BELL ATL. v. COMM’R. OF REV. SERV., 273 Conn. 240 (2005)

869 A.2d 611

No. (SC 17154).Supreme Court of Connecticut.

Sullivan, C. J., and Borden, Katz, Palmer and Vertefeuille, Js.

Syllabus
The plaintiffs, thirteen corporations that held partnership interests either directly or indirectly in C Co., appealed to the trial court from the decisions of the defendant, the commissioner of revenue services, denying their claims for refunds in the amount of the statutory (§ 12-217t) tax credit provided for certain electronic data equipment property used for business. Although C Co. had paid municipal property taxes on the equipment for the 1995 tax year, the commissioner denied the refund to the plaintiffs on the ground that a partnership like C Co. was not a “taxpayer” for purposes of § 12-217t and, therefore, was not eligible for a tax credit that could be passed through to the plaintiffs as its corporate partners. The trial court determined that because C Co. owned the property and had paid the municipal taxes, under principles of federal tax law, C Co. owned the tax credit as a partnership asset, and the plaintiffs were entitled to a pass through of the credit, which could then be used to offset their state corporation business tax. On the commissioner’s appeal, held that a review of § 12-217t having revealed that the legislature did not clearly and unambiguously grant partnerships a tax credit for the payment of personal property taxes on electronic data processing equipment, C Co.’s ineligibility to receive the § 12-217t tax credit precluded it from passing the credit through to the plaintiffs and, therefore, prevented them from using the credit; § 12-217t(c) limited the eligibility of the tax credit to a “taxpayer,” which under the statutory (§ 12-213 [a] [1]) definition of that term as expressly used in the corporation business tax statutes does not include partnerships, and C Co. bore no tax liability under the corporation business tax against which the claimed credit could be used in the manner prescribed by § 12-217t.

Argued November 22, 2004.

Officially released April 5, 2005.

Procedural History
Thirteen appeals from the decisions by the defendant denying the plaintiffs’ claims for a refund of state corporation business taxes they had paid, brought to the Superior Court in the judicial district of New Britain, Tax Session, where the cases were consolidated and tried to the court, Hon. Arnold W. Aronson, judge trial

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referee, who, exercising the powers of the Superior Court, rendered judgment sustaining the appeals, from which the defendant appealed. Reversed; judgment directed.

Susan Quinn Cobb, assistant attorney general, with whom were Louis P. Bucari, Jr., tax litigation director, and, on the brief, Richard Blumenthal, attorney general, for the appellant (defendant).

John R. Shaughnessy, Jr., with whom were Linda L. Morkan and, on the brief, Richard W. Tomeo, for the appellees (plaintiffs).

Opinion
BORDEN, J.

The issue in this appeal is whether the payment of personal property taxes on electronic data processing equipment by a partnership entitles the partners to the use of the tax credit provided by General Statutes § 12-217t.[1] The defendant, the commissioner

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of revenue services, appeals from the judgment of the trial court sustaining the tax appeals, brought pursuant to General Statutes § 12-237,[2] of thirteen corporate plaintiffs that hold partnership interests in Cellco Partnership (Cellco).[3] The defendant maintains that the

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absence of any reference to a partnership in the definition of “taxpayer,” as used in the statute, renders a partnership ineligible for the § 12-217t tax credit, with the result that no tax credit inures to the partnership for it to pass through to the partners. The defendant further maintains that were we to conclude that partnership eligibility for the tax credit exists, the plaintiffs could not use the credit because § 12-217t
neither contains a provision that would allow the partnership to pass the tax credit through to the partners, nor incorporates federal tax concepts such that such a provision could be implied. We agree that a partnership cannot establish eligibility for a tax credit under § 12-217t and, accordingly, we reverse the judgment of the trial court.

Initially, the plaintiffs did not claim the tax credit provided for in § 12-217t for the 1995 tax year. The plaintiffs thereafter timely filed amended tax returns for that tax year pursuant to General Statutes § 12-225 (b) (1),[4] claiming refunds in the amount of the § 12-217t

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credit. The defendant denied the plaintiffs’ claims for refunds. The plaintiffs filed an administrative appeal, and the defendant issued a final determination upholding that denial. The plaintiffs subsequently appealed from the defendant’s final determination to the Superior Court, which sustained the appeal and rendered judgment for the plaintiffs. This appeal followed.[5]

The following facts, as stipulated to by the parties, and procedural history are undisputed. In July, 1995, Bell Atlantic Corporation and NYNEX Corporation formed Cellco, a general partnership, by contributing the assets from their public wireless cellular communications services, commonly referred to as cellular telephone services or cellular services, to form a single cellular network covering a larger geographic area than either corporation had served separately. Prior to that time, the Bell Atlantic Mobile Companies and the NYNEX Mobile Companies, using distinct cellular services networks, had separately provided cellular services to overlapping geographic markets. Bell Atlantic Corporation contributed the assets of the Bell Atlantic Mobile Companies either directly to Cellco or to Bell Atlantic Cellular Holdings, L.P., in exchange for partnership interests in Bell Atlantic Cellular Holdings, L.P.; Bell Atlantic Cellular Holdings, L.P., then contributed its assets to Cellco in exchange for a general partnership interest in Cellco. NYNEX Corporation contributed the assets of the NYNEX Mobile Companies to Cellco in exchange for partnership interests in Cellco.

Among the assets that the partners contributed to the formation of Cellco was the electronic data processing equipment located in Connecticut that each had used

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in providing cellular services. Prior to its contribution to Cellco, the equipment had been listed for assessment with Connecticut municipalities on October 1, 1994, and had been assessed against those plaintiffs who owned it on that date. Once the plaintiffs formed Cellco, however, that partnership became the owner of the electronic data processing equipment. As the owner of the equipment, Cellco paid $957,718 in personal property taxes on the equipment to Connecticut municipalities during the 1995 tax year.

Although Cellco, as the owner of the electronic data processing equipment, assumed municipal property tax liability for the equipment, it bore no income tax liability pursuant to the Connecticut corporation business tax because, as a partnership, it was not a “`[t]axpayer'” as defined in General Statutes §12-213 (a) (1).[6] Each of the plaintiffs, on the other hand, eliminated any municipal property tax liability it had for the electronic data processing equipment by transferring ownership of the equipment to Cellco, but with the formation of Cellco, became liable for the income tax on its properly apportioned distributive share of Cellco’s annual income pursuant to the applicable sections of the corporation business tax.[7]

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When the plaintiffs filed their original corporation business tax returns for 1995, wherein they reported net income from the operations of Cellco, they did not claim a credit under §12-217t for the municipal taxes paid by Cellco on the Connecticut electronic data processing equipment. As a result, the plaintiffs’ payments of the corporation business tax on that portion of the Cellco net income allocable to Connecticut did not reflect the § 12-217t tax credit. The plaintiffs subsequently timely filed amended 1995 corporation business tax returns to claim the § 12-217t tax credit and claimed tax refunds on that basis.

The defendant disagreed with the plaintiffs’ claim that they were entitled to the § 12-217t tax credit and denied their claims for tax refunds. In response, the plaintiffs filed administrative appeals of the defendant’s decision and requested a hearing thereon, which the defendant granted, pursuant to § 12-225
(b) (2).[8] Following the hearing, the defendant issued a final determination upholding the earlier denials of the plaintiffs’ refund claims based on the conclusion that “a partnership is not a taxpayer for purposes of § 12-217t and therefore would not be entitled to a tax credit that could be pass[ed] through to its partners.”

The plaintiffs appealed from the defendant’s decision to the Superior Court pursuant to § 12-237. See footnote 2 of this opinion. The trial court found that Cellco had owned the Connecticut electronic data processing

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equipment and had paid the resultant municipal taxes. Further, it sustained the plaintiffs’ appeals on the theory that because “Cellco [had] owned the tax credit as a partnership asset” and “Connecticut tax laws often incorporate [f]ederal tax principles,” the § 12-217t tax credit owned by Cellco had passed through “to the corporate partners in its original form as a tax credit” consistent with those principles. Accordingly, the trial court concluded that the plaintiffs properly could use the tax credit to offset their liabilities under the corporation business tax.

The defendant maintains on appeal that, although the trial court correctly found that Cellco had owned the equipment and had paid the associated municipal taxes, those facts did not entitle Cellco to a § 12-217t tax credit because Cellco fails to satisfy the definition of a “`[t]axpayer'” as that term is used in the statute and, therefore, cannot establish eligibility to receive the credit. Furthermore, the defendant claims that, even if we were to conclude that Cellco has established eligibility for a § 12-217t tax credit, it cannot pass the tax credit through to the plaintiffs because § 12-217t contains neither an explicit pass-through provision in its language, nor an implicit pass-through provision via the incorporation of federal tax principles. The plaintiffs counter that Connecticut has implicitly adopted the federal pass-through or conduit treatment of partnership tax attributes in the corporation business tax through the legislature’s incorporation of the federal income tax definition of “gross income”[9] for use in part I of the corporation business tax chapter of the General Statutes.[10]
Although we agree with the plaintiffs that the

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incorporation of the federal income tax definition of “gross income” effects an adoption of the federal conduit treatment of partnership tax attributes in part I of the corporation business tax chapter, we conclude that Cellco’s ineligibility to receive the § 12-217t tax credit precludes it from passing the credit through to the plaintiffs and, therefore, prevents the plaintiffs from using the credit.

The threshold issue in this appeal is eligibility for the tax credit. If the plaintiffs cannot establish Cellco’s eligibility for the tax credit, which would require further analysis to determine if Cellco could then pass that tax credit through to them, or their own direct eligibility for the tax credit on the basis of the statutory language and conduit principles, no tax credit exists for their use. Resolution of this issue requires an analysis of § 12-217t because the tax credit exists solely as a function of state law.[11] Therefore, statutory interpretation of § 12-217t,

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rather than the general partnership law concepts advanced by the plaintiffs, controls our determination of eligibility for the tax credit.[12] Because statutory interpretation involves a question of law, we exercise plenary review. State v Kirk R, 271 Conn. 499, 510, 857 A.2d 908 (2004).

“The process of statutory interpretation involves a reasoned search for the intention of the legislature. . . .

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In other words, we seek to determine, in a reasoned manner, the meaning of the statutory language as applied to the facts of [the] case, including the question of whether the language actually does apply. In seeking to determine that meaning, we look to the words of the statute itself, to the legislative history and circumstances surrounding its enactment, to the legislative policy it was designed to implement, and to its relationship to existing legislation and common law principles governing the same general subject matter. . . .

“In performing this task, we begin with a searching examination of the language of the statute, because that is the most important factor to be considered. In doing so, we attempt to determine its range of plausible meanings and, if possible, narrow that range to those that appear most plausible. We do not, however, end with the language. We recognize, further, that the purpose or purposes of the legislation, and the context of the language, broadly understood, are directly relevant to the meaning of the language of the statute.” (Citations omitted; internal quotation marks omitted.) Miller v Egan, 265 Conn. 301, 327-28, 828 A.2d 549 (2003), quoting State v. Courchesne, 262 Conn. 537, 577-78, 816 A.2d 562 (2003).[13]

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Along with these principles, we are also guided by the applicable rules of statutory construction specifically associated with the interpretation of tax statutes. Although “[t]his court [normally] gives considerable deference to the commissioner’s interpretation of taxation statutes and regulations”; Clinton Nurseries, Inc. v Commissioner of Revenue Services, 205 Conn. 761, 765, 535 A.2d 361 (1988); the defendant’s interpretation of §12-217t is not entitled to any special deference because it “ha[s] not previously been subjected to judicial scrutiny, [is] not the subject of a legislatively approved regulation[14] and [is] not a time tested interpretation of the statute.” Dine Out Tonight Club, Inc. v. Dept. of Revenue Services, 210 Conn. 567, 570 n. 3, 556 A.2d 580 (1989). Additionally, because § 12-217t operates in a manner analogous to a tax exemption in that it relieves potential taxpayers of a tax burden that they would otherwise bear, we must construe it strictly against the party claiming the credit — that is, because the credit is a matter of legislative grace, we must interpret it to include only that which falls strictly within its terms. See Fanny J. Crosby Memorial, Inc. v. Bridgeport, 262 Conn. 213, 220, 811 A.2d 1277 (2002).

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Finally, “[i]t is . . . well settled that the burden of proving entitlement to a claimed tax exemption rests upon the party claiming the exemption.” (Internal quotation marks omitted.) Id.

With these principles in mind, we examine § 12-217t to ascertain whether Cellco can establish eligibility for the tax credit, which it can pass through to the plaintiffs, or the plaintiffs can establish eligibility for the tax credit directly. That examination leads us to conclude that, because both parties present persuasive interpretations of the applicable statutes, the appeal must ultimately be resolved against the plaintiffs because those statutes do not clearly and unambiguously grant partnerships the credit provided by § 12-217t; see Golf Digest/Tennis, Inc. v. Dubno, 203 Conn. 455, 465, 525 A.2d 106 (1987); and the plaintiffs cannot establish direct eligibility for the credit.

We begin with the text of the statute. Section 12-217t consists of six subsections, four of which, namely, § 12-217t (a), (b), (c) and (e), are relevant to our analysis.

Subsection (a) of § 12-217t establishes the existence of the tax credit upon payment of personal property taxes on electronic data processing equipment, providing in relevant part: “There shall be allowed as a credit against the tax imposed by chapter 207, this chapter, chapter 208a, 209, 210, 211, or 212 or against the tax imposed pursuant to section 12-202a in an amount determined under the provisions of subsection (b) of this section with respect to the personal property taxes paid during any income year, on electronic data processing equipment. . . .” Subsection (b) of § 12-217t establishes the amount of the tax credit as the full amount of the personal property taxes paid on the subject equipment, and provides: “The amount allowed as a credit in any income year shall be the full amount of the tax on such electronic data processing equipment

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paid pursuant to section 12-71 or 12-80a, and as defined under Section 168 of the Internal Revenue Code of 1986, or any subsequent corresponding internal revenue code of the United States, as from time to time amended, provided no credit shall be allowed for the payment of any interest or penalty on the tax.” Linguistically, these two subsections place no limitation on who may acquire or use the tax credit because they are phrased in the passive voice, and do not specify who is entitled to the tax credit.

Subsection (c) of § 12-217t appears to limit acquisition and use of the tax credit to a “taxpayer”; see foot-note 6 of this opinion; by dictating how the tax credit is to be used. “The credit provided for by this section shall be allowed for any taxes owed on the grand list of October 1, 1994, and each grand list annually thereafter or included in the list prescribed under section 12-80a for such grand list. Such credits shall first be used by the taxpayer against the corporation business tax under this chapter, if any, and then may be used against any tax paid by the taxpayer under the provisions of chapter 207, 208a, 209, 210, 211 or 212 or the tax imposed upon a health care center under section 12-202a. . . .” (Emphasis added.) General Statutes § 12-217t (c). Thus, although § 12-217t (a) may allow a tax credit when personal property taxes are paid on electronic data processing equipment, this language suggests that eligibility for the tax credit can be established only by a “taxpayer” who can use the credit in the manner prescribed.

Furthermore, § 12-217t (e), although not directly applicable in the present case, strongly suggests that the legislature anticipated that a “taxpayer” would pay the personal property taxes on the electronic data processing equipment and use the tax credit. Subsection (e) of § 12-217t provides in relevant part: “In the case of taxpayers filing a combined return pursuant to section

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12-223a, the credit provided by this section shall be allowed on a combined basis, such that the amount of personal property taxes paid by such taxpayers with respect to such equipment may be claimed as a tax credit against the combined tax liabilit of such taxpayers as determined under this chapter. . . .” (Emphasis added.) Thus, the text of the statute indicates that the legislature intended to grant eligibility for the §12-217t tax credit to a “taxpayer” who has paid the personal property taxes on the electronic data processing equipment and who can use the tax credit against tax liabilities arising from the corporation business tax or other specific chapters of the tax code.

We next consider other sources of information that might provide evidence of the legislature’s intent. A review of other statutes that provide tax credits, both in the corporation business tax chapter and in other chapters of the General Statutes, supports the conclusion that the legislature intended to grant eligibility for the § 12-217t tax credit to “taxpayers.” Se State v. Reynolds, 264 Conn. 1, 77-78, 836 A.2d 224 (2003) (statutes interpreted with regard to relevant statutes because legislature presumed to have created consistent body of law), cert. denied, 541 U.S. 908, 124 S. Ct. 1614, 158 L. Ed. 2d 254 (2004). Although several tax credit statutes in the corporation business tax chapter, like § 12-217t, grant eligibility to a “taxpayer,” other tax credit statutes in the same chapter either restrict eligibility to a subset of the entities identified as “taxpayers,” or expand eligibility to entities beyond those identified as “taxpayers.” For instance, General Statutes §§ 12-217J, 12-21 l, 12-217o, 12-217s and 12-217w restrict eligibility to corporations, a subset of the entities included in the definition of “taxpayer.” Conversely, General Statutes §§ 12-217p (a) and 12-217y (a) (1) each grant a tax credit to a “`business firm,'” which both statutes define as “any business entity authorized to do

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business in this state and subject to the corporation business tax imposed under this chapter,” a broader set of entities than that included in the definition of “taxpayer.” General Statutes § 12-217u restricts eligibility to a “`[f]inancial institution'” as defined in the statute, and also redefines “`[c]ompany'” specifically to include a partnership as used in that statute.[15] Other tax statutes, not in the corporation business tax chapter, that provide tax credits define “taxpayer” to include partnerships. For instance, a “`[t]axpayer,'” defined as “any person, as defined in [General Statutes §] 12-1,” is eligible for a tax credit that can be used against the corporation business tax under both General Statutes §§ 32-9t
(a) (7) and 38a-88a (a) (9). The definition of “`person'” in § 12-1 includes a partnership.

Where the legislature has taken action in an area, we generally interpret the legislature’s failure to take similar action in a closely related area as indicative of a decision not to do so. See Carmel Hollow Associates Ltd. Partnership v Bethlehem, 269 Conn. 120, 135-36, 848 A.2d 451 (2004) (legislature’s failure to grant municipality or town assessors discretionary authority concerning classification of property as forest land, as it did with classification of property as farmland and open space land, indicative that it did not intend to grant

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authority with respect to forest land). Thus, where the legislature has varied the eligibility for tax credits to be both broader and more restrictive than those entities identified in the § 12-213 (a) (1) definition of “`taxpayer,'” its failure to do so in § 12-217t indicates an intent not to do so.

Furthermore, these examples demonstrate that the legislature routinely balances the perceived economic benefit of a tax credit against the potential revenue loss to the state by specifying who should be eligible for the credit, and is well equipped to indicate its intent through the use of terms explicitly defined for use in the particular statute. The legislature explicitly defined “`[t]axpayer'” in § 12-213 (a) (1) and “`[p]artnership'” in § 12-213 (a) (24) for use in part I of the corporation business tax chapter. It chose to confer eligibility for the § 12-217t tax credit on the former without conferring eligibility on the latter.

Thus, under the interpretation advocated by the defendant, Cellco cannot establish eligibility for the tax credit because it neither qualifies as a “taxpayer,” as that term is used in §12-217t, nor bears any tax liability under the corporation business tax that would allow it to use the credit in the manner prescribed by § 12-217t. As the payer of the property tax on the electronic data equipment, Cellco qualifies as a “taxpayer” as that term is generally understood.[16] This general understanding of the meaning of “taxpayer” does not control the term’s usage in § 12-217t, however, because § 12-213, which contains legislative definitions expressly applicable to part I of the corporation business tax chapter, contains the statutory definition of the term. “[C]ourts are bound to accept the legislative definition of terms in a statute. . . .” (Citation omitted; internal quotation marks

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omitted.) Connecticut Light Power Co. v Texas-Ohio Power, Inc., 243 Conn. 635, 653, 708 A.2d 202
(1998). Section 12-213 (a) (1) defines both “`[t]axpayer'” and “`company'” as “any corporation, foreign municipal electric utility . . . electric distribution company . . . electric supplier . . . generation entity or affiliate . . . joint stock company or association or any fiduciary thereof and any dissolved corporation which continues to conduct business but does not include a passive investment company or municipal utility. . . .” The absence of a partnership from the list of entities that the legislature has included in the definition of “taxpayer,” along with Cellco’s inability otherwise to satisfy the definition, prevents Cellco from being a “taxpayer” for purposes of § 12-217t.

Furthermore, Cellco has not used and, indeed, cannot use the tax credit against taxes paid under either the corporation business tax or other chapters specified in § 12-217t as required by the statute because, as a partnership, it has no income tax liability under those chapters. In the absence of such liability, no opportunity exists for Cellco to satisfy the statutory mandate that the tax credit “shall first be used by the taxpayer against the corporation business tax under this chapter, if any, and then may be used against any tax paid by the taxpayer under [other specific chapters of the tax code]. . . .” (Emphasis added.) General Statutes § 12-217t
(c). In effect, the plaintiffs find themselves in a situation with respect to Cellco and the electronic data processing equipment tax credit directly analogous to that of the plaintiffs i Caveney v. Bower, 207 Ill. 2d 82, 797 N.E.2d 596 (2003), with respect to a subchapter S corporation and the research and development tax credit. See footnote 12 of this opinion. The plaintiffs cannot claim the credit because they did not incur the equipment property taxes, whereas Cellco cannot claim

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the credit because it lacks the requisite income tax liability.

The plaintiffs concede that Cellco is not a “`[t] ax-payer'” as defined in § 12-213 (a) (1), and that it has no income or corporate tax liability. They contend, however, that §12-217t (a) and (b) are the operative provisions of the statute for determining eligibility for the tax credit, whereas the provisions of § 12-217t (c) are essentially ordering rules. Under the plaintiffs’ theory, an entity becomes eligible for the § 12-217t tax credit upon payment of the municipal property tax on the equipment, regardless of its subsequent ability to use the credit. Thus, under this view, Cellco established eligibility for the tax credit by paying the municipal property tax.

This interpretation of the statute gains support in light of the legislative policy that § 12-217t was designed to implement and the statute’s structure in relation to other tax credits in the corporation business tax chapter. The legislative history suggests that the legislature enacted the tax credit to spur economic development in Connecticut and enhance the probability of attracting and maintaining industries that rely on the use of electronic data processing equipment.[17] It is certainly plausible

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that granting the tax credit to partnerships would further the desired legislative policy. Cellco’s eligibility for the tax credit would tend to influence it to keep the electronic data processing equipment, and the jobs associated with its operation, in this state, all other things being equal. Thus, the legislative purpose supports the plaintiffs’ interpretation of the statute.

A comparison of the structure of § 12-217t to that of the other tax credits in the corporation business tax chapter also supports that eligibility. The corporation business tax chapter currently contains nineteen separate statutes that provide tax credits for various activities. Eighteen of those tax credit statutes use language similar to the § 12-217t (a) language to dictate the action necessary to generate the credit.[18]
Each of these statutes contains one of the following phrases: “[t]here shall be allowed as a credit against the tax imposed”;[19] “[t]here shall be allowed a credit against the tax imposed”;[20] or “[t]here shall be allowed a credit for. . . .”[21] Fifteen of the statutes then proceed to limit eligibility for the specific tax credit either by identifying who may receive the tax credit,[22] or whom the corporation business tax must be imposed upon immediately following that phrase.[23] Subsection (a) of § 12-217t contains no such limiting language.

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Although these factors support the plaintiffs’ interpretation of the statute, they do not create the requisite level of certainty to establish that interpretation as definitive because, despite the fact that the plaintiffs present a persuasive interpretation of the statute, the defendant’s interpretation is persuasive as well. Sufficient ambiguity exists in the language and the structure of the statute to admit either interpretation as persuasive. Hence, we return to the principle of statutory construction applicable to tax statutes set forth at the beginning of our statutory analysis, namely, that we strictly construe statutes that grant tax exemptions against the party claiming the exemption. See Fanny J. Crosby Memorial, Inc. v. Bridgeport, supra, 262 Conn. 220. We have adopted this rule of construction because exemptions operate in a manner equivalent to an appropriation of public funds in that they shift the burden of taxation from the potential taxpayer to other taxpayers. Id. In order to prevail in light of this rule of construction, the plaintiffs must establish that § 12-217t
clearly and unambiguously entitles them to the tax credit Golf Digest/Tennis, Inc. v. Dubno, supra, 203 Conn. 465. Although the plaintiffs offer a persuasive interpretation of § 12-217t whereby Cellco would be eligible for the tax credit, they are unable to overcome the burden of establishing that the statute clearly and unambiguously entitles Cellco to the credit in the face of the defendant’s interpretation, which is also persuasive.

The plaintiffs also argue that Cellco’s payment of the municipal property tax is an act that can be attributed to the partners under the conduit treatment of partnership tax attributes. Under this theory, the partners are

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treated as if they paid the property tax directly for purposes of the § 12-217t tax credit. Such treatment would entitle the plaintiffs to the use of the credit because they qualify as “`[t]axpayers'” pursuant to the statutory definition of the term, and they can use the credit in the manner prescribed by the statute. To determine if the plaintiffs can establish eligibility for the tax credit under this theory, we must first determine if the statutory scheme involved incorporates the conduit treatment of partnership tax attributes and, if it does, explore the contours of that treatment.

The plaintiffs advance two arguments for Connecticut’s incorporation of the conduit treatment of partnership tax attributes into the corporation business tax: a general incorporation of federal tax principles into Connecticut’s tax laws; and the specific incorporation of federal tax principles into the corporation business tax through the adoption, in that chapter, of the federal income tax definition of “gross income.” For purposes of the corporation business tax, “`[g]ross income’ means gross income, as defined in the Internal Revenue Code. . . .” General Statutes § 12-213 (a) (9) (A); see footnote 9 of this opinion. Although we disagree that our precedents denote the general incorporation of federal tax principles into our state tax statutes, we conclude that the corporation business tax does incorporate the federal conduit treatment of partnership tax attributes through the adoption of the federal income tax definition of “gross income.”

We reach both of these conclusions on the basis of our well established approach to determining whether state law incorporates federal tax principles. “We long have held that when our tax statutes refer to the federal tax code, federal tax concepts are incorporated into state law. . . . Although this rule does not require the wholesale incorporation of the entire body of federal tax principles into our state income tax scheme, where

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a reference to the federal tax code expressly is made in the language of a statute, and where incorporation of federal tax principles makes sense in light of the statutory language at issue, our prior cases uniformly have held that incorporation should take place.” (Citations omitted; internal quotation marks omitted.) Berkley v. Gavin, 253 Conn. 761, 773, 756 A.2d 248 (2000). Thus, no general incorporation of federal tax principles into our state tax law takes place; incorporation requires an express reference to the federal tax code and is limited to the principles associated with that reference. The corporation business tax reference to the Internal Revenue Code definition of “gross income” satisfies the requirement for an express reference. Accordingly, the corporation business tax incorporates the federal income tax concept of “gross income.”

That concept of “gross income,” in turn, incorporates the conduit treatment of partnership tax attributes. In the Internal Revenue Code, “gross income” includes income derived from a “[d]istributive share of partnership gross income. . . .”26 U.S.C. § 61 (a) (13). Section 702 (c) of the Internal Revenue Code further specifies that “[i]n any case where it is necessary to determine the gross income of a partner for purposes of this title, such amount shall include his distributive share of the gross income of the partnership.” 26 U.S.C. § 702 (c). Consequently, in a partnership situation, the character of those items constituting a partner’s distributive share of the partnership’s gross income provides essential context to the concept of a partner’s gross income. Section 702 (b) of the Internal Revenue Code provides that “[t]he character of any item of income, gain, loss, deduction, or credit included in a partner’s distributive share . . . shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.” 26 U.S.C. § 702

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(b). This provision results in the conduit treatment of partnership tax attributes in the federal tax code. Se United States v. Basye, 410 U.S. 441, 448 n. 8, 93 S. Ct. 1080, 35 L. Ed. 2d 412 (1973) (“[t]he legislative history indicates, and the commentators agree, that partnerships . . . are conduits through which the taxpaying obligation passes to the individual partners in accord with their distributive shares”); Rath v. Commissioner of Internal Revenue, 101 T.C. 196, 203 (1993) (“[i]t is well settled that [Internal Revenue Code §] 702 [b] reflects a `conduit’ approach whereby the character of an item of income, gain, loss, deduction, or credit is determined at the entity or partnership level before the item is passed through to the partners”). Thus, the incorporation of the federal conduit treatment of partnership tax attributes necessarily follows from the conclusion that the corporation business tax incorporates the federal income tax concept of “gross income.”

This treatment of partnership tax attributes agrees not only with the federal approach but with the approach of most other states. “Most states follow the basic federal tax structure governing income taxation of partners and partnerships. Under the federal rules, partnerships are treated as conduits and are not themselves subject to tax, but partners are directly taxable with respect to their distributive shares of partnership items of income, gain, loss, deduction, and credit. As under federal law, partnership items normally retain their character when passed through to the partners as though realized directly by the partners from their source.” II J. Hellerstein W. Hellerstein, State Taxation (3d Ed. 2003) § 20.08, p. 20-134.

The defendant contends that the legislature’s reference to the Internal Revenue Code definition of “gross income” is irrelevant to the question of whether a partnership can pass a § 12-217t
tax credit through to its partners because § 12-217t does not refer to “gross

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income,” and that the statute requires an explicit conduit provision, which does not exist, to allow such a pass through. The defendant emphasizes that we incorporate federal tax principles “where a reference to the federal tax code expressly is made in the language of a statute. . . .” (Emphasis added.) Berkley v. Gavin, supra, 253 Conn. 773. The defendant reads the application of this case law too narrowly. Section 12-213 (a) (9) (A), which contains the definition of “`[g]ross income,'” applies to all of the statutes in part I of the corporation business tax.

Establishing that corporation business tax attributes pass through the partnership to the partners with the same character that they had at the partnership level, however, does not suffice to establish that Cellco’s payment of the municipal property tax resulted in a credit that can be attributed to the partners. Under the conduit approach, “the character of [the tax attribute] is determined at the entity or partnership level before the item is passed through to the partners.” (Emphasis added.)Rath v. Commissioner of Internal Revenue, supra, 101 T.C. 203. In the present case, Cellco’s payment of the municipal property tax was just that, a payment, not a tax credit. Not every action taken by the partnership passes through to the partners as if they performed the act. Section 702 (b) of the Internal Revenue Code provides that “[t]he character of any item of income, gain, loss, deduction, or credit
included in a partner’s distributive share . . . shall be determined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership.” (Emphasis added.) 26 U.S.C. § 702 (b). This provision does pass credits through a partnership to its partners. It does not, however, create credits. Cellco’s payment of the municipal property tax could result in it having a credit only by virtue of state law. In the present case, Cellco’s

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payment of the municipal property tax did not result in a tax credit because, under the Connecticut tax statute, it cannot be said that Cellco was plainly and unambiguously eligible to receive such a credit.

Finally, the plaintiffs argue that an interpretation of §12-217t that does not permit the partners to use the tax credit leads to an absurd result because it denies two corporations acting through a partnership a benefit that each party could obtain if it acted on its own. All parties agree that, had the plaintiffs operated as thirteen separate corporations, instead of through a partnership, and had those corporations collectively paid the same taxes on the same equipment, each corporation would fall within the definition of “taxpayer” and would be able to use the associated tax credit to offset its tax liability under the corporation business tax, as the plaintiffs seek to do in the present case. The plaintiffs, however, chose to operate through a partnership, not as separate corporations. Sophisticated business entities recognize selection of a business form as a critical decision that carries with it certain legal consequences, including tax implications. The legislature’s decision to grant a tax credit to certain business forms while denying it to others does not constitute an absurd result. The fairness of such decisions remains within the prerogative of the legislature, not of this court. See Yaeger v Dubno, 188 Conn. 206, 213, 449 A.2d 144 (1982).

The judgment is reversed and the case is remanded to the trial court with direction to render judgment dismissing the plaintiffs’ appeal.

In this opinion the other justices concurred.

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