You asked for a summary of the Connecticut Supreme Court's ruling in the case of Bell Atlantic NYNEX Mobile, Inc. , et. al. v. Commissioner of Revenue Services (273 Conn. 240, 4/4/05).

SUMMARY

The case arose because Connecticut law provides a credit for personal property taxes paid on electronic data processing equipment against the corporation tax and certain other comparable business taxes (those on insurance companies; nonprofit corporations' unrelated business income; air carriers; railroad companies; express, telegraph, cable, and community antenna television companies; utilities; and HMOs) (CGS § 12-217t). The question at issue in the case was whether a partnership that paid personal property taxes on electronic data processing equipment (1) was eligible for the credit even though it does not have to pay the corporation tax and (2) could pass the credit through to its partners who are liable for the corporation tax.

The Connecticut Supreme Court found that (1) because partnerships do not pay the corporation tax or any of the other business taxes against which the credit could be claimed, they are not eligible for the credit and (2) although Connecticut's corporation tax law explicitly incorporates federal tax principles that would allow a partnership to pass an asset

such as a tax credit through to its partners, when the partnership is ineligible for a credit, nothing passes through and the partners cannot take advantage of the credit either.

BACKGROUND TO THE CASE

In 1995, Bell Atlantic Corporation and NYNEX Corporation formed a general partnership called Cellco to provide cellular telephone service in areas where they had previously operated separate cellular networks. Both corporations contributed assets, including electronic data processing equipment, in return for partnership interests in Cellco. Cellco became the owner of the equipment and became liable for personal property taxes on it. As a partnership, Cellco is not subject to the Connecticut corporation tax.

Bell Atlantic and NYNEX, in giving up ownership of the equipment also gave up their property tax liability on the equipment. But, as corporations, they are subject to corporation tax on their distributive shares of annual income from the Cellco partnership. As a result, the two companies sought credits against their 1995 corporation tax liability for their allocable shares of the $ 957,718 in property tax Cellco paid on data processing equipment in 1995.

The Department of Revenue Services (DRS) disallowed the credits on the grounds that, because Cellco was not eligible for the credit, it could not pass it through to its corporate partners. The two corporations appealed DRS' ruling to Superior Court. The Superior Court found for the companies on the grounds that (1) Cellco owned the credit as a partnership asset, (2) the Connecticut corporation tax incorporates federal tax principles, and (3) those principles allow the credit to pass through to the partners. DRS appealed this ruling on the grounds that (1) Cellco is ineligible for the tax credit and (2) the Connecticut corporation tax contains neither explicit nor implicit language incorporating federal partnership pass-through principles.

CONNECTICUT SUPREME COURT RULING

In its ruling, the court considered two issues: (1) whether Cellco is eligible for the property tax credit simply because it paid property taxes regardless of whether it is subject to the corporation tax and (2) whether Cellco's payment of the tax can be attributed to its partners under federal pass-through principles because Connecticut incorporates the federal definition of “gross income” for purposes of its corporation tax.

Cellco's Eligibility for the Tax Credit

The court ruled that Cellco was ineligible for the data processing equipment property tax credit because, as a partnership, it is not subject to the state corporation tax. Because Cellco could not claim the credit, it could not pass it through to the partners.

In determining that Cellco was ineligible for the credit under § 12-217t, the court relied on the “well-settled” principle that “the burden of proving an entitlement to a claimed tax exemption rests upon the party claiming the exemption” (p. 252). The statute specifies that only a “taxpayer” who has paid personal property taxes on electronic data processing equipment may claim the credit. As used in the statute, a “taxpayer” means an entity that pays the corporation tax or one of the other specified business taxes.

The court supported its restrictive interpretation of §12-217t by noting that other corporation tax credits use more general terms, such as “business firm” or “business entity,” to define those who are eligible. “Where the legislature has taken action in an area, we generally interpret the legislature's failure to take similar action in a closely related area as indicative of a decision not to do so” (p. 255).

Adoption of Federal Pass-Through Principles

The plaintiff corporations argued that Cellco's payment of the municipal property taxes should be attributed to the partners under federal principles incorporated into the state law by reference. These principles would treat the partners as if they had paid the property taxes directly. And since they are corporations, they would qualify as “taxpayers” under § 12-217t and could receive the credit.

The plaintiffs based their argument for the application of federal pass-through principles on two arguments: (1) that Connecticut's tax laws generally incorporate federal tax principles and (2) that the state corporation tax law uses the federal tax definition of “gross income,” thereby effectively adopting federal pass-through treatment for partnership assets.

The court disagreed with the conclusion that “our precedents denote general incorporation of federal tax principles into our state tax statutes” (p. 261). Instead, “incorporation requires an express reference to the federal tax code and is limited to principles associated with that reference” (p. 262). By virtue of its express reference to the federal

definition of gross income, the court found that the Connecticut corporation tax does explicitly incorporate federal pass-through treatment of partnership tax attributes.

But, although tax credits could pass through to partners under these principles, the fact that Cellco is not eligible for the property tax credit in § 12-217t means that there is nothing to pass through. Thus, the court overruled the lower court ruling and disallowed the credits claimed by the two corporations.

JL: ro