Ruskewich v. Commissioner of Revenue Services

• Decision Date: 21 November 1989
• Docket Number: No. 13690,13690
• Citation: Ruskewich v. Commissioner of Revenue Services, 213 Conn. 19, 566 A.2d 658 (Conn. 1989)
• Court: Connecticut Supreme Court
• Parties: Alex RUSKEWICH et al. v. COMMISSIONER OF REVENUE SERVICES.

Page 658

566 A.2d 658

213 Conn. 19

Alex RUSKEWICH et al. v.COMMISSIONER OF REVENUE SERVICES.

No. 13690.

Supreme Court of Connecticut.

Argued Oct. 4, 1989.

Decided Nov. 21, 1989.

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

Alex Ruskewich, pro se, with whom, on the brief, was Ritva Ruskewich, pro se, appellees(plaintiffs).

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

CALLAHAN, Associate Justice.

This is an appeal by the defendant commissioner of revenue services (commissioner) from the judgment of the Superior Court setting aside an assessment of additional capital gains tax against the plaintiffs Alex and Ritva Ruskewich(taxpayers).The issue presented is whether the taxpayers can carry over and deduct a capital loss to calculate net gain on their Connecticut capital gains and dividends tax return when they reported no carryover loss on their federal income tax return for the same taxable year.¹

The commissioner disallowed the capital loss carryover, assessed a tax deficiency against the taxpayers, and denied the taxpayers' appeal of the assessment.Thereafter, the taxpayers appealed to the Superior Court, which decided the case on the basis of stipulated facts.That court set aside the commissioner's assessment.The commissioner appealed to the Appellate Court and we transferred the matter to this court, pursuant to Practice Book§ 4023.We find no error.

The stipulation reveals the following facts.The taxpayers moved to Connecticut in April, 1981.On their 1981 federal income tax return they reported capital gains totaling $32,799 and capital losses totaling $13,822 for a net gain of $18,977.Since the taxpayers realized the capital gains prior to April, they only reported the $13,822 capital loss on their 1981 Connecticut capital gains and dividends tax return.²

In 1983, the taxpayers realized capital gains of $41,746, of which $21,276 was included in their adjusted gross income on their federal income tax return.They did not report any capital loss carryover from prior years.In contrast, on their Connecticut tax return, they reduced the $21,276 net taxable gain by $13,644, the unused capital loss carryover from 1981.The taxpayers reported a net gain of $7632 on their Connecticut tax return.³

The commissioner disallowed the capital loss carryover claiming that General Statutes(Rev. to 1983)§§ 12-505 ⁴ and 12-506⁵ only allow a loss carryover for Connecticut purposes when it is used in the computation of net gain on the taxpayers' federal income tax return.The taxpayers disagree with the commissioner's assessment and argue that General Statutes(Rev. to 1983)§ 12-505 incorporates federal tax law and requires the taxpayers to utilize the federal tax system for calculating capital gain.Accordingly, they argue, the taxpayers could offset the capital loss carryover against capital gains in 1983 in accordance with federal law.

Our well established principles of statutory construction are designed to further our fundamental objective of ascertaining and giving effect to the apparent intent of the legislature.Texaco Refining & Marketing Co. v. Commissioner, 202 Conn. 583, 589, 522 A.2d 771(1987)."In seeking to discern that intent, we look to the words of the statute itself, to the legislative history and circumstances surrounding its enactment[and] to the legislative policy it was designed to implement...."Id.;Phelps Dodge Copper Products Co. v. Groppo, 204 Conn. 122, 128, 527 A.2d 672(1987);Kellems v. Brown, 163 Conn. 478, 502-503, 313 A.2d 53(1972), appeal dismissed, 409 U.S. 1099, 93 S.Ct. 911, 34 L.Ed.2d 678(1973).

This court pays considerable deference to the commissioner's interpretation of tax statutes and regulations.Clinton Nurseries, Inc. v. Commissioner of Revenue Services, 205 Conn. 761, 765, 535 A.2d 361(1988).Where, however, the issue has not previously been the subject of judicial scrutiny, has not been the subject of a legislatively approved regulation and is not a time-tested interpretation of the statute, the commissioner's interpretation of the statute is not entitled to special deference.Dine Out Tonight Club, Inc. v. Department of Revenue Services, 210 Conn. 567, 570 n. 3, 556 A.2d 580(1989).While statutes that provide an exemption or deduction from taxation must be strictly construed in favor of the taxing authority;Clinton Nurseries, Inc. v. Commissioner of Revenue Services, supra, 205 Conn. at 764, 535 A.2d 361;Skaarup Shipping Corporation v. Commissioner, 199 Conn. 346, 352, 507 A.2d 988(1986);"[i]t is also true ... that such strict construction neither requires nor permits the contravention of the true intent and purpose of the statute as expressed in the language used."Jewett City Savings Bank v. Board of Equalization, 116 Conn. 172, 185, 164 A. 643(1933);Phelps Dodge Copper Products Co. v. Groppo, supra, 204 Conn. at 129, 527 A.2d 672;Hartford Hospital v. Hartford, 160 Conn. 370, 375, 279 A.2d 561(1971).

General Statutes(Rev. to 1983)§ 12-506(a)(2) imposes a capital gains tax upon "all net gains from the sale or exchange of capital assets."General Statutes(Rev. to 1983)§ 12-505(A) defines "gains from the sale or exchange of capital assets" as the "net gain as determined for federal income tax purposes, after due allowance for losses and holding periods ... (2) from transactions or events taxable to the taxpayer as such sales or exchanges, and being the net amount includable in the taxpayer's adjusted gross income, with respect to all such sales, exchanges, transactions, or events, under the provisions of the Internal Revenue Code in effect for the taxable year."Section 12-505 provides further that, " 'adjusted gross income' means adjusted gross income for federal income tax purposes."

The commissioner's argument focuses upon the language that defines "net gain" as being the "net amount includable in the taxpayer's adjusted gross income ... under the provisions of the Internal Revenue Code in effect for the taxable year."General Statutes(Rev. to 1983)§ 12-505(A)(2).The commissioner urges us to construe "net gain" to mean the net amount included in the taxpayers' adjusted gross income on their federal income tax return for that particular year.Accordingly, the commissioner argues, since the taxpayers did not deduct a capital loss carryover against capital gains to arrive at their adjusted gross income for federal purposes for 1983, they could not deduct a capital loss carryover for state purposes.⁶In other words, the "net gain" for state tax purposes must be exactly the same number as "net gain" for federal tax purposes.We disagree.

In seeking to discern the intent of the legislature, we look to the words of the statute as a whole to offer guidance.General Statutes(Rev. to 1983)§ 12-505(A) states that taxable net gains are those defined for federal income tax purposes "after due allowance for losses and holding periods."The legislature clearly intended that losses be accounted for when "net gain" is computed.The only guidance the legislature gives on how to account for losses is through its reference to federal tax law.

"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, supra, [163 Conn. at] 518-19[313 A.2d 53];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)."Harper v. Tax Commissioner, 199 Conn. 133, 139, 506 A.2d 93(1986);Skaarup Shipping Corporation v. Commissioner, supra, 199 Conn. at 351, 507 A.2d 988.General Statutes(Rev. to 1983)§ 12-505 makes repeated references to the federal tax code.Specifically, the statute refers to "net gain as determined for federal income tax purposes ... and being the net amount includable in the taxpayer's adjusted gross income ... under the provisions of the Internal Revenue Code in effect for the taxable year."(Emphasis added.)General Statutes(Rev. to 1983)§ 12-505(A)(2).Both the language of the statute and long-standing precedents of this court support the conclusion that § 12-505 incorporates the federal tax system of taxing capital gain income.Harper v. Tax Commissioner, supra, 199 Conn. at 139, 506 A.2d 93;Peterson v. Sullivan, supra, 163 Conn. at. 525, 313 A.2d 49;Kellems v. Brown, supra, 163 Conn. at 515, 313 A.2d 53.The statute explicitly refers to the provisions of the Internal Revenue Code and not simply to an amount calculated on the federal tax return.

There is no dispute that under the federal tax code, capital losses can be carried over to succeeding tax years to offset capital gains.See26 U.S.C. §§ 1212(b)(1)and1222.Since § 12-505 makes no express provision for the treatment of capital losses except by way of reference to federal law, the legislature evidently intended to incorporate the federal method of treating capital loss carryovers.

Our conclusion is based upon our holding in Kellems v. Brown, that is, that the intent of the legislature in enacting § 12-505 was to incorporate federal tax law.In Kellems v. Brown, supra, this court construed the term "net gain" in order to determine whether § 12-505 allowed a deduction for long term capital gains equivalent to that allowed under 26 U.S.C. § 1202 of the federal tax code.Despite the fact that § 12-505 did not make a specific reference to the § 1202 deduction, this court construed the statute to incorporate the...