Tax 3.01(4)(b)1.a. a. The primary motivation for the transaction was one or more business purposes other than the avoidance or reduction of state income or franchise taxes.

Tax 3.01(4)(b)1.b. b. The transaction changed the economic position of the taxpayer in a meaningful way apart from tax effects.

Tax 3.01(4)(b)1.c. c. The expense was paid, accrued, or incurred using terms that reflect an arm’s length relationship.

Tax 3.01(4)(b)2. 2. This paragraph is the primary test for establishing whether related entity expenses may be deducted. The tests in pars. (d) and (e) are indicators that the test under this paragraph may have been met.

Tax 3.01(4)(c) (c) Factors indicating requirements are not met. Factors indicating that the related entity expense does not meet the requirements under par. (b) include:

Tax 3.01(4)(c)1. 1. There was no actual transfer of funds from the taxpayer to the related entity.

Tax 3.01 Note Example: A book or journal entry alone is not considered an actual transfer of funds.

Tax 3.01(4)(c)2. 2. There was an actual transfer of funds, then the funds were substantially returned to the taxpayer, either directly or indirectly. Such return need not be immediate in order for this factor to be applicable.

Tax 3.01(4)(c)3. 3. If the transaction was entered into on the advice of a tax advisor, regardless of whether a client relationship exists or existed at the time of the advice, the advisor’s fee was determined by reference to the tax savings. “Tax advisor” includes a “material advisor” under s. 71.81 (1) (b), Stats.

Tax 3.01(4)(c)4. 4. The related entity does not regularly engage in similar transactions with unrelated parties on terms substantially similar to those of the subject transaction.

Tax 3.01(4)(c)5. 5. The transaction was not entered into at terms comparable to an arm’s length transaction as determined by Treas. Reg. section 1.482-1(b).

Tax 3.01(4)(c)6. 6. There was no reasonable expectation of profit from the transaction apart from the tax benefits.

Tax 3.01(4)(c)7. 7. The transaction resulted in the improper matching of income and expenses.

Tax 3.01(4)(c)8. 8. The expense for the transaction was accrued under Financial Accounting Standards Board Interpretation number 48. For purposes of this section, this factor applies to both income and franchise taxes.

Tax 3.01 Note Note: Financial Accounting Standards Board Interpretation number 48 is available on the Financial Accounting Standards Board’s web site at www.fasb.org.

Tax 3.01(4)(c)9. 9. If the related entity expense is a rental expense, the rent was paid, accrued, or incurred to a captive real estate investment trust.

Tax 3.01(4)(c)10. 10. If the related entity expense is an interest expense, additional factors specific to interest expenses include any of the following:

Tax 3.01(4)(c)10.a. a. The taxpayer is not sufficiently capitalized or has no reasonable expectation to make payment on the debt underlying the interest expense.

Tax 3.01(4)(c)10.b. b. There is no written contract underlying the interest expense.

Tax 3.01(4)(c)10.c. c. There is a contract, but the contract does not reflect an interest obligation resulting from an arm’s length transaction.

Tax 3.01(4)(c)10.d. d. The interest is attributable to an unpaid charge that is not an allowable expense, a loan from a captive insurance company, a dividend note, a loan from a related entity with net business loss carryforwards or net operating loss carryforwards, or a loan from a related entity that is an intermediary set up in a jurisdiction that imposes no corporate-level income or franchise tax.

Tax 3.01(4)(d) (d) Related entity acts as a conduit.

Tax 3.01(4)(d)1. 1. ‘Requirements.’ Section 71.80 (23) (a), Stats., provides that if a taxpayer added back related entity expenses, the taxpayer may then deduct such expenses if the taxpayer meets the requirements under s. 71.80 (23) (a) 1., Stats. The taxpayer shall establish it meets the requirements under s. 71.80 (23) (a) 1., Stats., by clear and convincing evidence. The taxpayer shall meet all of the following requirements:

Tax 3.01(4)(d)1.a. a. The related entity to which the taxpayer paid, accrued, or incurred related entity expenses during the taxable year directly or indirectly paid, accrued, or incurred such amounts in the same taxable year to a person who is not a related entity. In this subdivision, “taxable year” means the taxable year of the taxpayer claiming the deduction for related entity expenses paid, accrued, or incurred to the related entity. The department will consider such expenses the related entity pays, accrues, or incurs to an unrelated entity by the unextended due date of the taxpayer’s income or franchise tax return to be paid, accrued, or incurred within the taxpayer’s “taxable year.” However, such expenses that occur after the end of the taxpayer’s taxable year may not then be counted again as occurring in the subsequent taxable year.

Tax 3.01(4)(d)1.b. b. Except as provided in subd. 2., the related entity to which the taxpayer paid, accrued, or incurred such expenses is a holding company or a direct or indirect subsidiary of a holding company, as defined in 12 USC 1841(a) or (l) or 12 USC 1467a(a)(1)(D).

Tax 3.01(4)(d)2. 2. ‘Investments of a bank, subsidiary, or affiliate.’ Related entity expenses may not satisfy the test in subd. 1. b. when such expenses are paid, accrued, or incurred directly or indirectly to an entity that is organized under the laws of another jurisdiction and that primarily holds and manages investments of a bank, subsidiary, or affiliate, unless the related entity expenses satisfy the provisions in subd. 1. a.

Tax 3.01(4)(d)3. 3. ‘Interest on acquisition of stock.’ As specifically provided under s. 71.80 (23) (a) 1., Stats., interest expense paid, accrued, or incurred in connection with any debt incurred to acquire taxpayer’s assets or stock under section 368 of the Internal Revenue Code may not satisfy the test under this paragraph.

Tax 3.01 Note Example: Corporation A borrows money from Corporation B. No portion of the debt was used to acquire A’s own stock or assets under section 368 of the Internal Revenue Code. In order to obtain the funds to loan to A, B borrows money from Bank C. A is a calendar year taxpayer, while B is on a fiscal year beginning July 1 and ending June 30. During the calendar year 2008, A accrued $100,000 of interest expense attributable to the loan from B. In turn, B accrued $90,000 of interest expense attributable to the loan from C during that same time period of January 1, 2008, through December 31, 2008. During the period of January 1, 2009, through March 15, 2009, B accrued $10,000 of interest expense to C.

For purposes of determining if the test under subd. 1. a. applies to A’s interest expense, B may be considered to have accrued $100,000 of interest expense ($90,000 + $10,000) to C in A’s 2008 taxable year. However, in A’s 2009 taxable year, A cannot consider the $10,000 of interest expense accrued by B to C during the period of January 1, 2009, through March 15, 2009, to be accrued during A’s 2009 taxable year.