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Connecticut Responds to the Federal Repatriation Tax

Earlier this month, Connecticut Governor Dan Malloy released his Governor’s Bill addressing the various state tax implications of the federal tax reform bill enacted by Congress in December 2017, commonly referred to as the “Tax Cuts and Jobs Act.” Among other things, the Governor’s Bill addresses Connecticut’s treatment of the foreign earning deemed repatriation tax provisions of amended section 965 of the Internal Revenue Code (IRC). While the Governor’s Bill does not explicitly provide that the addition to federal income under IRC section 965 is an actual dividend for purposes of Connecticut’s dividend received deduction, the bill does protect Connecticut’s ability to tax at least part of the income brought into the federal tax base under the federal deemed repatriation tax provisions by defining nondeductible “expenses related to dividends” as 10 percent of the amount of the dividend.

Currently, Connecticut provides a 100 percent dividend received deduction for foreign dividends not otherwise deducted from federal gross income. Conn. Gen. Stat. §12-217(a)(1)(D). While there is no explicit guidance in Connecticut regarding whether the amount included in federal income under the new deemed repatriation provisions in the Tax Cuts and Jobs Act will be deemed a dividend for purposes of Connecticut income tax, certain proposed provisions in the Governor’s Bill are aimed to make sure that, if such amount is considered a dividend, Connecticut would, effectively, get to tax a material portion of the amount deemed repatriated, despite the 100 percent dividend received deduction, through the disallowance of expenses related to such dividend (which the bill would define as 10 percent of the dividend).

Under the current Connecticut statutes, because dividends received are not taxable, expenses related to dividends, correspondingly, are not deductible, although there is no guidance as to how to determine when an expense is related to dividends. Conn. Gen. Stat. §12-217(a)(2)(A). If enacted, the Governor’s Bill would provide that “expenses related to dividends shall be 10 percent of all dividends received by a company during an income year.” Corporations would have the ability to petition the Commissioner to use a different percentage but it would be within the Commissioner’s discretion whether to grant any such petition. This new provision defining “expenses related to dividends” as 10 percent of the dividends would be effective for tax years beginning January 1, 2017, which makes clear that this provision is, at least in part, an attempt to tax a piece of the addition to income under the federal repatriation provisions despite the 100 percent dividend received deduction in Connecticut.

As expected, states are beginning to change their laws to adapt to the new Internal Revenue Code provisions. Connecticut is just one example and similar efforts are likely to proliferate. Please reach out with any questions about the state tax implications of federal tax reform.

© 2020 McDermott Will & EmeryNational Law Review, Volume VIII, Number 47


About this Author

Stephen P. Kranz Lawyer McDermott Will

Stephen P. Kranz is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  He engages in all forms of taxpayer advocacy, including audit defense and litigation, legislative monitoring, and the formation and leadership of taxpayer coalitions.  Steve is at the forefront of state and local tax issues, including developments arising in the world of cloud computing and digital goods and services.  He assists clients in understanding planning opportunities and compliance obligations for all states and all tax types. ...

Alysse McLoughlin attorney state and local tax matters, financial services companies MCDermott Will New York

Alysse McLoughlin is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's New York office.  She focuses her practice on state and local tax matters, with particular skill working with financial services companies.

Alysse was most recently the head of state tax at Barclays Capital, where she was responsible for all including income, franchise, sales and use, and excise tax issues.  Her responsibilities included establishment of state tax return filing positions and reserves, participation in the financial statement process, and the handling of all state tax audits.  She has also held positions as state tax counsel at Lehman Brothers and attorney in the chief counsel division of the Internal Revenue Services.

Alysse received her LL.M. from New York University School of Law and her J.D. from Fordham University School of Law.  She earned her B.A. from the State University of New York at Binghamton.

Alysse is admitted to practice in New York

212 547 5307

Diann Smith is counsel in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  Diann focuses her practice on state and local taxation with an emphasis on tax challenges relating to compliance, controversy, planning and legislative activity.   

Kathleen Quinn, McDermott Will, State Tax Matters Lawyer, Corporate Development Attorney

Kathleen Quinn focuses her practice on state and local tax matters. She has represented corporations and individuals in New York State and New York City income tax controversies. She also has advised clients on the state and local consequences of corporate restructurings and other business transactions.

Previously, Kathleen worked at a Big Four accounting firm, where her practice focused exclusively on state and local tax.

(212) 547-5718