2001 Connecticut Tax Law Developments

Publication year2021
Connecticut Bar Journal
Volume 75.




By John R. Shaughnessy, Jr. and Richard W. Tomeo*

In contrast to the previous year, in which substantial expansion of single-factor apportionment was adopted to include manufacturers and financial services companies, few substantive legislative changes were made to the Connecticut tax laws in 2001. Those changes which were adopted were largely encompassed in a single revenue measure enacted in the June special session. On the judicial front, important decisions include Millward Brown, (fn1) concerning the scope of the single-factor apportionment formula, and Carpenter Technology, (fn2) regarding the Commissioner's discretionary authority under section 12-226a of the Connecticut General Statutes. Among the administrative developments discussed in detail below, most noteworthy is the progress of an ad hoc "Business Users Group" convened by the Commissioner to address matters of concern in tax administration as well as issues created by the Carpenter Technology decision.

I. Legislative Developments

A. Corporation Business Tax

New legislation affects several corporate tax credits. Section 12-217ee, which has provided for a buy-back of certain unused research and development credits, was changed to grant the right to a refund, avoiding payment of interest on the buy-back. (fn3) A sunset for the insurance reinvestment fund credit was established by adding a stipulation that investments must be made no later than December 31, 2015 to qualify for this benefit. (fn4) Further, while that credit had been disallowed when a company failed to maintain at least 25% of its work force in new jobs with the exception of cessation of business due to dissolution, the General Assembly added a clarification that reorganization and liquidation also qualify.(fn5)

The recapture provision is triggered by a numerical reduction in the Connecticut workforce, not by a decrease in the Connecticut workforce relative to total workforce. (fn6)

The General Assembly also changed the date when corporation business tax returns and payments are due to the first day of the month following the federal due date, effective for income years commencing on or after January 1, 2001.(fn7) In addition, the due date for filing a petition to disregard single-factor apportionment under section 12-218b was established as 60 days prior to the due date of a return, including extensions.(fn8) The deadline provided in section 12-223a for electing an alternative method of apportionment on a combined return remains at 60 days prior to the return's due date, but the statute is amended to specify that this includes extensions.(fn9) However, section 12-221a was not amended, with the result that a petition under that section may be filed with the return.

B. Sales and Use Taxes

The General Assembly repealed the sales and use tax on patient care services for the period July 1, 2001 through June 30, 2003. (fn10) Also excluded from the tax base are parking services for space in a railroad parking facility owned and operated by the state in a severe nonattainment zone. (fn11) In addition, the General Assembly adopted the recently enacted federal standards for sourcing mobile telecommunications, which applies to transactions invoiced on or after August 1, 2002. (fn12) This legislation also permits telecommunications companies to elect to bundle services, with sales tax applying only to the taxable portion of the charge. (fn13)

This year's legislative session also saw the adoption of a number of amendments to the sales and use tax exemptions. Exempt for the first time are machinery and equipment, and materials, tools, and fuel used in a facility manufacturing fuel cell technology. (fn14) In addition, the exemptions for vehicles powered by alternative fuels, equipment used to convert a vehicle powered by alternative fuel, and equipment used in compressed natural gas filling or electric recharging stations were extended to June 30, 2002. (fn15) The exemption for services provided among controlled entities was amended to include Indian tribes as eligible entities; (fn16) the credit for qualified investments relating to electronic commerce was expanded by $2 million effective July 1, 2003; (fn17) and caskets used in cremation were added to the exemption of section 12-412(55). (fn18)

Finally, providing some relief to taxpayers in the troublesome area of bonding and withholding with respect to nonresident contractors, the General Assembly extended the period during which one who hires a nonresident contractor must pay over amounts withheld from 30 to 90 days from contract inception. (fn19)

C. Income Tax

The most important change to the income tax imposed on individuals, estates, and trusts was the enactment of an amendment to the definition of adjusted gross income, (fn20) aimed at reversing the decision in Berkeley v. Gavin (fn21) (discussed in some detail in last year's Survey. (fn22) Briefly, it applied the tax benefit rule to permit the taxpayers to increase the basis of stock they had sold in 1994 by the amount of their pre-1991 S corporation losses not taken on any Connecticut return. For Connecticut purposes, this provided a higher basis than that shown on their 1994 federal return and resulted in a 1994 loss. The amendment does not repeal the tax benefit rule itself, but reverses Berkeley by restricting adjustments to federal adjusted gross income to those specifically enacted in chapter 229. (fn23)

The General Assembly also enacted a provision sourcing the Connecticut lottery winnings of nonresidents to Connecticut,(fn24) and amended section 12-704(a) to specify which of its provisions apply to resident trusts and estates.(fn25)

D. Miscellaneous Taxes

An important amendment to the petroleum products gross earnings tax lowers the threshold for payment of tax on importation of taxable products from $100,000 per quarter to $3,000. (fn26) In addition, in line with sales tax exemptions, exemptions under the petroleum products gross earnings tax and public service companies' tax for propane or natural gas used as fuel in a vehicle were extended until June 30, 2002. (fn27)

E. Procedure and Administration

New legislation requires the Department of Administrative Services to notify the Department of Revenue Services ("DRS") of defaults on student loans for the purpose of offsetting personal income tax refunds against the loan. (fn28) The Department of Revenue Services was enabled to make public the name, municipality of residence, and the postal district of the owner of an unclaimed refund check. (fn29) In addition, taxpayers who elect to pay taxes by electronic funds transfer are now permitted to initiate the transaction on the date payment is due rather than required to do so on the day prior. (fn30) An amendment to section 12-690 permits any document to be filed electronically if the Commissioner and the taxpayer agree. (fn31)

Finally, an amendment to section 22a-132a removes the responsibility for collecting the special assessment on generators of hazardous waste from the DRS, shifting that responsibility to the Connecticut Siting Council.(fn32)

II. Litigation and Administrative DEVELOPMENTS

While there was not a heavy volume of litigation involving state-level taxes in 2001, there were some important decisions, two of which involved the continuing efforts of the DRS to secure retroactive legislative reversal of court decisions. Another Superior Court decision reflects an expansive view of the process of de novo review of DRS decisions and there are also a few pending cases of interest to follow in the future.

A. Income Taxes

The Supreme Court's per curiam affirmance in Carpenter Technology Corporation v. Commissioner (fn33) represents a serious setback for the DRS in its efforts to make adjustments involving arrangements among affiliated taxpayers that, in its view, result in an inaccurate reflection of income within the meaning of section 12-226a of the General Statutes. Carpenter Technology manufactures various types of equipment marketed in the United States and overseas. The Tax Session of the Superior Court (hereafter "Tax Session") found that Carpenter Technology had adopted a holding company structure for the purpose of providing liability insulation from product...

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