TEI Wisconsin Chapter - Wisconsin Department of Revenue liaison meeting.

• Position: Tax Executives Institute

On October 18, 1994, the Wisconsin Chapter of Tax Executives Institute held a liaison meeting with officials of the Wisconsin Department of Revenue. Reprinted below are the written responses prepared by the Department to the questions discussed during the meeting. The answers reflect the Department's views as of the date of the meeting.

1. Explain how the Department applies the tax benefit rule in the following situation:

   Assume there are two separate Wisconsin corporate taxpayers, A & B. They each invest $100 in non-Wisconsin partnerships, X & Y, respectively, in 1980. In 1981, X sustains a $100 loss and Y has a $200 profit, neither of which affects A's & B's apportionable Wisconsin taxable income because the partnerships had no Wisconsin activity and the Department treated the partnership income as nonapportionable income. For federal income tax purposes, A's basis in X is reduced to $0, and B's basis in Y is increased to $300. In 1982, A & B sell their partnership interests. A sells its interest for $75 and B sells its interest for $250. The economic reality is that A sustained a loss on the sale and B realized a gain. What is the gain or loss that is taxable for Wisconsin purposes for A and B? Please explain the rationale for your determination.

   The gain or loss for Wisconsin purposes will be the same as the federal gain or loss. The income (loss) of partnerships X and Y was included in the computation of the net income of corporation A and B in 1981. Therefore, the basis of partnerships X and Y as held by corporations A and B should be adjusted by income (or loss) reported. The fact that the income or loss was directly allocated to another state pursuant to sec. 71.07(1m), Wis. Stats. (1981), has no bearing on a corporation's basis in a partnership.

   With the law change effective for the 1982 tax year, the gain or loss on the sale of the partnership interest results in apportionable income or loss. There were no transitional provisions provided with this law change. Accordingly, there is no authority to adjust the Wisconsin basis in the partnerships. Please note that the 1982 treatment of the gain or loss would be the same if the partnerships had been located in Wisconsin or if Corporations A and B first had nexus in Wisconsin for 1982.

2. What is the current status of updating apportionment rules for specialized industries?

   The Department is currently studying rule Tax 2.49 (Apportionment of Interstate Finance Companies) in conjunction with the Multistate Tax Commission's review of this issue and its just released proposed regulation Uniform Apportionment of Net Income From Financial Institutions." Revised department regulations will most likely be recommended to more accurately reflect the changing financial industry. None of the Department's other special apportionment rules (Interstate Air Carriers, Motor Carriers, Pipeline Companies, Railroads, etc.) is being revised at this time. Taxpayers should feel free to contact the Department with any suggestions, concerns, etc., regarding any specialized apportionment rule.

3. What is the status of the tax release on Wisconsin treatment of Foreign Sales Corporation and is the Department going to follow the IRS pricing safe harbors for FSCs?

   The tax release on Wisconsin's treatment of Foreign Sales Corporations FSCs) is scheduled to be included in the January 1995 Wisconsin Tax Bulletin.

   Under sec. 71.26(3)(r) Wis. Stats., sections 921 and 927 of the Internal Revenue Code (IRC) (relating to foreign sales corporations) are excluded in computing Wisconsin income. Accordingly, Wisconsin is not legally bound by the transfer pricing rules under IRC [section] 925. This issue has not come up previously nor been studied by the Department. The Department may very well decide to follow the federal pricing safe harbor rules.

4. What is the effect of the Manpower decision on the Department's position on sales tax on software? Please discuss the effect at the field audit level as well as at appeals.

   The Manpower decision has not changed the Department's position on computer software. The Department has appealed the Manpower decision to the Circuit Court and is maintaining its policy that canned software is taxable and custom software is exempt. (Effective May 1, 1992, sec. 77.51(20), Wis. Stats., was amended to clarify that tangible personal property includes computer programs, except custom computer programs.) The field audit and appeals process has not changed in light of the Wisconsin Tax Appeals Commission decision in Manpower.

5. Regarding the recent decision in Manpower International, Inc. v. Wisconsin Department of Revenue (Dkt. No. 93-S-255), will the State...