Opinion
No. CV 01 0507875S
June 1, 2005
MEMORANDUM OF DECISION
This action is a tax appeal taken by the plaintiffs, Kenneth Fadner and Pamela Fadner (collectively, the Fadners), pursuant to General Statutes § 12-730, contesting an income tax assessment by the commissioner of revenue services (commissioner) that resulted from a disallowance of net operating losses (NOLs) taken by the Fadners in computing their Connecticut adjusted gross income for the taxable years of 1995 and 1996.
The facts in this case are not in dispute. The Fadners are Connecticut residents living in the town of Wilton. The Fadners incurred substantial NOLs in 1992 and 1993. For federal income tax purposes, the Fadners elected to carry back the NOLs they incurred in 1992 and 1993, to the years 1989 and 1990. By doing so, the Fadners reduced their federal adjusted gross income for the carryback years to zero. The Fadners filed amended federal income tax returns for 1989 and 1990 in order to reflect this change.
The parties filed a joint stipulation of facts on May 26, 2004. The court notes that the stipulation is apparently misdated as May 26, 2003.
The Fadners, however, did not correspondingly amend their Connecticut tax returns filed for 1989 and 1990, although they were required to do so pursuant to General Statutes § 12-511a. Instead, the Fadners took a modification for the NOLs they incurred in 1992 and 1993 on their 1995 and 1996 Connecticut income tax returns. This, in turn, reduced the Fadners' adjusted gross income for 1995 and 1996. The amount of the modification taken by the Fadners on their 1995 Connecticut income tax return was $3,189,607 and the amount of modification taken by the Fadners on their 1996 Connecticut income tax return was $3,170,061. (See Stipulation of Facts, dated May 26, 2003, ¶ 12.)
General Statutes § 12-511a recites in pertinent part: "Any individual whose return to the Director of Internal Revenue has been amended in any respect affecting the tax imposed under this chapter shall, within ninety days after having filed such amended return, make an amended return to the commissioner."
The problem in this case arises from the fact that during the carryback years of 1989 and 1990, Connecticut residents were not subject to a state income tax as it existed on the federal level, but rather were subject to the dividends, interest income and capital gains tax. Effective August 22, 1991, the dividends, interest income and capital gains tax statute was repealed and a Connecticut income tax statute was enacted. See Public Acts, Spec. Sess., June 1991, No. 91-3, § 51.
It is the claim of the Fadners that Kenneth Fadner telephoned the "Tax Help Line" of the department of revenue services, a service provided by the department to assist taxpayers, and inquired whether he could carry back NOLs incurred in 1992 and 1993. Kenneth Fadner claims that he assumed he could not carry back the state income tax losses incurred in 1992 and 1993 because there was no income tax in Connecticut prior to 1991. Fadner further claims that the "Tax Help Line" representative told him that he could not carry back the losses, but could carry the NOLs forward for the years 1994 through 1999. Fadner further claims that he relied on this advice in not filing an amended tax return for 1989 and 1990 to apply the NOLs.
The commissioner, upon auditing the Fadners' 1995 and 1996 state income tax returns, determined that Connecticut statutes do not allow for a modification for NOLs and re-computed these tax returns to exclude the reported losses, which resulted in additional taxes due. (See Stipulation of Facts, dated May 26, 2003, ¶ 13.) The commissioner also denied the taxpayers the opportunity to amend their 1989 and 1990 tax returns to account for the NOLs incurred in 1992 and 1993 because the time to amend had long expired pursuant to the statute of limitations.
There are three issues in this case. The first issue is whether the commissioner is required to recognize a subtraction of NOLs from the Fadners' adjusted gross income in their 1995 and 1996 state income tax returns. The second issue is whether the Fadners, in the alternative, may amend their 1989 and 1990 tax returns in order to claim NOLs incurred in 1992 and 1993. The third issue is whether the commissioner is estopped from precluding the Fadners from amending their 1989 and 1990 state tax returns, so that they may claim the NOLs incurred in 1992 and 1993, in spite of the fact that the statutory time to amend has expired.
Adjusted gross income as defined by General Statutes § CT Page 9440 12-701(a)(19) "means the adjusted gross income of a natural person with respect to any taxable year, as determined for federal income tax purposes and as properly reported on such person's federal income tax return." Connecticut adjusted gross income is further defined in § 12-701(a)(20) as adjusted gross income with certain modifications. Section 12-701(a)(20)(B) sets out specific items that may be subtracted from adjusted gross income. Net operating losses are not included within these modifications. Since the legislature has not provided for a specific deduction, in this case a subtraction from its definition of adjusted gross income, the Fadners cannot prevail in their attempt to subtract NOLs incurred in 1992 and 1993 from their 1995 and 1996 adjusted gross income. See Berkley v. Gavin, 253 Conn. 761, 778, 756 A.2d 248 (2000).
As to the second issue, General Statutes § 12-515 provides: "Any taxpayer who feels that he [or she] has overpaid any taxes due under this chapter may file a claim for refund in writing with the commissioner within three years from the due date for which such overpayment was made . . ." Clearly, the time to amend the 1989 and 1990 tax returns to claim a refund of dividends, interest income and capital gains tax, at this late date, is barred by the statute of limitation in § 12-515. As the commissioner points out in her brief, the Fadners "had three years from the due date of their return, or until April 15, 1994, to file their amended return for taxable year 1990." (Defendant's Post-Trial Memorandum of Law, dated March 15, 2005, p. 19.)
Turning to the final issue, the Fadners argue that the commissioner is estopped from making an assessment against them for the taxable years 1995 and 1996 because they were misled to believe that the NOLs they incurred in 1992 and 1993 could be carried forward.
In Connecticut, a claim of estoppel is predicated upon the proof of two elements. The first is that the party against whom estoppel is claimed must do or say something that leads the party making the claim into believing certain facts exist. Second, the party claiming estoppel, acting on those beliefs, must change his or her position in reliance on those facts causing some injury. Union Carbide Corp. v. Danbury, 257 Conn. 865, 873, 778 A.2d 204 (2001). In addition, estoppel, as applied to a public agency, "is limited and may be invoked: (1) only with great caution; (2) only when the action in question has been induced by an agent having authority in such matters; and (3) only when special circumstances make it highly inequitable or oppressive not to estop the agency." Kimberly-Clark Corp. v. Dubno, 204 Conn. 137, 148, 527 A.2d 679 (1987).
Assuming the best scenario for the Fadners, that the agent for the commissioner gave them the wrong interpretation of the taxing statutes of Connecticut, the Fadners, still, could not prevail on this issue. The commissioner points to the case of Neri v. Commissioner of Internal Revenue, 54 T.C. 767 (Tax Ct. 1970), in which the petitioners claimed that a representative of the IRS gave them erroneous advice regarding the years in which an NOL could be taken. The tax court in Neri citing Automobile Club of Michigan v. Commissioner of Internal Revenue, 353 U.S. 180, 183, 77 S.Ct. 707, 1 L.Ed.2d 746 (1957), concluded that estoppel was not a bar to the commissioner correcting a mistake of law. Neri v. Commissioner of Internal Revenue, supra, 54 T.C. 772. Similarly, in Chiawana, Inc. v. Department of Revenue, No. 21559-8-III, Court of Appeals of Washington, January 27, 2004, p. 6, the Washington court of appeals held that equitable estoppel does not lie where the issue is a legal one, dealing with the construction of a taxing statute. As noted by the Chiawana court, "equitable estoppel does not apply to representations regarding the meaning of a statutory provision." (Citation omitted.) Id. As in Chiawana, the present case involves an interpretation of a statutory provision by the commissioner's agent, not a misrepresentation of facts.
This court finds that there is no provision in § 12-701(a)(20)(B) that allows the Fadners to subtract a net operating loss from their adjusted gross income and that § 12-515, being a statute of limitations, precludes the Fadners from amending their 1989 or 1990 state income tax returns, and further, since there is no basis for finding that the commissioner is estopped from denying plaintiffs the use of the NOLs incurred in 1992 and 1993, the plaintiffs' appeal is denied. Accordingly, judgment may enter in favor of the defendant commissioner without costs to either party.
Arnold W. Aronson Judge Trial Referee