Chapter Tax 3

INCOME TAXATION, DEDUCTIONS FROM GROSS INCOME,
EXCLUSIONS AND EXEMPTIONS

Tax 3.01   Addback and disclosure of related entity expenses.

Tax 3.02   Pass-through entity withholding.

Tax 3.03   Dividends received deduction — corporations.

Tax 3.04   Subtraction for military pay received by members of a reserve component of the armed forces.

Tax 3.05   Job creation deduction.

Tax 3.085   Retirement plan distributions.

Tax 3.095   Income tax status of interest and dividends received from government and other securities by individuals and fiduciaries.

Tax 3.096   Interest paid on money borrowed to purchase exempt government securities.

Tax 3.098   Railroad retirement supplemental annuities.

Tax 3.01 Tax 3.01 Addback and disclosure of related entity expenses.

Tax 3.01(1) (1) Scope. This section provides further interpretation and explanation relating to the addition and subtraction modifications and disclosure provisions in ch. 71, Stats. In general, the addback statutes provide that a taxpayer shall modify federal income to add back interest, rental, and intangible expenses and management fees that are directly or indirectly paid, accrued, or incurred to a related entity or related person. If certain tests are satisfied, the taxpayer may subsequently deduct the expenses. The addback statutes also impose a disclosure requirement for related entity expenses. Notwithstanding a taxpayer satisfying the tests allowing the deductions of related entity expenses, the department has express authority to reallocate a taxpayer’s income, deductions, credits, or allowances to prevent tax evasion or to clearly reflect income. The department also has express authority to disregard transactions that lack economic substance.

Tax 3.01(2) (2) Definitions. In this section:

Tax 3.01(2)(a) (a) “Addback” means the addition and subtraction modifications and disclosure requirement required by ss. 71.05 (6) (a) 24. and (b) 45., 71.26 (2) (a) 7. and 8., 71.34 (1k) (j) and (k), 71.45 (2) (a) 16. and 17., and 71.80 (23), Stats. Where applicable, “addback” also refers to subtraction modification to a related entity pursuant to ss. 71.05 (6) (b) 46., 71.26 (2) (a) 9., 71.34 (1k) (L), and 71.45 (2) (a) 18., Stats.

Tax 3.01(2)(b) (b) “Aggregate effective tax rate,” for a related entity, is the sum of its effective tax rates for each state, U.S. possession, or foreign country where it is engaged in business. In determining whether a related entity is engaged in business in a state, U.S. possession, or foreign country, the legal standard set forth under s. 71.22 (1r), Stats., shall apply to such other jurisdiction for purposes of applying the addback provisions.

Tax 3.01(2)(c) (c) “Captive insurance company,” for purposes of applying the addback provisions, means an insurer that issues any policy of insurance or reinsurance with respect to which the person insured is related under section 267 or 1563 of the Internal Revenue Code.

Tax 3.01(2)(d) (d) “Captive REIT” means a real estate investment trust other than a qualified real estate investment trust under s. 71.22 (9ad), Stats.

Tax 3.01(2)(e) (e) “Combined unitary income” has the meaning given in s. Tax 2.60 (2) (e).

Tax 3.01(2)(f) (f) “Effective tax rate”, for a particular jurisdiction for a related entity, means the maximum tax rate imposed by that jurisdiction multiplied by the related entity’s apportionment percentage, if any, computed for that particular jurisdiction.

Tax 3.01(2)(g) (g) “Intangible expense” has the meaning given in s. 71.01 (5n), 71.22 (3g), 71.34 (1c), or 71.42 (1sg), Stats., as applicable.

Tax 3.01(2)(h) (h) “Intangible property” has the meaning given in s. 71.01 (5p), 71.22 (3h), 71.34 (1d), or 71.42 (1sh), Stats., as applicable.

Tax 3.01(2)(i) (i) “Interest expense” has the meaning given in s. 71.01 (5s), 71.22 (3m), 71.34 (1e), or 71.42 (1t), Stats., as applicable.

Tax 3.01(2)(j) (j) “Management fees” has the meaning given in s. 71.01 (7v), 71.22 (6d), 71.34 (1h), or 71.42 (3c), Stats., as applicable.

Tax 3.01(2)(k) (k) “Pass-through entities” include tax-option (S) corporations, partnerships, limited liability companies treated as partnerships, estates, and trusts.

Tax 3.01(2)(L) (L) “Rental expenses” or “rent expenses” has the meaning given in s. 71.01 (9an), 71.22 (9an), 71.34 (1r), or 71.42 (4n), Stats., as applicable.

Tax 3.01(2)(m) (m) “Related entity” or “related entities” has the meaning given in s. 71.01 (9am), 71.22 (9am), 71.34 (1p), or 71.42 (4m), Stats., as applicable. The terms include related individuals. In determining relatedness under section 267 of the Internal Revenue Code, section 267 (b) controls, which defines relationships through which taxpayers would be considered related for purposes of disallowing losses or deductions on transactions between related taxpayers. Section 707 (b) of the Internal Revenue Code, incorporated by reference into section 267, applies in determining whether partnerships and limited liability companies treated as partnerships and their respective partners are related. The stock attribution rules of section 318 (a) of the Internal Revenue Code otherwise apply for purposes of establishing indirect stock ownership and thereby determine related entities.

Tax 3.01 Note Examples: The following relationships involving partnerships and limited liability companies (LLC) constitute related entities: