1997 Connecticut Tax Developments
| Pages | 17 |
| Publication year | 2021 |
72 CBJ 17. 1997 CONNECTICUT TAX DEVELOPMENTS
In 1997 the volume of tax litigation continued to decline, resulting in part from the Tax Session's reduction of its backlog and in part from a more settlement-minded approach on the part of the Department of Revenue Services ("DRS"). At the same time, the State has been in sound fiscal condition for some time, which has afforded lawmakers the opportunity to focus on policy-oriented structural tax changes rather than short-term revenue needs. One Connecticut legislative development potentially affecting many business taxpayers was adoption of the single-member limited liability company (`SMLLC"), (fn1) a development that dovetailed with the Internal Revenue Service ("IRS") adoption in December, 1996, of the final entity classification regulations, often referred to as "check-the-box."(fn2) Under check-the-box, the SMLLC is treated not as an entity separate from its owner but as part of its owner, in effect a tax nothing. This characterization can have significant beneficial effects for taxpayers, such as simplifying return preparation for corporate consolidated groups. The General Assembly's adoption of this legislation permits the formation of SMLLC's under Connecticut law and removes whatever doubt there may have been that such an entity is to be classified for tax purposes as part of its owner unless it elects classification as a corporation. (fn3)
A. Corporation Business Tax
The General Assembly acted to alleviate two problems arising from enactments of recent years that were intended to provide taxpayer relief. First, implementation of the safe harbor provisions for corporation business tax estimated tax payments was accelerated. (fn4) For years beginning in 1997, the safe harbor is one hundred fifty percent of the before-credit tax shown for the preceding income year and for 1998 and later years, one hundred percent. Second, during the pendency of the phaseout of corporate tax on S corporations, these entities are, for 1997 and later years, eligible for tax credits to the extent their net income is subject to the corporation business tax. (fn5)
The Assembly also plunged into the thicket that is the corporation business tax credit provisions and hacked away a significant. amount of the underbrush. Public Act 97-295 consolidates :more than a dozen existing credits into two new credit provisions. These two new credits, one for investment in fixed capital and the other for investments in human capital, are first available for years commencing in 1998 and later. Each is measured at,3% of creditable expenditures for years beginning in 1998, 4% for years beginning in 1999, and 5% for 2000 and later years. Each has a five-year carry forward. The repealed credits which they replace continue to be available only for years commencing before January 1, 1998, but the legislation makes clear that the unused amount of any such credit may be carried forward just as if the credit provision had not been repealed. (fn6)
The fixed capital investment credit applies to purchases of property with a class life of more than four years under Internal Revenue Code section 168(e)(fn7) that is held and used in Connecticut in the ordinary course of trade or business for five or more full years following acquisition. Inventory, real property and mobile transportation property are not eligible for the credit, nor are any property acquired from a related person and property that is leased to another person during the twelve months following acquisition. The measure of the credit is the amount paid or incurred for any new, fixed capital investment during the income year.
The measure of the credit for human capital investment is the amount paid or incurred during the income year for a number of activities related to employee education and training and child care. Included are: job training accomplished in Connecticut for Connecticut employees; work education programs in Connecticut; worker training and education for Connecticut employees provided by institutions of higher education in Connecticut; donations or capital contributions to Connecticut institutions of higher education for the improvement or advancement of technology; planning, site preparation, construction, renovation or acquisition of facilities in Connecticut to establish a day care facility to be used primarily by children of employees employed in Connecticut; and subsidies to employees employed in Connecticut for child care provided in Connecticut.
The Act also establishes a Corporation Business Tax Credit Review Committee to study and evaluate the existing corporation business tax credits, taking into consideration whether a credit has provided a benefit to the state, whether there exists sufficient justification to continue credit, whether a credit could be more efficiently administered as part of a broad-based credit, and whether there is unnecessary complexity in the application, administration and approval process for the credit.(fn8) The committee is to issue its report by January 30, 2002.
This consolidation of a number of credits into two nevertheless leaves a number of credits still in existence and the Act makes some modifications to these. The Act clarifies the opportunity voucher tax credit program for companies that hire as part-time employees persons who have been receiving benefits from the temporary family assistance program. Also amended is Connecticut General Statutes Section 32-41q to eliminate the credit for funds invested in the Critical Industries Development Account. (fn9) The rental housing assistance credit in Connecticut General Statutes Section 8-395 was amended to limit its applicability to the corporation business tax and to provide that the credit must be claimed on the return for the income year during which the creditable amount was paid. (fn10) Clarifying amendments are also made to a number of credit sections. (fn11) In addition, the Connecticut General Statutes Section 12-217g credit for apprenticeship training was expanded to include such training in all manufacturing, plastics and construction trades. (fn12) The Act also amended Connecticut General Statutes Section 12-217i to extend the clean alternative fuel credit through the end of 1999. (fn13) Finally, Public Act 97-251 amended Connecticut General Statutes Section 12-632 to increase the total credit available under the Neighborhood Assistance Act from $3,000,0000 to $4,000,000 annually (fn14) and Public Act 97-259 amended Connecticut General Statutes Section 12-634 to increase from $10,000 to $50,000 the credit available to companies that invest cash in the construction or operation of child day care facilities used primarily by employees. (fn15)
To close a loophole that apparently would have permitted banks to convert mortgage interest income into deductible dividends, the General Assembly acted at the request of the Commissioner of Revenue Services to amend Connecticut General Statutes Section 12-217 to exclude deductions for dividends from a captive real estate investment trust ("REIT"). As a result of this legislation, the deduction for such dividends is now limited to those that are either deductible under section 243 of the Internal Revepue Code or are received by a qualified dividend recipient from a qualified REIT more than 5% of which is owned by persons other than the dividend recipient and related parties. (fn16) A qualified dividend recipient is one that invested in the qualified REIT before April 1, 1997. A qualified REIT is one that elects REIT treatment under Code section 856 before April 1, 1998 and that before April 1, 1997 was incorporated and had contributed to it a minimum of $500 million dollars worth of real estate assets. Substitute language deleted a provision that would have applied the Act's restrictions to dividends of regulated investment companies.
In an effort to attract or retain in Connecticut credit card issuing institutions, the General Assembly in its June 18 Special Session enacted Public Act 97-4. (fn17) The Act permits an institution that is either one whose activities are limited to those described in 12 U.S.C. § 1841 (c) (2) (F), or a bank or wholly owned securitization subsidiary of a bank whose deposits are insured by the Federal Deposit Insurance Corporation and that issues credit cards, to elect to apportion its income derived from credit card activities using a single factor receipts apportionment formula that sources receipts to the billing address of the cardholder. Apportionment of income other than that from credit card operations remains unchanged. The election is made on or before the due date of the institution's return and is irrevocable for five years. Further, until January 1, 2002, use of this special apportionment formula is restricted to corporations whose principal credit card operations are located in a distressed municipality. In years commencing on and after that date, an institution will be eligible to elect the single factor market-based formula without regard to the location of its principal credit card activities.
In Public Act 97-193 the Commissioner was provided the authority to disallow any credit otherwise allowable against corporate tax if the company's payment of any tax is overdue by more than thirty days. (fn18) The Act also provided similar authority to the Secretary of the Office of Policy and Management, permitting him to deny a claim for exemption from property tax exemption of new machinery and equipment by a claimant delinquent in paying corporate tax. (fn19)
B. Sales And Use Taxes
A number of amendments to sales and use tax definitions were made during the regular and special sessions. Connecticut General Statutes Sections...
To continue reading
Request your trial