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Understanding the Deere and Company v Wisconsin Department of Revenue Tax Dispute

Understanding the Deere and Company v Wisconsin Department of Revenue Tax Dispute

Sometimes waiting for the end of a long-standing legal dispute can feel like waiting for the conclusion of a good television series. Just as we once collectively sat on the edge of our seats to see who would finally assume the iron throne, many Wisconsin corporate taxpayers with pending refund claims have been awaiting the resolution of Deere and Company v Wisconsin Department of Revenue.[1]

The case finally has found resolution – at least temporarily.

With Respect to Common Stock

In Deere and Company, at issue was the deductibility of distributions received from a foreign partnership. The crux of the substantive dispute was the extent to which the taxpayer’s Check-the-Box election to treat the partnership as a corporation should extend for Wisconsin tax purposes. Wisconsin law provides a corporate income tax deduction for certain distributions received “from a corporation with respect to its common stock.” In its audit of Deere and Company, the Department disallowed the taxpayer’s claimed dividends-received deduction because the distributions were not made by a Wisconsin “corporation” and were not made with respect to “common stock.”

An Issued Guidance: Publication 119

The Wisconsin Court of Appeals also found for the taxpayer, but for a separate reason. It turns out the Department had previously issued guidance in Publication 119 in which the validity of the federal classification of eligible entities was specifically confirmed for Wisconsin purposes. Declining to address the underlying substantive issue, the Court of Appeals determined that under Wisconsin law the Department was procedurally prohibited from advancing any position contrary to its existing written guidance.

At this point, the Department has apparently thrown in the towel: in its last Tax Bulletin, the Department notes that it has chosen not to appeal the Court of Appeals decision.

Like the end of so many television dramas, however, the door has been left slightly ajar for a sequel. The Department revised Publication 119 in June 2019, apparently attempting to remove the offending guidance that provided the basis for Deere’s procedural complaint. With the Court of Appeals having declined to resolve the underlying substantive issue in Deere, it is possible the Department could resume its legal position going forward.

In what seems almost intentionally designed to raise suspense, the revised Publication 119 removed just one of the two provisions the Court of Appeals found problematic. The two provisions the Court of Appeals focused on were:

Sec. 6(A): “An LLC that is treated as a corporation under the [internal revenue code] is treated as a corporation for Wisconsin purposes.”; and

Sec. 9: “If an LLC is classified as a corporation, an LLC interest is treated in the same manner as stock.”

These provisions remained through the March 2018 version of Publication 119. In its June 2019 version of the publication, the Department removed the second of these sentences (Section 9), but left the first (Sec. 6(A)) in place.

What’s Next & How We Can Help

If you have questions about the impact this decision may have on your Wisconsin tax filings please reach out to Joe Haller at 415-227-2401 or Tom McCarthy at 914-798-9902.  Please visit us at www.gmgconsulting.com to learn more about our services and how we can help your business implement effective state and local tax strategies.

[1] Deere & Company vs. Wisconsin Department of Revenue, Court of Appeals, District IV, February 25, 2021.

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