Is a qualified REIT subsidiary a separate corporation for Connecticut corporation business tax, or is it merged into the REIT?

Note: DRS has since declared this Ruling obsolete in part (Announcement 94(1)) and later cited it in Ruling 2001-1. It is preserved here as grounded historical guidance; confirm the current corporation business tax treatment of REITs and their subsidiaries before relying on it.

Plain-English summary

A business trust that qualified as a real estate investment trust (REIT) under federal law planned to form a wholly-owned "qualified REIT subsidiary" (QRS) to do business in Connecticut. Federal tax law (26 U.S.C. § 856(i)) says a QRS is not treated as a separate corporation — all of its assets, liabilities, income, deductions, and credits are treated as the REIT's own — which lets a REIT wall off liability in separate subsidiaries while still being taxed as a single entity. The trust asked how Connecticut's corporation business tax treats the subsidiary.

The subsidiary is still taxable. Connecticut's corporation business tax is a tax on the privilege of carrying on business in corporate form (Conn. Gen. Stat. § 12-214). A QRS whose separate existence is disregarded federally still enjoys that corporate privilege, so it remains subject to the tax. DRS distinguished its earlier Ruling 91-26 (regulated-investment-company "series funds"), where the separate corporate existence was a mere legal fiction — a QRS is a real corporation.

But it files together with the REIT. Because federal law folds the QRS's tax items into the REIT's, the REIT files one corporation business tax return covering itself and its qualified REIT subsidiaries. The mechanics DRS spelled out:

• Each QRS must obtain its own Connecticut tax registration number.
• A signed statement ("This corporation business tax return is filed in accordance with Ruling No. 92-10.") identifying each QRS by name, Connecticut registration number, and federal employer identification number must be attached to the return.

One carve-out. The minimum or maximum additional tax under Conn. Gen. Stat. § 12-219(a)(2) is computed separately for each corporation — the REIT and each QRS — disregarding the single-taxpayer treatment.

What this means for you

A "disregarded" entity can still owe Connecticut corporation business tax

Federal law disregarding a subsidiary (as with a qualified REIT subsidiary) does not automatically make it invisible for Connecticut's corporation business tax. The tax reaches the privilege of operating in corporate form, so an entity that keeps its corporate existence can remain a taxpayer even when its income is reported on a parent's return.

File as one taxpayer, but register each entity and disclose it

Where the ruling applies, the REIT reports on a single combined return, yet each qualified REIT subsidiary still needs its own Connecticut registration number and must be named in an attached, signed statement. The combined-filing convenience does not erase each entity's separate registration and disclosure duties.

Watch the separate minimum/maximum tax calculation

The additional tax under § 12-219(a)(2) (Connecticut's alternative tax base with a floor and a ceiling) is run entity by entity, not on the combined group — a detail that can change the total tax owed compared with treating the group as one taxpayer.

Common questions

Q: Is a qualified REIT subsidiary subject to Connecticut corporation business tax?
A: Yes. Even though federal law disregards it as a separate corporation, it still enjoys the privilege of doing business in corporate form, which is exactly what the tax reaches.

Q: Does the subsidiary file its own return?
A: No — the REIT files a single corporation business tax return covering itself and its qualified REIT subsidiaries. But each subsidiary must obtain its own Connecticut tax registration number and be identified in a signed statement attached to the return.

Q: Is anything calculated separately?
A: Yes. The minimum or maximum additional tax under Conn. Gen. Stat. § 12-219(a)(2) is figured separately for each corporation, disregarding the single-taxpayer treatment.

Q: Is this ruling still current?
A: Not entirely — DRS later declared it obsolete in part (Announcement 94(1)). Treat it as historical guidance and confirm the current rules for REITs and their subsidiaries.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-214 (privilege tax on carrying on business in corporate form); § 12-219(a)(2) (minimum/maximum additional tax); § 12-213 (definitions)
• Conn. Agencies Regs. § 12-213-1(e) (association taxable as a corporation); § 12-214-1 (carrying on business in Connecticut)
• 26 U.S.C. § 856(a), (c), (i)(1)-(2) (REIT qualification; qualified REIT subsidiary disregarded, its tax items treated as the REIT's)

Case law (as cited by the ruling):

• Flint v. Stone Tracy Co., 220 U.S. 107 (1911); Spector Motor Service, Inc. v. Walsh, 135 Conn. 37, 61 A.2d 89 (1948)

Related DRS ruling (described, not linked):

• Ruling 91-26 (regulated investment company "series funds") — distinguished here, and clarified to require a similar attached statement.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 92-10

Original ruling text

Ruling 92-10, Corporation Business Tax / Real Estate Investment Trusts

Ruling 92-10

Corporation Business Tax

Real Estate Investment Trusts

This Ruling is obsoleted in part by   AN 94(1) ; cited in   Ruling 2001-1

FACTS:

A business trust [hereinafter, "the Trust"] is an association taxable as a corporation for federal income tax purposes, as defined in Conn. Agencies Regs. §12-213-1(e).

The Trust is also a real estate investment trust, as defined in 26 U.S.C. §856(a).

Under 26 U.S.C. §856(c), the Trust is "considered a real estate investment trust."

The Trust will form a wholly-owned subsidiary that will be a qualified REIT subsidiary, as defined in 26 U.S.C. §856(i)(2).

Either the Trust or the qualified REIT subsidiary will carry on, or will have the right to carry on, business in Connecticut, as the phrase is used in Conn. Gen. Stat. §12-214 and defined in Conn. Agencies Regs. §12-214-1.

ISSUE:

Whether a qualified REIT subsidiary is treated as a separate corporation or whether all its assets, liabilities, and items of income, deduction, and credit are treated as assets, liabilities, and such items of the real estate investment trust.

DISCUSSION:

For purposes of [title 26 of the United States Code]--

(A) a corporation which is a qualified REIT subsidiary shall not be treated as a separate corporation, and

(B) all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary shall be treated as assets, liabilities, and such items (as the case may be) of the real estate investment trust.

26 U.S.C. §856(i)(1).

This subsection was added by the Tax Reform Act of 1986; Pub. L. No. 99-514, §662(a), 100 Stat. 2085, 2300-2301. By the addition of this subsection, Congress allowed a real estate investment trust to limit its liability by forming separate wholly-owned subsidiaries; S. Rep. No. 313, 99th Cong., 2d Sess. 775 (1986); without changing the requirements of 26 U.S.C. §856(c), which were to apply to the real estate investment trust and each of its wholly-owned subsidiaries as if only a single corporate taxpayer existed. H.R. Conf. Rep. No. 841, 99th Cong., 2d. Sess. II-216 (1986), reprinted in 1986 U.S. Code Cong. & Ad. News 4075, 4304.

As was noted in Ruling No. 91-26 , the corporation business tax is "a tax or excise upon [a company's] franchise for the privilege of carrying on or doing business within the state in a corporate capacity ...." Conn. Gen. Stat. §12-214.

The thing taxed is not the mere dealing in merchandise, in which the actual transactions may be the same, whether conducted by individuals or corporations, but the tax is laid upon the privileges which exist in conducting business with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals. These advantages are obvious, and have led to the formation of such companies in nearly all branches of trade. The continuity of the business, without interruption by death or dissolution, the transfer of property interests by the disposition of shares of stock, the advantages of business controlled and managed by corporate directors, the general absence of individual liability, these and other things inhere in the advantages of business thus conducted, which do not exist when the same business is conducted by private individuals or partnerships. It is this distinctive privilege which is the subject of taxation, not the mere buying or selling or handling of goods which may be the same, whether done by corporations or individuals.

Flint v. Stone Tracy Co ., 220 U.S. 107, 161-162 (1911) (quoted in Spector Motor Service, Inc. v. Walsh , 135 Conn. 37, 66-67, 61 A.2d 89 (1948)).

Corporations are subject to the tax, because they enjoy the privileges derived from conducting business in a corporate capacity. Unlike the situation in Ruling No. 91-26, where the separate corporate existence of the series funds was a legal fiction, a qualified REIT subsidiary whose separate corporate existence is disregarded pursuant to 26 U.S.C. §856(i) still enjoys the privileges derived from conducting business in a corporate capacity. Therefore, a qualified REIT subsidiary is subject to the tax.

Nonetheless, because all assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary are treated as assets, liabilities, and such items of the real estate investment trust; 26 U.S.C. §856(i)(1); the Trust shall file a single corporation business tax return on behalf of itself and its qualified REIT subsidiaries, each of which must apply for its own Connecticut tax registration number. However, any minimum or maximum additional tax under Conn. Gen. Stat. §12-219(a)(2) will be calculated by disregarding this treatment of the Trust and its qualified REIT subsidiaries as a single corporate taxpayer.

A statement ("This corporation business tax return is filed in accordance with Ruling No. 92-10 .") that is signed by the same person who signed the return, identifying by name, Connecticut tax registration number and federal employer identification number each qualified REIT subsidiary of the Trust, must be attached to the return.

( Ruling No. 91-26 is clarified to require that a similar statement ("This corporation business tax return is filed in accordance with Ruling No. 91-26.") that is signed by the same person who signed the return, identifying by name, Connecticut tax registration number and federal employer identification number each fund of the regulated investment company, be attached to each return.)

RULING:

All the assets, liabilities, and items of income, deduction, and credit of a qualified REIT subsidiary are treated as assets, liabilities, and such items of the real estate investment trust, but any minimum or maximum additional tax under Conn. Gen. Stat. §12-219(a)(2) will be calculated for each corporation by disregarding this treatment of the Trust and its qualified REIT subsidiaries as a single corporate taxpayer.

LEGAL DIVISION

April 20, 1992