Connecticut General Statutes 12-218c – Restrictions on the deductibility of certain intangible expenses and interest expenses with a related member
(a) As used in this section:
Terms Used In Connecticut General Statutes 12-218c
- Assets: (1) The property comprising the estate of a deceased person, or (2) the property in a trust account.
- Combined group: means the group of all companies that have common ownership and are engaged in a unitary business, where at least one company is subject to tax under this chapter. See Connecticut General Statutes 12-213
- Commissioner: means the Commissioner of Revenue Services. See Connecticut General Statutes 12-213
- company: means any person, partnership, association, company, limited liability company or corporation, except an incorporated municipality. See Connecticut General Statutes 12-1
- Corporation: A legal entity owned by the holders of shares of stock that have been issued, and that can own, receive, and transfer property, and carry on business in its own name.
- Evidence: Information presented in testimony or in documents that is used to persuade the fact finder (judge or jury) to decide the case for one side or the other.
- Income year: means the calendar year upon the basis of which net income is computed under this part, unless a fiscal year other than the calendar year has been established for federal income tax purposes, in which case it means the fiscal year so established or a period of less than twelve months ending as of the date on which liability under this chapter ceases to accrue by reason of dissolution, forfeiture, withdrawal, merger or consolidation. See Connecticut General Statutes 12-213
- Intangible property: Property that has no intrinsic value, but is merely the evidence of value such as stock certificates, bonds, and promissory notes.
- Internal Revenue Code: means the Internal Revenue Code of 1986, or any subsequent internal revenue code of the United States, as from time to time amended, effective and in force on the last day of the income year. See Connecticut General Statutes 12-213
- Net income: means net earnings received during the income year and available for contributors of capital, whether they are creditors or stockholders, computed by subtracting from gross income the deductions allowed by the terms of section 12-217, except that in the case of a domestic insurance company which is a life insurance company, "net income" means life insurance company taxable income (A) increased by any amount or amounts which have been deducted in the computation of gain or loss from operations in respect of (i) the life insurance company's share of tax-exempt interest, (ii) operations loss carry-backs and capital loss carry-backs, and (iii) operations loss carry-overs and capital loss carry-overs arising in any taxable year commencing prior to January 1, 1973, and (B) reduced by any amount or amounts which have been deducted as operations loss carry-backs or capital loss carry-backs in the computation of gain or loss from operations for any taxable year commencing on or after January 1, 1973, but only to the extent that such amount or amounts would, for federal tax purposes, have been deductible in the taxable year as operations loss carry-overs or capital loss carry-overs if they had not been deducted in a previous taxable year as carry-backs, and provided no expense related to income, the taxation of which by the state of Connecticut is prohibited by the law or . See Connecticut General Statutes 12-213
- Paid: means "paid or accrued" or "paid or incurred" construed according to the method of accounting upon the basis of which net income is computed under this part. See Connecticut General Statutes 12-213
- person: means any individual, partnership, company, limited liability company, public or private corporation, society, association, trustee, executor, administrator or other fiduciary or custodian. See Connecticut General Statutes 12-1
(1) “Affiliated group” has the same meaning as in Section 1504 of the Internal Revenue Code.
(2) “Intangible expenses and costs” includes (A) expenses, losses and costs for, related to, or in connection directly or indirectly with the direct or indirect acquisition, use, maintenance or management, ownership, sale, exchange, or any other disposition of intangible property to the extent such amounts are allowed as deductions or costs in determining taxable income before operating loss deduction and special deductions for the taxable year under the Internal Revenue Code; (B) losses related to or incurred in connection directly or indirectly with factoring transactions or discounting transactions; (C) royalty, patent, technical and copyright fees; (D) licensing fees; and (E) other similar expenses and costs.
(3) “Intangible property” means patents, patent applications, trade names, trademarks, service marks, copyrights and similar types of intangible assets.
(4) “Interest expenses and costs” means amounts directly or indirectly allowed as deductions under Section 163 of the Internal Revenue Code for purposes of determining taxable income under the Internal Revenue Code to the extent such expenses and costs are directly or indirectly for, related to, or in connection with the direct or indirect acquisition, maintenance, management, ownership, sale, exchange or disposition of intangible property.
(5) “Related member” means a person that, with respect to the taxpayer during all or any portion of the taxable year, is a related entity, as defined in this subsection, a component member as defined in Section 1563(b) of the Internal Revenue Code, or is a person to or from whom there is attribution of stock ownership in accordance with Section 1563(e) of the Internal Revenue Code.
(6) “Related entity” means (A) a stockholder who is an individual, or a member of the stockholder’s family enumerated in Section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder’s family own, directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer’s outstanding stock; (B) a stockholder, or a stockholder’s partnership, limited liability company, estate, trust or corporation, if the stockholder and the stockholder’s partnerships, limited liability companies, estates, trusts and corporations own directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer’s outstanding stock; or (C) a corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of Section 318 of the Internal Revenue Code, if the taxpayer owns, directly, indirectly, beneficially or constructively, at least fifty per cent of the value of the corporation’s outstanding stock. The attribution rules on Section 318 of the Internal Revenue Code shall apply for purposes of determining whether the ownership requirements of this subdivision have been met.
(b) For purposes of computing its net income under section 12-217 a corporation shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with, one or more related members.
(c) (1) The adjustments required in subsection (b) of this section shall not apply if the corporation establishes by clear and convincing evidence that the adjustments are unreasonable, or the corporation and the Commissioner of Revenue Services agree in writing to the application or use of an alternative method of apportionment under section 12-221a. Nothing in this subdivision shall be construed to limit or negate the commissioner’s authority to otherwise enter into agreements and compromises otherwise allowed by law.
(2) The adjustments required in subsection (b) of this section shall not apply to such portion of interest expenses and costs and intangible expenses and costs that the corporation can establish by the preponderance of the evidence meets both of the following: (A) The related member during the same income year directly or indirectly paid, accrued or incurred such portion to a person who is not a related member, and (B) the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the corporation and the related member did not have as a principal purpose the avoidance of any portion of the tax due under this chapter.
(3) The adjustments required in subsection (b) of this section shall apply except to the extent that increased tax, if any, attributable to such adjustments would have been avoided if both the corporation and the related member had been eligible to make and had timely made the election to file a combined return under subsection (a) of section 12-223a.
(4) The adjustments required in subsection (b) of this section shall not apply if the corporation and the related member are both members of a combined group required to file a combined unitary tax return pursuant to section 12-222.
(d) Nothing in this section shall require a corporation to add to its net income more than once any amount of interest expenses and costs or intangible expenses and costs that the corporation pays, accrues or incurs to a related member described in subsection (b) of this section.
(e) Nothing in this section shall be construed to limit or negate the commissioner’s authority to make adjustments under section 12-221a or 12-226a.