Ruling 2004-1, Income Tax / Unit Investment Trust
FACTS:
H, an individual, and G, an individual, are each holders of an interest in a unit investment trust, as defined in 26 C.F.R. §1.851-7(d). The assets of the unit investment trust consist of obligations issued by or on behalf of the state of Connecticut or a political subdivision thereof, or a public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut.
H sells her interest in the unit investment trust to a third party. H recognizes a gain for federal income tax purposes from the sale of her interest to the third party.
The custodian of the unit investment trust sells G’s proportionate share of the trust assets and distributes the proceeds from such share to G in exchange for his interest in the unit investment trust. G recognizes a gain for federal income tax purposes from the exchange of his interest in the unit investment trust for the proceeds from the custodian’s sale of his proportionate share of the trust assets.
ISSUES:
Is the holder of an interest in a unit investment trust, as defined in 26 C.F.R. §1.851-7(d), who recognizes a gain for federal income tax purposes from the sale or exchange of the holder’s interest in the unit investment trust, required under Conn. Gen. Stat. §12-701(a)(20)(B)(vii), in computing his or her Connecticut adjusted gross income, to subtract such gain from his or her federal adjusted gross income, to the extent such gain is attributable to the sale or exchange of obligations issued by or on behalf of the state of Connecticut or a political subdivision thereof, or a public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut?
Is the holder of an interest in a unit investment trust, as defined in 26 C.F.R. §1.851-7(d), who recognizes a loss for federal income tax purposes from the sale or exchange of the holder’s interest in the unit investment trust, required under Conn. Gen. Stat. §12-701(a)(20)(A)(v), in computing his or her Connecticut adjusted gross income, to add such loss to his or her federal adjusted gross income, to the extent such loss is attributable to the sale or exchange of obligations issued by or on behalf of the state of Connecticut or a political subdivision thereof, or a public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut?
RULING:
The holder of an interest in a unit investment trust, as defined in 26 C.F.R. §1.851-7(d), who recognizes a gain for federal income tax purposes from the sale or exchange of the holder’s interest in the unit investment trust, is required under Conn. Gen. Stat. §12-701(a)(20)(B)(vii), in computing his or her Connecticut adjusted gross income, to subtract such gain from his or her federal adjusted gross income, to the extent such gain is attributable to the sale or exchange of obligations issued by or on behalf of the state of Connecticut or a political subdivision thereof, or a public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut.
The holder of an interest in a unit investment trust, as defined in 26 C.F.R. §1.851-7(d), who recognizes a loss for federal income tax purposes from the sale or exchange of the holder’s interest in the unit investment trust, is required under Conn. Gen. Stat. §12-701(a)(20)(A)(v), in computing his or her Connecticut adjusted gross income, to add such loss to his or her federal adjusted gross income, to the extent such loss is attributable to the sale or exchange of obligations issued by or on behalf of the state of Connecticut or a political subdivision thereof, or a public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut.
DISCUSSION:
The starting point in computing an individual’s Connecticut income tax liability is his or her federal adjusted gross income. In computing the individual’s Connecticut adjusted gross income, items expressly provided for in Conn. Gen. Stat. §12-701(a)(20)(A) are added to his or her federal adjusted gross income, and items expressly provided for in Conn. Gen. Stat. §12-701(a)(20)(B) are subtracted from his or her federal adjusted gross income.
Conn. Gen. Stat. §12-701(a)(20)(A)(v) expressly provides for “any loss from the sale or exchange of obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut” to be added to an individual’s federal adjusted gross income, “to the extent properly includable in determining the net gain or loss from the sale or other disposition of capital assets for federal income tax purposes . . . .” Conn. Gen. Stat. §12-701(a)(20)(B)(vii) expressly provides for “any gain from the sale or exchange of obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut” to be subtracted from an individual’s federal adjusted gross income, “to the extent properly includable in determining the net gain or loss from the sale or other disposition of capital assets for federal income tax purposes . . . .”
Each holder of an interest in a unit investment trust, as defined in 26 C.F.R. §1.851-7(d), is treated (to the extent of such interest) as directly owning a proportionate share of the assets of the trust. 26 C.F.R. §1.851-7(a) and (c)(1).
Gain. If an individual, such as H, is the holder of an interest in a unit investment trust, and the unit investment trust owns obligations issued by the state of Connecticut, the individual is treated as directly owning a proportionate share of those obligations. If the individual sells his or her interest in the unit investment trust to a third party, and recognizes a gain for federal income tax purposes from the sale of his or her interest to the third party, then, to the extent that such gain is attributable to the sale of obligations issued by the state of Connecticut, the individual is treated as recognizing gain from the sale or exchange of obligations issued by the state of Connecticut.
Loss. If the individual sells his or her interest in the unit investment trust to a third party, and recognizes a loss for federal income tax purposes from the sale of his or her interest to the third party, then, to the extent that such loss is attributable to the sale of obligations issued by the state of Connecticut, the individual is treated as recognizing loss from the sale or exchange of obligations issued by the state of Connecticut.
Because a unit investment trust is “not a taxpayer subject to taxation under the Internal Revenue Code,” the unit investment trust does not recognize gain or loss if it “distributes a holder’s proportionate share of the trust assets in exchange for his interest in the trust” or if it “sells the holder’s proportionate share of the trust assets and distributes the proceeds from such share to the holder in exchange for his interest in the trust.” 26 C.F.R. §1.851-7(b). “Items of income, gain, loss, deduction, or credit received by the trust or a custodian thereof shall be taxed to the holders of interests in the trust (and not to the trust) as though they had received their proportionate share of the items directly on the date such items were received by the trust or custodian.” 26 C.F.R. §1.851-7(c)(1).
Gain. If an individual, such as G, is the holder of an interest in a unit investment trust, and the unit investment trust owns obligations issued by the state of Connecticut, the individual is treated as directly owning a proportionate share of those obligations. If the custodian of the unit investment trust sells the holder’s proportionate share of the trust assets and distributes the proceeds from such share to the holder in exchange for his or her interest in the unit investment trust, items of gain received by the unit investment trust are taxed to the holder as if the holder had received his or her proportionate share of the items directly. (The basis of a unit investment trust’s assets that are treated as “owned by the holder of an interest in such trust shall be the same as the basis of [the holder’s] interest in such trust. Accordingly, the amount of the gain or loss recognized by the holder upon the sale by the unit investment trust of the holder’s pro rata share of the trust assets shall be determined with reference to the basis of [the holder’s] interest in the trust.” 26 C.F.R. §1.851-7(c)(2).) To the extent that such gain is attributable to the sale of obligations issued by the state of Connecticut, the individual is treated as recognizing gain from the sale or exchange of obligations issued by the state of Connecticut.
Loss. If the custodian of the unit investment trust sells the holder’s proportionate share of the trust assets and distributes the proceeds from such share to the holder in exchange for his or her interest in the unit investment trust, items of loss received by the unit investment trust are taxed to the holder as if the holder had received his or her proportionate share of the items directly. To the extent that such loss is attributable to the sale of obligations issued by the state of Connecticut, the individual is treated as recognizing loss from the sale or exchange of obligations issued by the state of Connecticut.
If the holder of an interest in a unit investment trust is a trust or estate
Gain. If the holder of an interest in a unit investment trust, as defined in 26 C.F.R. §1.851-7(d), is a trust or estate, and the holder recognizes a gain for federal income tax purposes from the sale or exchange of the holder’s interest in the unit investment trust, then, to the extent such gain is attributable to the sale or exchange of obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut, the gain is required, under Conn. Gen. Stat. §12-701(a)(10)(B)(v), to be netted, along with other items enumerated in Conn. Gen. Stat. §12-701(a)(10)(B), against items enumerated in Conn. Gen. Stat. §12-701(a)(10)(A), in computing the Connecticut fiduciary adjustment.
Loss. If the holder is a trust or estate, and the holder recognizes a loss for federal income tax purposes from the sale or exchange of the holder’s interest in the unit investment trust, then, to the extent such loss is attributable to the sale or exchange of obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district or similar public entity created under the laws of the state of Connecticut, the loss is required, under Conn. Gen. Stat. §12-701(a)(10)(A)(iv), to be netted, along with other items enumerated in Conn. Gen. Stat. §12-701(a)(10)(A), against items enumerated in Conn. Gen. Stat. §12-701(a)(10)(B), in computing the Connecticut fiduciary adjustment.
If the total of the items enumerated in Conn. Gen. Stat. §12-701(a)(10)(A) exceeds the total of the items enumerated in Conn. Gen. Stat. §12-701(a)(10)(B), the trust or estate’s share of the Connecticut fiduciary adjustment is to be added to the trust or estate’s federal taxable income in computing its Connecticut taxable income. If the total of the items enumerated in Conn. Gen. Stat. §12-701(a)(10)(B) exceeds the total of the items enumerated in Conn. Gen. Stat. §12-701(a)(10)(A), the trust or estate’s share of the Connecticut fiduciary adjustment is to be subtracted from the trust or estate’s federal taxable income in computing its Connecticut taxable income.
LEGAL DIVISION
March 2, 2004