Wis. Dep't of Revenue v. Deere & Co.
| Decision Date | 25 February 2021 |
| Docket Number | Appeal No. 2020AP726 |
| Citation | 2021 WI App 20,958 N.W.2d 170 (Table),396 Wis.2d 704 |
| Parties | WISCONSIN DEPARTMENT OF REVENUE, Petitioner-Appellant, v. DEERE AND COMPANY, Respondent-Respondent. |
| Court | Wisconsin Court of Appeals |
¶1 The Wisconsin Department of Revenue appeals a decision of the Wisconsin Tax Appeals Commission permitting taxpayer corporation Deere and Company ("Deere") to claim a deduction from its state taxable income under Wisconsin's so called "dividends-received deduction" statute, WIS. STAT. § 71.26(3)(j) (2017-18).1 Deere's claim to the deduction involved a Deere subsidiary that was organized outside the U.S. and that the federal Internal Revenue Service treated as a corporation for federal tax purposes, even though the subsidiary is not organized as a corporation. The Department challenges the commission's rulings that: (1) under the deduction statute, Deere could deduct from Deere's taxable income distributions that Deere received from its subsidiary; and (2) in the alternative, regardless which interpretation of the deduction statute is correct, the Department is precluded by WIS. STAT. § 73.16(2)(a) from advancing the position that Deere could not take this deduction, because that would contradict guidance published by the Department. We have no need to reach the statutory interpretation issue because we agree with Deere and the commission on the contrary-to-guidance issue, and we conclude that this is dispositive.
¶2 On the contrary-to-guidance issue, the Department argues that the text of the guidance that was in effect at pertinent times was not contrary to its current position that the deduction statute does not apply. In the alternative, the Department argues that the guidance cannot in itself "entitle Deere to the dividends-received deduction." We conclude that the commission correctly determined that the Department's position regarding the dividends-received deduction is contrary to the guidance that was then in effect and that therefore WIS. STAT. § 73.16(2)(a) prohibited the Department from advancing its current position before the commission. We further conclude that the Department fails to develop an argument that, despite the terms of § 73.16(2)(a), it may disallow Deere's claim of the deduction. Accordingly, we affirm the tax appeals commission.
¶3 We resolve this appeal based on the contrary-to-guidance issue. But to place that issue in understandable context, it is necessary to explain in some detail the parties’ dispute over the proper interpretation of WIS. STAT. § 71.26(3)(j).
¶4 The parties have stipulated to the pertinent facts. This case arose from a Department audit of Deere for the tax years ending on October 31 for 2013, 2014, and 2015. For ease of reference we generally speak in terms of a single deduction claim.
¶5 At all pertinent times, Deere was a corporation that was incorporated under Delaware law. It was part of the following ownership chain of business entities. Deere was the sole owner of John Deere Holding LLC, a limited liability company, also organized under Delaware law. Deere Holding was a disregarded entity for Wisconsin and federal tax purposes.2 Deere and Deere Holding collectively owned all of the equity of a third entity, John Deere Holding LLC 1 S.C.S. ("Deere Luxembourg"), which the U.S.-based companies created under the laws of Luxembourg. Because Deere Holding was a disregarded entity, Deere was treated as the sole owner of Deere Luxembourg for tax purposes.
¶6 Deere Luxembourg was organized as a form of limited partnership under the laws of Luxembourg. Accordingly, Deere's federal tax return described Deere's ownership interest in Deere Luxembourg as an interest in a partnership, and the partnership agreement governing Deere Luxembourg established that its sole form of ownership consisted of partnership interests. Despite that declaration, it is undisputed that Deere Luxembourg could and did elect to be treated as a "corporation" for U.S. federal tax purposes under federal regulations sometimes referred to as the "check-the-box" regulations: a qualifying entity's federal tax status is established merely by placing a check in the "corporation" box or the "partnership" box. See Dover Corp. & Subsidiaries v. Comm'r , 122 T.C. 324, 330-31 (2004) (); see also Marx v. Morris , 2019 WI 34, ¶25, 386 Wis. 2d 122, 925 N.W.2d 112 ().
¶7 During two of the audited tax years, Deere and Deere Holding received cash distributions from Deere Luxembourg. Deere reported these distributions as part of its income on its Wisconsin tax return, including distributions made to the disregarded Deere Holding. Deere's Wisconsin return also deducted the full amount of these distributions based on the dividend-received deduction, WIS. STAT. § 71.26(3)(j).
¶8 We now briefly explain pertinent Wisconsin tax law. When a Wisconsin "corporation" owns a sufficient share of another "corporation," it is permitted under WIS. STAT. § 71.26(3)(j) to "deduct from [its] income [those] dividends received from [the owned] corporation with respect to its common stock," that is, with respect to common stock of the owned corporation. "[U]nless context requires otherwise," "corporation," as it is used in Wisconsin's corporate tax statutes, is defined to "include" non-corporate entities that have timely elected corporate tax treatment. WIS. STAT. § 71.22(1k). We describe § 71.22(1k) and § 71.26(3)(j) in more detail in the Discussion section below.
¶9 We now summarize the Department guidance at issue. Before and during the audit period, the Department had in place public guidance in the form of its Publication 119, which was entitled "Limited Liability Companies (LLCs)." WIS. DEP'T OF REVENUE , LTD. LIAB. COS. ( LLCS ), PUBL'N NO. 119, § I (Feb. 2014). This guidance stated that its purpose was to provide "information about the Wisconsin tax treatment of limited liability companies." The guidance contained the following pertinent statements. First, "[a]n LLC that is treated as a corporation under the [internal revenue code] is treated as a corporation for Wisconsin purposes." Id. , § VI.A. Second, "[i]f an LLC is classified as a corporation, an LLC interest is treated in the same manner as stock."Id. , § IX. This guidance was in effect when the Department notified Deere that the Department had determined that Deere could not claim the dividends-received deduction with respect to distributions from Deere Luxembourg.3
¶10 Returning to the case chronology, the Department sought from Deere a total of $151,937 in additional tax, plus interest, on the ground that the distributions to Deere were not "dividends received from [Deere Luxembourg] with respect to its common stock" under WIS. STAT. § 71.26(3)(j).
¶11 Deere petitioned the Department to reconsider. Deere argued that the pertinent Wisconsin tax statutes mirrored the federal approach. Under this view, once Deere Luxembourg "checked" the "corporation" "box" for tax purposes, Deere was free to treat its partnership interest in Deere Luxembourg as stock and to treat Deere Luxembourg's distributions as dividends for tax purposes. The Department rejected Deere's petition, and Deere appealed to the commission.
¶12 The commission concluded that Deere could deduct the Deere Luxembourg distributions through Wisconsin's dividends-received deduction. The commission noted that, under federal tax regulations, an entity that has elected to be taxed as a corporation is treated as having become a corporation for tax purposes. More specifically, the commission went on to explain, federal taxing authorities treat the entity as if it had actually completed a business transaction that effectively reorganized the entity as a corporation and converted its ownership interests into stock. See Treas. Reg. § 301.7701-3(g)(1)(i) ().
¶13 Turning to Wisconsin law, the commission reasoned that the legislature's decision to include, within the WIS. STAT. § 71.22(1k) definition of "corporation," entities that are treated as corporations for federal tax purposes has the effect of importing into Wisconsin law the federal regulatory practice of deeming such entities as having been converted into corporations with stock. Applying this reasoning, the commission determined that Deere Luxembourg's distributions to Deere were "dividends received from [Deere Luxembourg] with respect to its common stock" under WIS. STAT. § 71.26(3)(j) because for Wisconsin tax purposes Deere Luxembourg is "not only taxed as a corporation, it is a corporation."
¶14 As we describe in more detail below, the commission also determined that the Department guidance was consistent with the commission's conclusions on the dividends-received deduction and contrary to the Department's position before the commission. As a result, the commission decided that, under WIS. STAT. § 73.16(2)(a), the Department could not advance its contrary-to-guidance position.
¶15 As it had a right to do under WIS. STAT. §§ 73.015, 227.52, and 227.53, the Department appealed the commission's decision to the circuit court. The court affirmed the commission on both the statutory interpretation issue and the alternative contrary-to-guidance issue. The Department appeals.
¶16 The Department argues that the commission erred in concluding that the Department's guidance was contrary to the interpretation of WIS. STAT. § 71.26(3)(j) that the Department advanced before the commission. The Department argues in the alternative...
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