Tax 2.61(4)(b)2. 2. The testing period for purposes of subd. 1. is the tested corporation’s taxable year that would be included in the combined group’s taxable year, as determined by s. 71.255 (8), Stats. If the tested corporation was not otherwise eligible to be a combined group member for any part of that taxable year (for example, the corporation did not satisfy the conditions in sub. (2) (a) 1. or 2.), the testing period is the portion of that taxable year in which the corporation was otherwise eligible to be a member.

Tax 2.61(4)(b)3. 3. An 80/20 corporation may be either a foreign corporation or a domestic corporation.

Tax 2.61(4)(b)4. 4. For purposes of this paragraph, a corporation’s active foreign business income includes gross income attributed from subsidiary corporations as provided in subchapter N of the Internal Revenue Code, but only to the extent the gross income of the subsidiary corporations is derived from the combined group’s unitary business.

Tax 2.61(4)(b)5. 5. A disregarded entity’s active foreign business income and worldwide gross income shall be combined with those of its owner for purposes of applying the test in subd. 1.

Tax 2.61(4)(c) (c) Foreign source income.

Tax 2.61(4)(c)1. 1. For purposes of the water’s edge rules in pars. (d) and (e), income is foreign source income if it is from sources without the United States as provided in sections 861 through 865 of the Internal Revenue Code, except as provided in subd. 2. “United States” has the same meaning as in sections 861 through 865 of the Internal Revenue Code.

Tax 2.61(4)(c)2. 2. For a foreign corporation, foreign source income does not include income that is subject to United States taxation because it is effectively connected with the conduct of a trade or business within the United States under sections 861 through 865 of the Internal Revenue Code, even if the income is otherwise from sources without the United States. However, this subdivision shall be disregarded in applying the test under par. (b) 1.

Tax 2.61(4)(c)3. 3. All income that is not foreign source income is U.S. source income.

Tax 2.61(4)(d) (d) Water’s edge rules for domestic corporations.

Tax 2.61(4)(d)1. 1. A domestic corporation that is not an 80/20 corporation shall include in the unitary combination all net income or loss from the unitary business regardless of whether it is foreign source income or U.S. source income, and any apportionment factors related to that net income or loss.

Tax 2.61(4)(d)2. 2. A domestic corporation that is an 80/20 corporation is a consolidated foreign operating corporation. A consolidated foreign operating corporation shall include in the unitary combination its net income or loss from the unitary business to the extent it is both U.S. source income and is income described in s. 71.255 (2) (d), Stats., and any apportionment factors related to that net income or loss. The consolidated foreign operating corporation may not include in the unitary combination any foreign source income, income not described in s. 71.255 (2) (d), Stats., expenses or deductions related to the excluded income as provided in sub. (6) (h), or apportionment factors related to the excluded income. However, the excluded income may still be taxable as described in par. (h). The income described in s. 71.255 (2) (d), Stats., is explained further in par. (f).

Tax 2.61(4)(e) (e) Water’s edge rules for foreign corporations.

Tax 2.61(4)(e)1. 1. A foreign corporation that is not an 80/20 corporation shall include in the unitary combination its net income or loss from the unitary business to the extent it is U.S. source income, and any apportionment factors related to that net income or loss. The corporation may not include in the unitary combination any foreign source income, expenses or deductions related to the excluded income as provided in sub. (6) (h), or apportionment factors related to the excluded income. However, this foreign source income may still be taxable as described in par. (h).

Tax 2.61(4)(e)2. 2. Except as provided in subd. 3., a foreign corporation that is an 80/20 corporation may not include any income, expenses, or apportionment factors in the unitary combination, but may still have taxable income as described in par. (h).

Tax 2.61(4)(e)3. 3. A foreign corporation that is an 80/20 corporation but elects to be included in a federal consolidated return for the taxable year shall be treated as if it is a domestic corporation, in which case the rules of par. (d) 2. apply to the corporation. This subdivision applies regardless of whether the combined group has made the controlled group election.

Tax 2.61(4)(f) (f) Includable income of consolidated foreign operating corporations. The net income that a consolidated foreign operating corporation shall include in a unitary combination, as described in par. (d) 2., includes the items described in subds. 1. to 5. to the extent the income is U.S. source income and from the unitary business, regardless of whether earned or incurred directly by that corporation or by a pass-through entity in which the corporation has an interest:

Tax 2.61(4)(f)1. 1. Interest income or income generated from intangible property, whether or not the income is derived from persons or entities related to the consolidated foreign operating corporation. Income generated from intangible property includes income related to the direct or indirect acquisition, use, maintenance, management, ownership, sale, exchange, or any other disposition of intangible property; income from factoring transactions or discounting transactions; royalty, patent, technical, and copyright fees; and licensing fees. For purposes of this subdivision, “intangible property” has the meaning given in s. 71.22 (3h), Stats.

Tax 2.61(4)(f)2. 2. Income derived from interest expenses or intangible expenses that were paid, accrued, or incurred by combined group members to or for the benefit of the consolidated foreign operating corporation; to the extent those amounts were not already included under subd. 1. For purposes of this subdivision, “interest expenses” has the meaning given in s. 71.22 (3m), Stats., and “intangible expenses” has the meaning given in s. 71.22 (3g), Stats.

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.