Tax 2.61(4)(f)3.3. Dividend income received from a real estate investment trust that is not a qualified real estate investment trust as defined in s. 71.22 (9ad), Stats. Tax 2.61(4)(f)4.4. Gains or losses derived from the sale or lease of real or personal property located in the United States. Tax 2.61(4)(f)5.5. Expenses or deductions related to the income, gains, and losses described in subds. 1. to 4., determined in the manner provided in sub. (6) (h). Tax 2.61(4)(g)(g) Applicability of federal treaties. If a corporation’s income is not included in gross income for federal income tax purposes under the provisions of a federal treaty, the income is not included in gross income for Wisconsin purposes and shall not be included in combined unitary income. Tax 2.61(4)(h)(h) Taxation of income not subject to combination under water’s edge. Any income, expenses, and apportionment factors that are excluded from the unitary combination under pars. (d) and (e) shall be taken into account by the separate corporation that earned the income. The following rules apply to determining and reporting Wisconsin net income or loss not subject to combination under the water’s edge rules: Tax 2.61(4)(h)1.1. The net income or loss is presumed to be from a unitary business and therefore apportionable. Tax 2.61(4)(h)2.2. The corporation’s nexus depends on whether the corporation is a “combined group member” as defined in s. Tax 2.60 (2) (b). If the corporation is a combined group member, the provisions of subd. 3. apply. If the corporation is not a combined group member, the provisions of subd. 4. apply. Tax 2.61(4)(h)3.3. Under s. 71.255 (5) (a), Stats., a corporation that is a combined group member is doing business in this state if any member of the combined group is doing business in this state relating to the unitary business. If the corporation is a combined group member because of the controlled group election, that corporation is doing business in this state if any member of the combined group is doing business in this state. In either case, an apportioned share of the corporation’s net income or loss that is not subject to combination under the water’s edge rules may be taxed by Wisconsin. “Doing business in this state” is defined in s. 71.22 (1r), Stats., and further explained in s. Tax 2.82. Tax 2.61(4)(h)4.4. If the corporation is not a combined group member, s. 71.255 (5) (a), Stats., does not apply. Instead, the corporation is doing business in this state if, when considered as a separate entity, it is “doing business in this state” as defined in s. 71.22 (1r), Stats., and further explained in s. Tax 2.82. For example, and without limitation, the corporation may have nexus in this state if any agent of the corporation, including a member of the combined group, acts on the corporation’s behalf in this state in a manner that would create nexus under s. 71.22 (1r), Stats., s. Tax 2.82, or otherwise. Tax 2.61(4)(h)5.5. The provisions of ss. 71.26 (2) (a) 7. and 71.45 (2) (a) 16., Stats., requiring an addition modification for interest expenses, rent expenses, intangible expenses, and management fees paid, accrued, or incurred to a related entity, apply to any amounts not subject to combination which were paid, accrued, or incurred by the corporation to any related entity, even if the related entity was a combined group member. Tax 2.61(4)(h)6.6. The numerator and denominator of the apportionment ratio shall include only that corporation’s apportionment factors attributable to unitary business income that is not subject to combination. Intercompany transactions may not be eliminated from the apportionment factors unless the department determines those transactions have no economic substance as determined under the provisions of ss. 71.30 (2m) or 71.80 (1m), Stats., as applicable, or if the department determines that those transactions have no business purpose other than tax avoidance. If the corporation is a combined group member, it must apply the provisions of sub. (7) (c) in computing the amount of throwback sales includable in the numerator. Tax 2.61(4)(h)7.7. Income separately apportioned as described in this paragraph may be reported on a designated line of the combined return, supported by a department-prescribed schedule, instead of reporting that income on a separate return. This separately apportioned income shall be considered a separate entity item. See s. Tax 2.67 (2) (d) for filing requirements relating to separate entity items. Tax 2.61 NoteExamples: 1) A, B, and C are corporations in a commonly controlled group and engaged in a unitary business. All of the income of the corporations is derived from the unitary business. A and B are incorporated in Delaware. C is incorporated in France. The income of A and B is derived exclusively from U.S. sources. Ninety percent of C’s worldwide gross income is active foreign business income. The remaining 10% of C’s worldwide gross income is U.S. source income, some of which has situs in Wisconsin. C has agents acting on its behalf in Wisconsin which create nexus because their activities exceed the protection of P.L. 86-272. Since C is a foreign 80/20 corporation, none of its net income, expenses, or apportionment factors may be included in the unitary combination. Thus, C is not a combined group member.
Tax 2.61 NoteHowever, C is subject to tax on an apportioned share of its worldwide net income, to the extent the income is not exempt by federal treaty. In determining the apportioned share, the numerator and denominator of C’s apportionment factors are its numerator and denominator computed for C on a separate entity basis. Since C is not a combined group member, it cannot consider the activities of A or B when it computes its throwback sales for purposes of the numerator. C is required to report this income to Wisconsin as a separate entity item.
Tax 2.61 Note2) Combined Group DE consists of Member D and Member E. Both D and E are Delaware corporations. All of the income of D and E is derived from the unitary business. All of D’s income is from sources within the U.S. However, 85% of E’s worldwide gross income is active foreign business income, making E a domestic 80/20 corporation. E has total of $150,000 of income from the unitary business, net of expenses. Of this amount, $100,000 is derived from intangible property and $50,000 is derived from service fees. D and E must include in the unitary combination all of D’s income, expenses, and apportionment factors and E’s income, expenses, and apportionment factors only to the extent related to its income derived from intangible property. Since E is a domestic 80/20 corporation and service fees are not one of the types of income subject to combination for a domestic 80/20 corporation, E’s service fee income, and expenses and apportionment factors relating to that income, must be excluded from the unitary combination.
Tax 2.61 NoteHowever, E is subject to tax on an apportioned share of its service fee income. E has nexus in Wisconsin because it is a member of Group DE, which is doing business in Wisconsin. In determining the apportioned share, the numerator and denominator of E’s apportionment factors are its numerator and denominator including only the factors relating to its service fee income and computed for E on a separate entity basis. However, since E is a combined group member, it may consider the activities of D when it computes its throwback sales for purposes of the numerator. E is required to report this income to Wisconsin as a separate entity item.
Tax 2.61(5)(5) Taxable income of a combined group member. The taxable income of a combined group member consists of the components listed in this subsection. For purposes of pars. (c) and (d), a “distinct business activity” means a business activity that is not unitary with the combined group’s unitary business. For purposes of determining the expenses and deductions attributable to each component, the provisions of sub. (6) (h) apply. A combined group member’s taxable income is the total of all of the following: Tax 2.61(5)(a)(a) Its apportioned share of the combined unitary income, as computed under subs. (6) and (7), or, in the case of a combined group where all members are doing businesses solely within Wisconsin, its unitary business income subject to combination as computed under subs. (6) and (8). A corporation may have a share of combined unitary income or unitary business income from more than one combined group, in which case s. Tax 2.67 (2) (d) 4. applies. Tax 2.61(5)(b)(b) An apportioned share of the unitary business income not subject to combination under the water’s edge rules of sub. (4), or in the case of a combined group where all members are doing business solely within Wisconsin, its total unitary business income not subject to combination under the water’s edge rules of sub. (4). Tax 2.61(5)(c)(c) An apportioned share of income from a distinct business activity conducted within and outside this state wholly by the member. Tax 2.61(5)(d)(d) Its income from a distinct business activity conducted entirely within this state wholly by the member. Tax 2.61(5)(e)(e) Its nonbusiness income or loss allocable to this state. Tax 2.61(5)(f)(f) Its income realized from the purchase and subsequent sale or redemption of lottery prizes, if the winning tickets were originally bought in this state. Tax 2.61(5)(g)(g) To the extent not included in combined unitary income under par. (a), any income, loss, or deduction allocated or apportioned in an earlier year which is taken into account as Wisconsin source income or loss during the taxable year, other than a net business loss carryforward. Under this paragraph, non-sharable net capital loss carryovers may be used to offset the taxable income of a combined group member, as described in sub. (6) (c). Tax 2.61(5)(h)(h) Its net business loss carryforward, including any other combined group members’ net business loss carryforwards which may offset the member’s share of combined unitary income under the provisions of sub. (9). Tax 2.61(6)(6) Computation of combined unitary income. This subsection interprets s. 71.255 (4), Stats., relating to a combined group’s computation of business income subject to combination, which is called “combined unitary income” for purposes of this section. The steps to compute combined unitary income are as follows: Tax 2.61(6)(a)1.1. Compute the sum of each combined group member’s net income determined under the Internal Revenue Code before Wisconsin modifications, without regard to net capital gain or loss, net gain or loss under section 1231 of the Internal Revenue Code, net gain or loss from involuntary conversions, or deductions for charitable contributions. Compute this income as if the member were not consolidated for federal purposes. Tax 2.61(6)(a)2.2. Defer or recognize any intercompany income, expense, gain, or loss between combined group members as described in par. (b), except to the extent the income, expense, gain, or loss is excluded from the combined unitary income because it does not relate to the unitary business or is not subject to combination under the water’s edge rules of sub. (4). Tax 2.61(6)(a)3.3. Add net capital gain includable in the combined unitary income, applying the loss limitation as described in par. (c) and using the federal basis of assets. Any differences between the federal and Wisconsin basis of assets, including basis differences that arise from the application of par. (f), are accounted for as Wisconsin modifications under subd. 6. The Wisconsin basis of a corporation’s depreciable property for the first year the corporation becomes taxable in Wisconsin equals its federal basis as of the beginning of the taxable year in which the corporation becomes taxable in Wisconsin, as required under s. 71.265, Stats. The federal basis shall be computed under the Internal Revenue Code in effect for federal purposes as required under ss. 71.22 (4) and (4m), 71.26 (3) (y), 71.42 (2), and 71.98 (3), Stats. Tax 2.61 NoteNote: Under ss. 71.22 (4) and (4m), 71.26 (3) (y), and 71.42 (2), Stats., the federal bonus depreciation provisions in section 168(k) of the Internal Revenue Code are excluded from the Internal Revenue Code in effect for Wisconsin purposes. Therefore, the federal basis computed under subd. 3. must be computed without regard to any bonus depreciation claimed for federal purposes. Tax 2.61(6)(a)4.4. Subtract any net section 1231 loss or net loss from involuntary conversions that results from the aggregation in par. (c) 1. Tax 2.61(6)(a)5.5. Subtract the charitable contributions deduction includable in the combined unitary income, computed as described in par. (d). Tax 2.61(6)(a)6.6. Apply Wisconsin addition and subtraction modifications provided in ss. 71.26 and 71.45, Stats., as applicable. For interest expenses, rent expenses, intangible expenses, and management fees 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. Tax 2.61(6)(a)7.7. Subtract any dividends that qualify for elimination under par. (e) to the extent the dividends did not qualify for a subtraction modification under subd. 6. Tax 2.61(6)(a)8.8. If a combined group member is an insurance company, subtract the portion of net income attributable to the insurance company’s life insurance operations as determined using s. 71.45 (2) (b), Stats. Tax 2.61(6)(a)9.9. Subtract the income, as modified by subds. 6. to 8., which is not includable in combined unitary income because it is not derived from the unitary business or is not subject to combination under the water’s edge rules of sub. (4). The income subtracted under this subdivision shall be net of any directly or indirectly related expenses as provided in par. (h). The amount subtracted under this subdivision may not duplicate any amounts already subtracted. Tax 2.61(6)(b)(b) Intercompany transactions. Defer or recognize any intercompany income, expense, gain, or loss between combined group members that would be deferred or recognized between those members under 26 CFR 1.1502-13 as if the combined group were a federal consolidated group, except that the provisions for intercompany dividends are excluded and replaced with par. (e). This paragraph does not apply to intercompany transactions which occurred in taxable years beginning before January 1, 2009 or to intercompany transactions where the income, expense, gain, or loss would not otherwise be subject to combination. For modifications to 26 CFR 1.1502-13 that are necessary in the case of a combined group doing business solely in this state, see sub. (8). Any deferred intercompany income, expense, gain, or loss that is recognized under this paragraph shall be recognized by the same combined group member that deferred the income, expense, gain, or loss. The deferred income, expense, gain, or loss shall be recognized when required under 26 CFR 1.1502-13 as if the combined group were a federal consolidated group, or when any of the following apply: Tax 2.61(6)(b)1.1. The buyer resells the object of the deferred intercompany transaction to an entity that is not a member of the combined group. Tax 2.61(6)(b)2.2. The object of the deferred intercompany transaction is used outside the combined group’s unitary business as a result of the buyer’s resale, conversion, or transfer of the asset. Tax 2.61(6)(b)3.3. The buyer and seller are no longer members of the same combined group, regardless of whether they are in the same unitary business. 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).
