Wisconsin: Foreign Limited Partnership that Checked-the Box May Claim Dividends Received Deduction

A Wisconsin circuit court recently affirmed a state Tax Appeals Commission (Commission) decision holding that cash distributions from a foreign partnership, which had elected to be treated as a corporation for federal income tax purposes, were eligible for the Wisconsin dividends-received deduction (DRD).

The taxpayer was a corporation that, along with its disregarded LLC, were the owners of a Luxembourg partnership, which elected to be treated as a corporation for federal income tax purposes.  The partnership made cash distributions to its partners.  The taxpayer included these distributions as income for Wisconsin purposes and claimed a DRD on the distributions.  The Wisconsin Department of Revenue (Department) disallowed the DRD.  The taxpayer appealed to the Commission, which ruled in its favor.  The Department then appealed to the circuit court.

Under Wisconsin law, a DRD is allowed for dividends received from a corporation with respect to its common stock if the corporation receiving the dividends owns, directly or indirectly, at least 70 percent of the combined voting stock of the payor corporation.  The court identified the key issues as whether the partnership was a  “corporation“ for purposes of the Wisconsin DRD and whether the partnership’s cash distributions were dividends “with respect to its common stock.“ Wisconsin law provides that entities treated as corporations for federal purposes are treated as corporations for Wisconsin purposes “unless the context requires otherwise.”  The Department argued that this was such a “context,” but the court found there was no indication of that in the statute and that the foreign partnership fell under the general rule of following an entity’s federal treatment as a corporation. With respect to whether the distributions qualified as dividends from common stock, the Department contended that the partnership interest was not common stock under the plain meaning of the statute.  The court disagreed, noting that the common stock language preceded state law allowing LLCs and LLPs, so the legislature could not have intentionally meant to exclude such entities.  In addition, the court discussed certain implications of the Department’s interpretation and found it led to an unreasonable result. It concluded by pointing to a Department publication stating that for LLCs taxed as corporations the “LLC interest is treated … as stock.”   Please contact Brad Wilhelmson at 312-665-2076 for more information on Wisconsin Department of Revenue v. Deere & Company.