Connecticut Administrative Code › Title 12 - Taxation › 740(a) - INCOME TAX › Part VII - Partnerships and S corporations › Section 12-715(c)-1 - Connecticut income tax avoidance or evasion

Current through July 10, 2024
(a) If
				a partnership agreement provides for a special allocation among the partners of
				any item of partnership income, gain, loss or deduction, federal income tax law
				requires that such a provision be disregarded for federal income tax purposes,
				where its principal purpose is the avoidance or evasion of federal income tax.
				In such a case, each partner's distributive share of such item is determined by
				such partner's distributive share for federal income tax purposes of the
				taxable income or loss of the partnership as described in section 702(a)(8) of
				the Internal Revenue Code. This treatment and distribution of the item is
				reflected in each partner's federal adjusted gross income and, therefore, in
				each partner's Connecticut adjusted gross income, even though in a particular
				case no Connecticut income tax avoidance or evasion may be involved.
(b) In certain cases, however, a provision
				for special allocation does not have as its principal purpose the avoidance or
				evasion of federal income tax, but has as its principal purpose the avoidance
				or evasion of Connecticut income tax. In such an instance, any such provision
				shall be disregarded and each partner's share of the pertinent item of
				partnership income, gain, loss or deduction shall also be determined by the
				partner's distributive share for federal income tax purposes of the taxable
				income or loss of the partnership as described in section 702(a)(8) of the
				Internal Revenue Code.
(c) Whether
				the principal purpose of a special allocation of an item is the avoidance or
				evasion of Connecticut income tax depends on the surrounding facts and
				circumstances. Among the relevant facts to be considered are the following:
				whether the partnership or partner individually has a business purpose for the
				allocation; whether the allocation has substantial economic effect, as the term
				is used in section 704(b)(2) of the Internal Revenue Code (i.e., whether the
				allocation may actually affect the dollar amount of the partners' shares of the
				total partnership income or loss independently of Connecticut income tax
				consequences); whether related items of income, gain, loss or deduction from
				the same source are subject to the same allocation; whether the allocation was
				made without recognition of normal business factors and only after the amount
				of the specially allocated item could reasonably be estimated; the duration of
				the allocation; and the overall Connecticut income tax consequences of the
				allocation.
Example: A and B are equal partners. The partnership
				  agreement, however, allocates to A, who has a higher effective rate of
				  Connecticut income tax than B, all interest income on bonds of the State of
				  Connecticut held by the partnership and allocates to B all interest income on
				  bonds of other states. The partnership agreement also provides that any
				  difference in the amounts of such interest income allocated to each partner is
				  to be equalized out of other partnership income. Because the purpose and effect
				  of this allocation is solely to reduce the Connecticut income tax of A without
				  actually affecting the distributive shares of A and B in partnership income,
				  such allocation is not recognized. Accordingly, in determining their respective
				  Connecticut adjusted gross incomes, A and B each shall add to federal adjusted
				  gross income one-half of the interest income from bonds of other states under
				  §
										12-701(a)(20)-2
				  of Part I.
(d) While this
				section pertains to Section
				12-715(c)
				of the general statutes, for purposes of supplementary interpretation, as the
				phrase is used in Section
				12-2
				of the general statutes, the adoption of this section is authorized by Section
				12-740(a)
				of the general statutes.