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On April 3, 2018, Governor Scott Walker signed 2017 Assembly Bill 259 (AB 259) into law.¹ AB 259 enacts a number of tax provisions that are summarized below.

AB 259 contains tax-related changes to Subchapters I, IV, V and VII of Chapter 71 of the Wisconsin Statutes, impacting individuals, corporations, S corporations and insurance companies. Some of these changes respond to the significant changes in federal tax law under the Tax Cuts and Jobs Act (P.L. 115-97) (TCJA). This Alert primarily focuses on the corporate income tax law changes made by AB 259 but also addresses other tax provisions in AB 259 that are independent of the TCJA.

IRC conformity and TCJA implications

Wisconsin is a fixed conformity state with regard to its references to the Internal Revenue Code (IRC). AB 259 updates this conformity in two respects.

For tax years beginning before January 1, 2018, Wisc. Stat. Section 71.22(4)(k)(3) is amended to provide that the reference to the IRC does not include amendments made after December 31, 2016, except for certain provisions of the TCJA relating to increased contributions to ABLE accounts, rollovers from 529 programs to ABLE accounts, and the modification of the treatment of S to C corporation conversions. Accordingly, Wisconsin adopts neither the transition tax under IRC Section 965 nor the immediate expensing provisions under IRC Section 179 of the TCJA for tax years ending before 2018.

For tax years beginning after December 31, 2017, Wisc. Stat. Section 71.22(4)(L) is added to update the IRC reference to December 31, 2017. For corporate income tax purposes,² however, AB 259 decouples from certain provisions of the TCJA, including IRC Section 168(k) (bonus depreciation), IRC Section 174 (amendments to amortization of research and experimental expenditures), IRC Section 163(j) (limitations on business interest deductions), IRC Section 162(m), 274 (modification of limitation on excessive employee remuneration and fringe benefit expenses), IRC Section 245A, 1248 (deduction for dividends received from 10%-owned foreign corporations), IRC Section 451 (accounting methods), IRC Section 951A, 250 (GILTI and corresponding deduction, as well as the FDII deduction), IRC Section 59A (BEAT) and IRC Section 965³ (transition tax).

Other tax-related changes

Wisc. Stat. Section 71.10(1m)(c), 71.30(2m)(c) and 71.80(1m)(c) are amended to change the standard of proof a taxpayer must meet to establish a transaction has economic substance from a "clear and convincing evidence" standard to "clear and satisfactory evidence" standard.⁴ This provision is effective for 2018 tax years.

Wisc. Stat. Section 73.16(3)(c) precludes a taxpayer's reliance on the result of past audits⁵ when: (a) the Wisconsin Department of Revenue (Department) establishes, by clear and satisfactory evidence, that the taxpayer provided incomplete or false information relevant to the tax issue in the prior audit determination; (b) the tax issue was settled in the prior audit determination by a written settlement agreement between the parties that was entered before the law's effective date; or (c) the tax issue was settled in the prior audit determination by a written agreement between the parties entered on or after the law's effective date, and in which the parties acknowledged that the Department did not adopt the taxpayer's position. This provision is effective on the effective date of AB 259, regardless of when the prior audit determination was issued.

Contact Information For additional information concerning this Alert, please contact:   State and Local Taxation Group • Bill Nolan (330) 255-5204 • Tiffany Davister (414) 223-7306

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ENDNOTES

¹ Wisconsin legislation is effective the day after the date of its publication.

² AB 259 also decouples from TCJA amendments to IRC Section 162(r) (limitation on deduction for FDIC premiums), 199A (deduction for qualified business income) and Section 461 (limitation on losses for non-C corporation taxpayers).

³ In recent Wisconsin audits, EY has observed that the Wisconsin Department of Revenue has taken the position that it decouples from IRC Section 959, which excludes previously taxed income from the federal tax base. This position could have TCJA implications as, although Wisconsin has decoupled from the transition tax, it has not coupled to IRC Section 959.

⁴ The term "clear and satisfactory evidence" is not defined in A.B. 259. In prior versions of the legislation, the standard would have been lowered from "clear and convincing evidence" to a "preponderance of the evidence." Given that the Legislature is changing the language, it seems clear it is also changing the standard. It appears that the Legislature is adopting something between the two more commonly understood standards. The lack of guidance as to what "clear and satisfactory evidence" means, however, may result in controversies between the Department and taxpayers as to how the standard should apply.

⁵ Wisc. Stat. Section 73.16(3)(a) allows taxpayers to rely on past audit results when: (a) the liability asserted in the current audit was a tax issue associated with a prior audit period; (b) the prior audit team identified or reviewed the tax issue as shown by audit workpapers or other written evidence; and (c) no liability for the tax issue was asserted in the prior audit.