Publications

Presented at the Ninth Annual Connecticut State Tax Issues Update ’99 November 11, 1999.

Reprinted with permission from PESI.

I. Overview of Income Tax

A. Tax Rate

1. Income Tax Rate

 

Connecticut Income Tax Rates
Filing Status	Tax Rates are 3% for the first . . .
Single or Married Filing Separately	$10,000 of CT taxable income, and 4.5% of the excess over $10,000
Head of Household	$16,000 of CT taxable income, and 4.5% of the excess over $16,000
Married Filing Jointly	$20,000 of CT taxable income, and 4.5% of the excess over $20,000

 

 

The Connecticut alternative minimum tax is a tax imposed on individuals, estates and trusts in addition to the regular Connecticut income tax. Taxpayers who are subject to and are required to pay the federal alternative minimum tax are subject to the Connecticut alternative minimum tax. The Connecticut alternative minimum tax is the lesser of:

• 19% of adjusted federal alternative minimum tax; or
• 5% of adjusted federal alternative minimum taxable income.

The Connecticut alternative minimum tax is reported on Form CT-6251, Connecticut Alternative Minimum Tax Return – Individual. See IP 94(2.4), Q & A: The Connecticut Alternative Minimum Tax for further details.

B. Who is subject to Personal Income Tax

1. Resident individuals, trusts, and estates

Residents compute Connecticut taxable income by adding and subtracting from federal adjusted gross income the modifications set forth in section III B. and C. below. Residents are those who are either domiciled in Connecticut for the entire tax year or have maintained a permanent place of abode in Connecticut and have spent a total of more than 183 days in Connecticut during the taxable year (and are not part-year residents defined below at I B.3.). For special rules governing Military Personnel, see IP 92(2.5) (issued 12/4/98).

Domicile is the place the taxpayer intends to have as the permanent home. A taxpayer may only have one domicile even though the taxpayer has more than one place to live. A taxpayer’s domicile does not change until the taxpayer moves to a new location and definitely intends to make the new location the permanent home.

Permanent place of abode is a residence that a taxpayer permanently maintains. A place of abode is not deemed permanent if its is maintained only during a temporary stay for the accomplishment of a particular purpose.

2. Non-residents

A non-resident taxpayer’s tax liability is computed based upon the greater of the taxpayer’s Connecticut adjusted gross income or total income from Connecticut sources.

Connecticut source income of a nonresident is income derived from or connected with sources within Connecticut when:

• The income is attributable to ownership or disposition of real or tangible personal property within Connecticut; including, but not limited to, the income from the rental or sale of such property;
• The income is attributable to compensation for services performed in Connecticut or income from a business, trade, profession or occupation carried on in Connecticut (including income derived directly or indirectly by athletes, entertainers or performing artists from closed-circuit and cable television transmissions of irregularly scheduled events if such transmissions are received or exhibited in Connecticut);
• The income is from a partnership doing business in Connecticut;
• The income is from an S corporation doing business in Connecticut; or
• The income is from a trust or estate with income derived from or connected with sources within Connecticut.

Generally speaking, Connecticut source income of a nonresident does not include the following income even if it was included in the taxpayer’s federal adjusted gross income:

• Distributions from qualified or non-qualified pension or retirement plans;
• Interest, dividends or gains from the sale or exchange of intangible personal property, unless that property is employed in a business, trade, profession or occupation carried on in Connecticut;
• Compensation received from active service in the United States military;
• Dividends from a corporation doing business in Connecticut;
• Compensation received from an interstate rail carrier, interstate motor carrier, or interstate motor private carrier;
• Gambling winnings;
• Interest earned by an individual from a Connecticut bank; or
• Income from business or employment activities in Connecticut that are considered casual, isolated or inconsequential.

3. Part-Year residents

Part-year residents are those who have changed permanent legal residence by moving into or out of Connecticut during the taxable year. Part-year residents first compute Connecticut tax liability in the same manner as residents. The tax calculated is then multiplied by a ratio of Connecticut adjusted gross income derived from or connected with Connecticut sources to Connecticut adjusted gross income from all sources.

Connecticut source income of a part-year resident is the sum of:

• Connecticut adjusted gross income for the part of the year the taxpayer was a resident;
• Income derived from or connected with Connecticut sources for the part of the year the taxpayer was a nonresident; and
• Special accruals (A part-year resident must recognize and report items of income, gain, loss or deduction on the accrual basis, regardless of the method of accounting normally used by the taxpayer. In general, an item of income is subject to special accrual if the right to receive it is fixed and the amount to be paid is determinable with reasonable accuracy at the time the taxpayer changes residency status).

If Connecticut adjusted gross income from Connecticut sources exceeds Connecticut adjusted gross income from all sources, a special calculation is needed. For instance, where a non-Connecticut source loss reduced federal adjusted gross income below the amount of a part-year resident’s Connecticut source income, the Connecticut tax is calculated on only the Connecticut source income, less any personal exemption allowed.

II. Specific items included from Connecticut Sources

A. Incentive Stock Options (Conn. Agencies Reg. § 12-711(b)-16).

Connecticut adjusted gross income derived from or connected with sources within Connecticut includes income from the disposition of stock that was purchased by an employee under an incentive stock option if, during the period beginning with the first day of the employee’s taxable year during which such option was granted and ending with the last day of the employee’s taxable year during which such option was exercised, the employee was performing services within Connecticut as an employee.

If the employee’s services were performed wholly within Connecticut, the amount by which the fair market value of the stock, at the time such option was exercised, exceeds the option price is compensation that is derived from or connected with sources within this state, provided, if the fair market value of the stock, at the time such option was exercised, exceeds the amount realized on the disposition of the stock, then only the amount of income that is recognized for federal income tax purposes shall be considered compensation that is derived from or connected with sources within Connecticut.

If, however, the employee’s services were performed partly within and partly without Connecticut, the portion of the amount by which the fair market value of the stock, at the time such option was exercised, exceeds the option price, that is derived from or connected with sources within this state is in the same ratio that the total compensation received from the employer during such period for services performed in this state bears to the total compensation received from the employer during such period for services performed both within and without Connecticut.

B. Restricted Property (Conn. Agencies Reg. § 12-711(b)-17).

Connecticut adjusted gross income derived from or connected with sources within Connecticut includes income recognized under section 83 of the Internal Revenue Code on the transfer of property in connection with the performance of services, if, during the period beginning with the first day of the taxable year of the transferee during which such property was transferred and ending with the last day of the taxable year of the transferee during which the rights of the person having the beneficial interest in such property first were transferable or first were not subject to a substantial risk of forfeiture, whichever occurs earlier (or, if an election is made under section 83(b)(1) of the Internal Revenue Code, the taxable year that such election is made), the transferee was performing such services within Connecticut.

If the transferee’s services were performed wholly within Connecticut, the amount by which the fair market value of the property, as determined under section 83(a) of the Internal Revenue Code, at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, exceeds the amount, if any, paid for such property, is derived from or connected with sources within this state. If an election is made under section 83(b)(1) of the Internal Revenue Code, the amount by which the fair market value of the property, as determined under section 83(b) of the Internal Revenue Code, exceeds the amount, if any, paid for such property, is derived from or connected with sources within Connecticut.

If, however, the transferee’s services were performed partly within and partly without Connecticut, the portion of the amount by which the fair market value of the property, as determined under section 83(a) of the Internal Revenue Code, at the first time the rights of the person having the beneficial interest in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier, exceeds the amount, if any, paid for such property, that is derived from or connected with sources within Connecticut is in the same ratio that the total compensation received from the transferor during such period for services performed in this state bears to the total compensation received from the transferor during such period for services performed both within and without Connecticut. If an election is made under section 83(b)(1) of the Internal Revenue Code, the portion of the amount by which the fair market value of the property, as determined under section 83(b) of the Internal Revenue Code, exceeds the amount, if any, paid for such property, that is derived from or connected with sources within Connecticut is in the same ratio that the total compensation received from the transferor during such period for services performed in Connecticut bears to the total compensation received from the transferor during such period for services performed both within and without this state.

The difference between (1) the amount realized on the disposition of the property and (2) the fair market value of the property, as determined under section 83(a) or (b) of the Internal Revenue Code, as the case may be, is income or loss that is not derived from or connected with sources within this state.

C. Non-Qualified Stock Options (Conn. Agencies Reg. § 12-711(b)-18).

Connecticut adjusted gross income derived from or connected with sources within Connecticut includes income recognized under section 83 of the Internal Revenue Code in connection with a nonqualified stock option if, during the period beginning with the first day of the taxable year of the optionee during which such option was granted and ending with the last day of the taxable year of the optionee during which such option was exercised (or, if the option has a readily ascertainable fair market value, as defined in 26 C.F.R. § 1.83-7(b), at the time of grant, the taxable year during which such option was granted), the optionee was performing services within Connecticut.

If the optionee’s services were performed wholly within Connecticut, any amount by which (1) the fair market value of the stock, at the time such option was exercised, exceeds (2) the option price, is compensation that is derived from or connected with sources within Connecticut.

If, however, the optionee’s services were performed partly within and partly without Connecticut, the portion of the amount by which the fair market value of the stock, at the time such option was exercised, exceeds the option price, that is derived from or connected with sources within Connecticut is in the same ratio that the total compensation received from the grantor during such period for services performed in this state bears to the total compensation received from the grantor during such period for services performed both within and without this state.

The difference between the amount realized on the disposition of the stock and the fair market value of the stock, at the time such option was exercised, is gain or loss that is not derived from or connected with sources within Connecticut.

D. Non-Qualified Deferred Compensation (Conn. Agencies Reg. § 12-711(b)-19).

Connecticut adjusted gross income derived from or connected with sources within Connecticut includes nonqualified deferred compensation that is attributable to services performed wholly within Connecticut.

Connecticut adjusted gross income derived from or connected with sources within Connecticut does not include deferred compensation that is attributable to services performed wholly without Connecticut, whether or not the recipient was a nonresident individual at the time that the services were performed.

Where the employee’s services were performed partly within and partly without Connecticut, Connecticut adjusted gross income derived from or connected with sources within Connecticut includes that proportion of the nonqualified deferred compensation included in Connecticut adjusted gross income that the total compensation received from the employer for the services performed in Connecticut during a period consisting of the portion of the taxable year prior to receipt of the nonqualified deferred compensation and the three immediately preceding taxable years bears to the total compensation received from the employer during such period for services performed within and without Connecticut. The compensation for services performed within Connecticut shall be determined separately for each taxable year or portion of a year.

E. Covenants not to Compete (Conn. Agencies Reg. § 12-711(b)-20).

Connecticut adjusted gross income derived from or connected with sources within Connecticut includes income that is received by a nonresident individual from a covenant not to compete, to the extent that such income is attributable to refraining from carrying on a trade, business, profession or occupation in Connecticut.

Example: X, a nonresident individual who is a partner in a law firm, retires during 1994 and, in exchange for receiving the sum of $100,000 in 1994 and each of the nine succeeding years, covenants not to compete with the firm anywhere that the firm is engaged in the practice of law during the next five years. The firm has an office in Connecticut, and an office in Massachusetts. On its 1994 Form CT-1065, the firm properly apportions 60% of the net amount of its items of income, gain, loss and deduction to Connecticut, and 40% to Massachusetts. The partners file 1994 income tax returns with both jurisdictions, also properly reporting 60% of their distributive share of partnership income as derived from or connected with Connecticut sources, and 40% as derived from or connected with Massachusetts sources. Whether X worked at the firm’s Connecticut office or at its Massachusetts office, X’s Connecticut adjusted gross income derived from or connected with Connecticut sources for 1994 and the nine succeeding years shall include 60% of the income that is received by X from the covenant not to compete. If the percentage of X’s distributive share of partnership income that is derived from or connected with Connecticut sources has varied from year to year, the average of such percentage for the taxable year in which X retires and for the two preceding taxable years may be used in determining the percentage of the income that is received by X from the covenant not to compete that is derived from or connected with Connecticut sources.

III. Calculation of Connecticut Taxable Income

A. Formula

Federal Adjusted Gross Income

Plus or minus

Connecticut Modifications

Equals

Connecticut Adjusted Gross Income

Minus

Connecticut Personal Exemptions

Equals

Connecticut Taxable Income

Multiplied by

Tax Rate

Equals

Tentative Tax Liability

Minus

Connecticut Tax Credits

Equals

Connecticut Tax Liability

B. Additions to Federal Adjusted Gross Income

• Interest on obligations of states and political subdivisions other than Connecticut (if excluded from federal adjusted gross income). This does not include interest income derived from government obligations of Puerto Rico, Guam, American Samoa and the U.S. Virgin Islands;
• Exempt-interest dividends received from a mutual fund that are derived from state and municipal government obligations, other than obligations of Connecticut. If the exempt-interest dividends are derived from obligations of both Connecticut and other states, only the percentage derived from other states is included.
• If the taxpayer is a shareholder of an S corporation that is subject to the Connecticut corporation business tax, and the S corporation’s taxable year for federal income tax purposes is the calendar year, the taxpayer multiplies 55% of his pro rata share of the S corporation’s nonseparately computed loss by the S corporation’s Connecticut corporation business tax apportionment percentage. If the taxpayer is a shareholder of an S corporation whose taxable year is other than the calendar year, the taxpayer multiplies 75% of his pro rata share of the S corporation’s nonseparately computed loss by the S corporation’s Connecticut corporation business tax apportionment percentage.
• Taxable amount of lump-sum distributions from qualified plans not included in federal adjusted gross income;
• Beneficiary’s share of Connecticut fiduciary adjustment; and
• Loss on sale of Connecticut State and Local Government bonds.

C. Subtractions from Federal Adjusted Gross Income

• Interest income (to the extent includible in federal adjusted gross income) derived from United States government obligations such as Savings Bonds Series EE and Series HH, U.S. Treasury bills and notes. Interest income derived from the following are not subtracted: Fannie Mae bonds, Ginnie Mae bonds, and Freddie Mac securities.
• Exempt dividends from certain qualifying mutual funds derived from U.S. Government obligations;
• Social Security benefit adjustments;
• Refunds of state and local income taxes;
• Tier 1 and Tier 2 Railroad Retirement Benefits and Supplemental Annuities;
• If the taxpayer is a shareholder of an S corporation that is subject to the Connecticut corporation business tax and the S corporation’s taxable year for federal income tax purposes is the calendar year, the taxpayer multiplies 55% of his pro rata share of the S corporation’s nonseparately computed income by the S corporation’s Connecticut corporation business tax apportionment percentage. If the S corporation has a taxable year other than a calendar year, the taxpayer multiplies 75% of his pro rata share of the S corporation’s separately computed income by the S corporation’s Connecticut corporation business tax apportionment percentage.
• Beneficiary’s share of Connecticut fiduciary adjustment; and
• Gain on sale of Connecticut state and local government bonds.

D. Personal Exemptions

To compute Connecticut taxable income, a taxpayer subtracts his Connecticut personal exemption from his Connecticut adjusted gross income. If the taxpayer’s Connecticut adjusted gross income is less than or equal to the maximum exemption amount for his filing status, the taxpayer does not owe any Connecticut income tax.

Maximum personal exemption levels are as follows:

• $12,000 – single filer or married filing separately. For every $1,000 (or part thereof) of Connecticut adjusted gross income over $24,000, the exemption is reduced by $1,000;
• $19,000 – head of household. For every $1,000 (or part thereof) of Connecticut adjusted gross income over $38,000, the exemption amount is reduced by $1,000;
• $24,000 – married filing jointly. For every $1,000 (or part thereof) of Connecticut adjusted gross income over $48,000, the exemption amount is reduced by $1,000.

E. Credits

• Connecticut residents may claim a credit for taxes paid to another state, the District of Columbia. The taxes must be paid on income that is subject to Connecticut personal income tax. The amount of credit is limited to the amount of Connecticut tax that would be applicable to the same income. The credit is calculated by using a ratio of the income taxed in the other jurisdiction over Connecticut adjusted gross income, and multiplying this ratio by the total Connecticut tax.
• For taxable years beginning on or after January 1, 1999, the maximum property tax credit is increased to $425 and for taxable years beginning on or after January 1, 2000, the maximum property tax credit is $500. The property tax must have been paid to a Connecticut political subdivision on a primary residence or motor vehicle, or both. These credits are subject to limitations for taxpayers with income over certain levels as follows:

 

Filing Status	CT Adjusted Gross Income	Property Tax Credit Phaseout
Single	Over $52,500	The amount of the credit that exceeds $100 is reduced by 10% for each $10,000 (or fraction thereof) that CT AGI exceeds $52,500
Married Filing Separately	Over $50,250	The amount of the credit that exceeds $100 is reduced by 10% for each $5,000 (or fraction thereof) that CT AGI exceeds $50,250
Head of Household	Over $78,500	The amount of the credit that exceeds $100 is reduced by 10% for each $10,000 (or fraction thereof) the CT AGI exceeds $78,500
Married Filing Jointly	Not over $100,500	The amount of the credit that exceeds $100 is reduced by 10% for each $10,000 (or fraction thereof) that CT AGI exceeds $100,500

 

IV. Legislative Changes (CT Tax News Quarterly, Vol. 11 (July/Aug. 1999)

A. Social Security

Recently enacted legislation exempts certain Social Security recipients from paying Connecticut income tax on their Social Security Benefits. The new legislation applies to individuals who filed a federal income tax return as single or married filing separately and reported a federal adjusted gross income of less than $50,000, and to those who filed a federal income tax return as married individuals filing jointly or head of household and reported a federal adjusted gross income of less than $60,000. Eligible individuals will be able to subtract the amount of federally taxable Social Security benefits from federal adjusted gross income in arriving at Connecticut adjusted gross income on returns filed for taxable years beginning on or after January 1, 1999. (P.A. 99-173, § 1).

Social Security recipients who pay federal income tax on their benefits and report a federal adjusted gross income above the threshold amounts are unaffected by the new law. These individuals remain liable for the Connecticut income tax on up to 25% of total Social Security benefits received and should complete the Social Security Benefit Adjustment Worksheet to compute the amount of benefits that are taxable for Connecticut income tax purposes.

B. Relief for Innocent Spouses

Newly enacted legislation provides three types of relief from joint and several liability to innocent spouses who have filed a joint Connecticut income tax return. Any individual who has filed a joint return may request (1) separation of liability, (2) innocent spouse relief, or (3) equitable relief to avoid join and several liability.

Separation of liability is available to any individual who filed a joint return for the taxable year(s) that has a deficiency due, in part, to an item of the taxpayer’s spouse. If relief is granted, the deficiency is allocated between the taxpayer and the taxpayer’s spouse. Certain transfers between spouses may invalidate this election.

Innocent spouse relief is available to any individual who has filed a joint return that has an understatement of tax due to an erroneous item of the taxpayer’s spouse. If relief is granted, the taxpayer shall be relieved of tax liability (including interest and penalties) to the extent such liability is attributable to the understatement.

If the taxpayer does not qualify for separation of liability of innocent spouse relief, that taxpayer may request equitable relief if it is inequitable to hold the taxpayer liable for any unpaid tax or deficiency.

Individuals seeking relief must complete Form CT-8857, Request for Innocent Spouse Relief. An individual may file for relief within two years after the date on which the Commissioner has started collection activities against the taxpayer seeking relief. (P.A. 99-48, §§ 3 and 4). See also SN 99(2) (issued 2/10/99) regarding confidentiality of returns and return information.

C. Extension Requirement Clarified

For taxable years beginning on or after January 1, 1999, taxpayers who pay 90% or more of their total income tax due with their extension request by the original due date of the return and pay the remaining 10% balance with a timely-filed income tax return will avoid penalty for failure to pay the full amount due by the original due date. (P.A. 99-121, § 22).

D. Single Filer Relief

The personal income tax exemptions and credits available to single individuals are increased over an 8 year period for taxable years beginning on or after January 1, 2000. In calculating Connecticut taxable income, single taxpayers will reduce Connecticut adjusted gross income by a higher personal exemption rate before applying the income tax rate. After calculating the Connecticut income tax rate, single taxpayers will then apply a higher personal credit percentage to arrive at the amount of total Connecticut tax liability. The tax tables will be revised beginning with the 2000 taxable year to reflect the increase in personal exemptions and credits over the 8 year period. The personal income tax exemptions and credits for taxpayers who file as married filing separately, head of household and married filing jointly will remain unchanged. (P.A. 99-173, §§ 5, 6, 7 and 8).

The Connecticut adjusted gross income thresholds used by single filers to calculate the property tax credit will increase over an 8 year period. (P.A. 99-173, § 7).

E. Time for Making Deficiency Assessments

The Commissioner may mail a notice of proposed deficiency at any time if a taxpayer fails to report a change or correction by the IRS, which, in the case of an individual, increases federal adjusted gross income or in the case of a trust or estate, increases federal taxable income. The Commissioner may mail a notice of proposed deficiency at any time if a taxpayer fails to report a change or correction by tax officers of another jurisdiction which affects the tax that the taxpayer is required to pay to another jurisdiction. Also, if a taxpayer reports a change or correction by the IRS or by tax officers of another jurisdiction, the assessment, if not made upon the filing of the report, may be made not later than three years after such report is filed. (P.A. 99-121, § 25).

F. Fraud Penalty

A 25% penalty applies to any deficiency assessment where a federal court has held that a taxpayer has filed a fraudulent return with the IRS. (P.A. 99-121, § 23).

G. Jeopardy Assessment

Jeopardy assessments are final ten days after service of the notice of assessment, unless the taxpayer files a timely written protest. The amount assessed is due and payable no later than the tenth day after service of the notice of assessment, unless the taxpayer has obtained a stay of collection. (P.A. 99-121, § 24).

H. Change of Withholding Tables

The DRS states that that for the period prior to July 1, 2000, single individuals should make withholding or estimated tax payments without regard to the personal income tax exemption and credit changes. The Commissioner will issue new withholding tables and estimated income tax worksheets effective July 1, 2000. The new tables and worksheets will reflect the increased personal exemptions and credits for single individuals that are in effect for all of taxable year 2000. (P.A. 99-173, § 8).

I. Private Delivery Services

Generally, a document is considered filed and a payment is considered made when it is received. Prior law provided, however, that where a document or payment was delivered by United States mail to the DRS after a due date prescribed by law, the date of the postmark is considered the date of delivery or date of payment.

Effective October 1, 1999, the “timely mailing as timely filing/payment” rule was expanded to include deliveries by designated private delivery services. (P.A. 99-48, § 1). Special Notice 99(14) (issued 9/29/99) provides details on this new rule and lists the following private delivery services which qualify for the “timely mailing as timely filing/payment” rule:

 

Airborne Express	DHL Worldwide Express	Federal Express	United Parcel Service
Overnight Air Express Service	DHL “Same Day” Service	FedEx Priority Overnight	UPS Next Day Air
Next Afternoon Service	DHL USA Overnight	FedEx Standard Overnight	UPS Next Day Air Saver
Second Day Service		FedEx 2Day	UPS 2nd Day Air and UPS 2nd Day Air A.M.

 

The issue was whether the reduction to plaintiffs’ federal basis in the S corporation stock was excluded when computing their adjusted gross income in determining Connecticut income tax liability.

The plaintiffs argued that pass thru losses for 1988, 1989 and 1990 were not applied to reduce their Connecticut capital gains tax liability during those years and therefore the tax benefit rule should permit them not to add back the losses to the basis of the worthless stock when computing the Connecticut income tax. The Superior Court held that plaintiffs had benefited from the pass-thru losses because the losses reduced their federal adjusted gross income upon which the Connecticut capital gain tax was based. Plaintiffs appeal is pending before the Connecticut Supreme Court.

VI. Administrative Rulings

A. Income from Regulated Investment Companies

Ruling 99-4 (issued 9/2/99) concluded, among other things, that an individual receiving a distribution from a regulated investment company of exempt-interest dividends derived from interest income allocable to Connecticut State or Local Bonds is not required to add the amount of the distribution to the individual’s federal adjusted gross income in computing Connecticut adjusted gross income.

Under the facts of the ruling, a trust, established under Massachusetts law, was registered as an open-end management investment company. The trust established portfolios in which investments were made. Investors in such portfolios were regulated investment companies as defined in I.R.C. § 851. Each portfolio was classified for federal income tax purposes as a partnership. One of the portfolios invested in Connecticut State or Local Bonds.

Connecticut law provides that a taxpayer must add to his federal adjusted gross income any exempt-interest dividends exclusive of exempt-interest dividends derived from State or Local obligations. C.G.S/ § 12-701(a)(20)(A)(ii). The DRS ruled that because the interest income derived from the Connecticut State and Local Bonds retained in the hands of the investor its character as interest income and because payment by an investor who is a aregulated investment company to a shareholder be an exempt-interest dividend to the extent properly allocable to interest income received by the Investor in respect of the State or Local Bonds, such distribution was not required to be added to the shareholder’s federal adjusted gross income under C.G.S. § 12-701(a)(20)(A)(ii). The ruling follows similar decisions by the states of Massachusetts, South Carolina, and New York.

B. Limited Liability Companies and S Corporations

Special Notice 99(3) (issued 2/22/99) explains the DRS’ tax treatment of limited liability companies and S corporations.

Limited Liability Companies

In determining the Connecticut income tax treatment of both a single member limited liability company (SMLLC) and a limited liability company (LLC) the DRS adopts the entity’s federal income tax classification as determined under the check-the-box rules. Thus, for taxable years beginning on or after January 1, 1997, a SMLLC will be disregarded as an entity separate from its owner for Connecticut income tax purposes if it is so disregarded for federal income tax purposes. Otherwise, an SMLLC will be treated as a corporation for Connecticut income tax purposes if it is classified as such for federal income tax purposes. Similarly, effective for taxable years beginning on or after January 1, 1997, an LLC with two or more members will be treated as a partnership for Connecticut income tax purposes if it is so classified for federal income tax purposes. Otherwise, an LLC with two or more members will be treated as a corporation for Connecticut income tax purposes if it is so classified for federal income tax purposes.

SMLLCs that elect to be treated as sole proprietorships are not required to file Form CT-1065, Connecticut Partnership Income Tax Return. Where an SMLLC that elects to be disregarded as a separate entity is owned by a corporation, the SMLLC will be treated as a branch or division of the owner. Accordingly, the corporation owner must take into account the activities of the SMLLC in determining whether the owner is doing business in Connecticut. All of the SMLLC’s activities will be attributed to the owner.

LLCs that are treated as partnerships for federal income tax purposes and that have income, gain, loss or deductions derived from or connected with Connecticut sources during the year are required to file a Form CT-1065.

S Corporations

S corporations may own qualified S corporation subsidiaries (QSSS). Under the Internal Revenue Code, a corporation is a QSSS if it is 100 percent owned by an S corporation and that S corporation elects to treat the subsidiary as a QSSS. A QSSS is not treated as a separate corporation, but rather all of the subsidiary’s assets, liabilities, and items of income, deduction and credit are treated as those of the S corporation parent.

Connecticut relies on the Internal Revenue Code for purposes of defining S corporations under both the personal income tax and corporate business tax. Because the personal income tax and the corporation business tax both incorporate the federal income tax definition of S corporations, a corporation that meets the expanded definition of an S corporation for federal tax purposes will be treated as an S corporation in Connecticut. In addition, where an S corporation has a QSSS, the subsidiary’s items of income, loss and deduction pass through to the parent’s shareholders.

An S corporation must pass its items of income, loss and deductions through to its shareholders. Where an S corporation elects pass-thru treatment for a QSSS, only one Form CT-1120SI, S Corporation Information and Composite Income Tax Return is required to be filed. Where an S corporation does not elect pass-thru treatment for a QSSS, two Form CT-1120SIs are required to be filed: one for the S corporation parent and one for the S corporation subsidiary.

VII. Connecticut Taxpayer Bill of Rights

Policy Statement 99(4) (issued 9/2/99) explains the Connecticut Taxpayer Bill of Rights which guarantees that the rights, privacy and property of Connecticut taxpayers are safeguarded and protected during tax assessments, collection and enforcement.

The rights include the following:

• The right to receive available information and to be provided with prompt, accurate responses to questions and requests for tax assistance;
• The right to request assistance from a taxpayer’s rights advocate if the taxpayer has a complaint or problem;
• The right to be represented or advised by counsel or other qualified representatives at any time in administrative interactions with the Department of Revenue Services and the right to have audits, inspections or records and interviews conducted at reasonable times and places;
• The right to receive simple, nontechnical statements which explain the procedures, remedies and rights available during audit, appeals, and collection proceedings, and the right to be provided with a narrative description which explains the basis of audit changes, proposed assessments, assessment and denials of refunds, identifies the amount owed in tax, interest and penalties, and states that consequences of failing to comply with the notice.
• The right to be informed of impending collection actions which require sale or seizure of property or freezing of assets, except jeopardy assessments, and the right to at least thirty days’ notice in which to pay the liability or seek further review;
• The right to have all other collection actions attempted before a jeopardy assessment unless delay will endanger collection and, after a jeopardy assessment is made, taxpayer has the right to an immediate review of the jeopardy assessment;
• The right to seek review, through formal or informal proceedings, of any adverse decisions relating to determinations in the audit or collection process;
• The right to have tax information kept confidential;
• The right to procedures for requesting the cancellation, release, or modification of liens filed by the Department of Revenue Services and for requesting that any lien which is filed in error be so noted on the lien cancellation filed by the Department of Revenue Services in public notice and in notice to any credit agency;
• The right to procedures that ensure that individual employees of the Department of Revenue Services are not paid, evaluated or promoted on the basis of the amount of assessment or collections from taxpayers;
• The right to have the Department of Revenue Services begin and complete its audits in a timely and expeditions manner after notification of intent to audit.

APPENDIX

Special Notices

SN 99(2) 1998 Legislative Changes Affecting the Confidentiality of Returns and Return Information

SN 99(3) Effect of Federal Tax Law Changes on the Taxation of Limited Liability Companies and S Corporations and Their Shareholders

SN 99(14) Designated Private Delivery Services

Informational Publications

IP 99(1) Is My Connecticut Withholding Correct?

IP 99(3) Personal Taxes

IP 97(9.1) Q & A: Income Tax Credit for Property Taxes Paid to a Connecticut Political Subdivision

IP 94(2.4) Q & A: The Connecticut Alternative Minimum Tax

IP 93(6.5) A Guide to Calculating your Annualized Estimated Income Tax Installments and Worksheet CT-1040 AES

IP 92(5.8) Estimated Connecticut Income Taxes

IP 92(2.5) Connecticut Income Tax Information for Military Personnel and Veterans

Policy Statements

PS 99(4) Your Rights as a Connecticut Taxpayer

Rulings

Ruling No. 99-4 Income Tax