Wisconsin: Department of Revenue Cannot Advance Position Contrary to its Guidance

Recently, the Wisconsin Court of Appeals concluded 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 at issue 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. This DRD was later challenged by the Department of Revenue and the matter eventually came before the Tax Appeals Commission.

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.  After first determining that the partnership was a  “corporation“ for purposes of the Wisconsin DRD, the Commission next held that the  partnership’s cash distributions were dividends “with respect to its common stock.“ Although the Department contended that the partnership interest was not common stock, the Commission disagreed. In reaching its conclusion, the Commission noted that a conclusion that the partnership interest was equivalent to common stock was consistent with the Department’s Publication 119. For the tax years at issue, Publication 119 stated that “[i]f an LLC is classified as a corporation, an LLC interest is treated in the same manner as stock.”  In the Commission’s view, Publication 119 applied to LLPs treated as corporations just as it applied to LLCs treated as corporations. After a circuit court upheld the Commission’s ruling in March 2020, the Department appealed.

In its opinion issued on February 25, 2021, the Court of Appeals noted that it was reviewing the Tax Appeal Commission’s ruling, as opposed to the circuit court decision upholding that ruling, but was not required to give any deference to the Commission’s ruling.  The court proceeded to rule against the Department, but did not base its determination on a specific interpretation of the Wisconsin DRD statute. Rather, the court determined that the contrary-to-guidance issue governed the outcome of the case. Wisconsin law generally prohibits the Department from taking a position “contrary to any guidance published by the department prior to that period and not subsequently retracted, altered, or amended by the department or the legislature or by a final and conclusive decision of the tax appeals commission or courts.”   The court determined the Department was not permitted to advance a position that contradicted Publication 119. In the court’s view, the Department’s current position rested on a universal distinction between all stock-issuing corporations and all non-corporations for the purposes of the dividends-received deduction, and this position could not be reconciled with the guidance contained in Publication 119.  The Department also failed to develop an argument that it could contradict its own guidance. It should be noted that the text in Publication 119 providing that if “an LLC is classified as a corporation an LLC interest is treated in the same manner as stock” was removed in 2019.  Please contact Brad Wilhelmson at 312-665-2076 for more information on Wisconsin Department of Revenue v. Deere & Company.