The length of the recognition period for built-in gains tax; the evidentiary standard for proving a transaction has economic substance; participation by the Department of Revenue in the Multistate Tax Commission Audit Program; and reliance by a taxpayer on past audits by the Department of Revenue. (FE)

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 for which the taxpayer was previously audited.

2. DOR identified the tax issue during the prior audit.

3. DOR did not assert any liability for the tax issue during the prior audit.

Current law provides certain exceptions to a taxpayer's ability to rely on past audits to avoid liability in later audits.

The bill eliminates an exception that provides that, if a taxpayer did not give DOR adequate and accurate information regarding the tax issue during the prior audit or if the taxpayer and DOR settled the tax issue in the prior audit by a written agreement, the taxpayer cannot rely on the prior audit to avoid liability for the tax issue in a later audit. Under the bill, a taxpayer can rely on a prior audit even if the taxpayer provided inadequate or inaccurate information during the prior audit or settled the same tax issue with DOR during the prior audit.