2021 - 2022 LEGISLATURE
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2021 SENATE BILL 794
December 17, 2021 - Introduced by Senators MARKLEIN and KOOYENGA,
cosponsored by Representatives WITTKE, ARMSTRONG and BROOKS. Referred to
Committee on Financial Institutions and Revenue.
1 AN ACT to repeal 71.775 (1) (b); to renumber and amend 71.76 (2); to
2 consolidate, renumber and amend 71.775 (1) (intro.) and (a); to amend
3 71.365 (6), 71.78 (1), 71.88 and 73.16 (4); and to create 71.738 (3d), 71.738 (3e),
4 71.738 (3f), 71.745, 71.76 (2) (b), 71.77 (7) (c), 71.78 (11), 71.80 (26) and 71.83
5 (1) (a) 12. of the statutes; relating to: pass-through entity audits.
Analysis by the Legislative Reference Bureau
This bill makes various changes related to conducting tax audits of
pass-through entities such as partnerships, limited liability companies, and
tax-option corporations. Under the bill, the Department of Revenue may do all of
the following with regard to an audit of a pass-through entity:
1. Assess and collect additional tax from a pass-through entity on income
otherwise reportable by its pass-through members. Under the bill, a “pass-through
member” is, generally, a partner in a partnership, member of a limited liability
company, shareholder in a tax-option corporation, a beneficiary of an estate or a
trust, or any other person who derives a tax benefit from a pass-through entity.
2. Direct the secretary of the Department of Administration to refund to a
pass-through entity that part of an overpayment paid by the pass-through entity
and not by the entity's pass-through members.
3. Assess an adjustment to reduce a tax credit to a pass-through entity if the
pass-through entity previously computed the credit and reported the credit to its
pass-through members.
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SENATE BILL 794
4. Assess an adjustment to increase a tax credit to offset additional tax assessed
to a pass-through entity.
5. Assess any pass-through member of a pass-through entity for additional tax
otherwise owed by one or more of the pass-through members.
For further information see the state fiscal estimate, which will be printed as
an appendix to this bill.
The people of the state of Wisconsin, represented in senate and assembly, do
enact as follows:
1 SECTION 1. 71.365 (6) of the statutes is amended to read:
2 71.365 (6) NOTICE TO SHAREHOLDERS OF APPEALS AND OTHER PROCEEDINGS. Any
3 Except as provided in s. 71.745, any notice of determination by the department of any
4 tax-option item may be contested by a tax-option corporation under subch. XIV. A
5 tax-option corporation shall timely notify all shareholders of any administrative or
6 judicial proceeding about the determination of any tax-option item. Each
7 shareholder may participate in any such proceeding and shall be bound by the final
8 determination in that proceeding.
9 SECTION 2. 71.738 (3d) of the statutes is created to read:
10 71.738 (3d) “Pass-through entity” means a partnership, a limited liability
11 company, a tax-option corporation, an estate, or a trust that is treated as a
12 pass-through entity for federal income tax purposes.
13 SECTION 3. 71.738 (3e) of the statutes is created to read:
14 71.738 (3e) “Pass-through item” means a tax-option item under s. 71.34 (3)
15 or an item of income, gain, loss, deduction, credit, or any other item that originates
16 with a pass-through entity and is required to be reported by one or more
17 pass-through members under this chapter.
18 SECTION 4. 71.738 (3f) of the statutes is created to read:
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SENATE BILL 794 SECTION 4
1 71.738 (3f) “Pass-through member” means a person who is a partner in a
2 partnership, member of a limited liability company, shareholder in a tax-option
3 corporation, beneficiary of an estate or a trust, or any other person whose tax liability
4 under this chapter is determined in whole or in part by taking into account the
5 person's share of pass-through items, directly or indirectly, from a pass-through
6 entity.
7 SECTION 5. 71.745 of the statutes is created to read:
8 71.745 Pass-through entity audits, additional assessments and
9 refunds at the entity level. (1) GENERAL APPLICABILITY. Unless specifically
10 provided in subs. (2) to (9), additional assessments and refunds of pass-through
11 entities and pass-through members shall follow the provisions under this chapter.
12 This section shall not apply for taxable years for which a pass-through entity made
13 an election under s. 71.21 (6) (a) or 71.365 (4m) (a) that the pass-through entity did
14 not revoke under s. 71.21 (6) (c) or 71.365 (4m) (c). The department shall not make
15 additional assessments and refunds under this section to an entity treated as a
16 disregarded entity described under U.S. Treasury Regulation 301.7701-2 or to a
17 grantor trust, of the income of which is reportable under the Internal Revenue Code
18 by the grantor of the trust or by any person other than the trust.
19 (2) AUDIT ASSESSMENTS AND REFUNDS. Except as provided in sub. (9), for the
20 purpose performing audit assessments and issuing refunds, the department may do
21 all of the following:
22 (a) Assess and collect additional tax from a pass-through entity on income
23 otherwise reportable by its pass-through members. In computing the tax to assess
24 to a pass-through entity under this paragraph, the department shall apply the
25 highest tax rate under s. 71.06 on income otherwise reportable by pass-through
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1 members that are individuals, estates, or trusts with a direct interest in the
2 pass-through entity and apply the highest tax rate under s. 71.27 on income
3 otherwise reportable by pass-through members, other than individuals, estates, or
4 trusts, with a direct interest in the pass-through entity.
5 (b) Direct the secretary of administration to refund to a pass-through entity
6 that part of an overpayment paid by the pass-through entity and not by the entity's
7 pass-through members. Pass-through members may claim overpayments not paid
8 by the pass-through entity within one year after the date the determination of the
9 overpayment becomes final or before the end of the period specified under s. 71.75,
10 whichever is later.
11 (3) ADJUSTMENT OF CREDITS. Except as provided in sub. (9), for the purpose
12 adjusting credits, the department may do all of the following:
13 (a) Assess an adjustment to reduce a credit under s. 71.07, 71.28, or 71.47 to
14 a pass-through entity if the pass-through entity previously computed the credit and
15 reported the credit to its pass-through members. An assessment made under this
16 paragraph may be reduced by the tax effect from the modifications described under
17 ss. 71.05 (6) (a) 15. and 25., 71.21 (4), 71.26 (2) (a) 4. and 11., 71.34 (1k) (g) and (m),
18 and 71.45 (2) (a) 10., if the modification occurs in a taxable year under review, except
19 that the modification shall not pass through to nor be claimed by the pass-through
20 members.
21 (b) Assess an adjustment to increase a credit under s. 71.07, 71.28, or 71.47 to
22 offset additional tax assessed to a pass-through entity under sub. (2). Any excess
23 credit not used to offset additional tax may be claimed by the pass-through members
24 within one year from the date the determination of the adjustment becomes final or
25 before the end of the period specified under s. 71.75, whichever is later.
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1 (4) ADJUSTMENTS ATTRIBUTABLE TO MEMBERS. Adjustments to pass-through
2 items under this section are attributable to each pass-through member in a manner,
3 and for the taxable year, that is consistent with the treatment of the pass-through
4 items if a determination was not made under this section.
5 (5) STATUTE OF LIMITATIONS, INTEREST, AND PENALTIES. Statute of limitations,
6 interest, and penalties under ss. 71.77, 71.82, and 71.83 apply to determinations
7 made under this section without regard to the action or inaction of pass-through
8 members.
9 (6) CONTESTED ADJUSTMENTS. (a) Except as provided in par. (b), a determination
10 made by the department under this section is final and conclusive upon receipt by
11 the pass-through entity. Pass-through members shall concede to the accuracy of
12 and shall be bound by a determination made under this section. A pass-through
13 entity shall timely notify all pass-through members of any administrative or judicial
14 proceeding regarding the determination of any pass-through item.
15 (b) A pass-through entity aggrieved by a determination made by the
16 department under this section may, within 60 days after receipt of the
17 determination, petition the department for redetermination. The department shall
18 make a redetermination on the petition within 6 months after the date on which the
19 petition is filed. If no timely petition for redetermination is filed with the
20 department, the department's determination shall be final and conclusive.
21 (7) LIABILITY MAY BE ASSESSED TO MORE THAN ONE PERSON. If the department
22 determines that a liability exists under this chapter and that the liability may be
23 owed by more than one pass-through member of a pass-through entity, the
24 department may assess any pass-through member of the pass-through entity for
25 additional tax otherwise due under this chapter.
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1 (8) ELECTION TO REDUCE ASSESSMENT. Within 60 days after the department's
2 determination under this section becomes final, a pass-through entity may elect, in
3 a manner prescribed by the department, to have the pass-through entity's
4 assessment under this section reduced for pass-through items reported and paid by
5 pass-through members within 60 days of the election. A pass-through entity shall
6 furnish to the department and its pass-through members the adjustments to the
7 each pass-through member's proportionate share of pass-through items for each
8 taxable year.
9 (9) ELECTION TO PRECLUDE ASSESSMENT. Within 60 days after the department's
10 determination under this section becomes final, a pass-through entity with 25 or
11 fewer pass-through members for all years under review may elect, in a manner
12 prescribed by the department, to require the department to make an assessment to
13 each of its pass-through members. This subsection does not apply to a pass-through
14 entity if one or more of its pass-through members is a pass-through entity for any
15 year under review. The election under this subsection does not relieve a
16 representative designated by the pass-through entity under s. 71.80 (26) (a) of the
17 representative's duties under s. 71.80 (26) (b) 2., 3., and 6.
18 SECTION 6. 71.76 (2) of the statutes, as created by 2021 Wisconsin Act 1, is
19 renumbered 71.76 (2) (a) and amended to read:
20 71.76 (2) (a) In Except as approved in par. (b), in the case of any partnership
21 adjustments, as defined under section 6241 of the Internal Revenue Code and
22 including adjustments under section 6225 of the Internal Revenue Code, the
23 partnership and its partners shall report such changes or corrections to the
24 department within 180 days after the final determination by the internal revenue
25 service and shall concede the accuracy of such determination or state how the
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1 determination is erroneous. The partnership and its partners are not required to
2 report such changes or corrections unless the changes or corrections affect the
3 amount of net tax payable under this chapter, of a credit calculated under this
4 chapter, of a Wisconsin net operating loss carried forward under this chapter, of a
5 Wisconsin net business loss carried forward under this chapter, or a capital loss
6 carried forward under this chapter. The partnership and its partners shall submit
7 amended returns, as applicable, for each reviewed year, as defined under section
8 6225 of the Internal Revenue Code, to which such partnership adjustments relate.
9 SECTION 7. 71.76 (2) (b) of the statutes is created to read:
10 71.76 (2) (b) In the case of any partnership adjustments, as defined under
11 section 6241 of the Internal Revenue Code and including adjustments under section
12 6225 of the Internal Revenue Code, the partnership may submit a request to the
13 department, in a manner prescribed by the department, within 60 days after the
14 final determination by the internal revenue service to amend the partnership
15 returns and pay tax on behalf of the partners at the highest tax rate computed under
16 s. 71.745 (1) (a) for each reviewed year, as defined under section 6225 of the Internal
17 Revenue Code, to which such partnership adjustments relate. The partnership and
18 its partners shall report such changes or corrections to the department within 180
19 days after the receipt of the notice of approval from the department and shall concede
20 the accuracy of such determination or state how the determination is erroneous. The
21 partnership and its partners shall report changes and corrections as provided under
22 par. (a) within 180 days after the receipt of the notice of denial from the department.
23 The partnership and its partners are not required to report such changes or
24 corrections unless the changes or corrections affect the amount of net tax payable
25 under this chapter, of a credit calculated under this chapter, of a Wisconsin net
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1 operating loss carried forward under this chapter, of a Wisconsin net business loss
2 carried forward under this chapter, or a capital loss carried forward under this
3 chapter.
4 SECTION 8. 71.77 (7) (c) of the statutes is created to read:
5 71.77 (7) (c) When an election is made under s. 71.745 (9), with respect to
6 assessments of a tax or an assessment to recover all or part of any tax credit under
7 this chapter in any calendar year or corresponding fiscal year, if notice of assessment
8 is given to pass-through members within one year from the date of the election.
9 SECTION 9. 71.775 (1) (intro.) and (a) of the statutes are consolidated,
10 renumbered 71.775 (1) and amended to read:
11 71.775 (1) DEFINITIONS. In this section: (a) “Nonresident" “nonresident”
12 includes an individual who is not domiciled in this state; a partnership, limited
13 liability company, or corporation whose commercial domicile is outside the state; and
14 an estate or a trust that is a nonresident under s. 71.14 (1) to (3m).
15 SECTION 10. 71.775 (1) (b) of the statutes is repealed.
16 SECTION 11. 71.78 (1) of the statutes is amended to read:
17 71.78 (1) DIVULGING INFORMATION. Except as provided in subs. (4), (4m) and,
18 (10), and (11), no person may divulge or circulate or offer to obtain, divulge, or
19 circulate any information derived from an income, franchise, withholding, fiduciary,
20 partnership, or limited liability company tax return or tax credit claim, including
21 information which may be furnished by the department as provided in this section.
22 This subsection does not prohibit publication by any newspaper of information
23 lawfully derived from such returns or claims for purposes of argument or prohibit
24 any public speaker from referring to such information in any address. This
25 subsection does not prohibit the department from publishing statistics classified so
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1 as not to disclose the identity of particular returns, or claims or reports and the items
2 thereof. This subsection does not prohibit employees or agents of the department of
3 revenue from offering or submitting any return, including joint returns of a sp