Was interest on promissory notes issued by a Connecticut district excluded from Connecticut's former dividend and interest income tax?

Note -- obsolete guidance on a former tax. DRS marks this ruling "not current" and states that it was obsoleted by Announcement (AN) 94(2). The summary explains the 1990 result only.

Plain-English summary

A Connecticut district organized under Conn. Gen. Stat. § 7-325 borrowed money for an underground sprinkler system. The expense exceeded $10,000, and the district issued promissory notes backed by its faith, credit, and taxing power. A Connecticut resident who held at least one note asked whether the interest was included in "interest income" under Connecticut's former dividend and interest income tax.

DRS ruled that the interest was excluded. Conn. Gen. Stat. § 7-369 allowed a municipality -- including the specified kind of district -- to issue bonds, notes, or other obligations. Section 12-505 excluded interest from obligations issued by Connecticut or a Connecticut-created political subdivision, authority, district, or similar public entity.

Because § 12-505 did not separately define "obligations," DRS used statutory-construction rules to read the term as covering notes, bonds, and similar evidence of indebtedness. The district's promissory notes therefore qualified as Connecticut district obligations.

What this means for you

Under the former tax, the issuer's status and the nature of the debt instrument controlled the result: notes issued under the district's statutory borrowing authority were treated as obligations of a Connecticut-created district, so their interest was outside taxable interest income. AN 94(2) later obsoleted the ruling.

Common questions

What financed the notes? The district borrowed to pay for an underground sprinkler system, with the debt backed by its faith, credit, and taxing power.

Why did promissory notes count as "obligations"? DRS read the word in context with the statute's references to notes, bonds, and similar evidence of indebtedness.

Can this ruling be used for a current Connecticut return? No. It concerns a former tax, and DRS marks it not current and obsoleted by AN 94(2).

Citations and references

• Conn. Gen. Stat. § 7-325.
• Conn. Gen. Stat. § 7-369.
• Conn. Gen. Stat. § 12-505.
• Sutherland Statutory Construction §§ 47.16 and 47.17 (4th ed.).
• Announcement (AN) 94(2) -- identified by DRS as obsoleting this ruling.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 90-50

Original ruling text

Ruling 90-50, Interest Income

This information is not current and is being provided for reference purposes only

Ruling 90-50

Interest Income

This Ruling has been obsoleted by   AN 94(2)

ISSUE:

Whether promissory notes issued by a district organized in accordance with Conn. Gen. Stat. 7-325 are "obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or ... district ... created under the laws of the state of Connecticut", as the phrase is used in Conn. Gen. Stat. §12-505, so that, for dividend and interest income tax purposes, interest paid on such notes is excludable from "interest income", as defined in Conn. Gen. Stat. §12-505.

FACTS:

At a duly called meeting of a district organized in accordance with Conn. Gen. Stat. §7-325, a resolution was approved by voters of the district that authorized the borrowing of money by the district, secured by the full faith and credit of the district, to cover the expense involved in the installation of an underground sprinkler system.

The expense involved exceeded $10,000.00.

To borrow the money, the district issued promissory notes "upon the faith and credit and taxing power and authority of the district." The promissory notes stated, that, as long as the notes remained unpaid, the district would not, without the prior written consent of the holders thereof, take any action to decrease its size or authority or to terminate its existence.

At least one of the holders is a "resident", as the term is defined in Conn. Gen. Stat. §12-505, who requested a letter ruling concerning the excludability from such resident's interest income of the interest paid on the promissory notes issued by the district.

RULING:

Conn. Gen. Stat. §7-369 provides in part that, "when any municipality has made appropriations or incurred debts exceeding ten thousand dollars ... it may issue ... bonds ... notes, or other obligations ... For the purpose of this section, "municipality" means ... any district, as defined in section 7-324 ...." (That definition pertains to the use of the term "district" in sections 7-324 to 7-329, inclusive.)

Conn. Gen. Stat. §12-505 provides in part that "'interest income' means ... (2) any interest income from obligations issued by or on behalf of any state, political subdivision thereof, or public instrumentality, state or local authority, district, or similar public entity, exclusive of such income from obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or public instrumentality, state or local authority, district, or similar public entity created under the laws of the state of Connecticut ...." [Emphasis supplied]

Conn. Gen. Stat. §12-505 also provides in part that "'gains from the sale or exchange of capital assets' means (1) net gain as determined for federal income tax purposes ... from (A) sales or exchanges of capital assets or assets treated as capital assets, other than notes, bonds or other obligations of the state of Connecticut or any of the political subdivisions thereof, or its or their respective agencies or instrumentalities ...." [Emphasis supplied]

The terms "notes", "bonds" and "obligations" are not defined in Conn. Gen. Stat. §12-505. Where, as in the definition of "gains from the sale or exchange of capital assets" appearing in Conn. Gen. Stat. §12-505, "general words follow specific words in a statutory enumeration, the general words are construed to embrace only objects similar in nature to those objects enumerated by the preceding specific words." Sutherland Stat. Const. §47.17 (4th Ed.). "The doctrine of ejusdem generis "[treats] the particular words ["notes" and "bonds"] as indicating the class, and the general words ["other obligations"] as extending the provisions of the statute to everything embraced in that class, though not specifically named by the particular words." Id. Thus, other evidences of indebtedness that are similar to notes or bonds would be embraced in that class.

In the subsequently added definition of "interest income" appearing in Conn. Gen. Stat. 12-505, only the term "obligations"--and not the terms "notes" and "bonds"--is used. "Where the meaning of a word is unclear in one part of a statute but clear in another part, the clear meaning can be imparted to the unclear usage on the assumption that it means the same thing throughout the statute." Sutherland Stat. Const. §47.16 (4th Ed.). Thus, the term "obligations" means notes and bonds and includes other evidences of indebtedness that are similar to notes and bonds.

Accordingly, it is hereby ruled that promissory notes issued by a district organized in accordance with Conn. Gen. Stat. §7-325, are "obligations issued by or on behalf of the state of Connecticut, any political subdivision thereof, or ... district ... created under the laws of the state of Connecticut", as the phrase is used in Conn. Gen. Stat. §12-505, so that, for dividend and interest income tax purposes, interest paid on such notes is excludable from "interest income", as defined in Conn. Gen. Stat. §12-505.

LEGAL DIVISION

May 21, 1990