Wisconsin Administrative Code › Department of Revenue › Chapter Tax 3 - Income Taxation, Deductions From Gross Income, Exclusions And Exemptions › Section Tax 3.01 - Addback and disclosure of related entity expenses

Current through June 24, 2024
(1) SCOPE. This
			 section provides further interpretation and explanation relating to the
			 addition and subtraction modifications and disclosure provisions in ch. 71,
			 Stats. In general, the addback statutes provide that a taxpayer shall modify
			 federal income to add back interest, rental, and intangible expenses and
			 management fees that are directly or indirectly paid, accrued, or incurred to a
			 related entity or related person. If certain tests are satisfied, the taxpayer
			 may subsequently deduct the expenses. The addback statutes also impose a
			 disclosure requirement for related entity expenses. Notwithstanding a taxpayer
			 satisfying the tests allowing the deductions of related entity expenses, the
			 department has express authority to reallocate a taxpayer's income, deductions,
			 credits, or allowances to prevent tax evasion or to clearly reflect income. The
			 department also has express authority to disregard transactions that lack
			 economic substance.
(2)
			 DEFINITIONS. In this section:
(a) "Addback"
			 means the addition and subtraction modifications and disclosure requirement
			 required by ss.
			 71.05(6)
			 (a) 24. and (b) 45., 71.26 (2) (a) 7. and 8.,
			 71.34 (1k) (j) and (k), 71.45 (2) (a) 16. and 17., and 71.80 (23), Stats. Where
			 applicable, "addback" also refers to subtraction modification to a related
			 entity pursuant to ss.
			 71.05(6)
			 (b) 46., 71.26 (2) (a) 9., 71.34 (1k) (L),
			 and 71.45 (2) (a) 18., Stats.
(b)
			 "Aggregate effective tax rate," for a related entity, is the sum of its
			 effective tax rates for each state, U.S. possession, or foreign country where
			 it is engaged in business. In determining whether a related entity is engaged
			 in business in a state, U.S. possession, or foreign country, the legal standard
			 set forth under s.
			 71.22(1r),
			 Stats., shall apply to such other jurisdiction for purposes of applying the
			 addback provisions.
(c) "Captive
			 insurance company," for purposes of applying the addback provisions, means an
			 insurer that issues any policy of insurance or reinsurance with respect to
			 which the person insured is related under section 267 or 1563 of the Internal
			 Revenue Code.
(d) "Captive REIT"
			 means a real estate investment trust other than a qualified real estate
			 investment trust under s.
			 71.22(9ad),
			 Stats.
(e) "Combined unitary
			 income" has the meaning given in s.
			 Tax
			 2.60(2) (e).
(f) "Effective tax rate", for a particular
			 jurisdiction for a related entity, means the maximum tax rate imposed by that
			 jurisdiction multiplied by the related entity's apportionment percentage, if
			 any, computed for that particular jurisdiction.
(g) "Intangible expense" has the meaning
			 given in s.
			 71.01(5n),
			 71.22(3g),
			 71.34(1c),
			 or
			 71.42(1sg),
			 Stats., as applicable.
(h)
			 "Intangible property" has the meaning given in s.
			 71.01(5p),
			 71.22(3h),
			 71.34(1d),
			 or
			 71.42(1sh),
			 Stats., as applicable.
(i)
			 "Interest expense" has the meaning given in s.
			 71.01(5s),
			 71.22(3m),
			 71.34(1e),
			 or
			 71.42(1t),
			 Stats., as applicable.
(j)
			 "Management fees" has the meaning given in s.
			 71.01(7v),
			 71.22(6d),
			 71.34(1h),
			 or
			 71.42(3c),
			 Stats., as applicable.
(k)
			 "Pass-through entities" include tax-option (S) corporations, partnerships,
			 limited liability companies treated as partnerships, estates, and
			 trusts.
(L) "Rental expenses" or
			 "rent expenses" has the meaning given in s.
			 71.01(9an),
			 71.22(9an),
			 71.34(1r),
			 or
			 71.42(4n),
			 Stats., as applicable.
(m) "Related
			 entity" or "related entities" has the meaning given in s.
			 71.01(9am),
			 71.22(9am),
			 71.34(1p),
			 or
			 71.42(4m),
			 Stats., as applicable. The terms include related individuals. In determining
			 relatedness under section 267 of the Internal Revenue Code, section 267 (b)
			 controls, which defines relationships through which taxpayers would be
			 considered related for purposes of disallowing losses or deductions on
			 transactions between related taxpayers. Section 707 (b) of the Internal Revenue
			 Code, incorporated by reference into section 267, applies in determining
			 whether partnerships and limited liability companies treated as partnerships
			 and their respective partners are related. The stock attribution rules of
			 section 318 (a) of the Internal Revenue Code otherwise apply for purposes of
			 establishing indirect stock ownership and thereby determine related entities.
Examples:
The following relationships involving partnerships and limited
				liability companies (LLC) constitute related entities:
1. A partnership and a partner who holds a
			 direct or indirect capital or profits interest in that partnership of more than
			 50%.
2. An LLC and a member who
			 holds a direct or indirect interest in that LLC of more than 50%.
3. Two partnerships or LLCs if a single
			 partner or member owns, directly or indirectly, more than 50% of both
			 entities.
(n) "Related
			 entity expenses" means interest, rent, or intangible expenses, and management
			 fees, either as an individual expense type or a combination of expense types in
			 a transaction or series of transactions whether paid, accrued, or incurred
			 directly or indirectly.
Examples:
1) Corporation A is the parent company of
			 Corporation B and Corporation C, which are related entities. B owns intangible
			 property that C uses in its manufacturing process. C incurs a royalty expense
			 as a result. A purchases the goods from C that A will hold and sell as
			 inventory. This increased cost due to the royalty is reflected in A's cost of
			 goods sold. The royalty portion of the cost of goods sold represents an
			 indirect related entity expense that must be added back to A's
			 income.
2) Corporation A,
			 Corporation B, Corporation C, and Corporation D are related entities. A and D
			 have nexus in Wisconsin, but B and C do not. B is not subject to tax in any
			 state. Previously, D owned intangible property which A used in operating its
			 business. In a series of transactions, D transfers the intangible property to
			 B. B then licenses the intellectual property to C, the inventory purchasing
			 company. A purchases the inventory from C. The royalty portion of A's cost of
			 goods sold represents an indirect related entity expense that must be added
			 back to A's income.
3) Corporation
			 O, Corporation H, and Corporation S are related entities. O, the operating
			 company, transfers various items of intangible property to H in conformity with
			 section 351 of the Internal Revenue Code. H enters into an agreement with S
			 that will allow S to license H's intangible property. S and O are related
			 entities. S licenses the intangible property to O whereby O pays fees to S
			 based on a percentage of sales. The intangible expense between O and S is a
			 related entity expenses that must be added back to O's income.