United States

Wisconsin: Court Upholds Imposition of Recycling Surcharge on Upper-Tiered Partnership Receiving Pass-Through Income

Mar 30, 2015
From KPMG TaxWatch

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Recently, a Wisconsin circuit court upheld a Tax Appeals Commission determination holding that an upper-tier partnership that was a partner in a partnership doing business in Wisconsin was subject to the recycling surcharge.  Under Wisconsin law for the tax years at issue, a recycling surcharge was imposed on all partnerships deriving income from business transacted in Wisconsin that had more than $4 million in gross receipts. The sole exception was for partnerships that derived income from farming. The upper-tier partnership’s sole source of income was pass-through income derived from a lower-tier partnership doing business in Wisconsin. The lower-tier partnership paid the recycling surcharge on its income, but the upper-tier partnership did not pay the surcharge on the pass-through income received from the lower-tier partnership. After the Department of Revenue assessed the upper-tier partnership for the unpaid recycling surcharge, the matter went before the Tax Appeals Commission. The Commission held that under the plain and unambiguous language of the imposition statute, the pass-through income received by the upper-tier partnership was “derived” from business activity in Wisconsin. Nothing in the statute required that the business activity be the taxpayer’s own business activity. The upper-tier partnership subsequently appealed.

The court noted at the outset that the Commission’s interpretation of the statute is entitled to due weight deference because the Commission is experienced in the area and has been charged by the legislature with making such determinations.  Under the due weight deference standard, the court must sustain the Commission’s decision if it is not contrary to the statute - unless the court determines that a more reasonable interpretation exists.  The court determined that under the plain meaning of the statute, partnerships are subject to the surcharge if they obtain income as a result of business conducted in Wisconsin. The upper-tier partnership, although a partner, was also a partnership that obtained income as a result of business conducted in Wisconsin. As such, the court upheld the imposition of the surcharge. With questions on GP Tangible Investments, LLC v. Wisconsin Department of Revenue, please contact Brian Kuler at 312-665-5110.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.