Opinion ID: 2587324
Heading Depth: 1
Heading Rank: 4

Heading: the burden on federal obligations

Text: The City tax law places a greater burden on taxpayers holding Federal obligations, thus making them less attractive investments, in two ways. First, the law discriminates in favor of the obligations of the other 49 States. Second, the law discriminates in favor of corporate obligations. The first form of discrimination arises out of the method for calculating a taxpayer's IAP. While the numerator is based on the value of corporate obligations, the denominator is based on the total value of investment capital, excluding United States obligations and bank accounts. Since the IAP is a fraction, the taxpayer is disadvantaged if the denominator is smaller. The following comparison of appellant's 1978 tax figures with those of a hypothetical taxpayer with otherwise identical investments  except for a presumed investment in Connecticut bonds rather than Federal obligations  is illustrative: Hypothetical Appellant Taxpayer Sheraton/Alabama $ 67,930 $ 67,930 IAP (2.38039%) (2.38039%) United States 6,931,345 0 Connecticut 0 6,931,345 Bank Accounts 579,808 579,808 _________ _________ 7,579,083 7,579,083 In both cases, the numerator for calculating the IAP will be the same. The fair market value of the corporate obligations ($67,930) is multiplied by the issuer's BAP (2.38039%). The resulting figure is $1,617. The denominators, however, are different. In appellant's return the denominator is $67,930, the fair market value of total investment capital excluding United States obligations and bank accounts. In the hypothetical return, the denominator will be $6,999,275  the fair market value of the corporate and Connecticut obligations. Thus, appellant would have an IAP of 2.38039%, while the hypothetical taxpayer would have an IAP of .0231%. In 1978, appellant had total investment income of $342,669. It determined its taxable investment income by multiplying that figure by its IAP (2.38039%), resulting in a figure of $8,157. At a 9% tax rate, the tax on its investment income was $734. Assuming that appellant had invested in Connecticut rather than Federal obligations and obtained the same total investment income, its taxable investment income would have been $79 ($342,669 × .0231%), yielding a tax of only $7. The second form of discrimination arises out of the 18% rule. In effect, the rule penalizes a taxpayer who invests 82% or more of its capital in obligations other than certain corporate obligations  including Federal obligations. Appellant's total investment income for the tax year 1978 was $342,669. Assuming that the income attributable to Sheraton obligations was $3,000, the 18% rule had the following effect: Without 18% Rule With 18% Rule Preallocation Investment Income $342,669 $339,669 Allocation Percentage 2.38039% 60% Taxable Investment Income 8,157 203,801 Tax (9%) 734 18,342 Moreover, had appellant invested less than 82% of its investment capital in Federal obligations, and instead invested more in corporate obligations having low BAP's, it would have escaped the 18% rule and paid less tax. For example, assuming appellant had realized the same investment income by purchasing $1,067,930 in corporate obligations (rather than $67,930) and $5,931,345 in Federal obligations (rather than $6,931,345), and assuming that the allocation percentage of the additional corporate obligations was also 2.38%, appellant's tax bill would have been $17,608 lower.