Ruling No. 2015-1, Corporation Business Tax Financial Service Company

Facts

Corporation is subject to the corporation business tax and is a partner in multiple entities that are treated as partnerships for federal income tax purposes (“Partnerships”).  Corporation is the general partner of each of the Partnerships.[1]  Corporation derives all of its gross income from its distributive shares of gross income from the Partnerships.  The Partnerships derive all of their gross income from sources and activities described in Conn. Gen. Stat. § 12-218b(a)(6)(J)(i) (“Financial Service Activities”).  Corporation and the Partnerships are not insurance companies or real estate brokers.

Issue

Whether Corporation is classified as a financial service company under Conn. Gen. Stat. § 12-218b(a)(6)(J)(i) due to the fact that its distributive shares of the Partnerships’ gross income, which the Partnerships derive entirely from Financial Service Activities, comprise all of Corporation’s gross income.

Ruling

Corporation is classified as a financial service company under Conn. Gen. Stat. § 12-218b(a)(6)(J)(i) due to the fact that its distributive shares of the Partnerships’ gross income, which the Partnerships derive entirely from Financial Service Activities, comprise all of Corporation’s gross income.

Relevant Law

Conn. Gen. Stat. § 12-218b provides for the apportionment of the net income of a financial service company.

Conn. Gen. Stat. § 12-218b(a)(6) sets forth the definition of “financial service company” and provides, in pertinent part, that said term includes:

Any company, other than an insurance company or a real estate broker, which derives fifty per cent or more of its gross income from one of more of the following sources or activities: Loans; letters of credit and acceptance of drafts; underwriting, purchase, placement, sale or brokerage of securities, commodities contracts or other financial instruments or contracts on its own account or for the account of others; exchanges, exchange clearinghouses and other services allied with the exchange of securities or commodities contracts; investment advisory or management services; investment banking services, corporate trust and escrow services; securities information processing; securities and financial rating agency services; transfer agent, clearing agent, securities custodial and depository services; securities exchange or quotation services; any of the services described in subsection (f) of section 12-218; any of the services described in subsection (g) of section 12-218; management, distribution or administrative services to or on behalf of an investment entity; management, distribution or administrative services to or on behalf of pension funds or retirement accounts; leasing or acting as an agent, broker or adviser in connection with leasing real and personal property that is the functional equivalent of an extension of credit and that transfers substantially all of the benefits and risks incident to the ownership of property, including any direct financing lease or leverage lease that meets the criteria of Financial Accounting Standards Board Statement No. 13, “Accounting for Leases” or any other lease that is accounted for as a financing by a lessor under generally accepted accounting principles; activities of a Morris plan company; credit card activities; third party insurance administration services, claim administration services, claim adjusting services, premium billing and collection services, or employee benefit plan administration services; insurance underwriting or policy issuance services; actuarial services; trust company services; financial planning services; insurance brokerage services; or risk management services.

Conn. Gen. Stat. § 12-218b(a)(6)(J)(i).

Conn. Gen. Stat. § 12-213(a)(9)(A) defines gross income as “gross income, as defined in the Internal Revenue Code.”   

With respect to Connecticut tax statutes that refer to the Internal Revenue Code, the Connecticut Supreme Court has stated:

We long have held that when our tax statutes refer to the federal tax code, federal tax concepts are incorporated into state law. . . .  Although this rule does not require the wholesale incorporation of the entire body of federal tax principles into our state income tax scheme, where a reference to the federal tax code expressly is made in the language of a statute, and where incorporation of federal tax principles makes sense in light of the statutory language at issue, our prior cases uniformly have held that incorporation should take place.

(Citations omitted; internal quotation marks omitted.)  Berkley v. Gavin, 253 Conn. 761, 773 (2000).

In accordance with its decision in Berkley, the Connecticut Supreme Court has found that “the corporation business tax incorporates the federal income tax concept of ‘gross income’” and, therefore, the corporation business tax “incorporates the conduit treatment of partnership tax attributes.”  Bell Atlantic NYNEX Mobil, Inc. v. Commissioner, 273 Conn. 240, 262 (2005).  

Section 61(a)(13) of the Internal Revenue Code provides that “gross income” includes income derived from a “[d]istributive share of partnership gross income.”

Section 702(b) of the Internal Revenue Code provides that “[t]he character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share. . . shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.”

Section 702(c) of the Internal Revenue Code provides that “[i]n any case where it is necessary to determine the gross income of a partner for purposes of this title, such amount shall include his distributive share of the gross income of the partnership.”

Discussion

The Connecticut Supreme Court has found that the corporation business tax incorporates the federal conduit treatment of partnerships through its adoption of the federal tax definition of “gross income.”  See Bell Atlantic, 273 Conn. at 262.  Based upon this incorporation, in any case where it is necessary to determine the gross income of Corporation for corporation business tax purposes, such as in determining Corporation’s gross income pursuant to the financial service company provisions under Conn. Gen. Stat. § 12-218b(a)(6)(J)(i), Corporation must include its distributive shares of the Partnerships’ gross income in its gross income.  See I.R.C. § 702(c).  Moreover, the character of Corporation’s distributive shares of such gross income “shall be determined as if such item were realized directly from the source from which realized by the [Partnerships].”  I.R.C. § 702(b). 

As stated above, Corporation derives all of its gross income from its distributive shares of the Partnerships’ gross income and the Partnerships derive all of their gross income from Financial Service Activities.  As such, in accordance with the conduit treatment of partnerships that is incorporated into the corporation business tax, Corporation derives all of its gross income directly from Financial Service Activities.  Accordingly, as Corporation derives fifty per cent or more of its gross income from Financial Service Activities, it is classified as a financial service company under Conn. Gen. Stat. § 12-218b(a)(6)(J)(i).