First Federal Sav. & Loan Ass'n of New Haven v. Connelly

Decision Date21 June 1955
Citation142 Conn. 483,115 A.2d 455
CourtConnecticut Supreme Court
PartiesThe FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF NEW HAVEN v. William F. CONNELLY, Tax Commissioner. Supreme Court of Errors of Connecticut

Charles M. Lyman and Edward F. Becker, New Haven, for plaintiff.

Louis Weinstein, Asst. Atty. Gen., with whom were Walter T. Faulkner, Asst. Atty. Gen., and, on the brief, John J. Bracken, Atty. Gen., for the defendant.


BALDWIN, Associate Justice.

The plaintiff is a corporation organized under the laws of the United States. 48 Stat. 132, as amended, 12 U.S.C. § 1464 [12 U.S.C.A. § 1464]. It appealed to the Superior Court from an assessment by the defendant of an additional corporation business tax upon its net income. General Statutes, c. 91. Twenty- nine other savings and loan associations, fourteen of which are corporations organized under the laws of the United States and fifteen under the laws of this state, are situated similarly to the plaintiff with respect to the assessment of an additional tax. The Superior Court has reserved the case for advice upon stipulated facts.

The Connecticut corporation business tax law imposed upon savings and loan associations, among other corporations doing business in this state, a tax of 3 per cent of net income derived from business in Connecticut. Cum.Sup.1951, § 397b, as amended, Cum.Sup.1953, § 883c. In arriving at net income, 'all items deductible under the federal corporation net income tax law effective and in force on the last day of the income year,' except, with respect to the case at bar, 'interest paid during the income year', were deductible from 'gross income,' whether or not the taxpayer was required to pay a tax to the federal government. Cum.Sup.1953, § 886c. The plaintiff's fiscal year ended on December 31, 1952. Before April 1, 1953, it filed its tax return for 1952 showing a tax due of $1836.47, which it paid. It claimed, under the heading 'Other deductions authorized by law,' $769,665.68 as properly deductible from gross income in arriving at net income. This sum included $648,149.07 for dividends paid its members. The defendant refused to allow this deduction and assessed an additional tax against the plaintiff of $18,878.13, with interest of $339.81. He took similar action against the twenty-nine other savings and loan associations.

Prior to January 1, 1952, the plaintiff had not claimed a deduction in its Connecticut tax return for dividends paid to its members. It had not been required to pay a federal income tax. Effective January 1, 1952, the Congress amended the Internal Revenue Code so as to subject savings and loan associations such as the plaintiff to the federal income tax. Int.Rev.Code of 1939, § 104(a), as amended, 65 Stat. 491, 26 U.S.C.A. § 104(a); sec 3 CCH 1955 Stand.Fed.Tax Rep. p3408.001. 1 In determining net income subject to the federal tax, the code allowed the deduction from gross income of dividends paid by banking corporations. Int.Rev.Code of 1939, § 23(r)(1) added by 65 Stat. 491, 26 U.S.C.A. § 23(r)(1); 26 C.F.R. § 39.23(r)-1 (1953). As dividends were deductible from gross income under the federal income tax law, the plaintiff took the same deduction in computing the state tax. Cum.Sup.1953, § 886c.

At its regular session in 1953, the General Assembly redefined the term 'interest paid,' as contained in § 886c, to include 'amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends on their deposits or withdrawable accounts' in mutual savings banks, co-operative banks, building and loan associations, and savings and loan associations, 'if such amounts paid or credited are withdrawable on demand subject only to customary notice of intention to withdraw.' Cum.Sup.1953, § 896c. 2 This amendment became effective June 9, 1953, and by its terms was made to apply, retroactively, to all income years or periods ending on or after January 1, 1952. The United States treasury department has ruled that money paid to depositors in federal savings and loan associations is not interest but dividend income, so that returns showing information concerning such dividend income were required under § 148 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 148. I.T. 4045, 1951-1 Cum.Bull. 34. The amount of dividends payable to the plaintiff's depositors on January 30 and December 31, 1952, was determined by its directors on the assumption that these dividends would be deductible in computing net income under the Connecticut corporation business tax law.

The questions presented for our advice are set forth in a footnote. 3 They raise the basic issues (1) whether the legislature could define the term 'interest paid' to include dividends paid or credited to depositors on deposits or withdrawable accounts in savings and loan associations, and (2) whether § 896c is unconstitutional.

The plaintiff claims that such dividends are not in fact interest and cannot be taxed as such. When the Congress subjected savings and loan associations to a tax on their net income, it provided that the amount paid or credited as dividends on depositors' accounts could be deducted in determining net income. Int.Rev.Code of 1939, § 23(r)(1), added by 65 Stat. 491. At that time General Statutes, Cum.Supp.1953, § 886c, allowed the same deductions as the federal law in computing net income under the Connecticut law except, among other exceptions not here pertinent, 'interest paid during the income year.' Savings and loan associations prior to the imposition of the federal income tax had never claimed dividends as a deduction in computing net income subject to the Connecticut tax. Consequently, to make it clear that the tax on dividends as part of net income continued, in spite of the provision exempting them from the federal income tax, the General Assembly enacted § 896c, redefining the term 'interest paid' to include dividends paid on accounts in savings and loan associations. When legislation contains a specific definition of a word or term, courts must accept that definition in construing the legislation. United Aircraft Corporation v. O'Connor, 141 Conn. 530, 537, 107 A.2d 398; City of Danbury v. Corbett, 139 Conn. 379, 384, 94 A.2d 6; 2 Sutherland, Statutory Construction (3d Ed.) § 3002. Other courts accept the construction placed upon a statute by the highest court of the state in which the statute was enacted. Smiley v. State of Kansas, 196 U.S. 447, 455, 25 S.Ct. 289, 49 L.Ed. 546; 14 Am.Jur. 302, § 89.

The legislative intent of § 896c was to make clear that amounts paid as dividends by savings and loan associations would continue to be subject to the Connecticut tax. The legislature has the power to choose the subject matter of taxation and to fix the method and extent of a tax, subject to certain limitations pertinent to this case which the plaintiff has raised and which will be considered later in this opinion. City of Norwalk v. Town of New Canaan, 85 Conn. 119, 124, 81 A. 1027; State v. Murphy, 90 Conn. 662, 666, 98 A. 343; State ex rel. Brush v. Sixth Taxing District, 104 Conn. 192, 198, 132 A. 561. If it chose to enact provisions, relating to the subject matter of the tax and the deductions to be allowed, different from those contained in federal income tax legislation, it had the power to do so.

The plaintiff claims that § 896c is retroactive legislation and violates the due process clauses of the federal and state constitutions. It asserts that it filed its tax return and paid the tax on the basis of the law in force at the time the tax was due and payable. When the plaintiff was brought under the federal income tax statute in 1952, the General Assembly was not in session. The regular session of 1953 offered the first opportunity it had for dealing with any change brought about by the action of the Congress. Furthermore, the effect of § 896c, as previously stated, was simply to clarify a provision of the Connecticut law. It imposed no new tax upon the plaintiff but simply required it to continue to pay a tax which, for the years prior to 1952, it had been paying regularly. The section did no more than remove a possible claim for a deduction which the plaintiff had not theretofore enjoyed. Blodgett v. Bridgeport City Trust Co., 115 Conn. 127, 141, 161 A. 83. A further tax can be measured by a past assessment or by the income of a period which has passed. Stockdale v. Insurance Companies, 20 Wall. 323, 331 87 U.S. 323, 331, 22 L.Ed. 348; Brushaber v. Union Pac. R. Co., 240 U.S. 1, 20, 36 S.Ct. 236, 60 L.Ed. 493; United States v. Hudson, 299 U.S. 498, 500, 57 S.Ct. 309, 81 L.Ed. 370; Welch v. Henry, 305 U.S. 134, 146, 59 S.Ct. 121, 83 L.Ed. 87. Under the circumstances of this case, it cannot be said that the plaintiff could not reasonably have anticipated either the nature or the amount of the tax it was expected to pay. Milliken v. United States, 283 U.S. 15, 22, 24, 51 S.Ct. 324, 75 L.Ed. 809. The retroactive effect of § 896c does not render it unconstitutional.

The plaintiff contends that the Connecticut corporation business tax is unlawfully discriminatory. It argues that commercial corporations can deduct the cost of the goods they sell, while savings and loan associations are taxed upon dividends which they must pay to obtain deposits, which are, in effect, the stock in trade with which they do business. The plaintiff urges, further, that electric co-operatives and credit unions are exempt from the tax. General Statutes, § 5349; Cum.Sup.1953, § 883c(2); Int.Rev.Code, of 1954, § 501(c)(14), 26 U.S.C.A. The legislature has a wide discretion in the classification of property for taxation and in granting exemptions. New Haven Metal & Heating Supply Co. v. Danaher, 128 Conn. 213, 219, 21 A.2d 383. The classification must be reasonable and not arbitrary and must be based upon a distinction which bears a fair and substantial relation to the object of the...

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