Bolt Technology Corp. v. Dubno

• Decision Date: 12 December 1989
• Docket Number: PERKIN-ELMER,13652 and 13653,Nos. 13648,s. 13648
• Citation: Bolt Technology Corp. v. Dubno, 567 A.2d 371, 213 Conn. 220 (Conn. 1989)
• Parties: BOLT TECHNOLOGY CORPORATION v. Orest T. DUBNO, Commissioner of Revenue Services. OLIN CORPORATION, INC. v. COMMISSIONER of REVENUE SERVICES.CORPORATION v. COMMISSIONER OF REVENUE SERVICES.
• Court: Connecticut Supreme Court

Page 371

567 A.2d 371

213 Conn. 220

BOLT TECHNOLOGY CORPORATION v.Orest T. DUBNO, Commissioner of Revenue Services.

OLIN CORPORATION, INC. v.COMMISSIONER of REVENUE SERVICES.

PERKIN-ELMER CORPORATION v.COMMISSIONER OF REVENUE SERVICES.

Nos. 13648, 13652 and 13653.

Supreme Court of Connecticut.

Argued Oct. 11, 1989.

Decided Dec. 12, 1989.

Gordon R. Erickson, Stamford, for appellant in the first cases(plaintiffBolt Technology Corp).

George G. Vest, with whom, on the brief, was Roger R. Caridad, Stamford, for the appellants in the second and third cases(plaintiffsOlin Corp., Inc., and Perkin-Elmer Corp.).

Robert L. Klein, Asst. Atty. Gen., with whom, on the brief, was Clarine Nardi Riddle, Atty. Gen., for appellee(defendant).

Before PETERS, C.J., and SHEA, GLASS, COVELLO and HULL, JJ.

GLASS, Associate Justice.

The plaintiffs, Bolt Technology Corporation, Olin Corporation, and Perkin-Elmer Corporation(taxpayers), brought appeals to the Superior Court from a determination of the defendant commissioner of revenue services (commissioner).Specifically, the commissioner disallowed certain commission expenses that each of the taxpayers claimed on its Connecticut corporation business tax return.In the Superior Court, the taxpayers and the commissioner entered into stipulations for reservation, and the Superior Court agreed to reserve the issue presented in the stipulations to the Appellate Court.¹This court then transferred the reservations to itself pursuant to Practice Book§ 4023.

The issue in these cases, that comes to us by way of reservation, is framed as follows: "Are the sales commissions paid by Plaintiff to International, and deducted on Plaintiff's federal income tax return, expenses related to the dividends received by a Plaintiff from International within the meaning of Connecticut General Statutes § 12-217(a)(D)(1) so that the commissions are not deductible to the extent of the dividends received in determining Plaintiff's Connecticut Corporation Business Tax liability?"

The stipulations indicate that the plaintiff, Bolt Technology Corporation(Bolt), formerly Bolt Associates, Inc., is a corporation duly organized and existing under the laws of Connecticut.Bolt incorporated Bolt International Corporation(International) in Connecticut.International qualified as a domestic international sales corporation (DISC) and elected to be taxed as a DISC, pursuant to § 992 of the Internal Revenue Code of 1954, as amended to 1982.Bolt is the sole stockholder and parent corporation of a DISC, International.In general, § 992 of the Internal Revenue Code provides that a DISC is a corporation, incorporated in any state, whose income is derived primarily from export sales and lease transactions and certain other export related activities, and whose assets consist principally of qualified export assets.Its function is to handle the export sales and leasing activities of a United States manufacturer.A DISC is not subject to federal income taxes.Internal Revenue Code § 991.Approximately one half of the income of a DISC, however, is taxed currently to its shareholders as constructive dividends, even though not distributed, and the balance is not taxed until actually distributed, or until the DISC shares are transferred in a taxable transaction, or the corporation ceases to qualify as a DISC.Internal Revenue Code § 995;Internal Revenue Code Reg. § 1.995-2.

A DISC may operate either on a commission agent basis (commission agent DISC), or on a buy-sell basis (buy-sell DISC).The commission agent DISC sells the manufacturing parent's product to foreign customers for a sales commission without taking title to the product.These commissions constitute the only operating income of the commission agent DISC.A buy-sell DISC actually takes title to property transferred from its manufacturing parent and earns its income from the resale of that property.The difference between the price at which the property is transferred to the DISC from its manufacturing parent, and the price at which the DISC resells the property to foreign customers, constitutes the income of the buy-sell DISC.Under the Internal Revenue Code and its regulations, the price at which the parent transfers the property to its DISC ordinarily is in excess of cost, but never less than the property cost.Furthermore, a buy-sell DISC acts as a principal when it sells goods, and not as an agent.The selling expenses incurred by a buy-sell DISC are deducted on the DISC's income tax return, not on the parent's income tax return.

The DISCs owned by the taxpayers in each of these cases operated as commission agent DISCs.For example, International was a commission agent DISC that sold products on a commission basis for its parent, Bolt.International did not take title to products but sold Bolt's products to foreign customers for a sales commission.International's only income consisted of the commissions it received from Bolt for the sale of Bolt's products to foreign customers, and interest income on producer loans to Bolt.For the fiscal year ending June 30, 1982, the gross income of International consisted of commissions received from Bolt of $2,904,687 and interest income on producer loans of $24,000.

For federal income tax purposes for the fiscal year ending June 30, 1982, each of the taxpayers included in its gross income the dividends attributable to its DISCs.Additionally, for federal income tax purposes, the taxpayers deducted from their gross income the sales commissions paid to their DISCs.²Bolt included on its federal income tax return, as an item of gross income, deemed dividends attributable to International in the amount of $1,736,313.Moreover, Bolt deducted from its gross income the sales commissions paid to International in the amount of $2,904,687.

For the fiscal year ending June 30, 1982, the taxpayers filed Connecticut corporation business tax returns on which they deducted from their gross income the sales commissions paid to their DISCs and the dividends received from their DISCs.On its state tax return, Bolt deducted from its gross income the sales commissions of $2,904,687 paid to International as well as the dividends of $1,736,313 received from International.

The commissioner, upon audit, asserted a deficiency against the taxpayers for the fiscal year of 1982.The commissioner disallowed the deduction of sales commissions paid by the taxpayers to the extent of dividends received by the taxpayers from their DISCs.The commissioner based his disallowance on the premise that the sales commissions, to the extent of the dividends paid by the DISCs to the taxpayers, were expenses related to dividends paid by the DISCs to the taxpayers within the meaning of General Statutes § 12-217(a)(D)(1), ³ and were, therefore, not deductible in an amount equal to the dividends received by the taxpayers from their DISCs.⁴

The disallowance of Bolt's deduction of that portion of its sales commissions paid to International equal to the dividends received from International resulted in an additional tax to Bolt of $79,233.35 together with interest of $17,167.25.Under protest, Bolt and the other taxpayers paid the additional tax and interest, and then requested a refund and a hearing.The commissioner denied the taxpayers' protests in reliance on the provisions of § 12-217(a)(D)(1).The taxpayers appealed the commissioner's adverse determinations to the Superior Court, pursuant to General Statutes § 12-237.⁵In that court each taxpayer requested that the same question be reserved to the Appellate Court for advice on the stated issue of law.The trial court granted the request, and thereafter, we transferred the reservation to this court.

I

The taxpayers' principal claim is one of statutory construction.According to the taxpayers, the commissioner has interpreted the amendment of § 12-217 by Public Acts 1981, No. 81-411⁶ in a manner at variance with its legislative history and the rules of statutory construction.Specifically, the taxpayers argue that the legislative purpose of the 1981amendment was to eliminate, in part, the corporation business tax on dividends, and not, as the commissioner concluded, to disallow the deduction of commission expenses to the extent of dividends that were paid to a parent company by its DISC.We find the taxpayers' argument unpersuasive.

The commissioner correctly concluded that § 12-217(a)(D)(1), as amended byNo. 81-411 of the 1981 Public Acts, disallows deductions of expenses when the following two conditions are present: (1) the expenses must be "allowable as a deduction or credit under the federal corporation net income tax law"; and (2) the expenses must be "related to dividends."In the present cases, the commissioner found that the commissions paid by the taxpayers to their DISCs were indeed deductible under the Internal Revenue Code (26 U.S.C. § 162[a] as "ordinary and necessary" business expenses.In fact, the taxpayers have stipulated that they deducted these expenses on their federal income tax returns.Furthermore, the commissioner concluded that the commissions were "expenses related to dividends."Therefore, finding these two conditions present, the commissioner disallowed the taxpayers' deductions of commissions to the extent of the dividends received by the taxpayers.The taxpayers assert, however, that commission expenses are not "related to dividends" for the purpose of § 12-217(a)(D)(1) in light of the applicable rules of statutory construction and the legislative history of the statute.We disagree.

As a threshold matter, it should be noted that the taxpayers' claims contest the proper treatment of items that, on their Connecticut corporation tax returns, they treated as deductions, for it is stipulated that they deducted from gross income the sales commissions paid to their DISCs and the dividends received from their DISCs.This court has "uniformly...