CONNECTICUT BANK TRUST CO. v. TAX COMMISSIONER

The defendant tax commissioner appealed from the decision of the Court of Common Pleas granting the plaintiff corporation's request for a refund of its alleged overpayment of corporate business taxes imposed under chapter 205 of the General Statutes. The plaintiff claimed that the interest it had received from certain state and local government bonds was tax exempt on the ground that it should have been excluded from net income — the figure on which the corporate business tax is based. Since the privilege of doing business in a corporate capacity may properly be taxed under chapter 208 by including in a corporation's net income otherwise tax exempt interest income, the trial court should have refused to grant the plaintiff's requested refund.

COTTER, C.J.

The parties have stipulated to the following pertinent facts relating to the present appeal: The plaintiff, a Connecticut corporation engaged in the business of commercial banking, was, at all times during the calendar year 1971, subject to the Connecticut corporation business tax. See General Statutes c. 208 (General Statutes 12-213 et seq.). In its business tax return for the calendar year 1971, the plaintiff included in the computation of net income "other interest" received in the amount of $53,863,780.77. On April 1, 1975, however, the plaintiff filed an amended corporation business tax return for the calendar year 1971 pursuant to 12-225 of the General Statutes, claiming a refund of $27,840.81. That amended return was filed to exclude from its net income, for the purposes of the business tax, interest of $407,596.45 received from obligations of the state of Connecticut and certain of its political subdivisions which was originally included in the "other interest" reported in its 1971 return.

On May 1, 1975, the defendant commissioner notified the plaintiff that its amended tax return for 1971 was unacceptable and that the plaintiff's claim for a refund of $27,840.81, made upon the basis of the amended return, was denied. Thereupon, pursuant to the provisions of General Statutes 12-237 then in effect, the plaintiff filed a timely appeal to the Court of Common Pleas from that action of the defendant. The court rendered judgment sustaining the plaintiff's appeal, from which the defendant has appealed to this court.

At issue in this case is the status, for purposes of computing the plaintiff's 1971 corporation business tax, of the interest the plaintiff received from certain state and local government obligations. General Statutes 12-214 imposes upon a company "carrying on, or having the right to carry on, business in this state . . . a tax or excise upon its franchise for the privilege of carrying on or doing business . . . within the state, such tax to be measured by the entire net income . . . received by such corporation or association from business transacted within the state during the income year . . . ." Under chapter 208, "`gross income' means gross income as defined in the federal corporation net income tax law . . . and, in addition, means any interest received . . . by the taxpayer . . . [which is] excluded from gross income for purposes of assessing the federal corporation net income tax . . . ." General Statutes 12213. In arriving at net income, the figure upon which the corporation business tax is based, "there shall be deducted from gross income . . . all items deductible under the federal corporation net income tax law . . . [except] interest received from federal, state and local government securities, if any such deductions are allowed by the federal government . . . ." General Statutes 12-217.

The plaintiff concedes, as it must, that the effect of the above statutory provisions is that interest received from all sources by a corporation is included in "gross income," and interest from federal, state and local government securities is not deducted from gross income to arrive at "net income." Nevertheless, the plaintiff contends that since the legislative enactments authorizing the issuance of the particular bonds in question specifically exempt the principal and interest of those bonds from state taxation, the taxation provisions of chapter 208 do not apply to those bonds and the interest received thereon. It is argued, moreover, that to give effect to the provisions exempting those obligations from taxation, they must be interpreted to exclude interest on such bonds from the computation of the corporation business tax. We disagree.

The determinative issue presented by this appeal concerns the applicability, or non-applicability, of the legislative enactments which have granted the bonds in question exemption from state taxation with respect to the tax imposed under chapter 208 of the General Statutes. Under the facts of the present case, the answer depends upon whether the corporation business tax is levied upon the interest on those bonds, and, if it is not, whether the immunity granted those bonds extends to a tax not imposed directly upon the bonds or the interest on them.

The tax established by chapter 208 of the General Statutes is "`in the nature of an excise tax levied against domestic and foreign corporations alike, for the privilege of doing business in a corporate capacity within this State.' Underwood Typewriter Co. v. Chamberlain, 94 Conn. 47, 55, 108 A. 154 [aff'd, 254 U.S. 113, 41 S.Ct. 45, 65 L.Ed. 165]; Bass, Ratcliff Gretton, Ltd. v. Tax Commission, 266 U.S. 271, 280 45 Sup. Ct. 82 [ 69 L.Ed. 282]; National Leather Co. v. Massachusetts, 277 U.S. 413, 423, 48 Sup. Ct. 534 [ 72 L.Ed. 935]." Stanley Works v. Hackett, 122 Conn. 547, 551, 190 A. 743. It is not a direct tax upon the allocated income of the corporation in a given year but a tax for the privilege of exercising its franchise within the state "measured by the entire net income . . . received by such corporation . . . from business transacted within the state during the income year . . . ." General Statutes 12-214; Underwood Typewriter Co. v. Chamberlain, supra; see Bass, Ratcliff Gretton, Ltd. v. Tax Commission, supra; see generally, 4 Cavitch, Business Organizations 79A.01; 14 Fletcher, Corporations 6953.

A very real distinction has been recognized between a tax laid directly on governmental instrumentalities or income derived from them, and an excise imposed upon corporate franchises, even though the corporate property or income which is the measure of the tax embraces tax exempt securities or their income. Educational Films Corporation of America v. Ward, 282 U.S. 379, 384-90, 51 S.Ct. 170, 75 L.Ed. 400; Flint v. Stone Tracy Co., 220 U.S. 107, 162-63, 31 S.Ct. 342, 55 L.Ed. 389; see Werner Machine Co. v. Director of Division of Taxation, 350 U.S. 492, 76 S.Ct. 534, 100 L.Ed. 634; Fletcher, op. cit. 6958. "This distinction, so often and consistently reaffirmed, is but a recognition that the franchise, the privilege of doing business in corporate form, which is a legitimate subject of taxation, does not cease to be such because it is exercised in the acquisition and enjoyment of nontaxables. The distinction is one of substance, not of form . . . . It suffices to say that the tax immunity extended to property qua property does not embrace a special privilege, the corporate franchise, otherwise taxable, merely because the value of the corporate property or net income is included in an equable [equitable] measure of the enjoyment of the privilege. The owner may enjoy his exempt property free of tax, but if he asks and receives from the state the benefit of a taxable privilege as the implement of that enjoyment, he must bear the burden of the tax which the state exacts as its price." Pacific Co. v. Johnson, 285 U.S. 480, 490, 52 S.Ct. 424, 76 L.Ed. 893; Educational Films Corporation of America v. Ward, supra.

The plaintiff nevertheless argues in support of the trial court's construction of the grants of immunity as not limited to taxes imposed upon the bonds and their interest but as embracing taxes on the corporate franchise measured by the net income of the taxpayer. The language of the legislation exempting these bonds and their interest from "any" or "all" taxation does not, in our view, reflect a legislative intent to extend the immunity to a tax upon a franchise, measured by net income from all sources. "Even if the construction were doubtful, the doubt, upon familiar principles, must be resolved in favor of the state." Pacific Co. v. Johnson, supra, 491. It is a well-settled principle that statutes which grant exemptions from taxation must be strictly construed against the party claiming an exemption. General Hartford, Inc. v. Tax Commissioner, 178 Conn. 240, ___ A.2d ___; Crescent Beach Assn. v. East Lyme, 170 Conn. 66, 71, 363 A.2d 1045; Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 599, 362 A.2d 847. Moreover, since our corporation business tax provisions explicitly include in a corporation's measure of net income interest received from tax-exempt federal securities, our conclusion that the state exemption provisions in issue are not broad enough to render the interest from state and local bonds nonincludable in the measure of net income under chapter 208 is consistent with federal law prohibiting discrimination against federal securities "`which diminish[es] . . . the market value or the investment attractiveness of obligations issued by the United States in an effort to secure necessary credit.'" New Jersey Realty Title Insurance Co. v. Division of Tax Appeals, 338 U.S. 665, 675, 70 S.Ct. 413, 94 L.Ed. 439; see Werner Machine Co. v. Director of Division of Taxation, 350 U.S. 492, 493-94, 76 S.Ct. 534, 100 L.Ed. 634.