Modifications comprising the Connecticut fiduciary adjustment: additions

(a) The following items are to be added in computing the Connecticut fiduciary adjustment of a trust or estate:

(1) Interest income on obligations issued by or on behalf of any state or of a political subdivision, or public instrumentality, state or local authority, district or similar public entity of such state, and interest income on obligations issued by or on behalf of the District of Columbia. However, interest income on Connecticut obligations is not to be added to federal taxable income of the trust or estate. Furthermore, interest income on obligations issued by or on behalf of any territory or possession of the United States (such as Puerto Rico, Guam and the Virgin Islands), or a political subdivision or public instrumentality, authority, district or similar public entity thereof, the taxation of which by any state is prohibited by federal law, is not be added to federal taxable income.

(2) (A) Any exempt-interest dividends, as defined in section 852(b)(5) of the Internal Revenue Code. However, exempt-interest dividends derived from Connecticut obligations are not to be added to federal taxable income. Furthermore, exempt-interest dividends derived from obligations issued by or on behalf of any territory or possession of the United States (such as Puerto Rico, Guam and the Virgin Islands), or a political subdivision or public instrumentality, authority, district or similar public entity thereof, the direct taxation of which by any state is prohibited by federal law, are not to be added to federal taxable income.

(B) Example: A resident trust receives $1,000 in exempt-interest dividends from a mutual fund that owns governmental obligations issued by or on behalf of various states, including Connecticut, and by or on behalf of the territory of Guam. If 45% of the exempt-interest dividends was derived from Connecticut obligations, 20% from New York obligations, 10% from Massachusetts obligations and 25% from Guam obligations, then the amount that is to be added to federal taxable income is $300 (that is, the percentage of exempt-interest dividends that is not derived from Connecticut obligations and other obligations, the direct taxation of which by any state is prohibited by federal law). The percentage of exempt-interest dividends derived from Connecticut obligations and Guam obligations is not to be added to federal taxable income.

(3) Interest or dividend income on obligations or securities of any authority, commission or instrumentality issued by or on behalf of the United States, which the laws of the United States exempt from federal income tax but not from state income taxes.

(4) (A) To the extent properly includible in determining the net gain or loss from sales or other dispositions of capital assets for federal income tax purposes, any loss from the sale or exchange of Connecticut obligations, in the taxable year such loss was recognized, whether or not, for federal income tax purposes, gains from sales or other dispositions of capital assets exceed losses therefrom.

(B) Example: For taxable year 1992, a resident trust has $4,000 of loss arising from the sale of Connecticut obligations and $3,000 of loss arising from the sale of bonds issued by the State of Florida. Such trust's federal gross income shall be increased by $4,000, the amount of loss derived from the sale of the Connecticut obligations, even though this amount exceeds the losses allowable under section 1211(b) of the Internal Revenue Code.

(5) To the extent deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, the amount of Connecticut income tax paid or accrued.

(6) (A) Interest expenses on indebtedness incurred or continued to purchase or carry obligations or securities, the interest on which is exempt from Connecticut income tax, to the extent that such expenses are deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries.

(B) Example: The fiduciary of a trust borrows money to purchase United States treasury certificates, the income from which is subject to federal income tax but exempt from Connecticut income tax. To the extent that this borrowing expense is deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries, the fiduciary shall add this expense back in computing the trust's Connecticut taxable income.

(7) (A) Expenses paid or incurred during the taxable year for (i) the production or collection of income exempt from Connecticut income tax or (ii) the management, conservation or maintenance of property held for the production of income exempt from Connecticut income tax or (iii) the amortizable bond premium on any bond, the interest on which is exempt from Connecticut income tax, to the extent such expenses and premiums are deductible in determining federal taxable income prior to deductions relating to distributions to beneficiaries.

If the trust or estate's miscellaneous itemized deductions, as defined in section 67(b) of the Internal Revenue Code, exceed 2% of its federal adjusted gross income, as computed under section 67(e) of the Internal Revenue Code, and the expenses and premiums described herein are deducted as miscellaneous itemized deductions, the portion of the excess that such expenses and premiums bear to the total miscellaneous itemized deductions shall be added to federal taxable income under this section.

If the expenses and premiums described herein are deducted under section 67(e)(1) of the Internal Revenue Code, they shall be added to federal taxable income under this section.

(B) Example: The fiduciary of a trust purchases shares in a mutual fund that invests solely in United States government obligations. The income therefrom is fully taxable for federal income tax purposes. The trust incurs expenses in connection with the production of such interest income. The trust has adjusted gross income of $10,000 and the amount of its miscellaneous itemized deductions, including the $400 of collection expenses, is $800. The interest income on the United States bonds is includible in the trust's federal taxable income but is subtracted from federal taxable income under § 12-701(a)(10)-3 of this Part. The miscellaneous itemized deductions ($800) exceed 2% of the trust's federal adjusted gross income ($200). The portion of the excess ($600) that the $400 paid or incurred to collect such U.S. bonds interest income bears to the miscellaneous itemized deductions ($800) is added to federal taxable income in computing Connecticut taxable income under this section. Therefore, $300 is added to federal taxable income. If miscellaneous itemized deductions had not exceeded 2% of federal adjusted gross income, no portion of the $400 of expenses would have been added to federal taxable income under this section.

(8) With respect to a trust or estate that is a shareholder of an S corporation carrying on business in Connecticut (as the term is used in Section 12-214 of the general statutes, and as defined in Conn. Agencies Regs. § 12-214-1), the amount of such trust or estate's pro rata share of the corporation's nonseparately computed loss (as defined in § 12-701(b)-1 of Part XIV), to the extent such loss is included in computing such trust or estate's federal gross income, multiplied by the corporation's apportionment fraction, if any, as determined under Section 12-218 of the general statutes (irrespective of whether the S corporation shall pay the additional tax under Section 12-219 of the general statutes).

(b) While this section pertains to Section 12-701(a)(10) of the general statutes, for purposes of supplementary interpretation, as the phrase is used in Section 12-2 of the general statutes, the adoption of this section is authorized by Section 12-740(a) of the general statutes.

(Effective November 18, 1994)

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