Bulletin #39

Taxpayer Services Division
9/7/88
Corporation Business Tax

On November 17, 1987 members of the State Taxation Committee of the Connecticut Society of Certified Public Accountants (CSCPA), as well as the CSCPA President and Vice President, met with State of Connecticut, Department of Revenue Services (DRS), Deputy Commissioner Pasquale A. Barbato and other DRS representatives to discuss issues of mutual interest and concern.

The Committee had submitted formal questions for discussion to DRS in advance of the meeting. Some of the questions and answers presented concerning the Connecticut Corporation Tax have been reproduced below:

1. Q. Regarding the dividend exclusion for corporations and the expenses allocable to dividends: Will the Department of Revenue Services continue to administratively pursue adjustments where the only dividends are from money market funds requiring minimal involvement on behalf of management?

A. It has and will continue to be the Department's position that there should be some allowance for expenses related to dividends for any and all dividends which are deducted on the corporation tax return. We have heard the argument that there are no related expenses many times before and we reject the argument entirely. The tax return preparer has the responsibility to address the issue at the time of preparation of the return, and an analysis or statement should be attached to the return to explain the reasoning and computation of the related expenses. Any cases where this has not been done will be challenged by the Department. Even in the case of money market funds there are expenses which must be considered such as broker fees, telephone and mailing expenses, the time cost of the manager or officer and staff who monitor and make investment decisions, allocation of corporate overhead where applicable, interest expense, etc.

2. Q. What personal liability is there on corporate returns for officers, directors or shareholders if the corporation owes taxes and is insolvent and dissolves with no net assets distributed to shareholders?

A. Corporate officers, directors, and stockholders would not be liable for corporate taxes in the event of a legal dissolution in which no assets were available for distribution to shareholders. However, if fraud on the part of any of the officers, directors, or shareholders were evident, liability would be a possibility. See Connecticut Agencies Regulations Section 12-2-8.

3. Q. Can CPAs sign Connecticut extensions in lieu of an officer, when the IRS allows this practice on their corresponding extension forms?

A. Section 12-222, Chapter 208, of the Connecticut General Statutes, requires the signature of a principal officer of the corporation on any return.

Section 12-508, Chapter 224, requires the filing of a return by the taxpayer.

The only legal signature other than that of the taxpayer's is that of someone authorized to sign by a power of attorney.

4. Q. Federal Consolidated Returns allow attachments to the 1120 showing each individual company (e.g., a Lotus spreadsheet). In Connecticut, we must submit a separate Form 208 for each company, even though this does not show any additional information. As a tax preparer for a company which files with 30-plus combined companies, this is an unnecessary bureaucratic requirement. Why not allow attachments showing the same information to save time and space?

A. For audit purposes, attachments such as Lotus spreadsheets would be satisfactory. However, for processing purposes, properly completed returns are necessary. Without standardized returns, it is much more time consuming to gather or analyze data. A letter to be sent out with the 1987 returns will again stress the importance of properly completed returns.

5. Q. In the apportionment of income for corporate business tax, exactly what is the Department's position in throwing back or throwing out sales? In what circumstances and what minimum nexus in other states is recognized to allow taxpayers to use "the three factor formula."

A. Section 12-221a of the Connecticut General Statutes allows for adjustments to the statutory formula in cases where the statutory formula leads to inequitable results. This section is applied by the Department in cases where there are nebulous or artificial agreements or it is perceived by the Department that tax avoidance was the goal of any arrangement. The specific circumstances vary greatly from case to case and it is difficult to answer a general question of this nature. Specific questions regarding cases may be directed to the Department.

6. Q. If a Connecticut corporation is found to have nexus in Massachusetts for corporate income tax purposes by virtue of meeting one or more of the Massachusetts minimal standards of solicitation, delivery in company trucks, or installation in Massachusetts, will the Department of Revenue Services allow Connecticut apportionment? If not, would it not be beneficial to the Connecticut and Massachusetts tax departments to get together and formulate a joint policy on this issue?

A. The Department of Revenue Services will allow Connecticut companies to apportion income only when it can be determined that the company is doing business outside of Connecticut. The Connecticut statutes and regulations are the determining factor, not the Massachusetts standards. A Connecticut corporation facing assessment by Massachusetts should attempt to prove that the corporation does not meet the minimum standards. It should be pointed out that many of these standards have not been tested by the courts and that Massachusetts might relax its position when faced with a court challenge. Connecticut requires registration of foreign corporations which regularly sell, deliver or install merchandise in Connecticut. The difference between the Connecticut and Massachusetts positions was discussed during negotiations concerning the Tri-State Compact but was not resolved. In those cases where Massachusetts has assessed companies, the cases should be brought to the attention of the Department. If an adjustment to the Connecticut tax paid is warranted by the circumstances, adjustment may be allowed per Section 12-221a of the Connecticut General Statutes.

7. Q. If the Department of Revenue Services intends to apply the alternative methods of apportionment relative to corporate business tax instead of allowing the specified statutory methods of apportionment, how can taxpayers, corporations, or CPA tax preparers possibly anticipate the actual tax result arrived at by the Department?

A. Tax return preparers are the first to see the results of returns prepared according to the statutory method and should analyze the results at that time. The Department has no way of analyzing returns until an audit is conducted, sometimes two to three years after a return is prepared. If a tax return preparer perceives a potential problem it is his responsibility to inform the client and to do the necessary research, he has the right to correspond with the Department or ask for an alternative method as outlined in Section 12-221a.

8. Q. What constitutes shares of stock held in private corporations specifically regarding mutual funds, money market funds, money market accounts, for purposes of computing the additional tax base?

A. Mutual funds and money market fund holdings are normally in the form of stock. Money market accounts are not stock and are similar to bank accounts. Mutual fund and money market fund holdings evidenced by stock certificates are allowed as a deduction in computing the additional tax base. Money market accounts are not deductible.

9. Q. Does the decision rendered in the Golf Digest case apply to a Section 332 liquidation? In other words if an 80% or more owned subsidiary with net operating loss (NOL) carry forwards is liquidated into the parent, does the NOL carry forward survive?

A. No, if the subsidiary is merged into the parent company the NOL carry forward of the subsidiary may not be claimed on the return of the parent company.

10. Q. Does the Golf Digest case apply to other carry over attributes under the Internal Revenue Code 381 or does it apply only to NOL's?

A. The Department's position applies to all carry over attributes.