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.

Tax 3.01(4)(d)4. 4. ‘Allocation of expense paid to unrelated entity.’ If less than 100 percent of the total related entity expenses paid, accrued, or incurred to the related entity from the taxpayer and all other related entities is paid, accrued, or incurred to an unrelated entity, a pro rata share of the taxpayer’s related entity expenses is considered to satisfy the test under subd. 1. a.

Tax 3.01 Note Example: Taxpayer A made a $200,000 interest payment to Taxpayer B. No portion of the underlying debt was used to acquire the taxpayer’s own stock or assets under section 368 of the Internal Revenue Code. B received a total of $800,000 of related entity interest income during A’s taxable year. Of this amount, $200,000 was from A and $600,000 from other related entities. In A’s taxable year, B paid $400,000 of interest expense to unrelated entities. In this case, $100,000 (($200,000/$800,000) x $400,000) of the interest A paid to B would be considered paid, accrued, or incurred to unrelated entities in A’s taxable year.

Tax 3.01(4)(e) (e) Related entity included income in tax base.

Tax 3.01(4)(e)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) 2., Stats. The taxpayer shall establish it meets the requirements under s. 71.80 (23) (a) 2., Stats., by clear and convincing evidence. The taxpayer shall meet all of the following requirements:

Tax 3.01(4)(e)1.a. a. The related entity was subject to tax on, or measured by, its net income or receipts in this state or any state, U.S. possession, or foreign country.

Tax 3.01(4)(e)1.b. b. The related entity’s tax base in such state, U.S. possession, or foreign country included the income received from the taxpayer corresponding to the related entity expenses.

Tax 3.01(4)(e)1.c. c. The related entity’s aggregate effective tax rate applied to such income or receipts was at least 80 percent of the taxpayer’s aggregate effective tax rate.

Tax 3.01(4)(e)1.d. d. The related entity is not a real estate investment trust under section 856 of the Internal Revenue Code, other than a qualified real estate investment trust.

Tax 3.01(4)(e)2. 2. ‘Differing taxable years.’ For both the taxpayer and the related entity, compute the aggregate effective tax rate for the taxable year that included the transaction date. If the related entity is on a taxable year that ends after the taxpayer’s taxable year, the aggregate effective tax rate shall be determined as follows:

Tax 3.01(4)(e)2.a. a. If in the related entity’s most recently ended taxable year the related entity was subject to a tax on or measured by net income or receipts in a state, U.S. possession, or foreign country, the related entity’s aggregate effective tax rate shall be computed based on the related entity’s most recently ended taxable year.

Tax 3.01(4)(e)2.b. b. If the related entity was not subject to such tax for its most recently ended taxable year, the related entity shall modify the computation of the aggregate effective tax rate as provided in subd. 2. c.

Tax 3.01(4)(e)2.c. c. The related entity uses 100 percent as the related entity’s apportionment percentage and the related entity uses the statutory tax rate of the state where the related entity is incorporated, organized, formed, or, if the related entity is an individual, where the individual resides.

Tax 3.01(4)(e)3. 3. ‘Items not includable in aggregate effective tax rate.’ The following are not included in the computation of the aggregate effective tax rate:

Tax 3.01(4)(e)3.a. a. If the related entity expense was paid, accrued, or incurred to a pass-through entity, any tax rate that is imposed at the shareholder, partner, member, or beneficiary level rather than at the pass-through entity level for that state, U.S. possession, or foreign country.

Tax 3.01(4)(e)3.b. b. If the related entity is a pass-through entity, only taxes imposed at the entity level that are on or measured by net income or receipts may be included in the pass-through entity’s effective tax rate for a particular jurisdiction. A pass-through entity’s aggregate effective tax rate cannot include taxes imposed against the entity’s shareholders, partners, members, or beneficiaries. If a pass-through entity elects to file a composite return in a jurisdiction on behalf of some or all of its shareholders, partners, members, or beneficiaries, the tax rate applicable to that composite return cannot be included in the entity’s effective tax rate for that jurisdiction.

Tax 3.01(4)(e)3.c. c. The tax rate of any jurisdiction where the taxpayer files with the related entity or the related entity files with another entity a combined or consolidated report or return if the report or return results in eliminating the tax effects of transactions, directly or indirectly, between either the taxpayer and the related entity or between the related entity and another entity.

Tax 3.01(4)(e)4. 4. ‘Items includible in aggregate effective tax rate.’ The following are included in the computation of the aggregate effective tax rate:

Tax 3.01(4)(e)4.a. a. Withholding taxes, such as the one imposed by s. 71.775, Stats., paid on income distributable to owners or beneficiaries of the pass-through entity, may be considered entity-level taxes if the state, U.S. possession, or foreign country imposes the withholding as a tax on the income of the pass-through entity.

Tax 3.01(4)(e)4.b. b. The Wisconsin economic development surcharge, which is imposed on tax-option (S) corporations pursuant to s. 77.93 (1), Stats.

Tax 3.01(4)(e)5. 5. ‘Dividends paid deduction.’ If the related entity is not taxed on some or all of its income in a state, U.S. possession, or foreign country because the entity is eligible for a dividends paid deduction under the laws of that jurisdiction, the amount of income considered to be included in its tax base in that jurisdiction is the amount of income after applying the dividends paid deduction. If the dividends paid deduction is less than 100 percent of the related entity’s total income, a pro rata share of its income from the transaction is deemed to be excluded from its tax base in that jurisdiction.

Tax 3.01(4)(e)6. 6. ‘Related entity has loss or credit carryforwards.’ For purposes of applying the test under par. (e), the related entity’s aggregate effective tax rate is computed without regard to loss carryforwards or credit carryforwards. If the related entity has no tax liability in a particular state, U.S. possession, or foreign country because of its loss or credit carryforwards, the related entity’s effective tax rate in that jurisdiction still remains that jurisdiction’s maximum statutory tax rate multiplied by the related entity’s apportionment percentage in that jurisdiction.

Tax 3.01 Note Example: Taxpayer A makes a $500,000 interest payment to Corporation C, a related corporation. Corporation C has no other income and is engaged in business only in State X. Corporation C has a $1,000,000 loss carryforward in State X and uses this carryforward to offset the $500,000 related entity interest income from Taxpayer A. Therefore, Corporation C owes no tax to State X. State X has a maximum corporation income tax rate of 6.2%. Corporation C’s aggregate effective tax rate would be 6.2%.

Tax 3.01(5) (5) Disallowed related entity expenses.