ACHILLION PHARMACEUTICALS, INC. v. LAW, No. CV 06 4012046 S (May 31, 2007)


ACHILLION PHARMACEUTICALS, INC. v. PAM LAW, COMMISSIONER OF REVENUE SERVICES.

2007 Ct. Sup. 7700, 43 CLR 503
No. CV 06 4012046 SConnecticut Superior Court Judicial District of New Britain, Tax Session at New Britain
May 31, 2007

[EDITOR’S NOTE: This case is unpublished as indicated by the issuing court.]

MEMORANDUM OF DECISION ON CROSS MOTIONS FOR SUMMARY JUDGMENT
ARNOLD W. ARONSON, JUDGE TRIAL REFEREE.

In 1999, the legislature enacted General Statutes § 12-217ee, the exchange statute, permitting qualified small businesses engaged in research and development (R D) in Connecticut, the opportunity to exchange their unused R D credits (hereinafter rolling R D tax credits) created by General Statutes § 12-217n, for a discounted amount of 65 cents on the dollar. The issue in this case involves the proper interpretation and application of General Statutes §§ 12-217n and 12-217ee.

The plaintiff, Achillion Pharmaceuticals, Inc. (Achillion), is a “qualified small business” as defined in § 12-217ee(e), reporting gross income of less than $70 million for years 2002 and 2003 on form CT-1120, the corporation business tax return. Achillion also reported that it incurred $10,733,363 in R D expenses for 2003.

On its form CT-1120 RDC for year 2003, Achillion reported its 2003 R D expenses and calculated an allowable tentative credit of $644,002 (6% of $10,733,363 in R D expenses). Because Achillion did not have any corporate business tax liability in 2003, pursuant to §12-217ee(a)(3), it applied to the commissioner to exchange the amount of $214,667 (1/3 of $644,002, its 2003 rolling R D tax credit), for a cash refund in the amount of $139,534 (65% of $214,667). The commissioner granted this refund request.

For the following year 2004, Achillion applied to exchange $429,335 ($644,002-$214,667), the two-thirds balance of the credit earned in 2003, for a cash refund in the amount of $279,068 (65% of $429,335). The commissioner denied this request contending that the cash refund could only be obtained in the year in which Achillion qualified for the rolling R D tax credit and that the cash refund could not be used in any year subsequent to 2003.[1]

CT Page 7701 The issue boils down to whether, in the year 2004, Achillion is entitled to obtain a cash refund of the two-thirds balance of a tax credit, created by § 12-217n, for R D expenses incurred in 2003, which refund, subject to certain conditions, is authorized by § 12-217ee.

Section 12-217n, the rolling R D tax credit statute, provides to qualified small businesses a rolling tax credit for R D expenses incurred in Connecticut that may be applied against the corporation business tax. Pursuant to § 12-217n(c)(1), the amount allowed as a tax credit in any income year, known as the “tentative credit,” is calculated in an amount equal to 6% of R D expenses. However, pursuant to § 12-217n(d)(2), “[n]o more than one-third of the amount of the credit allowable for any income year may be included in the calculation of the amount of the credit that may be taken in that income year.” Therefore, for purposes of the tax credit, only 2% of R D expenses may be considered in the year 2003, the year Achillion incurred the expenses.

Under § 12-217n(d)(4), the balance of the credit earned in 2003 “shall be carried forward to each of the successive income years until such credits, or applicable portion thereof, are fully taken.” An additional restriction contained therein is that “[n]o credit permitted under this section shall be taken in any income year until the full amount of all allowable credits carried forward to such year from any prior income year, commencing with the earliest such prior year, that otherwise may be taken under subdivision (2) of this subsection in that income year, have been fully taken.” Section 12-217n(d)(3) further restricts the amount of the credit based on the amount of the taxpayer’s tax liability.

Achillion had no tax liability in 2003 under the corporation business tax and therefore could not offset the credit earned in 2003 against 2003 tax liability. See affidavit of Mary Kay Fenton, plaintiff’s vice-president and chief financial officer. Pursuant to § 12-217ee, Achillion applied for and was granted an exchange of one-third of its 2003 rolling R D tax credit for a cash refund of $139,534.

In accordance with its interpretation of § 12-217ee, Achillion now seeks for year 2004 to exchange for a cash refund the balance of the two-thirds carry forward from its rolling R D tax credit earned in 2003. Both the plaintiff and the defendant recognize that the remaining two-thirds of the 2003 rolling R D tax credit became a carry forward available to the plaintiff in subsequent income years. See plaintiff’s memorandum of law, dated February 16, 2007 (hereinafter plaintiff’s 2/16/07 MOL), pp. 2-3; defendant’s memorandum of law, dated February 5, CT Page 7702 2007 (hereinafter defendant’s 2/5/07 MOL), p. 4. However, the plaintiff seeks to accelerate the exchange of the remaining two-thirds of the rolling R D tax credit earned in 2003 for a full cash refund in 2004.

The defendant argues that § 12-217ee must be interpreted by considering the language in § 12-217n. The defendant contends that “the plain language of . . . § 12-217ee(a)(2) . . . authorizes a taxpayer to exchange for refund a credit under . . . § 12-217n only in the year the taxpayer `qualifies’ for such credit . . . As the Plaintiff did not qualify for the Rolling Tax Credit at issue in 2004, it is not eligible to exchange in 2004, or in any subsequent year, any portion of said Credit. Rather, the plaintiff must utilize the amount it was allowed to carry forward from 2003 in accordance with the provisions of . . . § 12-217n(d)(4).” (Emphasis in original.) (Defendant’s 2/5/07 MOL, p. 17.)

At the heart of this appeal is Achillion’s claim that it can take a full refund in 2004 for the balance of the 2003 rolling R D tax credit carried forward to 2004, as opposed to the defendant’s claim that Achillion cannot use the cash refund provision in § 12-217ee beyond the calendar year of 2003, the year in which Achillion “qualified” for the refund. With all due deference to the parties’ expertise, neither side’s interpretation is correct.

The road map for the interpretation of both §§ 12-217n and 12-217ee
begins with the rolling R D tax credit statute, § 12-217n. Enacted as Public Act 93-433 and effective July 1, 1993, § 12-217n created a tax credit for R D expenses incurred by qualified small businesses in Connecticut. The legislative history suggests that the legislature enacted the tax credit in order to keep existing businesses in Connecticut, as well as to attract start-up companies in manufacturing, high technology, aerospace and pharmaceutical industries to the state with a favorable business environment. See remarks of Rep. Krawiecki, 6/8/93 House Transcript.

As discussed above, the amount of the tax credit is calculated, pursuant to § 12-217n(c)(1), as follows: “The amount allowed as a credit in any income year shall be the tentative credit calculated under subdivision (2) of this subsection, modified as provided in subsection (e) or (f) of this section, if applicable, except that in the case of a qualified small business the tentative credit allowed for research and development expenses shall be equal to six per cent of such expenses . . .”

Section § 12-217n(d)(2) sets restrictions on the use of the tax CT Page 7703 credits, providing that “[n]o more than one-third of the amount of the credit allowable for any income year may be included in the calculation of the amount of the credit that may be taken in that income year.”

Another restriction contained in § 12-217n(d)(4) provides that “[c]redits that are allowed under this section but that exceed the amount permitted to be taken in an income year by reason of subdivision (1), (2) or (3) of this subsection, shall be carried forward to each of the successive income years until such credits, or applicable portion thereof, are fully taken. No credit permitted under this section shall be taken in any income year until the full amount of all allowable credits carried forward to such year from any prior income year, commencing with the earliest such prior year, that otherwise may be taken under subdivision (2) of this subsection in that income year, have been fully taken . . .”

Subsequent to the passage of § 12-217n, the rolling R D tax credit statute, the legislature enacted § 12-217ee, the exchange statute, with Public Act 99-173, effective June 23, 1999. Section 12-217ee became applicable to taxable years commencing on or after January 1, 2000 and provided for qualified small businesses to exchange unused credits created under §§ 12-217j and 12-217n for a cash refund.

As noted in the legislative history of § 12-217ee, tax credits would be carried forward as provided in § 12-217n(d)(4) and “for small start-up and research firms that come to Connecticut under $70 million, there’s a 65% purchase of the tax credits that are in this bill which will make Connecticut a center and a great place to do research and development and it is important that we know that for our constituents that we will be the leaders in promoting this type of development.” (Remarks of Rep. Samowitz, 6/4/99 House Transcript.)[2]

Simply stated, § 12-217n provides qualified small businesses such as Achillion with the rolling R D tax credit by allowing Achillion to take a tax credit of 2% of R D expenses incurred in 2003 as well as to carry a balance of the remaining 2003 tax credit of 4% of R D expenses forward to future years to be applied to any future tax liability. Therefore, the clear implication of § 12-217n(d)(4) is that Achillion, as a qualified small business, must first use the oldest of the tax credits before applying tax credits earned in subsequent years.

Applying §§ 12-217n and 12-217ee to the present case, the commissioner refunded to the plaintiff the amount of $139,534 which is 65% of $214,667 (one-third of the rolling R D tax credit earned in 2003). The two-thirds remaining balance was carried forward to subsequent years. In CT Page 7704 this appeal, Achillion seeks a cash refund of the remaining two-thirds of the rolling R D tax credit in 2004 because Achillion had no tax liability in 2004. However, § 12-217n(d)(2) restricts the refund calculation to one-third of the 2003 rolling tax credit in any one income year, not the full amount of the tax credit, as the plaintiff proposes.

Contrary to the terms of § 12-217n(d)(2), Achillion claims that it may exchange the remaining two-thirds of the rolling R D tax credit earned in 2003 into a cash refund in year 2004. The basis for Achillion’s claim is its interpretation of § 12-217n(d)(4) that “a taxpayer with sufficient tax liability in the second year may take the remaining two-thirds of the Rolling R D Credit.” (Emphasis in original.) (Plaintiff’s 2/16/07 MOL, pp. 16-17.) However, Achillion ignores the plain meaning of § 12-217n(d)(2) that only one-third of the tax credit may be taken in any one year and therefore, that any cash refund is limited to the amount of the tax credit that may be taken in any one income year.

It is the defendant’s position that § 12-217ee(a)(2) authorizes the exchange of a rolling R D tax credit for a refund in the year the taxpayer qualifies for the credit. The defendant contends that a taxpayer qualifies for a rolling R D tax credit in the year the taxpayer incurs R D expenses pursuant to § 12-217n(a) and states that “there is no dispute, and the plaintiff . . . admits . . . that it incurred the expenses that gave rise to the Rolling Tax Credit in 2003 . . . Thus, by its own admission, the Plaintiff did not qualify for the Rolling Tax Credit in 2004. Therefore, as the Plaintiff did not qualify in 2004 for the credit it is seeking to exchange for a refund in 2004, the Plaintiff is not eligible under the plain language of . . . §12-217ee to exchange such credit in 2004. Consequently, the Defendant, applying . . . § 12-217ee as enacted by the Connecticut General Assembly, disallowed said credit.” (Defendant’s 2/5/07 MOL, pp. 1-2.)

The problem with the defendant’s reasoning is that, in this appeal, Achillion is not applying for a cash refund of a rolling R D tax credit earned in 2004, rather it seeks to cash in for a refund a rolling R D tax credit earned in 2003 and carried forward to 2004, pursuant to § 12-217n(d)(4) and § 12-217ee(a)(3).[3]

In order for the plaintiff to obtain a cash refund of the rolling R D tax credit, the following circumstances must be present:

(1) the plaintiff must be entitled to a rolling R D tax credit pursuant to § 12-217n;

CT Page 7705

(2) the plaintiff must use the “full amount of all allowable credits carried forward to such year from any prior income year” pursuant to § 12-217n(d)(4);
(3) the plaintiff is limited to one-third of the rolling R D tax credit in any one year and
(4) the plaintiff must have no tax liability in the year it seeks a cash refund.

Because there are factual issues that the parties must address, as they apply to the court’s interpretation of §§ 12-217n and 12-217ee, their cross motions for summary judgment are denied.

[1] In 2004, similar to the year 2003, the plaintiff applied to exchange for a cash refund the first one-third of its 2004 rolling R D tax credit along with the remaining two-thirds carry forward from its 2003 rolling R D tax credit. The defendant granted Achillion’s application to exchange one-third of its 2004 rolling R D tax credit but denied Achillion’s application to exchange the remaining two-thirds carry forward from 2003. See affidavit of Mary Kay Fenton.
[2] Representative Ward similarly observed that “[m]ost importantly, is what we’re doing to attract new business within this budget. As was stated before . . . the start-up company that wants to come to Connecticut and we’re particularly trying to attract those in pharmaceutical and bio-tech. The start-up company that knows that it will lose money for several years as it’s working on new projects, they can now come here. We’ll have a favorable environment that between the net operating loss carry forward and the exchange, really an innovative way to deal with the tax credits with the exchange, an opportunity to do business here and to be here and not be attracted away to North Carolina or some of the places with the better — with a far better climate for that kind of business. So I think this tax package in those areas does very good things.” (Remarks of Rep. Ward, 6/4/99 House Transcript.)
[3] See footnote one.

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