Did excluding income from federal gross income under 26 U.S.C. § 883(a)(1) make a corporation exempt from Connecticut corporation business tax?

Plain-English summary

X Corporation had income that was not included in federal gross income under 26 U.S.C. § 883(a)(1). Connecticut's historical corporation-business-tax definition began with federal corporate gross income, so that excluded income was likewise not included in Connecticut gross income.

But DRS drew a firm distinction between income being excluded and the corporation being exempt. Section 883(a)(1) did not make X Corporation a company "exempt by the federal corporation net income tax law" for purposes of Conn. Gen. Stat. § 12-214 and the cited regulation.

X Corporation therefore remained subject to the additional tax imposed by § 12-219. It also could owe the § 12-214 tax on income other than the Section 883 amount.

The ruling gave two examples of potentially taxable other income: interest on state and local obligations that federal law excluded but Connecticut included, and interest on federal obligations that Connecticut could include because its levy was a nondiscriminatory franchise tax.

What this means for you

An exclusion for a particular income stream did not exempt the entire corporation from Connecticut's historical corporation business tax system. The company still had to consider the additional tax and the treatment of every other income category.

Common questions

Was the Section 883(a)(1) income itself included in Connecticut gross income? No. The ruling says the historical Connecticut definition followed the federal exclusion for that income.

Did that make X Corporation federally exempt? No. DRS said an income exclusion was not an entity-level exemption.

Could other income still be taxed? Yes. The ruling specifically discussed state, local, and federal obligation interest.

Citations and references

• Conn. Gen. Stat. §§ 12-213, 12-214, and 12-219.
• Conn. Agencies Regs. § 12-214-2(b)(2).
• 26 U.S.C. § 883(a)(1).
• 31 U.S.C. § 3124.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 90-36

Original ruling text

Ruling 90-36, Corporation Business Tax

Ruling 90-36

Corporation Business Tax

"Gross income", for corporation business tax purposes, includes "gross income as defined in the federal corporation net income tax law." Conn. Gen. Stat. §12-213. "Gross income" does not include that income not includable in gross income pursuant to 26 U.S.C. §883(a)(1).

However, the fact that a company has income not includable in gross income pursuant to 26 U.S.C. §883(a)(1) does not mean that it is a company "exempt by the federal corporation net income tax law"; Conn. Gen. Stat. §12-214 and Conn. Agencies Regs. §12-214-2(b)(2).

Please note that X Corporation would be subject to the additional tax imposed by Conn. Gen. Stat. §12-219 and may even have income (other than income not includable in gross income pursuant to 26 U.S.C. §883(a)(1)) that is subject to the tax imposed by Conn. Gen. Stat. §12-214.

For example, X Corporation may have interest income derived from State and local obligations, which income is not includable in gross income for federal income tax purposes but is includable in gross income for Connecticut corporation business tax purposes. See Conn. Gen. Stat. §12-213. Or X Corporation may have interest income derived from Federal obligations that is includable in gross income for Connecticut corporation business tax purposes, because the tax is a nondiscriminatory franchise tax. See 31 U.S.C. §3124.

LEGAL DIVISION

March 19, 1990