Restrictions on the deductibility of certain intangible expenses and interest expenses with a related member

# (1)

“Affiliated group” has the same meaning as in Section 1504 of the Internal Revenue Code.

# (2)

“Intangible expenses and costs” includes (A) expenses, losses and costs for, related to, or in connection directly or indirectly with the direct or indirect acquisition, use, maintenance or management, ownership, sale, exchange, or any other disposition of intangible property to the extent such amounts are allowed as deductions or costs in determining taxable income before operating loss deduction and special deductions for the taxable year under the Internal Revenue Code; (B) losses related to or incurred in connection directly or indirectly with factoring transactions or discounting transactions; (C) royalty, patent, technical and copyright fees; (D) licensing fees; and (E) other similar expenses and costs.

# (3)

“Intangible property” means patents, patent applications, trade names, trademarks, service marks, copyrights and similar types of intangible assets.

# (4)

“Interest expenses and costs” means amounts directly or indirectly allowed as deductions under Section 163 of the Internal Revenue Code for purposes of determining taxable income under the Internal Revenue Code to the extent such expenses and costs are directly or indirectly for, related to, or in connection with the direct or indirect acquisition, maintenance, management, ownership, sale, exchange or disposition of intangible property.

# (5)

“Related member” means a person that, with respect to the taxpayer during all or any portion of the taxable year, is a related entity, as defined in this subsection, a component member as defined in Section 1563(b) of the Internal Revenue Code, or is a person to or from whom there is attribution of stock ownership in accordance with Section 1563(e) of the Internal Revenue Code.

# (6)

“Related entity” means (A) a stockholder who is an individual, or a member of the stockholder's family enumerated in Section 318 of the Internal Revenue Code, if the stockholder and the members of the stockholder's family own, directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock; (B) a stockholder, or a stockholder's partnership, limited liability company, estate, trust or corporation, if the stockholder and the stockholder's partnerships, limited liability companies, estates, trusts and corporations own directly, indirectly, beneficially or constructively, in the aggregate, at least fifty per cent of the value of the taxpayer's outstanding stock; or (C) a corporation, or a party related to the corporation in a manner that would require an attribution of stock from the corporation to the party or from the party to the corporation under the attribution rules of Section 318 of the Internal Revenue Code, if the taxpayer owns, directly, indirectly, beneficially or constructively, at least fifty per cent of the value of the corporation's outstanding stock. The attribution rules on Section 318 of the Internal Revenue Code shall apply for purposes of determining whether the ownership requirements of this subdivision have been met.

(b) For purposes of computing its net income under section 12-217 a corporation shall add back otherwise deductible interest expenses and costs and intangible expenses and costs directly or indirectly paid, accrued or incurred to, or in connection directly or indirectly with one or more direct or indirect transactions with, one or more related members.

(c) (1) The adjustments required in subsection (b) of this section shall not apply if the corporation establishes by clear and convincing evidence that the adjustments are unreasonable, or the corporation and the Commissioner of Revenue Services agree in writing to the application or use of an alternative method of apportionment under section 12-221a. Nothing in this subdivision shall be construed to limit or negate the commissioner's authority to otherwise enter into agreements and compromises otherwise allowed by law.

(2) The adjustments required in subsection (b) of this section shall not apply to such portion of interest expenses and costs and intangible expenses and costs that the corporation can establish by the preponderance of the evidence meets both of the following: (A) The related member during the same income year directly or indirectly paid, accrued or incurred such portion to a person who is not a related member, and (B) the transaction giving rise to the interest expenses and costs or the intangible expenses and costs between the corporation and the related member did not have as a principal purpose the avoidance of any portion of the tax due under this chapter.

(3) The adjustments required in subsection (b) of this section shall apply except to the extent that increased tax, if any, attributable to such adjustments would have been avoided if both the corporation and the related member had been eligible to make and had timely made the election to file a combined return under subsection (a) of section 12-223a.

(4) The adjustments required in subsection (b) of this section shall not apply if the corporation and the related member are both members of a combined group required to file a combined unitary tax return pursuant to section 12-222.

(d) Nothing in this section shall require a corporation to add to its net income more than once any amount of interest expenses and costs or intangible expenses and costs that the corporation pays, accrues or incurs to a related member described in subsection (b) of this section.

(e) Nothing in this section shall be construed to limit or negate the commissioner's authority to make adjustments under section 12-221a or 12-226a.

(P.A. 98-110, S. 20, 27; P.A. 15-244, S. 151; June Sp. Sess. P.A. 15-5, S. 139.)

History: P.A. 98-110 effective May 19, 1998, and applicable to income years commencing on or after January 1, 1999; (Revisor's note: In 2003 a reference in Subsec. (c)(2) to “chapter 208” was changed editorially by the Revisors to “this chapter”); P.A. 15-244 added Subsec. (c)(4) re adjustments under Subsec. (b) not to apply if corporation and related members are both members of combined group required to file combined unitary tax return, effective June 30, 2015, and applicable to income years commencing on or after January 1, 2015; June Sp. Sess. P.A. 15-5 changed effective date of P.A. 15-244, S. 151, from June 30, 2015, and applicable to income years commencing on or after January 1, 2015, to January 1, 2016, and applicable to income years commencing on or after that date, effective June 30, 2015.