwise be included in a combined group member’s modified sales factor. Tax 2.61(7)(e)1.1. If a sale is made by a combined group member to a pass-through entity which is more than 50 percent owned, directly or indirectly, by members of the combined group as provided in subd. 3., the selling member shall subtract from its modified sales factor numerator and denominator, as applicable, an amount equal to the gross receipts of the sale multiplied by the sum of all combined group members’ interests in the pass-through entity as of the date of the sale. This subdivision applies to the extent the gross receipts of the sale are otherwise includable in combined unitary income. For purposes of this subdivision, a combined group member’s interest in the pass-through entity as of the date of the sale means the percentage of the pass-through entity’s income or loss that is allocable to the member in the taxable year of the sale. Tax 2.61 NoteExamples: 1) Combined Group LM consists of Member L and Member M. L owns a 40% interest in Partnership P. M owns a 60% interest in Partnership P. On March 1, 2010, L sells a widget to Partnership P for $10,000, and this sale is includable in Group LM’s combined unitary income. In its computation of apportionment factors for 2010, L must subtract an amount of $10,000 (= $10,000 x (40% + 60%)) from the modified sales factor denominator and, if applicable, from its numerator.
Tax 2.61 Note2) Assume the same facts as Example 1, except that Member L owns a 25% interest and M owns a 50% interest in Partnership P. In its computation of apportionment factors for 2010, L must subtract an amount of $7,500 (= $10,000 x (25% + 50%)) from the modified sales factor denominator and, if applicable, from its numerator.
Tax 2.61(7)(e)2.2. If a sale is made by a pass-through entity to a combined group member and more than 50 percent of the pass-through entity is directly or indirectly owned by members of the combined group as provided in subd. 3., each member with an interest in the pass-through entity shall subtract from its modified sales factor numerator and denominator, as applicable, any amount attributable to the sale. This subdivision applies to the extent the gross receipts of the sale are otherwise includable in combined unitary income. Tax 2.61 NoteExample: Combined Group ST consists of Member S and Member T. S owns a 20% interest in Partnership R. T owns an 80% interest in Partnership R. On October 1, 2010, Partnership R sells a widget to S for $20,000, and this sale is includable in Group ST’s combined unitary income. In its computation of apportionment factors for 2010, S must subtract an amount of $4,000 (= $20,000 x 20%) from its sales factor denominator and, if applicable, from its numerator. Similarly, T must subtract an amount of $16,000 (= $20,000 x 80%) from its sales factor denominator and, if applicable, from its numerator.
Tax 2.61(7)(e)3.3. For purposes of subds. 1. and 2., a pass-through entity is owned more than 50 percent by combined group members if the aggregate amount of the combined group members’ interests in the pass-through entity, without regard to any agreement to allocate gains or losses on a basis other than their capital interests, is more than 50 percent, or the combined group members taken as a whole have more than 50 percent of the management rights of the pass-through entity, as evidenced by the terms of the agreement under which the pass-through entity was formed, voting rights, provisions of state or federal law, or otherwise. Tax 2.61(7)(f)(f) Special rules for zeroes and negative numbers in factors. This paragraph applies the special rules in ss. 71.25 (6m) and 71.45 (3e), Stats., to combined group members as follows: Tax 2.61(7)(f)1.1. If both the numerator and denominator of a member’s modified sales factor are zero, none of the combined unitary income shall be apportioned to the member. The member’s separate company denominator has no effect on this determination. Tax 2.61(7)(f)2.2. If the numerator of a member’s modified sales factor is a negative number, none of the combined unitary income shall be apportioned to the member. The member’s separate company denominator has no effect on this determination. Tax 2.61(7)(f)3.3. If the numerator of a member’s modified sales factor is a positive number and the denominator is a negative number or zero, all of the combined unitary income shall be apportioned to the member. The member’s separate company denominator has no effect on this determination. If this subdivision would result in apportioning all of the combined unitary income to more than one member, the combined unitary income shall be apportioned to the members having positive modified sales factor numerators in proportion to the amounts of their numerators. Tax 2.61 NoteExample: Combined Group XY consists of Member X and Member Y. In its taxable year 2009, Group XY has combined unitary income of $50,000. X and Y have the following apportionment factors:
Tax 2.61 NoteThe modified sales factor denominator, or sum of the separate company denominators, is ($5,000). The amount of combined unitary income that would be apportioned to X is $12,500 (= $50,000 x ($5,000 / $20,000)). The combined unitary income that would be apportioned to Y is $37,500 (= $50,000 x ($15,000 / $20,000)).
