Wis. Admin. Code § Tax 3.01 — Addback and disclosure of related entity expenses

Tax 3.01(1) (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.

Tax 3.01(2) (2) Definitions. In this section:

Tax 3.01(2)(a) (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.

Tax 3.01(2)(b) (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.

Tax 3.01(2)(c) (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.

Tax 3.01(2)(d) (d) “Captive REIT” means a real estate investment trust other than a qualified real estate investment trust under s. 71.22 (9ad) , Stats.

Tax 3.01(2)(e) (e) “Combined unitary income” has the meaning given in s. Tax 2.60 (2) (e) .

Tax 3.01(2)(f) (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.

Tax 3.01(2)(g) (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.

Tax 3.01(2)(h) (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.

Tax 3.01(2)(i) (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.

Tax 3.01(2)(j) (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.

Tax 3.01(2)(k) (k) “Pass-through entities” include tax-option (S) corporations, partnerships, limited liability companies treated as partnerships, estates, and trusts.

Tax 3.01(2)(L) (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.

Tax 3.01(2)(m) (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.

Tax 3.01(2)(n) (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.

Tax 3.01(3) (3) Addition modification.

Tax 3.01(3)(a) (a) General. A corporation, individual, or pass-through entity shall modify federal income for Wisconsin purposes so that related entity expenses that were paid, accrued, or incurred to a related entity are added back to income.

Tax 3.01(3)(b) (b) Taxpayers required to modify income. The addition modification applies to any individual, corporation, or pass-through entity that has deducted or excluded under the Internal Revenue Code any amounts for related entity expenses that are 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.

Tax 3.01(3)(c) (c) Interest expense. Interest expenses include interest expenses otherwise deductible under section 163 of the Internal Revenue Code and otherwise deductible in the computation of Wisconsin adjusted gross income or Wisconsin net income. Expenses deductible as interest expenses under section 163 of the Internal Revenue Code include:

Tax 3.01(3)(c)1. 1. Interest paid or accrued within the taxable year on indebtedness.

Tax 3.01(3)(c)2. 2. Original issue discount.

Tax 3.01(3)(c)3. 3. Non-separately stated interest included in carrying charges for installment purchases.

Tax 3.01(3)(c)4. 4. Redeemable ground rents, excluding amounts paid in redemption.

Tax 3.01(3)(c)5. 5. Premiums paid or accrued for mortgage insurance.

Tax 3.01(3)(d) (d) Rental expense.

Tax 3.01(3)(d)1. 1. Rent expenses include expenses otherwise deductible in computing Wisconsin adjusted gross income or Wisconsin net income which are attributable to, for the use of, or for the right to use, real property, including the following:

Tax 3.01(3)(d)1.a. a. Tangible personal property affixed to real property if the owner of the tangible personal property is the same as or related to the owner of the real property.

Tax 3.01(3)(d)1.b. b. Services rendered in connection with rented real property if the owner of the property is the same as or related to the entity providing the service.

Tax 3.01(3)(d)2. 2. For purposes of the addition modification, the method used to compute the expense and the manner in which it is reported for financial accounting purposes are immaterial.

Tax 3.01(3)(e) (e) Management fees.

Tax 3.01(3)(e)1. 1. Other than services provided by the taxpayer’s own employees, management fees include expenses and costs otherwise deductible in computing Wisconsin adjusted gross income or Wisconsin net income for the purchase or retention of services, including services that pertain to any of the following:

Tax 3.01(3)(e)1.a. a. Accounts receivable or payable.

Tax 3.01(3)(e)1.b. b. Employee benefit plans.

Tax 3.01(3)(e)1.c. c. Insurance, including self-insurance.

Tax 3.01(3)(e)1.d. d. Legal matters.

Tax 3.01(3)(e)1.e. e. Payroll.

Tax 3.01(3)(e)1.f. f. Data processing.

Tax 3.01(3)(e)1.g. g. Purchasing.

Tax 3.01(3)(e)1.h. h. Taxation.

Tax 3.01(3)(e)1.i. i. Financial matters.

Tax 3.01(3)(e)1.j. j. Securities.

Tax 3.01(3)(e)1.k. k. Accounting.

Tax 3.01(3)(e)1.L. L. Reporting or compliance matters.

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.