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Ezel / Tax Rulings / CT
CT Ruling 91-9 Capital Gains Tax 1991-03-29

Did Connecticut's former capital gains tax apply when an older retirement-plan participant elected federal transitional capital-gain treatment for a lump-sum distribution?

Short answer: Yes under this historical ruling. A Connecticut resident who had reached age 50 before January 1, 1986 and elected Pub. L. No. 99-514 § 1122(h)(3) treatment for a qualified-plan lump-sum distribution was subject to the former Connecticut capital gains tax under Conn. Gen. Stat. § 12-506(a)(2). The preserved federal rules treated part of the distribution as gain from a capital asset, and its omission from federal Schedule D did not change that legal character. DRS marks the ruling not current and obsoleted by AN 94(2).

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This page answers the general question as of 1991. Ezel answers yours, under current Connecticut tax law, with citations.

Currency note: this ruling is from 1991
Subsequent statutory amendments, regulation changes, court decisions, or later rulings may have changed the analysis. Treat this page as historical context, not current tax advice. Verify current law before relying on any specific rule, rate, or position mentioned here.
Disclaimer: This is an official 1991 Connecticut Department of Revenue Services Ruling based on the facts and law then in effect. DRS expressly marks it 'not current' and says it was obsoleted by Announcement (AN) 94(2). It addresses Connecticut's historical capital gains tax and a federal transition rule for certain lump-sum retirement distributions; it is not current return-preparation guidance. A taxpayer with different facts should not assume it applies. Connecticut imposes sales and use tax solely at the state level: there are no local or municipal sales taxes. This summary is informational only and is not legal or tax advice. Consult a licensed Connecticut tax professional about your specific situation.
About this page: The plain-English summary, reader guidance, and Q&A below were written by Ezel based on the official state tax ruling. The original ruling (linked on this page as a PDF) is the authoritative source for any reliance.
View original ruling (PDF)

Note -- obsolete historical guidance. DRS marks this ruling "not current" and states that it was obsoleted by Announcement (AN) 94(2). The summary below describes its 1991 treatment of a former tax and federal transition election.

Plain-English summary

A Connecticut resident received a lump-sum distribution from a qualified retirement plan. The person had reached age 50 before January 1, 1986 and elected the federal transition rule in Pub. L. No. 99-514 § 1122(h)(3), which preserved the old federal capital-gains provisions for qualifying distributions.

DRS ruled that the distribution was subject to Connecticut's former capital gains tax under Conn. Gen. Stat. § 12-506(a)(2). The federal transition provisions continued to treat part of the distribution as gain from the sale or exchange of a capital asset. Connecticut's statutory definition reached net gain determined for federal purposes from transactions treated as capital-asset sales or exchanges.

The ruling also rejected a form-over-substance argument: the fact that this portion of the lump-sum distribution did not appear on federal Schedule D was legally irrelevant. Its treatment under the preserved federal rules, not the line of the return where it appeared, controlled.

What this means for you

A federal transition election carried state consequences

Electing continued federal capital-gain treatment meant the distribution also fit Connecticut's historical capital-gains definition.

Reporting location did not change legal character

DRS looked to how federal law characterized the transaction, not whether the amount appeared on Schedule D.

The ruling is obsolete

DRS says AN 94(2) obsoleted it. It documents historical treatment and should not be applied to a current retirement distribution or return.

Common questions

Who fell within the ruling? A Connecticut resident who reached age 50 before January 1, 1986 and elected Pub. L. No. 99-514 § 1122(h)(3) for a qualified-plan lump-sum distribution.

Why did Connecticut tax the distribution as capital gain? The preserved federal rules treated part of it as gain from a capital asset, bringing it within Connecticut's historical statutory definition.

Did omission from Schedule D make it nontaxable? No. The ruling cited Yaeger v. Dubno for the point that the reporting form did not change the legal result.

Citations and references

  • Conn. Gen. Stat. §§ 12-505(a) and 12-506(a)(2) -- historical capital-gain definition and tax.
  • Pub. L. No. 99-514 § 1122(h)(3) and (6) -- transition election and definition of existing capital-gains provisions.
  • Former 26 U.S.C. §§ 402(a)(2) and 403(a)(2) -- treatment preserved by the federal transition rule.
  • Yaeger v. Dubno, 188 Conn. 206, 211 n.5 (1982) -- reporting-form point cited by DRS.
  • Announcement (AN) 94(2) -- identified by DRS as obsoleting this ruling.

Source

Original ruling text

Ruling 91-9, Capital Gains Tax

This information is not current and is being provided for reference purposes only

Ruling 91-9

Capital Gains Tax

This Ruling has been obsoleted by  AN 94(2)

ISSUE:

If a distributee who has attained age 50 before January 1, 1986 elects the application of Pub. L. No. 99-514, §1122(h)(3) to a lump sum distribution, is the distributee subject to the capital gains tax that is imposed by Conn. Gen. Stat. §12-506(a)(2)?

FACTS:

A resident, as defined in Conn. Gen. Stat. §12-505(a), is a distributee of a qualified retirement plan.

The distributee attained age 50 before January 1, 1986.

The distributee elected the application of Pub. L. No. 99-514, 100 Stat. 2085, 2470, 1122(h)(3) to a lump sum distribution from such plan.

DISCUSSION:

"In the case of a lump sum distribution to which [Pub. L. No. 99-514, §1122(h)(3)] applies, (i) the existing capital gains provisions shall continue to apply ...." Pub. L. No. 99-514, §1122(h)(3)(A)(i).

"For purposes of [Pub. L. No. 99-514, §1122(h)(3) and (4)], the term 'existing capital gains provisions' means the provisions of paragraph (2) of section 402(a) of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) and paragraph (2) of section 403(a) of such Code (as so in effect)." Pub. L. No. 99-514, §1122(h)(6), 100 Stat. 2085, 2472.

On the day before the date of the enactment of Pub. L. No. 99-514, 26 U.S.C. §402(a)(2) provided that a certain portion of the total taxable amount of a lump sum distribution "shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months ...."

On the day before the date of the enactment of Pub. L. No. 99-514, 26 U.S.C. §403(a)(2) provided that a certain portion of the total taxable amount of a lump sum distribution "shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months ...."

"Gains from the sale or exchange of capital assets", as defined in Conn. Gen. Stat. §12-505(a), "means (1) net gain as determined for federal income tax purposes, after due allowance for losses and holding periods, .... from (A) sales or exchanges of capital assets or assets treated as capital assets, ... or (B) from transactions or events taxable to the taxpayer as such sales or exchanges ...."

Because the tax imposed by Conn. Gen. Stat. §12-506(a)(2) applies to "net gain as determined for federal income tax purposes, after due allowance for losses and holding periods, ... (B) from transactions or events taxable to the taxpayer as [sales or exchanges of capital assets or assets treated as capital assets]", a distributee who has attained age 50 before January 1, 1986 and who elects the application of Pub. L. No. 99-514, §1122(h)(3) to a lump sum distribution would be subject to the tax.

The fact that the portion of the lump sum distribution to which the existing capital gains provisions, as defined in Pub. L. No. 99-514, §1122(h)(6), continue to apply (by reason of Pub. L. No. 99-514, §1122(h)(3)) is not reported on Schedule D to Form 1040 is without legal significance. See Yaeger v. Dubno, 188 Conn. 206, 211 n.5 (1982).

RULING:

A distributee who has attained age 50 before January 1, 1986 and who elects the application of Pub. L. No. 99-514, §1122(h)(3) to a lump sum distribution is subject to the capital gains tax that is imposed by Conn. Gen. Stat. §12-506(a)(2).

LEGAL DIVISION

March 29, 1991

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