2. A person whose commercial domicile of their business or agricultural activity is in this state.
(j) "Located in this state" means a person (including a natural person or fiduciary) who has a fixed business location in this state such as a commercial office, warehouse, or manufacturing facility.
(3) QUALIFYING BORROWERS. A commercial loan may qualify for the exemption in ss. 71.05(1)(i) and 71.26(1)(i), Stats., if the loan is provided to a person residing or located in this state. (4) PROCEEDS USED IN THIS STATE. A commercial loan may qualify for the exemption in ss. 71.05 (1) (i) and 71.26 (1) (i), Stats., if the loan proceeds are used primarily for a business or agricultural purposes in this state. Example: Financial Institution A issues a loan to Business B for $4,000,000. Business B uses $3,000,000 of the loan proceeds to expand their manufacturing facility in Wisconsin and $1,000,000 to renovate their headquarters office in Illinois. The loan is used primarily for a business purpose in Wisconsin since 75% of the loan proceeds ($3,000,000 / $4,000,000) were used to expand the Wisconsin facility.
(5) commercial loan limitation. A commercial loan may qualify for the exemption in ss. 71.05(1)(i) and 71.26(1)(i), Stats., if the commercial loan is $5,000,000 or less. This subsection interprets the $5,000,000 limitation. (a) General.
1. The original full amount of the loan obligation is used to determine the $5,000,000 limitation. In the case of secured open-end lines of credit and other secured revolving credit plans and letters of credit, the full amount of the loan obligation is the maximum amount of credit available to the borrower.
2. Costs and fees rolled into the loan are included as part of the original loan obligation.
3. Charge-offs or amounts not expected to be recoverable from a borrower do not reduce the original loan obligation.
Examples: 1) A borrower is issued a commercial loan with an obligation of $4,900,000 and incurs costs and fees of $150,000 on that loan. The borrower does not pay the $150,000 up front but instead rolls the amount into the loan. Since the loan obligation and costs and fees equal an original loan obligation of $5,050,000, income from the loan does not qualify for the exemption.
2) A bank lends a borrower $6,000,000 on an original commercial loan but charges off $2,000,000 and keeps track of the charged-off balance. Since the original borrowed obligation is $6,000,000, income from the loan does not qualify for the exemption.
(b) Commercial loan refinancing. A commercial loan that is refinanced is considered a new original loan obligation and the $5,000,000 limitation is computed based on the facts contained in the refinanced loan documentation.
(c) Loan participation and assignment. A commercial loan with an original loan obligation over $5,000,000 to a single borrower does not qualify for the exemption, regardless of whether the loan is sold or assigned, in whole or in part, to another financial institution for $5,000,000 or less. A financial institution that acquires a commercial loan through a purchase, assignment, or participation agreement may not exempt the income derived from the acquired loan if the original loan obligation is more than $5,000,000.
Examples: 1) Bank A issues a commercial loan of $7,000,000. Bank B purchases a loan participation of $3,000,000 in the commercial loan. The income derived from the commercial loan does not qualify for the exemption for Bank A or Bank B because the original loan obligation is over $5,000,000.
2) Assume the same facts as Example 1, except that $3,000,000 of the original loan obligation is assigned by Bank A to Bank B. The income derived from the commercial loan does not qualify for the exemption for Bank A or Bank B because the original loan obligation is over $5,000,000.
3) A commercial loan of $5,000,000 is issued by Bank A. Bank B purchases a loan participation of $3,000,000 in the commercial loan from Bank A.The income derived from the commercial loan may qualify for the exemption for Bank A and Bank B because the original loan obligation was for $5,000,000 or less.
(d) Loan syndication. If one or more financial institutions enter a loan syndication where both financial institutions will be originating the loans, the total loan amount provided to the borrower is used to determine the original loan obligation, not each financial institution's portion of the syndicated loan. If the original loan obligation is $5,000,000 or less, each financial institution may qualify for the exemption in proportion to the financial institution's interest in the syndicated loan.
Example: Four financial institutions pool their resources to fund a loan syndication to a borrower for a total original loan obligation of $20,000,000. Although each financial institution funds $5,000,000 of the loan, income derived from the $20,000,000 loan does not qualify for the exemption.
(e) Aggregation. For purposes of claiming the income exemption:
1. A financial institution may not create separate commercial loan agreements for $5,000,000 or less for a borrower that seeks a commercial loan over $5,000,000, including refinancing a single loan into separate loans.
2. A financial institution may have multiple qualifying commercial loans of $5,000,000 or less with the same borrower if the loans are obtained for a different use and qualifying purpose.
3. A commercial loan over $5,000,000 does not qualify, regardless of whether a portion of the loan is used for purposes outside this state.
Example: A commercial loan is issued for $15,000,000 and 33% or $4,950,000 of the proceeds are used for a business purpose in Wisconsin and 67% outside Wisconsin. The income derived from the commercial loan does not qualify for the exemption because the original loan obligation is over $5,000,000.
(6) Record keeping.
(a) Financial institutions shall keep electronic records in easily accessible and usable form to substantiate the exemption from income for each loan, including electronic data that can be queried and analyzed for each of the following data elements:
(1.) Borrower's legal name
(2.) Borrower's state of residence
(3.) Loan ID number
(4.) Name of originating underwriter of the loan if someone other than the financial institution
(5.) Loan origination date
(6.) Original loan obligation amount, including costs and fees rolled into the loan obligation
(7.) Detailed description of the purpose of the loan, including whether there is more than one purpose, and where the loan proceeds will be used.
(b) Financial institutions shall keep records to substantiate whether the borrower is a person who is a resident of this state, such as tax returns and trust agreements.
(c) The records described in pars. (a) and (b) shall be kept for as long as any period of limitation for assessment for the taxable year in which the exemption is claimed has not expired under ss. 71.76 and 71.77, Stats. If the taxable year results in a net loss, the records described in pars. (a) and (b) shall be kept for as long as the period of limitation for assessment for the taxable year in which the loss carryforward is used, as described in ss. 71.05 (8) (b) 1. and 71.26 (4) (a), Stats., has not expired. SECTION 2. Effective date. This rule takes effect upon publication in the state newspaper and shall remain in effect for 150 days, as provided in s. 227.24 (1) (c), Stats., subject to extensions under s. 227.24 (2), Stats. END RULE TEXT
DEPARTMENT OF REVENUE
Dated: By: ___________________________
Peter W. Barca
Secretary of Revenue
