Harper v. Tax Com'r

• Decision Date: 18 March 1986
• Docket Number: No. 12581,12581
• Court: Connecticut Supreme Court
• Parties: John HARPER et al. v. TAX COMMISSIONER of the State of Connecticut.

Page 93

506 A.2d 93

199 Conn. 133

John HARPER et al. v. TAX COMMISSIONER of the State of Connecticut.

No. 12581.

Supreme Court of Connecticut.

Argued Feb. 14, 1986.

Decided March 18, 1986.

John B. Willard, West Hartford, for appellants (plaintiffs).

Ralph G. Murphy, Asst. Atty. Gen., with whom were Robert L. Klein, Asst. Atty. Gen. and, on the brief, Joseph I. Lieberman, Atty. Gen., for appellee (defendant).

Before PETERS, C.J., and ARTHUR H. HEALEY, SHEA, DANNEHY and CALLAHAN, JJ.

PETERS, Chief Justice.

The issue in this case is the taxability, under the state capital gains tax, of the sale of patent rights on an installment basis. The defendant, the tax commissioner of the state of Connecticut, assessed a tax deficiency for the 1975 tax year against the plaintiffs, John F. Harper ¹ and Margaret Harper. The trial court, having heard the parties, dismissed the plaintiffs' appeal. The plaintiffs then took a timely appeal to this court. We find no error.

There is no dispute about the underlying facts. The plaintiff John F. Harper sold patent rights in 1956 and 1959. Because of these sales, the plaintiff incurred federal tax liability. He reported the income received from the sales as a capital gain; 26 U.S.C. § 1235(a); ² and elected to pay the federal taxes on an installment basis. 26 U.S.C. § 453. ³ At the time of the patent sales, Connecticut did not tax capital gains.

Connecticut first enacted a temporary capital gains tax in 1969. General Statutes § 12-505 et seq. ⁴ Because § 12-506 expressly taxed only sales "occurring after July 1, 1969," the tax commissioner promulgated § 12-518-1(d)(iii) of the Regulations of Connecticut State Agencies. ⁵ That regulation, in accordance with the statute, stated that "gain which is recognized subsequent to July 1, 1969, from the sale or exchange of property on or before July 1, 1969, shall be excluded." The commissioner relied on the regulation in refunding a capital gains tax payment tendered by the plaintiffs for the tax year 1970. The capital gains tax was reenacted in amended form in 1971, at which time it was broadened to include dividends and to extend its termination indefinitely. ⁶

In 1973, the legislature enacted Public Acts 1973, No. 73-356, to enlarge the scope of the capital gains tax itself. ⁷ As amended General Statutes § 12-505 defined taxable gain as "gain as determined for federal income tax purposes, after due allowance for losses and holding periods, from sales or exchanges of capital assets or assets treated as capital assets, or from transactions or events taxable to the taxpayer as such shares or exchanges...." The legislature also amended General Statutes § 12-506 to impose a tax on "the sale or exchange of capital assets which have been earned, received in fact or constructively, accrued or credited to the taxpayer during his taxable year," expressly deleting the former temporal restriction on when the underlying sales or exchanges had occurred. The commissioner did not, however, amend regulation § 12-518-1(d)(iii) until 1980. ⁸

For the tax year 1975, the chief tax examiner determined that the plaintiffs were subject to Connecticut capital gains tax for royalty payments they received in 1975 from the patent sales made during 1956 and 1959. The plaintiffs asked the commissioner to reconsider their deficiency assessment, claiming that the commissioner's ruling in regulation § 12-518-1(d)(iii) had never been overruled and precluded their liability. The commissioner relied on the 1973 amendment of §§ 12-505 and 12-506 in disallowing this request for withdrawal of the deficiency assessment. The plaintiffs then appealed to the Superior Court pursuant to General Statutes § 12-522. The trial court agreed with the commissioner. This appeal ensued.

The plaintiffs' appeal contains three assignments of error. Two of these claims of error relate to the taxability of patents as capital assets and the third relates to the taxability of gains derived from pre-1969 transactions of sale. We find no error.

I

The plaintiffs' first two claims of error challenge the conclusion of the commissioner and the trial court that patent sales fall within the statutory ambit of capital assets. The plaintiffs urge us to construe § 12-505 to exclude noncapital assets and to hold that patents are not capital assets. On such a construction, the plaintiffs' receipt of installment payments from their patent sales would, according to the plaintiffs, be entirely exempt from Connecticut tax.

The plaintiffs' argument is refuted by the language of § 12-505 and by long-standing precedents of this court. Section 12-505 defines taxable gains as "net gain as determined for federal income tax purposes ... from (A) sales or exchanges of capital assets or assets treated as capital assets ... or (B) from transactions or events taxable to the taxpayer as such sales or exchanges ... under the provisions of the Internal Revenue Code in effect for the taxable year...." This court has consistently held that when our tax statutes refer to the federal tax code, "federal tax concepts are incorporated into state law." The B.F. Goodrich Co. v. Dubno, 196 Conn. 1, 7, 490 A.2d 991 (1985); Yaeger v. Dubno, 188 Conn. 206, 210, 211-12, 449 A.2d 144 (1982); Woodruff v. Tax Commissioner, 185 Conn. 186, 191, 440 A.2d 854 (1981); Peterson v. Sullivan, 163 Conn. 520, 525, 313 A.2d 49 (1972); Kellems v. Brown, 163 Conn. 478, 518-19, 313 A.2d 53 (1972), appeal dismissed, 409 U.S. 1099, 93 S.Ct. 911, 34 L.Ed.2d 678 (1973); First Federal Savings & Loan Assn. v. Connelly, 142 Conn. 483, 489-93, 115 A.2d 455 (1955), appeal dismissed, 350 U.S. 927, 76 S.Ct. 305, 100 L.Ed. 811 (1956); McKesson & Robbins, Inc. v. Walsh, 130 Conn. 460, 461-64, 35 A.2d 865 (1944). It is undisputed that the federal tax code, in 26 U.S.C. §§ 1235(a) and 453(a), treats the sale of patents as a sale of capital assets. See Fawick v. Commissioner of Internal Revenue, 36 F.2d 655, 661 (6th Cir.1971). The trial court was therefore correct in its conclusion that the sale of patents is likewise a sale of capital assets for the purposes of § 12-505.

II

The plaintiffs' third claim of error challenges the conclusion of both the commissioner and the trial court that §§ 12-505 and 12-506, as amended in 1973, impose a capital gains tax on payments received by the plaintiffs in 1975 on account of their pre-1969 patent sales. This claim of error is a limited one. The plaintiffs do not argue that the legislation governing capital gains taxation in 1975 expressly excludes pre-1969 transactions, nor do they maintain that the legislation is in constitutional jeopardy for failing to contain such an exclusion. They focus instead on the specific language of regulation § 12-518-1(d)(iii) which excluded from taxable net gain any "gain which is recognized subsequent to July 1, 1969, from the sale or exchange of property on or before July 1, 1969...." They claim that, just as that regulation excused their tax liability in 1970, so it continued to afford them shelter in 1975. They argue that they were entitled to rely on its continued viability because it was neither rescinded by the commissioner nor disapproved by the legislature.

The crux of the plaintiffs' position is that the regulation finds support in statutory language that survives the 1973 amendment of §§ 12-505 and 12-506. In their reconstruction of the statutes, they argue that the three capital gains tax statutes enacted in 1969, 1971 and 1973 expressly address only the time of the realization of a taxable gain and not the time of the underlying transaction giving rise to the subsequent gain. The commissioner's regulation, on this theory, was neither required by the 1969 act nor invalidated by its subsequent amendments.

The plaintiffs' theory cannot be reconciled with the language of the statutes in 1969 and thereafter. In 1969, § 12-506 imposed a capital gains tax "on all gains from the sale or exchange of capital assets occurring after July 1, 1969, which gains have been earned, received, accrued or credited to the taxpayer during his taxable year. This tax shall not be applicable to gains on the sales or exchanges of capital assets occurring after June 30, 1971." Since the statute expressly made gains taxable in the year of their receipt, it was entirely reasonable for the commissioner to construe the phrase "occurring after July 1, 1969" to modify "sale or exchange." The basic structure of the statute was not changed by the 1971 amendment, in which the legislature substituted the date of December 31, 1970, for the date of July 1, 1969, and made the duration of the tax indefinite. Gains from pre-1969 transactions continued to enjoy a statutory exemption, while gains from all post-1969 transactions were taxable, originally under the 1969 act and subsequently under the 1971 act. See Peterson v. Sullivan, supra, 163 Conn. 524, 313 A.2d 49. In 1973, however, the legislature abolished the exemption for pre-1969 transactions when it amended § 12-506 to delete the phrase "occurring after December 31, 1970." As a result, after 1973, the capital gains tax reached all gains in the year of their receipt regardless of the time of the underlying transaction of sale or exchange. This statutory history demonstrates that the legislature, in enacting and amending the statutes governing capital gains taxes, fully understood the distinction between the timing of realized gains and the timing of underlying transactions, and made provision for both. The regulation promulgated by the commissioner was consistent with the legislation enacted in 1969 and 1971 but was in fundamental conflict with § 12-506 as it stood after 1973.

When two statutes are in irreconcilable conflict, the later enactment is presumed to have repealed the earlier one by implication. State v. Jenkins, 198 Conn. 671, 679, 504 A.2d 1053 (1986); Southern Connecticut Gas Co. v. Housing Authority 91 Conn. 514, 521-22, 468 A.2d...