Tax 2.61 Note Assume 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 Note Example: 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 Note Example: 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)1. 1. The elimination of dividends applies only to the extent that the dividends received deduction provided in ss. 71.26 (3) (j) or 71.45 (2) (a) 8., Stats., does not apply.

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 Note Note: 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 Note Example: 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 Note Example: 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 Note Example: 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 Note Example: 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 Note Example: 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).