AB 259

This bill makes the following tax law changes: 1) changes the length of the

recognition period for built-in gains tax; 2) changes the standard of proof a taxpayer

must meet to establish that a transaction has economic substance for income and

franchise tax purposes; 3) eliminates the Department of Revenue's obligation and

authority to participate in the Multistate Tax Commission Audit Program; and 4)

eliminates an exception to current law that allows a taxpayer to rely on past audits

to avoid tax liability in later audits.

Length of recognition period for built-in gains tax

The bill changes the period of time after a corporation elects tax-option

corporation status, called a recognition period, during which a tax-option

corporation that sells certain assets for a profit must pay income or franchise taxes

on the profit as though the tax-option corporation were a regular corporation. That

tax is commonly called a built-in gains tax.

Under current law, the term “recognition period” is defined by reference to

federal law, but the definition is not automatically updated to reflect changes to

federal law. The federal Protecting Americans from Tax Hikes Act of 2015 makes

permanent a reduction in the recognition period under federal law from ten years to

five years. The bill provides that the recognition period for purposes of Wisconsin law

is the same as under federal law, as federal law is amended from time to time.

Evidentiary standard to prove transaction has economic substance

The bill changes the standard of proof a taxpayer must meet to establish that

a transaction has economic substance for income and franchise tax purposes.

Under current law, if a taxpayer engages in a transaction without economic

substance to create a loss, to reduce taxable income, or to increase credits allowed in

determining Wisconsin income or franchise tax, DOR may disregard the transaction

for purposes of calculating the taxpayer's tax liability. Under current law, there is

a rebuttable presumption that transactions between members of a controlled group

lack economic substance.

The bill changes the evidentiary standard for a taxpayer to rebut the

presumption from “clear and convincing evidence” to “a preponderance of the

evidence.”

Multistate Tax Commission Audit Program

The bill eliminates DOR's obligation and authority to participate in the

Multistate Tax Commission Audit Program.

Reliance by taxpayer on past audits

The bill eliminates an exception to current law that allows a taxpayer to rely

on past audits to avoid tax liability in later audits. Under current law, a taxpayer

subject to an audit determination by DOR is not liable for amounts asserted by DOR

if the following conditions are met:

1. The tax issue giving rise to the liability was present during a period of time