Ruling 96-9, Corporation Business Tax / Specially Chartered Associations as Political Subdivisions
FACTS:
Residents of a lake community, which spans two towns, established a voluntary association (the "Association") to maintain the residential area surrounding the lake. Over time, the community changed from one where most of the residents were summer residents to one where most of the residents are year-round residents and where certain services normally provided by a municipality are needed year-round. The Association constructed and maintains a fire house and a beach pavilion. It also oversees seasonal recreational events, such as swimming in the summer and tobogganing in the winter.
The Association was like many other volunteer organizations which sprang up around waterfront property. (endnote 1) In 1931, the General Assembly, by Special Act, declared the then owners of the land within the limits of the Association, and all their successors, "to constitute a body politic and corporate" and a corporation "in law" with all general powers of a corporation (e.g., the power to remain in existence perpetually; the power to sue). Conn. Gen. Stat. §3382 (Rev. 1930) (similar to the provisions generally set forth in Conn. Gen. Stat.§ 33-291). However, the Special Act did not give the Association the specific power to carry on business that a general business corporation might carry on. Conn. Gen. Stat. §3383 (Rev. 1930); Conn. Gen. Stat. §33-291(e)(5) (Rev. 1995) Instead, the Special Act conveys upon the Association the following specific rights, privileges and duties:
the extinguishment of fires, oiling, sprinkling, care, repair and lighting of streets; laying of sidewalks and crosswalks; erection and maintenance of docks, breakwaters, retaining walls and bridges; dredging of harbors and creeks; care of beaches and waterfronts; maintenance of corporate property; regulation of peddling, as provided for towns under section 457 of the general statutes [Rev. 1930]; regulation of entertainments, concerts and celebrations; collection and disposal of garbage, refuse and ashes; abatement and prevention of every kind of nuisance and public annoyance; prevention and regulation of the carrying on within the limits of said association of any business prejudicial to public health or dangerous to, or constituting an unreasonable annoyance to, those living or owning property in the vicinity thereof; regulation of the erection of all lamp posts, telegraph, telephone and electric light posts and the wires and fixtures thereof; regulation of the planting, removal, protection and preservation of trees in the streets; keeping the streets and all public places within the limits of said association quiet and free from all undue noise; prevention and abatement of every kind of nuisance and public annoyance; regulation of the use and construction of cesspools, drains, sewers and privies, and the place and method of discharge of the same; prevention of assemblages of person on the sidewalks to the obstruction, hindrance or annoyance of the pubic; location and maintenance of wells, cisterns, or water works for the use in case of fire or domestic use; regulation of the discharge of firearms in said territory; regulation of the running of animals at large; regulation of the place and length of time for the parking of vehicles and regulation and prevention of the use of pig pens and the deposit of rubbish within the limits of the association.
Conn. Spec. Acts 450, §5.
The Association is also authorized, by the Special Act, to: (1) recover fines and penalties it imposes in a court having jurisdiction over such matters; (2) appoint police officers to act within the limits of the Association; (3) appoint a health officer (to serve without pay); and (4) lay a tax on the total value of assessed real estate within the limits of the Association. (Such tax constitutes a lien upon the property and is able to be collected by suit or foreclosure.) Conn. Spec. Acts 450, §§14, 15, and 20.
The Association is governed by a 12-member executive board that is elected by residents. Such executive board elects a president, vice-president, treasurer and clerk. All such officers serve without pay.
The object of the Association is declared by the Special Act to be "to provide for the improvement of the land in said territory and for the health, comfort, protection and convenience of persons living therein."
For federal income tax purposes, the Internal Revenue Service has concluded that the Association is a political subdivision and, under section 115(1) of the Internal Revenue Code of 1986, all of the Association's gross income is exempt from tax.
ISSUE:
Whether the Association is subject to the Corporation Business Tax.
DISCUSSION:
The Corporation Business Tax is actually comprised of two separate, alternative taxes. Under Conn. Gen. Stat. §12-214, a tax that is measured by the entire net income of a company, (endnote 2) is imposed on "every company engaged in the business of carrying passengers for hire over the highways of the state in common carrier motor vehicles doing business in this state, and every other company carrying on, or having the right to carry on, business in state", with certain statutory exceptions not relevant here. Under Conn. Gen. Stat. §12-219, as amended by 1996 Conn. Pub. Acts 297, an alternative minimum tax that is measured generally by the value of issued and outstanding capital stock and surplus reserves is imposed on a company, for the privilege of carrying on or doing business in this state. Each company subject to the tax imposed under Conn. Gen. Stat. §12-214 or §12-219 must file an annual corporation business tax return. Conn. Gen. Stat. §12-222.
"General tax statutes of a state are never, without the clearest words, construed to include its own property or that of its municipal corporations, although not in terms of exempted from taxation. This rule is sometimes referred to as an implied restriction on the power to tax, although in reality it would seem that it is not a limitation at all but merely a rule of construction of tax statutes." Thomas M. Cooley and Clark A. Nichols, The Law of Taxation (4th ed. 1924) 217 (footnote omitted). The theory behind such rule is "that such taxation would merely be taking money out of one pocket and putting it in another." Id. 1317 (footnote omitted). See also 71 Am Jur 2d, State and Local Taxation, §477. (Such rule, however, does not apply to instances where a political subdivision, as an employer or a retailer, withholds or collects tax imposed on another, such as in the case of an income tax and a sales tax.)
In the past, the General Assembly has imposed a specific state level tax on municipalities. Specifically, prior to July 1, 1947, an annual state tax was imposed upon towns. The state tax, as it was known, was apportioned to the towns in proportion to the total revenue received by the towns, and all special districts within the towns. Conn. Gen. Stat. §§1259, 1260, 1264, 1265, 1268 (Rev. 1930). (endnote 3)
In contrast to those provisions, the statutes by which the corporation business tax has been imposed do not expressly impose such tax on any political subdivision. Thus, the general rule applies and political subdivisions, even if they are in the form of a corporation, are not subject to such tax.
A political subdivision, as opposed to a particular geographical subdivision, exists for the purpose of discharging some function of local government, has a prescribed area, and possesses authority for subordinate self-government through officers selected by it. Dugas v. Beauregard, 155 Conn. 573, 578 (1967). An association, such as the one in issue, is generally considered a political subdivision. See Sachem's Head Property Owners' Association v. Guilford, 112 Conn. 515, 517-518 (1931); 1 McQuillin on Municipal Corporations (2d Ed.) 126; Report of the Connecticut Temporary Commission to Study the Tax Laws of the State and to Make Recommendations Concerning their Revision (1934) at 199 (beach associations considered as a political subdivision and subject to the same restrictions imposed on special districts with respect to approvals required for bond issuances).
RULING:
The Association is a political subdivision and as such, is not subject to the Corporation Business Tax imposed under Conn. Gen. Stat. §12-214 and §12-219. Accordingly, it is not required to file an annual Corporation Business Tax return.
Endnotes:
1. While all residential associations and special districts derive their powers from the state, the way in which they are created varies. In some cases, such as the instant case, an association is created by a special act of the legislature. In other instances, and usually with respect to associations with more limited powers, an association is created as a non-stock corporation under Chapter 600 of the Connecticut General Statutes. Residential Associations in the Coastal Area, Linda Krause (1976) pp. 15-17. In still other instances, special districts are created pursuant to special statutory provisions. Conn. Gen. Stat. §7-324 et seq.
2. "Company" , for purposes of the tax imposed under Conn. Gen. Stat. §12-214, as well as the tax imposed under Conn. Gen. Stat. §12-219, is defined to mean "any corporation, foreign municipal electric utility, as defined in [Conn. Gen. Stat.] section 12-59, joint stock company or association or any fiduciary thereof, but not a municipal utility as defined in chapter 212 and chapter 212a". By regulation, "joint stock company" is defined to mean "an organization of individuals for purposes of profit, having a capital stock contributed by the members composing it, such capital stock being divided into shares of which each member possesses one or more, and which are transferable by the owner." Conn. Agencies Regs. §12-213-1(d). By regulation, "association" is defined to mean "an unincorporated organization that has, as described in section 301.7701-2(a)(1) of title 26 of the Code of Federal Regulations, associates, an objective to carry on business and divide the gains therefrom, continuity of life, centralization of management, liability for corporate debts limited to corporate property, and free transferability of interests; and , as described in section 301.7701-2(a) of title 26 of the Code of Federal Regulations, more corporate characteristics than noncorporate characteristics." Conn. Agencies Regs. §12-213-1(e).
3. Conn. Gen. Stat. §1259 (Rev. 1930) provided as follows:
Sec. 1259. State tax. An annual state tax of one million two hundred fifty thousand dollars is imposed upon the several towns of the state. Such tax shall be paid on or before November tenth of each year, and the towns are authorized to assess and collect such tax in the manner provided for the assessment and collection of taxes for paying their current expenses.
Conn. Gen. Stat. §1260 (Rev. 1930) provided as follows:
Sec. 1260. State taxes, how apportioned. Such tax shall be apportioned to and paid by the several towns in the state in the proportion which the total revenue received yearly from direct taxation in each town, including that received by all taxing districts therein, that received from taxes on shares of stock of any bank or of any trust or insurance company and that which would have been received in taxes from all property exempted from taxation under the provisions of any special act or by town vote as valued under the provisions of section 1192, as averaged for the three fiscal years next preceding, bears to the total revenue so determined for such time as averaged in all the towns in the state.
1943 Conn. Pub. Acts 295 amended §1268 (which was renumbered §290g). 1947 Pub. Acts 439 repealed §§1259, 1260, 1264, 1265 and §290g, effective July 1, 1947.
LEGAL DIVISION
SEPTEMBER 10, 1996