2.61 Combined reporting. (1) SCOPE. Section

71.255, Stats., generally requires corporations that are commonly controlled and engaged in a unitary business to compute their net income on a combined basis. This section explains when com- bined reporting is required and how to compute a corporation[s net income and tax liability under combined reporting. Subsec- tions (2) to (4) describe who must use combined reporting and what income is subject to combination. Subsections (5) to (9) ex- plain how to compute the taxable income of a combined group member, including net business loss carryforwards. Subsection (10) provides rules relating to credits and credit carryforwards. (2) CORPORATIONS REQUIRED TO USE COMBINED REPORTING. (a) General. A corporation is required to use combined report- ing if it satisfies each of the following three conditions: 1. The corporation is a member of a Xcommonly controlled groupY as defined in s. 71.255 (1) (c), Stats. See sub. (3) for rules that apply to identifying a commonly controlled group of corporations. 2. The corporation is engaged in a Xunitary business,Y as de- fined in s. 71.255 (1) (n), Stats., with one or more other corpora- tions in its commonly controlled group, or the commonly con- trolled group makes a controlled group election. See s. Tax 2.62 for rules to determine whether corporations are engaged in a uni- tary business. See s. Tax 2.63 for rules pertaining to the con- trolled group election. 3. The corporation has unitary business income that is sub- ject to combination under the water[s edge rules described in sub. (4). (b) Effect of controlled group election. If a controlled group election applies as indicated in par. (a) 2., all corporations in the commonly controlled group are deemed to be engaged in the same unitary business, and all of their net income or loss and ap- portionment factors are deemed to be derived from that unitary business. In general, this means that if the controlled group elec- tion applies, all members of the commonly controlled group are included in a combined report. However, despite this election, a corporation may be required to exclude some or all of its net in- come, loss, and apportionment factors from the unitary combina- Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. tion if so required under the water[s edge rules described in sub. (4). (c) Corporations treated as pass-through entities. Except as provided in par. (f), corporations that are included in the defini- tion of Xpass-through entityY in s. 71.255 (1) (m), Stats., includ- ing tax-option corporations, real estate investment trusts, regu- lated investment companies, real estate mortgage investment con- duits, and financial asset securitization investment trusts, are nonincludable corporations. However, to the extent the net in- come or loss of these corporations is included in the net income of, or distributed to, a combined group member, the net income or loss is subject to combination to the extent derived from the unitary business and otherwise subject to combination under the water[s edge rules described in sub. (4). The provisions of s. 71.255 (1) (m), Stats., do not affect the taxation of tax-option cor- porations, real estate investment trusts, regulated investment companies, real estate mortgage investment conduits, or financial asset securitization investment trusts, other than to exclude them from combined reporting except where their inclusion is required under par. (f). (d) Tax exempt organizations. A corporation that is exempt from income and franchise taxes under ss. 71.26 (1) or 71.45 (1), Stats., is a nonincludable corporation except to the extent it has unrelated business taxable income as defined in section 512 of the Internal Revenue Code. The net unrelated business taxable income, and any corresponding apportionment factors are subject to combination to the extent the net income or loss is derived from the unitary business and is otherwise subject to combination under the water[s edge rules described in sub. (4). (e) Disregarded entities. An entity that is disregarded as a separate entity for federal income tax purposes under section 7701 of the Internal Revenue Code is considered a branch or divi- sion of its owner for Wisconsin income and franchise tax pur- poses. A corporation shall include the net income or loss and ap- portionment factors of any disregarded entity of which it is an owner in the combined report to the extent they would be in- cluded if the corporation itself earned the income. The water[s edge rules described in sub. (4) do not apply to disregarded enti- ties except insofar as the rules apply to the owner of the disre- garded entity. (f) Other provisions that may apply. Nothing in ss. Tax 2.60 to 2.67 is intended or should be construed as a waiver of the de- partment[s authority under s. 71.255 (2) (f), Stats., or any other authority granted to the department by law. Section 71.255 (2) (f), Stats., provides the following: 1. The department may require that a combined report in- clude the items of any person or entity who is not otherwise a combined group member but who is a member of the unitary business, in order to reflect proper apportionment of income of the entire unitary business. 2. If the reported income or loss of a combined group mem- ber engaged in a unitary business with a person or entity who is not otherwise a combined group member represents an avoidance or evasion of tax by either party, the department may require all or any part of the income or loss and apportionment factors of ei- ther party to be included in or excluded from a combined report, or may require the use of a different apportionment factor or factors. (3) COMMONLY CONTROLLED GROUP. In general, s. 71.255 (1) (c), Stats., provides that a commonly controlled group exists in cases where there is common ownership or control of stock representing more than 50 percent of the voting power of the cor- porations in the group. The corporations in a commonly con- trolled group shall be determined as provided in s. 71.255 (1) (c), Stats., which is further explained in the following paragraphs: (a) Stock attribution rules. For purposes of s. 71.255 (1) (c) 1. and 2., Stats., a shareholder is considered to have indirect owner- ship of stock or indirectly own stock if the shareholder has con- structive ownership of the stock by operation of section 318 of the Internal Revenue Code, except as provided in subds. 1. and 2. Example: Corporation A owns stock representing 40% of the voting power of Corporation B and has a 50% interest in Partnership C. Partnership C owns stock representing 30% of the voting power of Corporation B. By operation of section 318 of the Internal Revenue Code, Corporation A constructively owns stock repre- senting 55% (= 40% + (50% x 30%)) of the voting power of Corporation B. 1. In applying section 318(a)(2) of the Internal Revenue Code, if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of an entity, it shall be consid- ered to own all of the stock or other ownership or control interests owned by that entity. Example: Corporation D owns stock representing 10% of the voting power of Corporation E and has a 75% interest in Partnership F. Partnership F owns stock representing 45% of the voting power of Corporation E. Corporation D is consid- ered to constructively own stock representing 55% (= 10% + 45%) of the voting power of Corporation E. This is because Corporation D owns more than 50% of Partnership F and is therefore considered to own all of the Corporation E stock owned by Partnership F. 2. If a person has an option to acquire stock or other owner- ship interests in an entity, the stock or ownership interests are not considered owned by the person unless the department deter- mines it to be necessary to prevent tax avoidance. (b) Common owner or owners. The common owner or own- ers need not be combined group members, and the common owner or owners may be persons other than corporations. (c) Multiple unitary businesses. A commonly controlled group may be engaged in one or more unitary businesses. There- fore, a commonly controlled group may contain more than one combined group. (d) Voting power. 1. A shareholder has ownership or control of stock representing more than 50 percent of the voting power of a corporation only if the shareholder has ownership or control of more than 50 percent of the total combined voting power of all classes of stock of the corporation entitled to vote. 2. A group of two or more corporations need not be com- monly owned to be commonly controlled. As provided in s. 71.255 (1) (c) 3., Stats., a group of corporations may be a com- monly controlled group if stock representing more than 50 per- cent of the voting power in each corporation are interests that cannot be separately transferred. If a group of 2 or more corpora- tions would be considered stapled entities under section 269B of the Internal Revenue Code and the regulations that interpret it, without regard to whether the corporations are foreign or domes- tic, the corporations shall be considered part of a commonly con- trolled group. 3. The mere ownership of stock entitled to vote does not by itself mean that the shareholder owning the stock has the voting power of the stock. If there is any agreement, whether express or implied, that any shareholder will not vote its stock or will vote it only in a specified manner, or that shareholders owning stock having 50 percent or less of the total combined voting power will exercise voting power normally possessed by a majority of stock- holders, the department may presume that the nominal ownership of the voting power is not determinative of which shareholders actually hold the voting power and may disregard the nominal ownership. This presumption may be rebutted by the taxpayer. 4. If a shareholder owns shares of stock of a corporation which has another class of stock outstanding, the voting power of that other class of stock will be deemed owned by any person or persons on whose behalf it is exercised if the facts indicate that the shareholders of that other class of stock do not exercise their Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. WISCONSIN ADMINISTRATIVE CODE voting rights independently or fail to exercise their voting rights. If the voting power in that other class of stock is not exercised and the percentage of voting power of that class of stock is substan- tially greater than its proportionate share of the corporate earn- ings, the department may presume that the principal purpose of the arrangement was avoid the inclusion of the corporation in the commonly controlled group and may disregard the voting power of the class of stock that was not exercised. This presumption may be rebutted by the taxpayer. (4) WATER[S EDGE. This subsection describes how a corpora- tion that is otherwise a combined group member must determine and report items that are not subject to combination due to the ex- tent of the corporation[s activities outside the United States, as provided in s. 71.255 (2), Stats. In general, the corporation must consider whether it is a foreign corporation or domestic corpora- tion, whether it qualifies as an X80/20 corporation,Y and whether its income is from foreign sources or U.S. sources. The following rules apply: (a) Qualifying as a Xforeign corporationY. For purposes of the water[s edge rules in pars. (d) and (e), a Xforeign corporationY means any corporation that is not incorporated, organized, or cre- ated in the United States or under the laws of the United States or any state. For purposes of determining whether a corporation is a foreign corporation or a domestic corporation, the following rules apply: 1. If, for federal purposes, a corporation is treated as created or organized under the laws of both the U.S. and a foreign juris- diction, it is a domestic corporation. 2. A foreign corporation that domesticates and is treated by a state as organized under the laws of that state is a domestic corporation. 3. If an entity is organized in a foreign country and is recog- nized in that country as a corporation, but the entity[s owner elects to treat that entity as a branch for U.S. taxation purposes or the entity is a disregarded entity, the entity shall be treated as a branch of its owner. (b) Qualifying as an X80/20 corporationY. 1. For purposes of the water[s edge rules in pars. (d) and (e), a corporation is an X80/20 corporationY if 80 percent or more of its worldwide gross income during the testing period is Xactive foreign business in- comeY as defined in subchapter N of the Internal Revenue Code. 2. The testing period for purposes of subd. 1. is the tested corporation[s taxable year that would be included in the com- bined group[s taxable year, as determined by s. 71.255 (8), Stats. If the tested corporation was not otherwise eligible to be a com- bined group member for any part of that taxable year (for exam- ple, the corporation did not satisfy the conditions in sub. (2) (a) 1. or 2.), the testing period is the portion of that taxable year in which the corporation was otherwise eligible to be a member. 3. An 80/20 corporation may be either a foreign corporation or a domestic corporation. 4. For purposes of this paragraph, a corporation[s active for- eign business income includes gross income attributed from sub- sidiary corporations as provided in subchapter N of the Internal Revenue Code, but only to the extent the gross income of the sub- sidiary corporations is derived from the combined group[s uni- tary business. 5. A disregarded entity[s active foreign business income and worldwide gross income shall be combined with those of its owner for purposes of applying the test in subd. 1. (c) Foreign source income. 1. For purposes of the water[s edge rules in pars. (d) and (e), income is foreign source income if it is from sources without the United States as provided in sec- tions 861 through 865 of the Internal Revenue Code, except as provided in subd. 2. XUnited StatesY has the same meaning as in sections 861 through 865 of the Internal Revenue Code. 2. For a foreign corporation, foreign source income does not include income that is subject to United States taxation because it is effectively connected with the conduct of a trade or business within the United States under sections 861 through 865 of the Internal Revenue Code, even if the income is otherwise from sources without the United States. However, this subdivision shall be disregarded in applying the test under par. (b) 1. 3. All income that is not foreign source income is U.S. source income. (d) Water[s edge rules for domestic corporations. 1. A do- mestic corporation that is not an 80/20 corporation shall include in the unitary combination all net income or loss from the unitary business regardless of whether it is foreign source income or U.S. source income, and any apportionment factors related to that net income or loss. 2. A domestic corporation that is an 80/20 corporation is a consolidated foreign operating corporation. A consolidated for- eign operating corporation shall include in the unitary combina- tion its net income or loss from the unitary business to the extent it is both U.S. source income and is income described in s. 71.255 (2) (d), Stats., and any apportionment factors related to that net income or loss. The consolidated foreign operating corporation may not include in the unitary combination any foreign source in- come, income not described in s. 71.255 (2) (d), Stats., expenses or deductions related to the excluded income as provided in sub. (6) (h), or apportionment factors related to the excluded income. However, the excluded income may still be taxable as described in par. (h). The income described in s. 71.255 (2) (d), Stats., is explained further in par. (f). (e) Water[s edge rules for foreign corporations. 1. A foreign corporation that is not an 80/20 corporation shall include in the unitary combination its net income or loss from the unitary busi- ness to the extent it is U.S. source income, and any apportionment factors related to that net income or loss. The corporation may not include in the unitary combination any foreign source in- come, expenses or deductions related to the excluded income as provided in sub. (6) (h), or apportionment factors related to the excluded income. However, this foreign source income may still be taxable as described in par. (h). 2. Except as provided in subd. 3., a foreign corporation that is an 80/20 corporation may not include any income, expenses, or apportionment factors in the unitary combination, but may still have taxable income as described in par. (h). 3. A foreign corporation that is an 80/20 corporation but elects to be included in a federal consolidated return for the tax- able year shall be treated as if it is a domestic corporation, in which case the rules of par. (d) 2. apply to the corporation. This subdivision applies regardless of whether the combined group has made the controlled group election. (f) Includable income of consolidated foreign operating cor- porations. The net income that a consolidated foreign operating corporation shall include in a unitary combination, as described in par. (d) 2., includes the items described in subds. 1. to 5. to the extent the income is U.S. source income and from the unitary business, regardless of whether earned or incurred directly by that corporation or by a pass-through entity in which the corporation has an interest: 1. Interest income or income generated from intangible prop- erty, whether or not the income is derived from persons or enti- ties related to the consolidated foreign operating corporation. In- come generated from intangible property includes income related to the direct or indirect acquisition, use, maintenance, manage- Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. ment, ownership, sale, exchange, or any other disposition of in- tangible property; income from factoring transactions or dis- counting transactions; royalty, patent, technical, and copyright fees; and licensing fees. For purposes of this subdivision, Xintan- gible propertyY has the meaning given in s. 71.22 (3h), Stats. 2. Income derived from interest expenses or intangible ex- penses that were paid, accrued, or incurred by combined group members to or for the benefit of the consolidated foreign operat- ing corporation; to the extent those amounts were not already in- cluded under subd. 1. For purposes of this subdivision, Xinterest expensesY has the meaning given in s. 71.22 (3m), Stats., and Xin- tangible expensesY has the meaning given in s. 71.22 (3g), Stats. 3. Dividend income received from a real estate investment trust that is not a qualified real estate investment trust as defined in s. 71.22 (9ad), Stats. 4. Gains or losses derived from the sale or lease of real or personal property located in the United States. 5. Expenses or deductions related to the income, gains, and losses described in subds. 1. to 4., determined in the manner pro- vided in sub. (6) (h). (g) Applicability of federal treaties. If a corporation[s income is not included in gross income for federal income tax purposes under the provisions of a federal treaty, the income is not in- cluded in gross income for Wisconsin purposes and shall not be included in combined unitary income. (h) Taxation of income not subject to combination under wa- ter[s edge. Any income, expenses, and apportionment factors that are excluded from the unitary combination under pars. (d) and (e) shall be taken into account by the separate corporation that earned the income. The following rules apply to determining and reporting Wisconsin net income or loss not subject to combi- nation under the water[s edge rules: 1. The net income or loss is presumed to be from a unitary business and therefore apportionable. 2. The corporation[s nexus depends on whether the corpora- tion is a Xcombined group memberY as defined in s. Tax 2.60 (2) (b). If the corporation is a combined group member, the provi- sions of subd. 3. apply. If the corporation is not a combined group member, the provisions of subd. 4. apply. 3. Under s. 71.255 (5) (a), Stats., a corporation that is a com- bined group member is doing business in this state if any member of the combined group is doing business in this state relating to the unitary business. If the corporation is a combined group member because of the controlled group election, that corpora- tion is doing business in this state if any member of the combined group is doing business in this state. In either case, an appor- tioned share of the corporation[s net income or loss that is not subject to combination under the water[s edge rules may be taxed by Wisconsin. XDoing business in this stateY is defined in s. 71.22 (1r), Stats., and further explained in s. Tax 2.82. 4. If the corporation is not a combined group member, s. 71.255 (5) (a), Stats., does not apply. Instead, the corporation is doing business in this state if, when considered as a separate en- tity, it is Xdoing business in this stateY as defined in s. 71.22 (1r), Stats., and further explained in s. Tax 2.82. For example, and without limitation, the corporation may have nexus in this state if any agent of the corporation, including a member of the com- bined group, acts on the corporation[s behalf in this state in a manner that would create nexus under s. 71.22 (1r), Stats., s. Tax 2.82, or otherwise. 5. The provisions of ss. 71.26 (2) (a) 7. and 71.45 (2) (a) 16., Stats., requiring an addition modification for interest expenses, rent expenses, intangible expenses, and management fees paid, accrued, or incurred to a related entity, apply to any amounts not subject to combination which were paid, accrued, or incurred by the corporation to any related entity, even if the related entity was a combined group member. 6. The numerator and denominator of the apportionment ra- tio shall include only that corporation[s apportionment factors at- tributable to unitary business income that is not subject to combi- nation. Intercompany transactions may not be eliminated from the apportionment factors unless the department determines those transactions have no economic substance as determined un- der the provisions of ss. 71.30 (2m) or 71.80 (1m), Stats., as ap- plicable, or if the department determines that those transactions have no business purpose other than tax avoidance. If the corpo- ration is a combined group member, it must apply the provisions of sub. (7) (c) in computing the amount of throwback sales in- cludable in the numerator. 7. Income separately apportioned as described in this para- graph may be reported on a designated line of the combined re- turn, supported by a department-prescribed schedule, instead of reporting that income on a separate return. This separately ap- portioned income shall be considered a separate entity item. See s. Tax 2.67 (2) (d) for filing requirements relating to separate en- tity items. Examples: 1) A, B, and C are corporations in a commonly controlled group and engaged in a unitary business. All of the income of the corporations is derived from the unitary business. A and B are incorporated in Delaware. C is incorporated in France. The income of A and B is derived exclusively from U.S. sources. Ninety percent of C[s worldwide gross income is active foreign business income. The re- maining 10% of C[s worldwide gross income is U.S. source income, some of which has situs in Wisconsin. C has agents acting on its behalf in Wisconsin which create nexus because their activities exceed the protection of P.L. 86-272. Since C is a for- eign 80/20 corporation, none of its net income, expenses, or apportionment factors may be included in the unitary combination. Thus, C is not a combined group member. However, C is subject to tax on an apportioned share of its worldwide net income, to the extent the income is not exempt by federal treaty. In determining the appor- tioned share, the numerator and denominator of C[s apportionment factors are its numerator and denominator computed for C on a separate entity basis. Since C is not a combined group member, it cannot consider the activities of A or B when it computes its throwback sales for purposes of the numerator. C is required to report this income to Wisconsin as a separate entity item. 2) Combined Group DE consists of Member D and Member E. Both D and E are Delaware corporations. All of the income of D and E is derived from the unitary business. All of D[s income is from sources within the U.S. However, 85% of E[s worldwide gross income is active foreign business income, making E a domestic 80/20 corporation. E has total of $150,000 of income from the unitary business, net of expenses. Of this amount, $100,000 is derived from intangible property and $50,000 is derived from service fees. D and E must include in the unitary combina- tion all of D[s income, expenses, and apportionment factors and E[s income, ex- penses, and apportionment factors only to the extent related to its income derived from intangible property. Since E is a domestic 80/20 corporation and service fees are not one of the types of income subject to combination for a domestic 80/20 cor- poration, E[s service fee income, and expenses and apportionment factors relating to that income, must be excluded from the unitary combination. However, E is subject to tax on an apportioned share of its service fee income. E has nexus in Wisconsin because it is a member of Group DE, which is doing busi- ness in Wisconsin. In determining the apportioned share, the numerator and de- nominator of E[s apportionment factors are its numerator and denominator includ- ing only the factors relating to its service fee income and computed for E on a sepa- rate entity basis. However, since E is a combined group member, it may consider the activities of D when it computes its throwback sales for purposes of the numerator. E is required to report this income to Wisconsin as a separate entity item. (5) TAXABLE INCOME OF A COMBINED GROUP MEMBER. The taxable income of a combined group member consists of the components listed in this subsection. For purposes of pars. (c) and (d), a Xdistinct business activityY means a business activity that is not unitary with the combined group[s unitary business. For purposes of determining the expenses and deductions attrib- utable to each component, the provisions of sub. (6) (h) apply. A combined group member[s taxable income is the total of all of the following: (a) Its apportioned share of the combined unitary income, as computed under subs. (6) and (7), or, in the case of a combined group where all members are doing businesses solely within Wis- consin, its unitary business income subject to combination as computed under subs. (6) and (8). A corporation may have a Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. WISCONSIN ADMINISTRATIVE CODE share of combined unitary income or unitary business income from more than one combined group, in which case s. Tax 2.67 (2) (d) 4. applies. (b) An apportioned share of the unitary business income not subject to combination under the water[s edge rules of sub. (4), or in the case of a combined group where all members are doing business solely within Wisconsin, its total unitary business in- come not subject to combination under the water[s edge rules of sub. (4). (c) An apportioned share of income from a distinct business activity conducted within and outside this state wholly by the member. (d) Its income from a distinct business activity conducted en- tirely within this state wholly by the member. (e) Its nonbusiness income or loss allocable to this state. (f) Its income realized from the purchase and subsequent sale or redemption of lottery prizes, if the winning tickets were origi- nally bought in this state. (g) To the extent not included in combined unitary income un- der par. (a), any income, loss, or deduction allocated or appor- tioned in an earlier year which is taken into account as Wisconsin source income or loss during the taxable year, other than a net business loss carryforward. Under this paragraph, non-sharable net capital loss carryovers may be used to offset the taxable in- come of a combined group member, as described in sub. (6) (c). (h) Its net business loss carryforward, including any other combined group members[ net business loss carryforwards which may offset the member[s share of combined unitary income un- der the provisions of sub. (9). (6) COMPUTATION OF COMBINED UNITARY INCOME. This subsection interprets s. 71.255 (4), Stats., relating to a combined group[s computation of business income subject to combination, which is called Xcombined unitary incomeY for purposes of this section. The steps to compute combined unitary income are as follows: (a) General. 1. Compute the sum of each combined group member[s net income determined under the Internal Revenue Code before Wisconsin modifications, without regard to net cap- ital gain or loss, net gain or loss under section 1231 of the Inter- nal Revenue Code, net gain or loss from involuntary conversions, or deductions for charitable contributions. Compute this income as if the member were not consolidated for federal purposes. 2. Defer or recognize any intercompany income, expense, gain, or loss between combined group members as described in par. (b), except to the extent the income, expense, gain, or loss is excluded from the combined unitary income because it does not relate to the unitary business or is not subject to combination un- der the water[s edge rules of sub. (4). 3. Add net capital gain includable in the combined unitary income, applying the loss limitation as described in par. (c) and using the federal basis of assets. Any differences between the federal and Wisconsin basis of assets, including basis differences that arise from the application of par. (f), are accounted for as Wisconsin modifications under subd. 6. The Wisconsin basis of a corporation[s depreciable property for the first year the corpo- ration becomes taxable in Wisconsin equals its federal basis as of the beginning of the taxable year in which the corporation be- comes taxable in Wisconsin, as required under s. 71.265, Stats. The federal basis shall be computed under the Internal Revenue Code in effect for federal purposes as required under ss. 71.22 (4) and (4m), 71.26 (3) (y), 71.42 (2), and 71.98 (3), Stats. Note: Under ss. 71.22 (4) and (4m), 71.26 (3) (y), and 71.42 (2), Stats., the fed- eral bonus depreciation provisions in section 168(k) of the Internal Revenue Code are excluded from the Internal Revenue Code in effect for Wisconsin purposes. Therefore, the federal basis computed under subd. 3. must be computed without re- gard to any bonus depreciation claimed for federal purposes. 4. Subtract any net section 1231 loss or net loss from invol- untary conversions that results from the aggregation in par. (c) 1. 5. Subtract the charitable contributions deduction includable in the combined unitary income, computed as described in par. (d). 6. Apply Wisconsin addition and subtraction modifications provided in ss. 71.26 and 71.45, Stats., as applicable. For interest expenses, rent expenses, intangible expenses, and management fees paid, accrued, or incurred between combined group mem- bers, including pass-through entities owned by those members to the extent of their distributive shares of income, the addition modifications for related entity expenses under ss. 71.26 (2) (a) 7. and 71.45 (2) (a) 16., Stats., are not required to the extent the re- cipient of the income includes the income in the combined uni- tary income. 7. Subtract any dividends that qualify for elimination under par. (e) to the extent the dividends did not qualify for a subtrac- tion modification under subd. 6. 8. If a combined group member is an insurance company, subtract the portion of net income attributable to the insurance company[s life insurance operations as determined using s. 71.45 (2) (b), Stats. 9. Subtract the income, as modified by subds. 6. to 8., which is not includable in combined unitary income because it is not de- rived from the unitary business or is not subject to combination under the water[s edge rules of sub. (4). The income subtracted under this subdivision shall be net of any directly or indirectly re- lated expenses as provided in par. (h). The amount subtracted un- der this subdivision may not duplicate any amounts already subtracted. (b) Intercompany transactions. Defer or recognize any inter- company income, expense, gain, or loss between combined group members that would be deferred or recognized between those members under 26 CFR 1.1502-13 as if the combined group were a federal consolidated group, except that the provisions for inter- company dividends are excluded and replaced with par. (e). This paragraph does not apply to intercompany transactions which oc- curred in taxable years beginning before January 1, 2009 or to in- tercompany transactions where the income, expense, gain, or loss would not otherwise be subject to combination. For modifica- tions to 26 CFR 1.1502-13 that are necessary in the case of a combined group doing business solely in this state, see sub. (8). Any deferred intercompany income, expense, gain, or loss that is recognized under this paragraph shall be recognized by the same combined group member that deferred the income, expense, gain, or loss. The deferred income, expense, gain, or loss shall be rec- ognized when required under 26 CFR 1.1502-13 as if the com- bined group were a federal consolidated group, or when any of the following apply: 1. The buyer resells the object of the deferred intercompany transaction to an entity that is not a member of the combined group. 2. The object of the deferred intercompany transaction is used outside the combined group[s unitary business as a result of the buyer[s resale, conversion, or transfer of the asset. 3. The buyer and seller are no longer members of the same combined group, regardless of whether they are in the same uni- tary business. Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. Example: S and B are combined group members. S has land with a basis of $130,000 at the end Year 1. In Year 2, S sells the land to B for $100,000. B holds the land until Year 3, when it sells it to X, a person outside the combined group, for $110,000. Assume both sales are otherwise includable in the combined unitary in- come. Applying 26 CFR 1.1502-13 to S and B in the manner described in this para- graph, S would not recognize any gain or loss on the sale of the land to B in Year 2. However, in Year 3, S would recognize a $30,000 loss and B would recognize a si- multaneous $10,000 gain. Thus, in Year 2, the combined group cannot include S[s $30,000 loss on sale of land in its combined unitary income, but in Year 3, the com- bined group can include a $20,000 loss on sale of land (the net amount of S[s Year 2 loss and B[s Year 3 gain) in its combined unitary income. However, the capital loss limitation may limit this loss, as described further in par. (c). (c) Capital gains and losses. Compute the capital loss limita- tion so that it applies to the combined group as a whole, to the ex- tent the capital gains and losses are derived from the unitary busi- ness and otherwise subject to combination. Rules to determine the capital loss limitation, the assignment of capital gains and losses to members, and the amounts available for carryover, are as follows: 1. For short-term capital gains or losses, long-term capital gains or losses, section 1231 gains or losses, and involuntary con- versions, aggregate all combined group members[ amounts within each class of gain or loss. Except as provided in subd. 8., include sharable net capital loss carryovers as described in subd. 2. but not non-sharable net capital loss carryovers. 2. A combined group member[s sharable net capital loss car- ryover is any available net capital loss carryover which would be a sharable loss carryforward under sub. (9) (a) if it were a net business loss carryforward. A non-sharable net capital loss car- ryover is any available net capital loss carryover which would be a non-sharable loss carryforward under sub. (9) (b) if it were a net business loss carryforward. Net capital loss carryovers that are otherwise non-sharable may be included in the aggregation under subd. 1. if they were carryovers of a subgroup as described in sub. (9) (e) 1., but only in an amount not exceeding the net capital gain the subgroup would have if its amounts were not aggregated with those of the other combined group members. 3. Determine and apply the capital loss limitation under sec- tion 1211 of the Internal Revenue Code for the combined group based on the aggregate amounts computed in subd. 1. The provi- sions of 26 CFR 1.1502-22 and 1.1502-23, and the regulations which they reference, shall apply for this purpose, except that the separate return limitation year provisions are excluded and re- placed with the provisions of this paragraph and except to the ex- tent otherwise inconsistent with ss. 71.26 and 71.45, Stats., and the provisions of this section. 4. If the result is a net capital gain for the group, the net cap- ital gain shall be apportioned to Wisconsin for the members in the same manner as all other combined unitary income as de- scribed in sub. (7), except that if the combined group is doing business solely in Wisconsin, the net capital gain is assigned to the members as described in sub. (8) (b). If the result is a net cap- ital loss for the group, the net capital loss shall be assigned to the members that would have a net capital loss from the unitary busi- ness if their amounts were not aggregated with those of the other members of the combined group, in proportion to the amount of that net capital loss. Examples: 1) Combined Group PQR consists of Member P, Member Q, and Member R. In Group PQR[s unitary combination for 2010, P, Q, and R aggregate their short term capital gains and losses (including sharable capital loss carryovers), long-term capital gains and losses, section 1231 gains and losses, and involuntary conversions, and compute a total of $20,000 in net capital gain for Group PQR. P[s Wisconsin apportionment percentage computed under sub. (7) is 10%; Q[s is 25%; and R[s is 50%. P[s apportioned share of this net capital gain is $2,000 (= $20,000 x 10%), Q[s apportioned share is $5,000 (= $20,000 x 25%) and R[s apportioned share is $10,000 (= $20,000 x 50%). 2) Combined Group STU consists of Member S, Member T, and Member U. In the taxable year 2010, S, T, and U have the following capital gains and losses and section 1231 gains and losses attributable to the unitary business and subject to combination: Member S Member T Member U Long term capital gain $5,000 Short term capital loss ($12,000) ($6,000) Section 1231 gain/loss ($500) $2,000 $1,500 When S, T, and U aggregate each class of capital gains and losses and section 1231 gains and losses, Group STU has a net capital loss of $10,000. However, if S, T, and U[s capital gains and losses and section 1231 gains and losses were not aggre- gated with one another, S would have a net capital loss of $12,000 (its section 1231 loss would be treated as ordinary under section 1231(a)(2) of the Internal Revenue Code), T would have a net capital loss of $4,000, and U would have a net capital gain of $6,500. Thus, the amount of Group STU[s net capital loss that would be assigned to S is $7,500 (= ($12,000 / $16,000) x $10,000) and the amount that would be as- signed to T is $2,500 (= ($4,000 / $16,000) x $10,000). None of the net capital loss would be assigned to U since it did not contribute to Group STU[s net capital loss. 5. After applying subd. 4., each member computes its net capital gain or loss from separate entity items without consider- ing capital loss carryover amounts. If the result is a net capital loss, the loss may not be deducted except as provided in subd. 6. If the result is a net capital gain, the member may subtract from that amount, subject to the capital loss limitation, any current year net capital loss from the unitary business as computed in subd. 4. and any available net capital loss carryovers, whether they are sharable or non-sharable. The current year net capital loss from the unitary business shall be considered used before the net capital loss carryovers. Any remaining carryover may be used as provided in subd. 6. Example: Assume the same facts as Example 2 in subd. 4. Assume also that S has a $10,000 long term capital gain from separate entity items in 2010 and a net capital loss carryover of $3,000 which was incurred in 2008. Since the current year net capital loss from the unitary business is considered used before the net capital loss carryover, at the end of 2010 S would have a remaining 2008 net capital loss car- ryover of $500 (= $10,000 - $7,500 current year net capital loss from unitary busi- ness - $3,000 net capital loss carryover). 6. If a member has a share of net capital gain from the uni- tary business as computed in subd. 4., the member may use any available net capital loss, including current year net capital loss from separate entity items and net capital loss carryovers, to off- set that net capital gain. If the group uses apportionment, the member uses the available net capital loss by claiming a deduc- tion equal to the amount of the available net capital loss that does not exceed the group[s net capital gain from the unitary business, multiplied by the member[s apportionment percentage from the unitary combination. The current year net capital loss from sepa- rate entity items shall be considered used before the net capital loss carryovers. Example: Assume the same facts as Example 1 in subd. 4. Assume that Q has a $5,000 long term capital gain from separate entity items and a net capital loss carry- over of $6,000 which was incurred in 2008. Since the net capital loss carryover was incurred in a taxable year beginning before 2009, it is non-sharable and could not be used in computing the aggregate net capital gain or loss of the unitary business as described in subd. 1. However, Q may use the non-sharable loss carryover to offset its net capital gain from separate entity items. After doing this, Q has a $1,000 available net capital loss (= $5,000 - $6,000) to use against its share of the $20,000 net capital gain from the unitary business. To use the remaining carryover, Q may claim an additional capital loss deduction of $250 (= $1,000 available carryover x 25% apportionment percentage). After claiming this deduction, Q would have no remaining net capital loss carryover. 7. After each member applies subds. 4. to 6., as applicable, the member may carry back or carry forward any remaining net capital loss carryover as provided in section 1212 of the Internal Revenue Code and may share that carryover to the extent it is a sharable carryover. The sharable carryovers available for use in the aggregation under subd. 1. are determined without regard to when any non-sharable carryovers were incurred and are applied in the order the underlying sharable loss was incurred. The carry- overs available to offset the member[s net capital gain under subds. 5. and 6. are applied in the order the underlying loss was incurred. If the carryover available to offset the member[s net capital gain under subds. 5. and 6. consists of both a sharable and non-sharable amount incurred in the same taxable year, the carry- Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. WISCONSIN ADMINISTRATIVE CODE over is applied from the sharable and non-sharable amounts on a pro rata basis according to the amount of each type of carryover available from that year. Example: Member L is a member of Combined Group LM. Group LM uses a calendar year. At the beginning of 2012, L has the following available net capital loss carryovers: Year Incurred Sharable Carryover Non-sharable Carryover 2008 -- $2,500 2009 $4,000 $0 2010 $0 $500 2011 $10,000 $2,000 Since the sharable net capital loss carryovers available for use in the aggregation under subd. 1. are determined without regard to when any non-sharable carryovers were incurred, the total sharable carryover that L may include in Group LM[s com- putation of aggregate net capital gain or loss for the year 2012 is $14,000 (= $4,000 + $0 + $10,000). Assume $12,000 of this amount is absorbed in the aggregation. Since carryovers are applied in the order incurred, L[s remaining sharable carryover of $2,000 is from its 2011 net capital loss. This carryover is available to L to offset against its net capital gain from separate entity items for 2012. Assume L has a net capital gain from separate entity items of $4,000 and applies its available net capital loss carryover to offset this amount. Since carryovers are ap- plied in the order incurred, $2,500 of the amount used is from its 2008 non-sharable carryover and $500 is from its 2010 non-sharable carryover. Since the remaining $1,000 carryover used is from 2011 where L has both a sharable and a non-sharable carryover, the amount of each carryover used is determined on a pro rata basis. Since L has $2,000 in sharable carryover from 2011 and $2,000 in non-sharable car- ryover from 2011, the remaining $1,000 carryover used is applied equally from the sharable and non-sharable carryovers. Thus, at the end of its 2012 taxable year, L has $1,500 in sharable carryovers and $1,500 in non-sharable carryovers available to carry forward or carry back. 8. If a member has sharable net capital loss carryovers, that member may choose not to use them in the aggregation under subd. 1. If more than one member includes sharable net capital loss carryovers in the aggregation under subd. 1., the amount of each member[s carryover used shall be computed on a pro rata basis according to the amount of carryover each member included in the aggregation. Example: Combined Group QR consists of Member Q and Member R. Group QR is on a calendar year. For 2010, Q and R have the following amounts: Member Q Member R Sharable net capital loss carryover at beginning of year ($10,000) ($5,000) Long term capital gain $6,000 $2,000 Section 1231 gain/loss ($2,000) $3,000 Assume the long term capital gains and section 1231 gains and losses are derived from Group QR[s unitary business and are subject to combination. Before applying the carryovers, Group QR has an aggregate net capital gain of $9,000 (= $6,000 + $2,000 + ($3,000 - $2,000)). Both Q and R use their sharable net capital loss carry- overs to offset this amount. The amount used from Q[s sharable carryover is $6,000 (= $9,000 x ($10,000 / $15,000)) and the amount used from R[s sharable carryover is $3,000 (= $9,000 x ($5,000 / $15,000)). After applying these carryovers, Q[s re- maining sharable carryover is $4,000 (= $10,000 - $6,000) and R[s remaining sharable carryover is $2,000 (= $5,000 - $3,000). (d) Charitable contributions. Compute the charitable contri- butions deduction limitation so that it applies to the combined group as a whole. Rules to determine the charitable contribu- tions deduction limitation are as follows: 1. Compute the aggregate total deductions for charitable contributions for the taxable year, and any carryforwards of those deductions, for all combined group members. 2. Determine and apply the charitable contributions deduc- tion under Internal Revenue Code section 170, before any Wis- consin modifications under ss. 71.26 or 71.45, Stats., as if the combined group were a consolidated group for federal purposes. The provisions of 26 CFR 1.1502-24, and the regulations which it references, shall apply for this purpose, except to the extent oth- erwise inconsistent with ss. 71.26 and 71.45, Stats., and the pro- visions of this section. Example: Combined Group GH consists of Member G and Member H. G in- curred $5,000 in charitable contribution deductions relating to the unitary business in Year 1, while H incurred $15,000 in charitable contribution deductions. Assume the federal taxable income upon which the charitable contribution limitation (10% of adjusted taxable income) would be based is $50,000 for G and $30,000 for H. Applying 26 CFR 1.1502-24 to Group GH in the manner described in this para- graph, Group GH would include a charitable contribution deduction of $8,000 (= lesser of ($5,000 + $15,000) or (($50,000 + $30,000) x 10%)) in its combined uni- tary income. 3. Any unused charitable contribution deduction after apply- ing subd. 2. is assigned to the member that incurred the expense and is available to that member to offset its net income, if any, from separate entity items, subject to the limitation of section 170 of the Internal Revenue Code. Any of a member[s remaining un- used charitable contribution may be carried over by that member and used in subsequent years, subject to the carryover period pro- vided in section 170 of the Internal Revenue Code. The unused carryover may either be shared in a subsequent combined report in the manner described in subd. 2. or may be used by that mem- ber specifically. Example: Assume the same facts as in the example for subd. 2. After the compu- tation of Group GH[s combined unitary income for Year 1, the amount of unused charitable contribution deduction available to G would be $3,000 (= $12,000 un- used deduction x ($5,000 / $20,000)) and the amount available to H would be $9,000 (= $12,000 x ($15,000 / $20,000)). Assume G has separate entity items in Year 1 and the adjusted federal taxable income from those items is $20,000. G may deduct $2,000 (= $20,000 x 10%) of its unused deduction against its income from separate entity items. Assume H does not have separate entity items in Year 1 and both G and H are in Group GH in Year 2. In Year 2, Group GH could include $10,000 of charitable contribution deduction carryover from Year 1 ($1,000 from G and $9,000 from H) in its combined unitary income, subject to the limitations of section 170 of the Internal Revenue Code. (e) Dividends. Eliminate dividends paid between members of the same combined group, but only if the dividends were paid from earnings and profits attributable to net income or loss that was includable in that group[s combined unitary income in the current taxable year or a prior taxable year, and only to the extent the dividend does not exceed the payee[s basis in the payer[s stock. The following rules apply in determining the dividends that may be eliminated under this paragraph: 1. The elimination of dividends applies only to the extent that the dividends received deduction provided in ss. 71.26 (3) (j) or 71.45 (2) (a) 8., Stats., does not apply. 2. For purposes of this paragraph, dividends are treated as paid out of current earnings and profits, and if the dividends paid exceed current earnings and profits, then the dividends are treated as paid out of earnings and profits accumulated in preceding years, beginning with the year closest to the current year (LIFO rule). With respect to an individual taxable year, dividends are treated as paid from all earnings and profits earned in that taxable year on a pro rata basis according to the proportion of net income that was included in the combined unitary income for that taxable year (pro rata rule). Earnings and profits are determined as pro- vided in par. (g). Note: See the examples under subds. 4. and 5. for application of the LIFO and pro rata rules. 3. A combined group member[s earnings and profits attribut- able to the unitary business that were generated in its taxable years beginning before January 1, 2009, shall be deemed to be earnings and profits attributable to combined unitary income if the corresponding net income would have been included in the group[s combined unitary income in those years had s. 71.255, Stats., been in effect and required combined reporting in those years. 4. To the extent that a dividend is paid out of earnings and profits that were generated while the payer was not, or in the case of subd. 3. would not have been, a member of the combined group, the dividend may not be eliminated. Example: Combined Group MN consists of Member M and Member N. The combined group was formed when Corporation M acquired 60% of Corporation N on June 1, 2009. Group MN uses a calendar year. During 2010, N paid a dividend to M of $500,000. N[s current earnings and profits for 2010, before accounting for the distribution to M, are $100,000. N[s earnings and profits attributable to its 2009 calendar year are $1,000,000, of which $50,000 (5% of the total) were earned while N was a member of Group MN. Assume N had no separate entity items while it was a member of Group MN. Also assume M did not deduct any foreign taxes attribut- able to the dividend and N has sufficient stock basis. Applying the LIFO and pro rata rules of subd. 2., the amount of dividend that qualifies for elimination from Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. Group MN[s combined unitary income in 2010 is $120,000 (= $100,000 + (5% x $400,000)). Under the pro rata rule, 95%, or $380,000, of dividends paid out of N[s 2009 earnings and profits are considered to be paid from pre-acquisition earnings and profits. 5. To the extent that a dividend is paid out of earnings and profits that were generated in taxable years when the payer was, or in the case of subd. 3. would have been, a member of the com- bined group for all or a portion of the taxable year, any portion of the dividend attributable to separate entity items may not be eliminated. Example: Combined Group GH consists of Member G and Member H. G owns 55% of H. Group GH is on a calendar year and both G and H were members of the group for the entire taxable year. During 2010, H paid a dividend of $1,000,000 to G. H[s current year earnings and profits are $2,500,000. Of these earnings and prof- its, $250,000 (10% of the total) is attributable to separate entity items of H. Assume G did not deduct any foreign taxes attributable to the dividend and H has sufficient stock basis. Applying the pro rata rule of subd. 2., the amount of dividend that qual- ifies for elimination from Group GH[s combined unitary income is $900,000 (= $1,000,000 x 90%). Under the pro rata rule, 10%, or $100,000, of dividends paid out of H[s current year earnings and profits are considered to be attributable to sep- arate entity items. 6. The amount of dividends eliminated under this paragraph may not exceed the payee[s basis in stock of the payer as deter- mined under par. (f). 7. The amount of dividends eliminated under this paragraph shall be net of any taxes paid on the dividends to a foreign nation if those taxes were claimed as a deduction under ch. 71, Stats. (f) Stock basis adjustments. A combined group member[s ba- sis in stock of a subsidiary that is a member of the same com- bined group shall be adjusted to reflect the subsidiary[s distribu- tions and items of income, gain, deduction and loss taken into ac- count while the subsidiary was a member of the combined group. Except as provided in subds. 1. to 4. and except to the extent oth- erwise inconsistent with this section or ss. 71.26 or 71.45, Stats., the provisions of 26 CFR 1.1502-32, and the regulations which it references, shall apply in determining the amount of basis adjust- ment as if the Wisconsin combined group is a federal consoli- dated group: 1. A basis adjustment may not be made for the subsidiary[s distributions or items of income, gain, deduction, or loss taken into account for the subsidiary[s taxable years beginning before January 1, 2009. 2. A basis adjustment may not be made for the subsidiary[s items of income, gain, deduction, or loss to the extent those items were not included in the group[s combined unitary income. In the case of tax-exempt income, a basis adjustment may not be made to the extent the income is attributable to items that were not included in the combined unitary income. 3. An adjustment to reduce basis shall be made for the sub- sidiary[s distributions to the extent those distributions are from earnings and profits attributable to items that were included in the group[s combined unitary income, or from earnings and profits attributable to items deemed to be included in the group[s com- bined unitary income under par. (e) 3. for purposes of the divi- dend elimination under par. (e). For purposes of determining the amount of basis reduction under this subdivision, the LIFO and pro rata rules of par. (e) 2. apply. Example: Combined Group CD consists of Member C and Member D. C owns 65% of D. Group CD is on a calendar year. At the beginning of taxable year 2009, C[s basis in the stock of D is $2,000,000. In the group[s taxable year 2009, D has $100,000 of net income, all of which is included in Group CD[s 2009 combined uni- tary income. During 2009, D pays a dividend of $300,000 to C. Assume the entire dividend from D to C qualifies for elimination under par. (e) 3. and is eliminated from Group CD[s combined unitary income in 2009. C[s basis in the stock of D as of the beginning of 2010 is $1,800,000 (= $2,000,000 + $100,000 ] $300,000). 4. A basis adjustment may not be attributed to a subsidiary from a lower-tier subsidiary[s items of income, gain, deduction, or loss, except to the extent that the lower-tier subsidiary[s items of income, gain, deduction, or loss originated in taxable years be- ginning on or after January 1, 2009 and were included in the combined unitary income of that same unitary business. Example: Combined Group QRS consists of Member Q, Member R, and Mem- ber S. Q owns all the stock of R, and R owns all the stock of S. Group QRS is on a calendar year. As of the beginning of 2009, Q had an unadjusted basis of $500,000 in R stock, which includes R[s unadjusted basis of $200,000 in S stock under the rules of 26 CFR 1.1502-32. In the group[s 2009 taxable year, R had a total of $80,000 of net income and S had a total of $150,000 of net income. Of S[s net in- come, $20,000 was attributable to overseas operations, the income from which was not included in combined unitary income under the water[s edge rules. Neither R nor S made any distributions in 2009. At the end of 2009, Q[s basis in R stock is $710,000 (= $500,000 + $80,000 + $150,000 - $20,000). Q[s basis in R stock can- not include any amounts attributed from S that are attributable to separate entity items. (g) Earnings and profits. A combined group member[s earn- ings and profits shall be adjusted to reflect the undistributed earn- ings and profits of any subsidiary that is a member of the same combined group, subject to the following rules and limitations: 1. Except as provided in subd. 2. and except to the extent oth- erwise inconsistent with this section or ss. 71.26 or 71.45, Stats., the provisions of 26 CFR 1.1502-33, and the regulations which it references, shall apply in determining earnings and profits as if the Wisconsin combined group is a federal consolidated group. 2. Undistributed earnings and profits attributed to a sub- sidiary of a combined group member from any lower-tier sub- sidiary may not be included in the combined group member[s earnings and profits or its subsidiary[s earnings and profits except to the extent the lower-tier subsidiary[s earnings and profits are attributable to net income that was, or in the case of par. (e) 3. would have been, included in the group[s combined unitary income. Example: Combined Group EFG consists of Member E, Member F, and Member G. E owns all the stock of F, and F owns all the stock of G. Group EFG is on a cal- endar year. During the taxable year 2009, E has current year earnings and profits of $300,000 and F has current year earnings and profits of $500,000, both exclusive of any amounts attributed from subsidiaries. Assume these amounts are attributable entirely to items included in Group EFG[s 2009 combined unitary income. G has current year earnings and profits of $400,000. However, $50,000 of this amount is attributable to overseas operations, the income from which was not included in com- bined unitary income under the water[s edge rules. Assume none of the corpora- tions made distributions in 2009. F[s total current year earnings and profits are $850,000 (= $500,000 + ($400,000 - $50,000 attributed from G)), and E[s current year earnings and profits are $1,150,000 (= $300,000 + $850,000 attributed from F). (h) Allocation of expenses and deductions. 1. Combined uni- tary income shall exclude any expenses or deductions that are di- rectly or indirectly related to income that is not subject to combi- nation. If any expense or amount otherwise deductible is indi- rectly related both to income subject to combination and income not subject to combination, a reasonable proportion of the ex- pense or amount shall be allocated to each type of income, in light of all the facts and circumstances. 2. The allocation in subd. 1. shall be made according to the methods required or allowed for federal income tax purposes un- der the applicable sections of the Internal Revenue Code, includ- ing their corresponding regulations, except that section 265 of the Internal Revenue Code and its corresponding regulations are modified as provided in s. 71.26 (3) (L), Stats. For example, and without limitation, the allocation may be required under section 482 of the Internal Revenue Code or, for an expense related to for- eign source income, under sections 861 to 865 of the Internal Revenue Code. 3. For purposes of applying this paragraph, a combined group member[s income from outside the unitary business shall be treated as income of an affiliated corporation, and if a com- bined group member has U.S. source income excluded from the unitary combination under s. Tax 2.61 (4) (f), that U.S. source in- come shall be treated as foreign source income. (7) APPORTIONMENT OF COMBINED UNITARY INCOME. A combined group is considered to be a single taxpayer for pur- poses of determining whether it is engaged in business both Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. WISCONSIN ADMINISTRATIVE CODE within and outside Wisconsin. For combined groups engaged in business both within and outside Wisconsin, the combined uni- tary income is apportioned to the combined group members as provided in s. 71.255 (5), Stats. Under this section, each mem- ber[s share of the combined unitary income is the product of the combined unitary income and the member[s modified sales factor ratio. The following rules apply to this computation: (a) Numerator of modified sales factor. 1. For combined group members required to use the sales factor as provided in s. 71.25 (6) and (9), Stats., the numerator of the member[s modified sales factor ratio is the numerator of its sales factor as determined under s. 71.25 (9), Stats., and s. Tax 2.39 as if it were not a mem- ber of a combined group, except as provided in subd. 5. and pars. (c) to (e). 2. For combined group members that are insurers subject to tax under subch. VII of ch. 71, Stats., the numerator of the mem- ber[s modified sales factor is the numerator of its premiums fac- tor as determined under s. 71.45 (3) (a), Stats., as if it were not a member of a combined group, except as provided in subd. 5. and pars. (d) and (e). 3. For combined group members that are Xfinancial organi- zationsY as defined in s. 71.25 (10), Stats., the numerator of the member[s modified sales factor is the numerator of its receipts factor as determined under ss. Tax 2.49 or 2.495, as applicable, as if it were not a member of a combined group, except as provided in subd. 5. and pars. (c) to (e). 4. For combined group members that are required to appor- tion their income using more than one factor under s. 71.25 (10), Stats., and ss. Tax 2.46, 2.465, 2.47, 2.475, 2.48, 2.50, or 2.502, the numerator of the member[s modified sales factor is deter- mined as provided in par. (g). 5. The numerator of the modified sales factor may not in- clude sales, premiums, or receipts which are not included in the combined unitary income as computed in sub. (6). (b) Denominator of modified sales factor. The denominator of a combined group member[s modified sales factor ratio is the sum of the separate company denominators of each combined group member, so that each member of the combined group has the same modified sales factor denominator. Each combined group member[s separate company denominator is determined as follows: 1. For combined group members required to use the sales factor as provided in s. 71.25 (6) and (9), Stats., the member[s separate company denominator for purposes of the modified sales factor is the denominator of its sales factor as determined under s. 71.25 (9), Stats., and s. Tax 2.39 as if it were not a mem- ber of a combined group, except as provided in subd. 5. and pars. (d) and (e). 2. For combined group members that are insurers subject to tax under subch. VII of ch. 71, Stats., the member[s separate company denominator for purposes of the modified sales factor is the denominator of its premiums factor as determined under s. 71.45 (3) (a), Stats., as if it were not a member of a combined group, except as provided in subd. 5. and pars. (d) and (e). 3. For combined group members that are Xfinancial organi- zationsY as defined in s. 71.25 (10), Stats., the member[s separate company denominator for purposes of the modified sales factor is the denominator of its receipts factor as determined under ss. Tax 2.49 or 2.495, as applicable, as if it were not a member of a com- bined group, except as provided in subd. 5. and pars. (d) and (e). 4. For combined group members that are required to appor- tion their income using more than one factor under s. 71.25 (10), Stats., and ss. Tax 2.46, 2.465, 2.47, 2.475, 2.48, 2.50, or 2.502, the member[s separate company denominator for purposes of the modified sales factor is determined as provided in par. (g). 5. The separate company denominator for purposes of the modified sales factor may not include sales, premiums, or re- ceipts which are not included in the combined unitary income as computed under sub. (6). (c) Throwback sales. If a combined group member[s sale of tangible personal property is destined for a state in which any member of the combined group has nexus under the standards set forth in s. Tax 2.82, and that nexus relates to the unitary business, the sale may not be included in the numerator of the member[s modified sales factor. If a combined group member is subject to the controlled group election, that member[s numerator shall not include sales destined for a state in which any member of the combined group has nexus under the standards set forth in s. Tax 2.82. (d) Intercompany transactions. 1. Any transaction between members of the same combined group shall be excluded from the numerator and denominator of the modified sales factor. How- ever, if the seller subsequently recognizes income or loss from the intercompany transaction under the provisions of s. 71.255 (4) (g), Stats., and sub. (6) (b), the seller[s modified sales factor shall include any factors corresponding to that income or loss in the year it recognizes the income or loss. 2. If a combined group member sells an item or service to another combined group member and the purchaser subsequently resells it to a third party outside of the combined group, the situs of the sale between the combined group members and the sale from the purchasing member to the third party shall both be de- termined based on the situs of the sale from the purchasing mem- ber to the third party, and the purchasing member shall exclude from the numerator and denominator of the modified sales factor the amount the selling member already included under subd. 1. attributable to the item or service that was resold. Example: Combined Group YZ consists of Member Y and Member Z. Group YZ is on a calendar year. On December 30, 2009, Y sells a widget with a cost of $400 to Z, for $600. Y ships the widget to Z[s warehouse in Wisconsin. On January 30, 2010, Z resells the widget to Q, an unrelated third party, for $700. Z ships the widget to Q[s headquarters in Illinois. Assume both the sale by Y and the sale by Z are subject to combination, and assume that Z has nexus in Illinois. In 2009, Y did not recognize any gain on the sale to Z because the gain was deferred under the pro- visions of s. 71.255 (4) (g), Stats., and sub. (6) (b). Since the gain on the sale was not recognized, Y cannot include the $600 sale in its apportionment factors for 2009. In 2010, the year the widget was resold by Z, Y must include its $200 of gain on the sale to Z (= $600 - $400) in combined unitary income. Y must also include the sale amount of $600 in the modified sales factor denominator for 2010. Z must include its $100 gain on the sale to Q (= $700 - $600) in combined unitary income for 2010. However, since $600 of Z[s sales price has already been included in the combined group[s modified sales factor, Z may only include $100 of the sale amount in the modified sales factor denominator. Neither Y nor Z include these amounts in their modified sales factor numerators since both sales have a situs in Illinois where Z has nexus. Under the provisions of par. (c), Z[s nexus in Illinois applies to both itself and Y for purposes of applying the throwback rule. 3. If an item or service is sold between more than two com- bined group members before it is sold to a customer outside of the combined group, the situs of these intercompany sales shall be the situs of the ultimate sale to the customer outside of the combined group, and each purchasing combined group member shall exclude from the numerator and denominator of the modi- fied sales factor the amount its selling member already included under subd. 1. (e) Pass-through entities. A combined group member[s nu- merator and denominator for purposes of the modified sales fac- tor generally includes the apportionment factors of pass-through entities owned directly or indirectly by the member, in proportion to the combined group member[s distributive share of the pass- through entity[s net income or loss included in the combined uni- tary income. However, a combined group member[s modified sales factor may not include apportionment factors of a real estate Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. investment trust, regulated investment company, real estate mort- gage investment conduit, or financial asset securitization invest- ment trust. Additionally, subds. 1. and 2. apply in order to avoid duplication. For purposes of subds. 1. and 2., XsaleY includes sales as defined in s. 71.25 (9), Stats., premiums under s. 71.45 (3) (a), Stats., or receipts under ss. Tax 2.49 or 2.495, as applica- ble, which would otherwise be included in a combined group member[s modified sales factor. 1. If a sale is made by a combined group member to a pass- through entity which is more than 50 percent owned, directly or indirectly, by members of the combined group as provided in subd. 3., the selling member shall subtract from its modified sales factor numerator and denominator, as applicable, an amount equal to the gross receipts of the sale multiplied by the sum of all combined group members[ interests in the pass-through entity as of the date of the sale. This subdivision applies to the extent the gross receipts of the sale are otherwise includable in combined unitary income. For purposes of this subdivision, a combined group member[s interest in the pass-through entity as of the date of the sale means the percentage of the pass-through entity[s in- come or loss that is allocable to the member in the taxable year of the sale. Examples: 1) Combined Group LM consists of Member L and Member M. L owns a 40% interest in Partnership P. M owns a 60% interest in Partnership P. On March 1, 2010, L sells a widget to Partnership P for $10,000, and this sale is includ- able in Group LM[s combined unitary income. In its computation of apportionment factors for 2010, L must subtract an amount of $10,000 (= $10,000 x (40% + 60%)) from the modified sales factor denominator and, if applicable, from its numerator. 2) Assume the same facts as Example 1, except that Member L owns a 25% inter- est and M owns a 50% interest in Partnership P. In its computation of apportion- ment factors for 2010, L must subtract an amount of $7,500 (= $10,000 x (25% + 50%)) from the modified sales factor denominator and, if applicable, from its numerator. 2. If a sale is made by a pass-through entity to a combined group member and more than 50 percent of the pass-through en- tity is directly or indirectly owned by members of the combined group as provided in subd. 3., each member with an interest in the pass-through entity shall subtract from its modified sales factor numerator and denominator, as applicable, any amount attribut- able to the sale. This subdivision applies to the extent the gross receipts of the sale are otherwise includable in combined unitary income. Example: Combined Group ST consists of Member S and Member T. S owns a 20% interest in Partnership R. T owns an 80% interest in Partnership R. On Octo- ber 1, 2010, Partnership R sells a widget to S for $20,000, and this sale is includable in Group ST[s combined unitary income. In its computation of apportionment fac- tors for 2010, S must subtract an amount of $4,000 (= $20,000 x 20%) from its sales factor denominator and, if applicable, from its numerator. Similarly, T must subtract an amount of $16,000 (= $20,000 x 80%) from its sales factor denominator and, if applicable, from its numerator. 3. For purposes of subds. 1. and 2., a pass-through entity is owned more than 50 percent by combined group members if the aggregate amount of the combined group members[ interests in the pass-through entity, without regard to any agreement to allo- cate gains or losses on a basis other than their capital interests, is more than 50 percent, or the combined group members taken as a whole have more than 50 percent of the management rights of the pass-through entity, as evidenced by the terms of the agreement under which the pass-through entity was formed, voting rights, provisions of state or federal law, or otherwise. (f) Special rules for zeroes and negative numbers in factors. This paragraph applies the special rules in ss. 71.25 (6m) and 71.45 (3e), Stats., to combined group members as follows: 1. If both the numerator and denominator of a member[s modified sales factor are zero, none of the combined unitary in- come shall be apportioned to the member. The member[s sepa- rate company denominator has no effect on this determination. 2. If the numerator of a member[s modified sales factor is a negative number, none of the combined unitary income shall be apportioned to the member. The member[s separate company de- nominator has no effect on this determination. 3. If the numerator of a member[s modified sales factor is a positive number and the denominator is a negative number or zero, all of the combined unitary income shall be apportioned to the member. The member[s separate company denominator has no effect on this determination. If this subdivision would result in apportioning all of the combined unitary income to more than one member, the combined unitary income shall be apportioned to the members having positive modified sales factor numerators in proportion to the amounts of their numerators. Example: Combined Group XY consists of Member X and Member Y. In its taxable year 2009, Group XY has combined unitary income of $50,000. X and Y have the following apportionment factors: Member X Member Y Modified Sales Factor Numerator $5,000 $15,000 Separate Company Denominator ($10,000) $5,000 The modified sales factor denominator, or sum of the separate company denomi- nators, is ($5,000). The amount of combined unitary income that would be appor- tioned to X is $12,500 (= $50,000 x ($5,000 / $20,000)). The combined unitary in- come that would be apportioned to Y is $37,500 (= $50,000 x ($15,000 / $20,000)). (g) Multiple factor formulas. If a combined group member is required under s. 71.25 (10), Stats., to use an apportionment for- mula prescribed in ss. Tax 2.46, 2.465, 2.47, 2.475, 2.48, 2.50, or 2.502, the member[s modified sales factor is computed as follows: 1. The numerator of the modified sales factor is the product of the member[s apportionment percentage computed under ss. Tax 2.46, 2.465, 2.47, 2.475, 2.48, 2.50, or 2.502, as applicable, as if the member were not a member of a combined group except as provided in subds. 3. to 5., and the member[s separate com- pany denominator determined in subd. 2. 2. Except as provided in subds. 3. to 5., the member[s sepa- rate company denominator for purposes of the modified sales fac- tor is the member[s total company sales that would be includable in the sales factor computed under s. 71.25 (9), Stats., as if the member were required to use the sales factor and were not a member of a combined group. 3. Neither the numerator nor denominator shall include amounts that are not included in or directly related to income in- cluded in the combined unitary income as computed under sub. (6). 4. Intercompany transactions shall be excluded or recognized in the numerator and denominator, as applicable, in the manner described in par. (d). 5. To the extent the computation in this paragraph involves the sales factor as provided in s. 71.25 (9), Stats., the provisions of pars. (c) and (e) apply. (h) Alternative apportionment. A qualifying combined group may petition the department to use an alternative apportionment method, as provided in s. Tax 2.64. (i) Apportionment factors for dual-sourced income. If a cor- poration is eligible to exclude foreign source income from com- bined unitary income under sub. (4) (d) to (f) and the Internal Revenue Code requires the corporation to source a transaction both within the United States and without the United States, the corporation shall exclude from its modified sales factor any amounts attributable to the portion of the transaction that consti- tutes foreign source income under sub. (4) (c). The amounts ex- cluded from the modified sales factor under this paragraph shall be the amounts includable in the modified sales factor as if the transaction was sourced entirely within the United States, multi- plied by the percentage of the transaction[s gross receipts that constitutes foreign source income under sub. (4) (c). Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. WISCONSIN ADMINISTRATIVE CODE (8) INCOME COMPUTATION FOR GROUPS DOING BUSINESS SOLELY IN WISCONSIN. For combined groups that are engaged in business solely in Wisconsin, and therefore not eligible to use ap- portionment, each member[s net income subject to combination is determined on a separate entity basis and then adjusted to re- flect the member[s status as a combined group member. These incomes are added together to arrive at the combined unitary in- come. Therefore, if some combined group members have net in- come from the unitary business and others in the same group have net loss from the unitary business, the combined group[s tax liability is based on the total aggregate net income or loss of the unitary business. When each member computes its share of the combined unitary income, the provisions of sub. (6) apply, except that the modifications in pars. (a) to (d) are required: (a) Intercompany transactions. To the extent that sub. (6) (b) does not apply, intercompany transactions that consist of interest or other expenses paid, accrued, or incurred by one member to another are disregarded so that they neither increase nor decrease a member[s net income or loss. This paragraph does not apply to intercompany transactions which occurred in taxable years be- ginning before January 1, 2009 or to intercompany transactions where the income, expense, gain, or loss would not otherwise be subject to combination. (b) Capital gains and losses. 1. The net capital gain or loss, after applying any sharable net capital loss carryover, is first de- termined for the combined group as a whole in the manner de- scribed in sub. (6) (c) 1. to 3. If the result is a net capital gain for the group, the net capital gain is assigned to the members that would have a net capital gain from the unitary business if they were not members of the combined group, in proportion to the amount of that net capital gain. If the result is a net capital loss for the group, the net capital loss is assigned to the members that would have a net capital loss from the unitary business if they were not members of the combined group, in proportion to the amount of that net capital loss. Note: See Example 2 under sub. (6) (c) 4. for an example of this assignment method. 2. After applying subd. 1., each member computes its net capital gain or loss from separate entity items and applies the pro- visions of sub. (6) (c) 5. to 7., except that in applying the provi- sions of sub. (6) (c) 6., the applicable apportionment percentage is one hundred percent. (c) Basis adjustments. A combined group member[s basis in stock of a subsidiary that is a member of the same combined group shall be adjusted in the manner prescribed in sub. (6) (f). Intercompany interest and other expenses shall be included in these adjustments, even if those transactions were disregarded in the computation of the member[s income for the taxable year as provided in par. (a). (d) Earnings and profits. A combined group member[s earn- ings and profits shall be adjusted to reflect the undistributed earn- ings and profits of a subsidiary that is a member of the same com- bined group in the manner prescribed in sub. (6) (g). Intercom- pany interest and other expenses shall be included in these adjust- ments, even if those transactions were disregarded in the compu- tation of the member[s income for the taxable year as provided in par. (a). (9) NET BUSINESS LOSSES. A combined group member may carry forward its net business loss as provided in ss. 71.26 (4) and 71.45 (4), Stats. A net business loss carryforward is an attribute of the separate corporation rather than of the combined group. However, s. 71.255 (6) (b) and (bm), Stats., provides that a com- bined group member may share all or a portion of its net business loss carryforward with the other members of its combined group if certain conditions are met. This subsection explains which net business loss carryforwards are sharable, how to compute the sharable amount, and how to apply the shared losses. The follow- ing rules apply: (a) Sharable loss carryforwards. A combined group member may share its net business loss carryforward incurred in a taxable year beginning on or after January 1, 2009 with other combined group members to the extent that all of the following conditions are met: 1. The net business loss is attributable to combined unitary income included in a combined report. 2. The member originally computed the net business loss in the combined report for the same combined group as the com- bined group that will use the shared loss carryforward, regardless of whether corporations have joined or left the combined group in the intervening years. 3. The member is still a member of the combined group de- scribed in subd. 2. for the year the loss carryforward will be shared. (b) Non-sharable loss carryforwards. A combined group member[s net business loss carryforward incurred in a taxable year beginning on or after January 1, 2009 that cannot be shared with other combined group members includes amounts attribut- able to the following: 2. Net business losses attributable to separate entity items. 3. Net business losses attributable to a different unitary business. (c) Order of carryforwards. A combined group member shall apply net business loss carryforwards in the following order: 1. Net business loss carryforwards incurred by that same member in taxable years beginning before January 1, 2009, in the order that the underlying net business losses were incurred. 2. Sharable and non-sharable net business loss carryforwards under par. (d) incurred in taxable years beginning on or after Jan- uary 1, 2009, in the order that the underlying net business losses were incurred. If the net business loss carryforward to be used consists of both a sharable amount and a non-sharable amount in- curred in the same taxable year, the amount of sharable and non- sharable carryforward used shall be determined on a pro rata ba- sis according to the amount of each type of carryforward avail- able from that year. 3. For loss carryforwards shared in a taxable year that begins after December 31, 2011, pre-2009 net business loss carryfor- wards under par. (dm). Example: Combined Group EFG consists of Member E, Member F, and Member G. E has the following loss carryforwards: Year Incurred Sharable Carryforward Non-sharable Carryforward 2008 -- ($10,000) 2009 ($6,000) ($2,000) In 2010, E[s share of combined unitary income plus its separate entity items equal $14,000. After using its carryforwards to offset this income, E has $4,000 of re- maining net business loss carryforward (= ($10,000) + ($6,000) + ($2,000) + $14,000). Of this amount, a portion is a sharable carryforward that may be applied against F and G[s shares of combined unitary income in the manner described in par. (d). Since loss carryforwards are applied in the order incurred, the $10,000 carry- forward from 2008 is used in its entirety, and $4,000 of the 2009 carryforward is used. The portion of E[s remaining carryforward from 2009 that is sharable is $3,000 (= $4,000 x [$6,000 / $8,000]) and the portion that is non-sharable is $1,000 (= 4,000 x [$2,000 / $8,000]). In 2012, E has the following loss carryforwards: Year Incurred Sharable Carryforward Non-sharable Carryforward 2009 2010 ($3,000) -- ($1,000) -- 2011 ($4,000) ($6,000) In addition, in 2012 E received a pre-2009 net business loss carryforward of $3,000 ($60,000 x 5%) from Member F. E[s share of combined unitary income plus Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. its separate entity items for 2012 equal $16,000. After using its carryforwards to offset this income, E has $1,000 of remaining net business loss carryforward (= ($3,000) + ($1,000) + ($4,000) + ($6,000) + ($3,000) + $16,000). Since the loss carryforwards are first applied to the net business loss carryforwards incurred in 2009 and after, the $4,000 carryforward from 2009 and the $10,000 carryforward from 2011 are used in their entirety. The remaining $2,000 of loss carryforwards are applied to the pre-2009 net business loss carryforward. The remaining pre-2009 net business loss carryforward is $1,000. (d) Method of sharing. The amount of net business loss carry- forward under par. (c) 2. eligible for sharing shall be computed and assigned as follows: 1. Each combined group member shall first apply its total available net business loss carryforward against its total Wiscon- sin income as computed under sub. (5) (a) to (g), including net in- come or loss attributable to separate entity items. A combined group member[s net business loss carryforward shall be consid- ered used against its net income from separate entity items before its share of combined unitary income. 2. Each member shall then separate any remaining net busi- ness loss carryforward into the sharable amount and the non- sharable amount, as applicable, using the ordering rules in par. (c). The sharable net business loss carryforward amounts for each combined group member shall then be aggregated, except that any combined group member that elects not to share its sharable amount as provided in par. (h) may exclude some or all of its sharable amount from the aggregate sharable amount. 3. Except as provided in par. (g), relating to insurance com- panies, the aggregate sharable amount shall be assigned to each combined group member in proportion to its share of combined unitary income as computed in subs. (6) to (8), net of any losses from separate entity items or loss carryforwards already applied. The sharable amount may only be assigned to a member to the ex- tent the member[s share of combined unitary income has not al- ready been offset by losses taken into account under subd. 1. An amount may not be assigned to a combined group member whose share of combined unitary income, net of any losses already ap- plied by the member under subd. 1., is zero or less. 4. Any remaining sharable amount remains an attribute of the corporation that originally incurred the loss. The aggregate sharable amount used under subd. 3. shall be considered used proportionately from the sharable net business loss carryforwards of the corporations which contributed to the aggregate sharable amount. Example: Combined Group ABCD consists of Member A, Member B, Member C, and Member D. The corporations have the following net business loss carryfor- wards and net income amounts in 2010: Member A Member B Member C Member D Net business loss car- ryforward ] 1/1/2010 ($28,000) ($24,000) ($1,000) $0 Share of combined unitary income $3,000 $10,000 $20,000 $20,000 Net income from sep- arate entity items $1,000 ($2,000) $3,000 ($15,000) Remaining net business loss carryforward ($24,000) ($16,000) $0 $0 Assume all of A and B[s net business loss carryforwards are sharable. The aggre- gate sharable amount is $40,000 (= $24,000 + $16,000). This amount may be allo- cated to C and D based upon their respective shares of combined unitary income af- ter applying any losses from separate entity items. C[s adjusted share of combined unitary income is $20,000 (its $1,000 carryforward is considered used against its $3,000 net income from separate entity items before its share of combined unitary income) and D[s adjusted share of combined unitary income is $5,000 (= $20,000 - $15,000). The aggregate sharable amount exceeds the sum of C and D[s adjusted shares of the combined unitary income, which is $25,000 (= $20,000 + $5,000). Thus, C and D[s adjusted shares of combined unitary income are fully offset by the aggregate sharable amount. After the aggregate sharable amount is applied, the remaining aggregate sharable amount is $15,000 (= $40,000 - $25,000). Since the remaining sharable amount re- mains an attribute of the corporation that originally incurred the loss, at the end of 2010, A would have $9,000 (= $15,000 x ($24,000 / $40,000)) in remaining net business loss carryforward, and B would have $6,000 (= $15,000 x ($16,000 / $40,000)) in remaining net business loss carryforward. (dm) Pre-2009 net business loss carryforwards. 1. For a combined group member[s first taxable year beginning after De- cember 31, 2011, the member may, after using the pre-2009 net business loss carryforward to offset its own income for the tax- able year, and after using sharable losses to offset its own income for the taxable year, use 5 percent of the pre-2009 net business loss carryforward to offset the income of all other members of the combined group for the taxable year and for each of the 19 subse- quent taxable years. Example: Member A of Wisconsin Combined Group ABC has pre-2009 net business loss carryforwards of $100 million as of December 31, 2008. A[s share of the combined group[s income is $2 million in 2009, $3 million in 2010, and $5 mil- lion in 2011. A[s one-time calculation of the annual 5% sharable amount is $4.5 million, computed as follows: [$100 million pre-2009 net business loss carryfor- ward less the taxable income offset by the net business loss carryforward ($2 million in 2009, $3 million in 2010, and $5 million in 2011) multiplied by 5 percent]. In 2012 Member A[s share of the combined group[s Wisconsin income is $1 mil- lion. Member A first applies its pre-2009 net business loss carry-forward against its $1 million share of the combined group[s Wisconsin income. The remaining mem- bers of the group may use the $4.5 million sharable loss to offset the remaining group income on a proportionate basis. Assuming the combined group has enough income in 2012 to fully use the entire $4.5 million in pre-2009 net business loss car- ryforward, the pre-2009 net business loss carryforward available in 2013 is $84.5 million ($90 million total sharable loss less $1 million of Member A[s income offset by the net business loss carry-forward, less $4.5 million sharable loss utilized by the corporation in 2012). If Member A[s share of the combined group[s income is $0 for all the remaining years of the pre-2009 carry-forward, and the remaining mem- bers of the combined group were eligible to share the full $4.5 million net business loss carry-forward each year, the sharable pre-2009 net business loss available in 2031 will be $3.5 million ($4.5 million annual sharable loss computed in 2012 less $1 million loss used by Member A in 2012). 2. Except as provided in par. (g), relating to insurance com- panies, the sharable pre-2009 net business loss carryforward un- der subd. 1. shall be assigned to each combined group member in proportion to its share of combined unitary income as computed in subs. (6) to (8), net of any losses from separate entity items or loss carryforwards already applied. An amount may not be as- signed to a combined group member whose share of combined unitary income is zero or less. Any remaining sharable amount becomes part of the combined group[s pre-2009 net business loss carryforward that may be shared by all combined group members in subsequent years. Example: Member D of Combined Group DEF has a pre-2009 net business loss carry-forward of $2 million as of January 1, 2012. The 5% sharable amount allowed to members E and F in each year for taxable years 2012 through 2031 is $100,000 ($2 million net business loss carryforward multiplied by 5%). Member E[s propor- tional share of the $100,000 sharable net business loss in 2012 is $30,000. After us- ing all other allowable losses, Member E has $20,000 in income remaining to offset against its share of the pre-2009 net business loss carryforward. The remaining $10,000 net business loss carryforward not used by Member E in 2012 becomes part of the combined group[s pre-2009 net business loss carryforward that may be shared by all combined group members in 2013 and is in addition to the 5% net business loss carryforward previously computed. As a result, the net business loss carryfor- ward available in 2013 is $110,000 ($100,000 combined group yearly sharable loss plus Member E[s $10,000 proportional share of the $100,000 loss in 2012 that was not fully utilized by Member E in 2012). 3. Notwithstanding the provisions of ss. 71.26 (4) (a) and 71.45 (4) (a), Stats., under ss. 71.26 (4) (b) and 71.45 (4) (b), Stats., any unused pre-2009 net business loss carryforward under subd. 1. may be offset against the income of the members of the combined group for the 20 taxable years that begin after Decem- ber 31, 2011. Example: As of December 31, 2008, Member G of Combined Group GHI has a loss carryforward of $30,000 that is in the 14th year of the 15 year carryforward pe- riod under s. 71.26 (4) (a), Stats. Member G does not have any income to offset the $30,000 loss carryforward in its taxable years beginning in 2009, 2010, or 2011. For taxable years beginning on or after January 1, 2012, Member G is allowed to use the $30,000 pre-2009 net business loss carryforward to offset any of its own income first, then offset its proportional share of Combined Group GHI[s income, and fi- nally, any remaining loss may be shared proportionately among the other members of Combined Group GHI. Under s. 71.26 (4) (b), Stats., Member G[s pre-2009 net business loss carryforward of $30,000 begins a new carryforward period of 20 years from its taxable year beginning in 2012. (e) Departing combined group members. Except as provided in subds. 1. and 2., if a corporation leaves a combined group or is Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. WISCONSIN ADMINISTRATIVE CODE no longer eligible to be a combined group member, the corpora- tion[s remaining net business loss carryforward may not be shared with any other combined groups but shall be available only to that corporation. The following exceptions apply: 1. If a subgroup of two or more corporations leaves a com- bined group on the same date and immediately thereafter the cor- porations become a separate combined group or together become members of a new combined group, those corporations may share their remaining sharable net business loss carryforwards at- tributable to the former combined group with one another. For purposes of the computations in par. (d), the new combined group[s combined unitary income shall be used in place of the former combined group[s combined unitary income. This subdi- vision also applies to combined groups that merge to become a new combined group by operation of the controlled group elec- tion as described in s. Tax 2.63 (2) (c). 2. If a corporation leaves a combined group or is no longer eligible to be a combined group member, but subsequently re- joins the combined group, the corporation may share its net busi- ness loss carryforward with that combined group to the extent the carryforward otherwise qualifies as a sharable loss carryforward under par. (a). (f) New combined group members. If a new member joins the combined group or is formed within the combined group, the member may use the net business loss carryforwards shared by other combined group members in the same manner as described in this subsection, even if those losses originated before the new member was part of the group. (g) Special rules for insurance companies. Under s. 71.45 (4), Stats., the net business loss of an insurance company cannot in- clude the dividends received deduction provided in s. 71.26 (3) (j), Stats. Further, an insurance company may not use net busi- ness loss carryforwards in cases where its franchise or income tax liability is limited by two percent of its gross premiums as pro- vided in s. 71.46 (3), Stats. Therefore, the following rules apply: 1. For purposes of applying s. 71.45 (4), Stats., if a dividend qualified for both the dividends received deduction under s. 71.26 (3) (j), Stats., and the elimination of dividends under sub. (6) (e), the dividend is considered to be eliminated under sub. (6) (e) rather than deducted under s. 71.26 (3) (j), Stats. 2. If an insurance company is a member of a combined group that is engaged in business both within and outside Wisconsin and has a net business loss, the dividends received deduction that shall be added back to that loss includes the insurance company[s apportioned share of the total dividends received deduction which was deducted from the combined unitary income under s. 71.26 (3) (j), Stats., regardless of whether the insurance company was the combined group member which received the dividend. 3. If an insurance company is a combined group member and its tax liability measured by its total Wisconsin net income as provided in sub. (5), including any net business loss carryfor- wards available from other combined group members, exceeds two percent of its gross premiums as defined in s. 76.62, Stats., plus 7.9 percent of the income described in sub. (5) (f), its tax li- ability shall be limited to two percent of the gross premiums plus 7.9 percent of the income described in sub. (5) (f). If the insur- ance company[s tax liability is limited in this manner, its business loss carryforwards may not be shared with any other combined group members, and if the group is otherwise sharing loss carry- forwards, loss carryforwards may not be assigned to the insur- ance company. (h) Elections. 1. Although a combined group member is en- titled to the benefit of a net business loss carryforward, the mem- ber may elect not to use a portion or any of the available net busi- ness loss carryforward for a taxable year. This election does not reduce the amount of carryforward available for the following taxable year nor suspend the carryforward period provided in ss. 71.26 (4) and 71.45 (4), Stats. 2. A combined group member may also elect not to share a portion or any of its sharable net business loss carryforward with other combined group members. However, if the corporation shares any part of its sharable net business loss carryforward, the shared amount shall be divided among all members in the manner prescribed in this subsection, except as otherwise provided in pars. (d), (e) 1., and (g) 3. A combined group member[s election under this subdivision is effective only for the taxable year in which the election is made and shall have no effect on the mem- ber[s ability to share net business loss carryforwards in future tax- able years. (i) Applicability of Internal Revenue Code. 1. Notwithstand- ing the provisions of this subsection, the total amount of net busi- ness loss carryforward that may be used by a combined group member or shared with other combined group members for a tax- able year is limited by section 382 of the Internal Revenue Code as provided in s. 71.26 (3) (n), Stats. Section 382 of the Internal Revenue Code shall be applied without regard to the federal con- solidated return regulations under section 1502 of the Internal Revenue Code. 2. If a combined group member is acquired by another com- bined group member, section 381 of the Internal Revenue Code controls whether the acquiring corporation may succeed to the target corporation[s net business loss carryforwards. Wisconsin follows section 381 of the Internal Revenue Code, but modifies it in s. 71.26 (3) (n), Stats., so that it applies to Wisconsin net busi- ness loss carryforwards instead of federal net operating loss car- ryovers. If the acquirer succeeds to the target corporation[s net business loss carryforwards, the target corporation[s carryfor- wards shall be treated as originally incurred by the acquiring cor- poration and shall maintain their character as sharable or non- sharable. 3. The separate return limitation year provisions of the fed- eral regulations under section 1502 of the Internal Revenue Code do not apply to net business loss carryforwards. The provisions of this subsection apply in place of these limitations. (10) CREDITS. A credit is an attribute of the separate corpo- ration rather than of the combined group, and credits are com- puted for each corporation separately. However, s. 71.255 (6) (c), Stats., provides that a combined group member may share all or a portion of its research credits with the other members of the com- bined group. For purposes of this subsection, the term Xresearch creditY means only the research expense credit under ss. 71.28 (4) or 71.47 (4), Stats., and the research facilities credit under ss. 71.28 (5) or 71.47 (5), Stats. This subsection explains how cred- its are computed and applied as well as the special rules that ap- ply to research credits. (a) Nonrefundable credits other than research credits. A combined group member[s nonrefundable credits other than re- search credits, including carryforwards of those credits, may only be used by that combined group member to offset the tax liability attributable to its own taxable income as computed under sub. (5). (b) Refundable credits. Any refundable credits computed by a combined group member shall be claimed on the combined re- turn and refunded to the designated agent to the extent not used to offset the total tax liability reported on the combined return. (c) Sharing of research credits. If a combined group member computes a research credit, or has a carryforward of a research credit, the member may share a portion or all of the credit with Published under s. 35.93, Stats. Updated on the first day of each month. Entire code is always current. The Register date on each page is the date the chapter was last published. the other members. For purposes of determining the sharable amount, the provisions of sub. (9) (e) and (f) apply to available research credits in the same manner as they apply to net business loss carryforwards. Research credit carryforwards incurred in taxable years beginning before January 1, 2009 are sharable to the extent the corporation with the credits would have been a member of the combined group had s. 71.255, Stats., been in ef- fect and required combined reporting in those years. The method of sharing these credits is as follows: 1. Each combined group member shall first apply its total available credits, including its research credits, against its gross tax liability, if any, including its tax liability attributable to sepa- rate entity items. A combined group member[s available credits shall be considered used against its tax liability from separate en- tity items before its tax liability from its share of combined uni- tary income. Available credits shall be used in the order specified in s. 71.30 (3), Stats. A combined group member may elect to ap- ply a carryforward of a research credit before applying the re- search credit computed for the current taxable year. 2. Each member shall then separate any remaining available research credit into the sharable and non-sharable amount, as ap- plicable. The ordering rules provided in sub. (9) (c), relating to net business loss carryforwards, also apply to research credit car- ryforwards. The sharable research credits for each combined group member shall then be aggregated, except that any com- bined group member that elects not to share its sharable amount may exclude some or all of its sharable amount from the aggre- gate sharable amount. 3. The sharable amount shall be assigned to each combined group member in proportion to its tax liability from its share of combined unitary income. The sharable amount may only be as- signed to a member to the extent the member[s tax liability from combined unitary income has not already been offset by other credits and carryforwards applied by that member under subd. 1. An amount may not be assigned to a combined group member whose tax liability from combined unitary income has been fully offset by other credits. 4. Any remaining sharable amount remains an attribute of the corporation that originally generated the credit. The aggre- gate sharable amount used under subd. 3. shall be considered used proportionately from the sharable research credits of the corporations which contributed to the aggregate sharable amount. Example: Combined Group FGH consists of Member F, Member G, and Mem- ber H. F, G, and H have the following amounts in 2010: Member F Member G Member H Current year research expense credit ($3,000) Current year economic development credit ($17,000) Research expense credit carryforward ($20,000) (16,000) Tax liability from combined unitary income $8,000 $5,000 $20,000 Tax liability from separate entity items ______ $1,000 $2,000 Net tax $0 $0 $5,000 Remaining available research expense credit ($15,000) ($10,000) Assume all of the research expense credit carryforward is sharable. The aggre- gate sharable amount is $25,000 (= $15,000 + $10,000). This amount may be as- signed to H to the extent of its tax liability from its share of the combined unitary in- come after applying its own credits. After H applies its own credits, the remaining tax liability from combined unitary income is $5,000 (= ($17,000) + $2,000 + $20,000; its $17,000 economic development credit is applied against tax liability from separate entity items before tax liability from combined unitary items). Since this amount is less than the aggregate sharable amount, the entire remainder of H[s tax liability from combined unitary income ($5,000) is offset by the aggregate sharable amount. After the aggregate sharable amount is applied, the remaining aggregate sharable amount is $20,000 (= $25,000 - $5,000). Since the remaining sharable amount re- mains an attribute of the corporation that originally generated the credit, at the end of 2010, F would have $12,000 (= $20,000 x ($15,000 / $25,000)) in remaining re- search credit carryforward, and G would have $8,000 (= $20,000 x ($10,000 / $25,000)) in remaining research credit carryforward. 5. The provisions of sub. (9) (h), as they relate to elections applicable to net business loss carryforwards, apply also to avail- able research credits under this paragraph. (d) Exception for funded research. If a combined group mem- ber incurs expenses that are otherwise qualified research ex- penses under section 41(d) of the Internal Revenue Code but for the fact that the research is funded by another combined group member, the expenses shall be considered qualified research ex- penses of the combined group member performing the research, and the reimbursement from the combined group member fund- ing the research may not be considered a qualified research ex- pense of the funding member. Regardless of where the funding member is located, the research must be performed in this state to qualify for the research credit for Wisconsin purposes. Example: Combined Group AB consists of Member A and Member B. In Year 1, B performs research that would be Xqualified researchY under section 41(d) of the Internal Revenue Code, except for the fact that A and B have entered into a contract where A provides funding for all of B[s research at a markup of 10%. Neither A nor B perform any other research. During Year 1, A paid B $220,000 for research ser- vices, all of which would be Xqualified researchY for B if the research were not funded by A. On AB[s Year 1 combined return, B may include $200,000 of quali- fied research expenses (= $220,000 - $20,000 markup) in its computation of the re- search credit. However, A may not compute any research credit. Since A and B are members of the same combined group, the funding arrangement between A and B is ignored for purposes of computing the research credit. (e) Applicability of Internal Revenue Code. The provisions of sub. (9) (i), as they relate to net business loss carryforwards, also apply to carryforwards of credits under this subsection. Note: Section Tax 2.61 interprets s. 71.255, Stats. History: EmR1001: emerg. cr. eff. 1-15-10; CR 09-064: cr. Register April 2010 No. 652, eff. 5-1-10; CR 12-006: am. (9) (intro.), (a) (intro.), 1., (b) (intro.), r. (9) (b) 1., r. and recr. (9) (c) Register July 2012 No. 679, eff. 8-1-12; CR 13-078: am. (7) (a) 4., (b) 4., (g) (intro.), 1. Register April 2014 No. 700, eff. 5-1-14; CR 16-046: am. (9) (c) 3. (Example) Register January 2018 No. 745, eff. 2-1-18; CR 19-141: am. (4) (b) 1., 4., (6) (a) 3., r. and recr. (7) (h) Register September 2020 No. 777, eff. 10-1- 20; correction in (6) (a) 3. made under s. 35.17, Stats., Register September 2020 No. 777. Cross Reference: See s. Tax 2.60 for definitions that relate to this section.