Ruling 91-10

Dividend and Interest Income Tax

This Ruling has been obsoleted by AN 94(2)

ISSUE:

If interest income of an S corporation is properly reportable, for federal income tax purposes, as a nonseparately computed item of income, is a shareholder's pro rata share of such interest income subject to the dividend and interest income tax that is imposed by Conn. Gen. Stat. §12-506(a)(1)?

FACTS:

1. A resident, as defined in Conn. Gen. Stat. §12-505(a), is a shareholder of an S corporation.
2. The shareholder's adjusted gross income, as defined in Conn. Gen. Stat. §12-505(a), equals or exceeds $54,000.
3. The S corporation has interest income that it reports on its Form 1120S as a nonseparately computed item of income. On the Schedule K-1 that is issued to the shareholder, his pro rata share of such interest income is included in his pro rata share of the S corporation's nonseparately computed items of income.

DISCUSSION:

"An S Corporation will ... be treated as a conduit for the distribution of income and an S Corporation shareholder who is a Connecticut resident ... is subject to the Capital Gains, Dividends and Interest Taxes on the pro rata share of items of income which are treated, for federal tax purposes, as capital gain income, dividend income or interest income, respectively.

The character of any item of income which is included in a shareholder's pro rata share will be that character which it had when realized by the corporation." Department of Revenue Services Bulletin No. 19 (October 26, 1983).

"A partnership or S corporation is not subject to the taxes imposed under chapter 224. A taxpayer who is a partner or shareholder of such an entity which is treated, for federal income tax purposes, as a conduit for the distribution of income is subject to the taxes imposed under chapter 224 on his or her pro rata share of income which is treated, for purposes of the taxes imposed under chapter 224, as gains from the sale or exchange of capital assets, dividends or interest income." Conn. Agencies Regs. §12-518-7a(a).

The avoidance of multiple taxation of S corporation income is the purpose that underlies Bulletin No. 19. The capital gains tax is to be imposed on an S corporation shareholder's pro rata share of separately computed gains from the sale or exchange of capital assets. The dividend and interest income tax is to be imposed on an S corporation shareholder's pro rata share of separately computed dividend and interest income. The corporation business tax is to be imposed on the S corporation's nonseparately computed items of income and deduction. Just as the corporation business tax is not imposed on separately computed items of income and deduction, the taxes imposed under chapter 224 are not imposed on nonseparately computed items of income and deduction. The provisions of the subsequently promulgated Conn. Agencies Regs. §12-518-7a(a) are not to the contrary.

RULING:

If interest income of an S corporation is properly reportable, for federal income tax purposes, as a nonseparately computed item of income, an S corporation shareholder's pro rata share of such interest income is not subject to the dividend and interest income tax that is imposed by Conn. Gen. Stat. §12-506(a)(1).

LEGAL DIVISION

March 29, 1991