2004 and 2005 Connecticut Tax Law Developments
| Publication year | 2021 |
| Pages | 67 |
79 CBJ 67. 2004 AND 2005 CONNECTICUT TAX LAW DEVELOPMENTS
VOLUME 79, NO. 2
I. LEGISLATIVE DEVELOPMENTS
This portion of the article addresses legislative developments during 2004 and 2005, a time when the focus of the General Assembly was on measures aimed at revenue enhancements. These included, most notably, the addition of a 20% surcharge to the corporation business tax, although there was also some enlargement of existing tax credits. An area of conflict outside the imperative of revenue involved an effort to require public disclosure of return information protected by General Statutes section 12-15. The information sought would have required disclosure of return for the purpose of linking identifiable taxpayers with what are referred to by proponents of disclosure as "tax expenditures," generally referring to exemptions and credits. The result was an enactment in the Regular Session,(fn1) which was amended in the June Special Session to permit the Commissioner to disclose tax returns and return information to the Business Tax Credit and Tax Policy Review Committee, but not to disclose copies of tax returns filed with the Department of Revenue Services.(fn2) Separately, in response to a request from the legislative leadership in connection with an ongoing study of the Connecticut tax system by the Committee on Program Review and Investigations, the Attorney General opined that the Department was required to release return information to the General Assembly.(fn3) This opinion in turn prompted a public response by the Governor rejecting the Attorney General's conclusion and declaring her support of the sanctity of return
* Of the Hartford Bar.
1 2005 Conn. Acts 05-251, §§ 64,65 (Reg. Sess.).
2 2005 Conn. Acts 05-3, § 36 (June Spec. Sess.). Hereafter, the Department of Revenue Services is referred to as the Department. All Rulings, Announcements, Policy Statements, Special Notices and other such administrative pronouncements of the Department cited herein are all generally available at the Department's web-site at http://www.ct.gov.drs.
3 Op. Atty. Gen. 2005-28, available at http://www.ct.gov/ag.
information. Despite the enactments and expressed differences of opinion, however, we are not aware that protected return information has been divulged by the Department, to the General Assembly or others.
A. Corporate and Income Taxes
In 2004, the business community succeeded in persuading the legislature to reject the Department's proposal to require that taxpayers establish by clear and convincing evidence the valid business purpose of any arrangement attacked by the Commissioner as a sham, and to prove that the business purpose was commensurate with the tax benefit claimed by the taxpayer.(fn5) Aside from that, the only legislative action in 2004 affecting the corporation business tax related to credits. The section 12-217dd tax credit for donation of open space land was modified to include donation of water source land to a water company and to extend the carryforward from ten years to fifteen.(fn6) The sunset for the tax credit for clean alternative fuel vehicles and filling stations was extended from December 31, 2004, to December 31, 2008,(fn7) as was the exemption from the Utilities Companies Tax for sales of natural gas and propane as a fuel for such vehicles.(fn8) The research and development tax credit exchange was modified to permanently eliminate the potential for a capital base tax liability to eliminate the credit for such year.(fn9)
The exemption from Utilities Companies Tax for sales of gas or electricity for use in manufacturing was broadened to include sales of gas used in the operation of a cogeneration facility providing electricity or steam for use in manufacturing, where the facility is located entirely on the premises of the manufacturer.(fn10)
4 See Charles Lenore, Governor Hits Attorney General Opinion on Information Sharing, 58 STATE TAX NOTES 418 (2005).
5 See Conn. S. Bill 421, § 1(2004 Reg. Sess.).
6 2004 Conn. Acts 04-200, § 2 (Reg. Sess.) (Connecticut Public Acts are referred to hereafter as "P.A.").
7 P.A. 04-23 1, § 5 (Reg. Sess.)(amending CONN GEN. STAT. § 12 217i).
8 Id.§ 4.
9 P.A. 04-235, § 1 (Reg. Sess.)(amending CONN GEN. STAT. § 12-21ee).
(fn10)P.A. 04-180, § 7 (Reg. Sess.). Section 6 of the Act exempts sales of gas to an existing combined-cycle generating plant meeting certain criteria.
With respect to the income tax on individuals, estates and trusts, 2004 saw the maximum property tax credit increased from $350 to $500, ratably decreasing to zero when Connecticut adjusted gross income is over $190,500 and $145,500 for joint and single filers respectively.(fn11) The General Assembly also made major revisions to General Statutes sections 12 719 and 726, affecting the treatment of nonresident partners under the Income Tax.(fn12) The revisions require a partnership doing business in Connecticut, or having income derived from Connecticut sources, to either file a group return (which can be done only if the partners meet certain criteria and affirmatively elect to join in the group return), or pay taxes on behalf of each nonresident partner at the highest marginal rate applied to the partner's distributable share. The changes bring the requirements for filing returns in respect of nonresident partners and payment of their taxes by partnerships into line with those imposed on S corporations and impose for the first time on partnerships a withholding obligation. However, partnership filings and payments present issues not present in the realm of S corporations, such as dealing with tiered structures. Further, the withholding obligation presents a problem for partnerships with income but no distributable cash.(fn13)
In 2005, budget pressures required the addition of a 20% surtax to corporate tax, applicable both to the tax on the net income measure and to the additional tax on capital for years commencing in 2006, and 15% for years commencing in 2007.(fn14) In addition, the General Assembly amended the definition of "conducting or carrying on business" to specify that a company participating in trade shows at the Connecticut Convention Center will not be deemed to be carrying on or doing business in Connecticut, if its activities at such trade shows is limited to display of goods or promotion
11 P.A. 04-216, § 52 (Reg. Sess.). The upper income levels for head of household and married filing separate returns are $168,500 and $95,250, respectively.
12 Id.§§ 54,55.
13 The Department's approach to these issues is discussed below in section II.
14 P.A. 05-251, §§ 62, 63 (Reg. Sess.). The surtax does not apply if only the minimum tax is due.
of services, no sales are made, any orders received are both sent outside the state for acceptance or rejection and filled from outside the state, and such participation is for fourteen or fewer days in the company's income year.(fn15)
The urban and industrial reinvestment tax credit(fn16) was modified to reduce from $20 million to $5 million the amount of qualifying direct investment and, in the case of a project for the preservation and redevelopment of an historic facility for mixed uses including at least four housing units, the threshold was reduced to $2 million.(fn17) This credit was also amended to permit assignment to other taxpayers, provided that the credit may be used by the assignee only in a year when the assignor would have been able to utilize the credit.(fn18) An assignee may not further assign the credit.
The most notable of the 2005 changes to the corporate tax are new provisions aimed at tax shelters, in connection with which General Statutes section 12 233 was amended in several particulars, first by Public Act 05-116,(fn19) then by Public Act 05-260.(fn20) Public Act 05-116 specifies that there is no statute of limitations on a notice of deficiency in the case of a failure to file a return, including any amended return required by General Statutes section 12 226, or in the case of a deficiency due to fraud or intent to evade the provisions of law or regulation.(fn21) Further, the statute of limitations is extended to six years in the case of an omission from gross income in excess of 25% of the amount shown in the return, with the proviso that an amount disclosed in the return "in a manner adequate to apprise the commissioner of the nature and amount of [an item] is not an omission."(fn22) The legislation also specifies that in the case of a return that fails to report a listed transaction defined in section 6707A of the
15 P.A. 05 260, § 2 (Reg. Sess.).
16 CONN GEN. STAT. § 32-9t.
17 P.A. 05 276, § 2 (Reg. Sess.).
18 Id.§ 3.
19 P.A. 05-116 (Reg. Sess.).
20 P.A. 05-260 (Reg. Sess.).
21 P.A. 05 116, § 2 (Reg. Sess.).
22 Id.§ 2.
Internal Revenue Code,(fn23) a notice of deficiency may be mailed up to six years after filing a return "required under this chapter for the same income year," in effect extending the statute until six years after the filing of an amended return required by General Statutes section 12 226.(fn24) Also added was a new provision imposing a penalty for promotion of abusive tax shelters described in IRC section 6700A.(fn25) This penalty is imposed on a person who is subject to the 50% penalty imposed under that section of the IRC if the promotion affects returns filed in Connecticut and is in the amount of 50% of the gross income received for promoting the shelter. Finally, Public Act 05-116 added to General Statutes section 12-233 a penalty of 75% when any part of a deficiency for which assessment is made "is due to a failure to disclose a listed transaction . . . on the taxpayer's federal tax return,"(fn26) applicable to tax years beginning on or...
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