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LRB-2602/1
KRP:ahe
2017 - 2018 LEGISLATURE
April 20, 2017 - Introduced by Representatives Katsma, Macco, Bernier, E.
Brooks
, R. Brooks, Duchow, Gannon, Hutton, Jacque, Jarchow, Kooyenga,
Kremer, Kuglitsch, Kulp, Murphy, Neylon, Ripp, Skowronski and Tauchen,
cosponsored by Senators Marklein, Craig, Kapenga, Nass, Olsen and
Stroebel. Referred to Committee on Ways and Means.
AB259,1,7 1An Act to repeal 20.566 (1) (hn) and 73.03 (28d); to amend 71.10 (1m) (c), 71.30
2(2m) (c), 71.80 (1m) (c) and 73.16 (3) (b); and to create 71.98 (8) of the statutes;
3relating to: the length of the recognition period for built-in gains tax; the
4evidentiary standard for proving a transaction has economic substance;
5participation by the Department of Revenue in the Multistate Tax Commission
6Audit Program; and reliance by a taxpayer on past audits by the Department
7of Revenue.
Analysis by the Legislative Reference Bureau
This bill makes the following tax law changes: 1) changes the length of the
recognition period for built-in gains tax; 2) changes the standard of proof a taxpayer
must meet to establish that a transaction has economic substance for income and
franchise tax purposes; 3) eliminates the Department of Revenue's obligation and
authority to participate in the Multistate Tax Commission Audit Program; and 4)
eliminates an exception to current law that allows a taxpayer to rely on past audits
to avoid tax liability in later audits.
Length of recognition period for built-in gains tax
The bill changes the period of time after a corporation elects tax-option
corporation status, called a recognition period, during which a tax-option
corporation that sells certain assets for a profit must pay income or franchise taxes

on the profit as though the tax-option corporation were a regular corporation. That
tax is commonly called a built-in gains tax.
Under current law, the term “recognition period” is defined by reference to
federal law, but the definition is not automatically updated to reflect changes to
federal law. The federal Protecting Americans from Tax Hikes Act of 2015 makes
permanent a reduction in the recognition period under federal law from ten years to
five years. The bill provides that the recognition period for purposes of Wisconsin law
is the same as under federal law, as federal law is amended from time to time.
Evidentiary standard to prove transaction has economic substance
The bill changes the standard of proof a taxpayer must meet to establish that
a transaction has economic substance for income and franchise tax purposes.
Under current law, if a taxpayer engages in a transaction without economic
substance to create a loss, to reduce taxable income, or to increase credits allowed in
determining Wisconsin income or franchise tax, DOR may disregard the transaction
for purposes of calculating the taxpayer's tax liability. Under current law, there is
a rebuttable presumption that transactions between members of a controlled group
lack economic substance.
The bill changes the evidentiary standard for a taxpayer to rebut the
presumption from “clear and convincing evidence” to “a preponderance of the
evidence.”
Multistate Tax Commission Audit Program
The bill eliminates DOR's obligation and authority to participate in the
Multistate Tax Commission Audit Program.
Reliance by taxpayer on past audits
The bill eliminates an exception to current law that allows a taxpayer to rely
on past audits to avoid tax liability in later audits. Under current law, a taxpayer
subject to an audit determination by DOR is not liable for amounts asserted by DOR
if the following conditions are met:
1. The tax issue giving rise to the liability was present during a period of time
for which the taxpayer was previously audited.
2. DOR identified the tax issue during the prior audit.
3. DOR did not assert any liability for the tax issue during the prior audit.
Current law provides certain exceptions to a taxpayer's ability to rely on past
audits to avoid liability in later audits.
The bill eliminates an exception that provides that, if a taxpayer did not give
DOR adequate and accurate information regarding the tax issue during the prior
audit or if the taxpayer and DOR settled the tax issue in the prior audit by a written
agreement, the taxpayer cannot rely on the prior audit to avoid liability for the tax
issue in a later audit. Under the bill, a taxpayer can rely on a prior audit even if the
taxpayer provided inadequate or inaccurate information during the prior audit or
settled the same tax issue with DOR during the prior audit.

For further information see the state 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:
AB259,1 1Section 1. 20.566 (1) (hn) of the statutes is repealed.
AB259,2 2Section 2. 71.10 (1m) (c) of the statutes is amended to read:
AB259,3,93 71.10 (1m) (c) With respect to transactions a transaction between members of
4a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such
5transactions
the transaction shall be presumed to lack economic substance, and the
6taxpayer shall bear the burden of establishing by clear and convincing a
7preponderance of the
evidence that a the transaction or a the series of transactions
8between the taxpayer and one or more members of the controlled group has economic
9substance.
AB259,3 10Section 3. 71.30 (2m) (c) of the statutes is amended to read:
AB259,3,1711 71.30 (2m) (c) With respect to transactions a transaction between members of
12a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such
13transactions
the transaction shall be presumed to lack economic substance, and the
14taxpayer shall bear the burden of establishing by clear and convincing a
15preponderance of the
evidence that a the transaction or a the series of transactions
16between the taxpayer and one or more members of the controlled group has economic
17substance.
AB259,4 18Section 4. 71.80 (1m) (c) of the statutes is amended to read:
AB259,4,419 71.80 (1m) (c) With respect to transactions a transaction between members of
20a controlled group, as defined in section 267 (f) (1) of the Internal Revenue Code, such
21transactions
the transaction shall be presumed to lack economic substance, and the

1taxpayer shall bear the burden of establishing by clear and convincing a
2preponderance of the
evidence that a the transaction or a the series of transactions
3between the taxpayer and one or more members of the controlled group has economic
4substance.
AB259,5 5Section 5. 71.98 (8) of the statutes is created to read:
AB259,4,106 71.98 (8) Recognition period for built-in gains tax. For taxable years
7beginning after December 31, 2017, and for purposes of determining the recognition
8period for tax imposed on certain built-in gains, section 1374 (d) (7) of the Internal
9Revenue Code means section 1374 (d) (7) of the federal Internal Revenue Code in
10effect on the date the recognition period of the corporation begins.
AB259,6 11Section 6. 73.03 (28d) of the statutes is repealed.
AB259,7 12Section 7. 73.16 (3) (b) of the statutes is amended to read:
AB259,4,2313 73.16 (3) (b) This subsection does not apply to any period associated with an
14audit determination, if the period begins after the promulgation of a rule,
15dissemination of written guidance to the public or to the person who is subject to the
16audit determination, the effective date of a statute, or the date on which a tax appeals
17commission or court decision becomes final and conclusive and if the rule, guidance,
18statute, or decision imposes the liability as a result of the tax issue described in par.
19(a) 1. This subsection does not apply to any period associated with an audit
20determination if the taxpayer did not give the department employee adequate and
21accurate information regarding the tax issue in the prior audit determination or if
22the tax issue was settled in the prior audit determination by a written agreement
23between the department and the taxpayer.
AB259,8 24Section 8. Nonstatutory provisions.
AB259,5,4
1(1) Multistate tax commission audit program. The repeal of sections 20.566
2(1) (hn) and 73.03 (28d) of the statutes does not affect the validity of any assessment
3based entirely or in part on information or documents obtained from the multistate
4tax commission prior to the repeal.
AB259,9 5Section 9. Initial applicability.
AB259,5,116 (1) Evidentiary standard to prove transaction has economic substance. The
7treatment of sections 71.10 (1m) (c), 71.30 (2m) (c), and 71.80 (1m) (c) of the statutes
8first applies to taxable years beginning on January 1 of the year in which this
9subsection takes effect, except that if this subsection takes effect after July 31, this
10act first applies to taxable years beginning on January 1 of the year following the
11year in which this subsection takes effect.
AB259,5,1412 (2) Multistate tax commission audit program. The treatment of section 73.03
13(28d) of the statutes first applies to a contract that is entered into or extended,
14modified, or renewed on July 1, 2018.
AB259,5,1615 (3) Reliance on past audits. The treatment of section 73.16 (3) (b) of the
16statutes first applies to an audit commenced on the effective date of this subsection.
AB259,10 17Section 10. Effective dates. This act takes effect on the day after publication,
18except as follows:
AB259,5,2019 (1) Multistate tax commission audit program. The treatment of section 20.566
20(1) (hn) of the statutes takes effect on July 1, 2018.
AB259,5,2121 (End)
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