Achillion Pharmaceuticals, Inc. v. Law

Achillion Pharmaceuticals, Inc. v. Law, 291 Conn. 525 (2009), decided by Justice Vertefeuille, is the leading Connecticut Supreme Court decision on the scope of the state's research and development (R&D) tax credit cash-refund option for qualified small businesses. Achillion Pharmaceuticals, a Delaware corporation headquartered in New Haven and a qualified small business under General Statutes section 12-217n(b)(4), appealed the denial of its request to exchange for a refund the unused portion of an R&D tax credit it had carried forward from a prior income year.

Connecticut's R&D Credit and Refund-Exchange Scheme

Connecticut established its R&D expense tax credit in 1993 under section 12-217n, and in 1998 extended a more generous 6-percent tentative credit to qualified small businesses. Under section 12-217n(d)(2), no more than one-third of the credit allowed for a given income year may actually be taken in that year; the remaining two-thirds is carried forward to future years under section 12-217n(d)(4). In 1999, the legislature enacted section 12-217ee, giving qualified small businesses with no tax liability -- and therefore unable to use the credit currently -- the option to exchange the credit with the state for a cash refund equal to a percentage of its value, instead of carrying it forward.

The Dispute

For its 2003 income year, Achillion incurred R&D expenses generating a tax credit in excess of $600,000; it exchanged one-third of that credit for a refund and carried forward the remaining two-thirds under section 12-217n(d)(4). In 2004, Achillion again incurred R&D expenses, again exchanged one-third of its new 2004 credit for a refund, and additionally sought to exchange the carried-forward balance of its 2003 credit for a refund as well. The commissioner of revenue services denied the request as to the carried-forward 2003 balance. The trial court agreed with Achillion that section 12-217ee permits exchanging carried-forward credits in principle, but ruled against Achillion on the separate ground that it had violated an ordering rule requiring older credits to be exhausted first. The Supreme Court affirmed on a different, broader ground raised by the commissioner: that section 12-217ee does not authorize the exchange of carried-forward credits for a refund at all, regardless of ordering.

The Court's Textual Analysis

The Court held the statute unambiguous. Section 12-217ee(a) gives a qualifying taxpayer a choice between two options -- to "elect to carry such credit forward" or to "apply ... to exchange such credit ... for a credit refund" -- joined by the disjunctive "or," which the Court read as foreclosing any combination of the two: once a taxpayer carries a credit forward, it cannot later exchange that same credit for cash. The Court also found significance in the statute's use of the singular article "a" credit refund, and in section 12-217ee(b)'s requirement that a refund application be filed "at the same time" as the return for the income year in which the credit is earned, with no application permitted after that return's due date -- textual signals that the refund option is available, if at all, only in the single income year in which the credit was originally earned. Because the Legislature enacted section 12-217ee six years after establishing the carry-forward mechanism in section 12-217n, and is presumed aware of its own prior enactments, its failure to expressly extend the refund option to carried-forward balances was treated as deliberate.

Significance

Achillion is the controlling Connecticut authority on the timing limits of the R&D credit refund-exchange option: a qualified small business may cash out its statutory one-third refund share only in the income year the credit is earned, and any remainder that must be carried forward under section 12-217n(d)(2) permanently loses eligibility for the cash-refund exchange, regardless of the taxpayer's tax liability in later years.