After a compromise was brokered between the Department of Revenue and stakeholders, the Taxpayer Fairness Act (Assembly Bill 259/Senate Bill 203), authored by Senator Howard Marklein and Representative Terry Katsma, has moved closer to becoming law this week. The bill stalled over the fall in both houses after it was not included in the budget. The original bill had four provisions:
- Federalized treatment of the built-in gains tax for C corporations that converted to S corporations.
- Ended Wisconsin’s participation in a third-party audit group known as the Multi-State Tax Commission.
- Extended taxpayer protections for material reviewed during an earlier tax audit.
- Lowered the burden of proof for challenging assertions of economic substance for transactions between members of a controlled group.
The compromise amendment pared down the bill to two provisions, lowering the burden of proof for challenging assertions of economic substance for transactions between members of a controlled group and extending protections for material reviewed during a prior tax audit. Specifically:
- The amendment strikes the last sentence in Wis. Stat. §73.16(3)(b), which contains an ambiguous exemption to a taxpayer’s ability to rely on past audits to defend against future tax liability. The sentence will be replaced with three limited exemptions:
- “The department establishes by clear and satisfactory evidence that the taxpayer provided incomplete or false information relevant to the tax issue in the prior audit determination.
- The tax issue was settled in the prior audit determination by a written agreement between the department and the taxpayer that was entered into before the effective date of this subdivision.
- The tax issue was settled in the prior audit determination by a written agreement between the department and the taxpayer that was entered into on or after the effective date of this subdivision, and in which the parties acknowledged that the department did not adopt the taxpayer’s position on the tax issue.”
- The burden of proof to show a transaction between members of a controlled group has economic substance has been lowered from “clear and convincing” to “clear and satisfactory.” This will make it easier for a member of a controlled group to prove a transaction had economic substance, and was not conducted just to lower tax liability.
The Assembly Ways and Means Committee held an executive session on this bill on February 8th. The Senate Committee on Revenue, Financial Institutions, and Rural Issues has yet to schedule an executive session on the bill.