Wisconsin Taxpayer Allowed DRD with Respect to Distributions from a Foreign Partnership Electing to Be Taxed as a Corporation


On March 9, 2020, the Wisconsin Circuit Court for Dane Country upheld the Wisconsin Tax Appeals Commission’s ruling, discussed below.

On August 21, 2019, the Wisconsin Tax Appeals Commission (Commission) issued a ruling in favor of a corporate taxpayer claiming the Wisconsin dividends received deduction (DRD).  In Deere & Company v. Wisconsin Department of Revenue, the taxpayer owned a foreign limited partnership that made a “check-the-box” election to be treated as a corporation for federal and Wisconsin income tax purposes.  The Commission ruled that distributions from the foreign partnership were dividends on common stock and qualified for the DRD for Wisconsin corporate income tax purposes.  This decision was highly anticipated by numerous taxpayers that had received audit notices disallowing their Wisconsin DRDs, as filed under similar facts to Deere & Company. 




Deere & Company (Deere) owned 100 percent of John Deere Holding, LLC (JDH-US), which was treated as a disregarded entity for both federal and Wisconsin income tax purposes.  Deere and JDH-US formed a limited partnership in Luxembourg, JDH-Lux.  Deere filed federal Form 8832 to treat JDH-Lux as a corporation for federal income tax purposes.
During the tax periods at issue, Deere received distributions from JDH-Lux.  As Deere was the sole owner of JDH-US, Deere was also deemed to be the sole owner of JDH-Lux, for federal tax purposes.  Deere filed Wisconsin combined franchise tax returns.
On its Wisconsin returns, Deere also claimed the Wisconsin DRD with respect to distributions from JDH-Lux.  On audit, the Wisconsin Department of Revenue (Department) disallowed Deere’s DRD and contended the distributions from JDH-Lux did not qualify for the Wisconsin DRD.  According to the Department, the distributions were not with respect to common stock.


Wisconsin Law and Ruling

Wisconsin’s DRD differs from the federal DRD in IRC Section 243 and most other states’ DRD statutes.  Under Wis. Stat. Section 71.26(3)(j), to qualify for the DRD, a corporate taxpayer must not only own at least 70 percent of all voting stock of the distributing entity for the entire taxable year, but the dividends must be paid with respect to stock that is common stock.  Based on a literal interpretation of the DRD statute, the Department argued that because JDH-Lux was a limited partnership, it had not under local law issued common stock, and the DRD was inapplicable to the distributions that Deere received from JDH-Lux.     
The Commission disagreed with the Department.  The Commission first determined that JDH-Lux was a corporation for Wisconsin income tax purposes, because Wisconsin conforms to the federal “check-the-box” entity tax classification regulations.  When Wisconsin chose to conform with the federal regulations and also treated JDH-Lux as a corporation for Wisconsin income tax purposes, the ownership interests in JDH-US were also deemed stock.  For example, the Commission noted that under the federal regulations, a series of transactions are deemed to occur when a partnership elects income tax treatment as a corporation.  First, the partnership is deemed to contribute its assets to a new corporation in exchange for stock.  Next, the partnership is deemed to distribute the stock to its partners in liquidation, and the “former” partners are deemed to own stock as shareholders in a new corporation.  According to the Commission, if the Department followed the federal regulations and also classified JDH-Lux as a corporation, then it had to follow the regulations in their entirety.
The Commission also cited the Department’s own guidance in support of its ruling - Publication 119, issued January 13 and February 14, which was in effect for the tax periods at issue and treated as common stock an interest in a non-corporate entity that elected to be taxed as a corporation for federal and Wisconsin income tax purposes.   
Finally, the Commission concluded that since Deere’s “stock” in JDH-Lux was not preferred stock, it was “common stock.”  As a result, the distributions made by JDH-Lux to Deere were dividends made with respect to common stock.  The Commission ruled that Deere properly claimed a Wisconsin DRD.


BDO Insight

  • The Department has issued numerous audit notices to corporate taxpayers that claimed a Wisconsin DRD under fact patterns similar to Deere & Company.  If a Wisconsin taxpayer has a protest pending with the Department that has been held in abeyance pending the outcome in Deere & Company, or if a Wisconsin DRD was not claimed under similar fact patterns in any open year, you should consult with your tax advisor as to the appropriate course of action.
  • The Wisconsin Department of Revenue has 20 days to petition for rehearing before the Commission, or 30 days to petition for judicial review to the appropriate county circuit court.  At this point, it is unclear whether the Department will appeal the ruling.
  • The Commission’s ruling was, in part, based on prior versions of Publication 119 that were in effect during the tax periods at issue.  Publication 119 was recently updated, and it no longer contains the section and example cited by the Commission.



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