Arbern-Wilmington, Inc. v. Director of Revenue

• Decision Date: 18 June 1991
• Docket Number: INC,ARBERN-WILMINGTO
• Citation: 596 A.2d 1385
• Parties: , Appellee Below, Appellant/Cross-Appellee, v. DIRECTOR OF REVENUE, Appellant Below, Appellee/Cross-Appellant. . Submitted:
• Court: Supreme Court of Delaware

Page 1385

596 A.2d 1385

ARBERN-WILMINGTON, INC., Appellee Below, Appellant/Cross-Appellee, v. DIRECTOR OF REVENUE, Appellant Below, Appellee/Cross-Appellant.

Supreme Court of Delaware.

Submitted: June 18, 1991.

Decided: Sept. 18, 1991.

Appeal and Cross-Appeal from Superior Court. Affirmed in Part. Reversed in Part.

Johannes R. Krahmer and John S. McDaniel, Morris, Nichols, Arsht & Tunnell, Wilmington, for appellant.

Joseph Patrick Hurley, Jr., Deputy Atty. Gen., Dept. of Justice, Div. of Revenue, Wilmington, for appellee.

Before CHRISTIE, C.J., HORSEY and WALSH, JJ.

WALSH, Justice:

These cross appeals from the Superior Court require a determination of whether one engaged in the conversion of apartments into condominium units is subject to the tax imposed on a contractor's gross receipts under 30 Del.C. § 2501 or an occupation tax under 30 Del.C § 2301(b), or neither. The Tax Appeal Board ("Board") ruled that the appellant, Arbern-Wilmington, Inc. ("Arbern"), was not subject to the contractor tax nor was it required to secure an occupational license. On appeal by the Director of the State Division of Revenue (the "Director"), the Superior Court affirmed the Board's ruling that Arbern could not be deemed a contractor but ruled that Arbern was subject to the occupational tax. We affirm the Superior Court's determination as to the contractor license but reverse its ruling that Arbern is subject to payment of a tax on its gross receipts under an occupational license.

I

The facts underlying this matter are essentially undisputed. On March 19, 1985, the Director issued a notice of assessment to Arbern imposing a tax deficiency in the amount of $57,407 for failure to secure a contractor's license. This tax was computed upon the retail sale prices of condominium units sold by Arbern during the years 1981, 1982 and 1983. The notice also assessed penalties in the amount of $50,664 and interest of $21,298.

The Director also issued an alternative notice of assessment which proposed to impose an occupational license tax in the amount of $37,500 attributable to Arbern's sales of condominiums during the same period. This alternative assessment proposed to impose penalties of $32,429 and interest of $13,603.

Arbern filed a written protest with the Division of Revenue contesting the proposed tax assessment and penalties. On March 12, 1986, the Division issued a letter rejecting Arbern's protest and upholding the notice of assessment. Arbern then filed a timely appeal of the assessment with the Board. Prior to the hearing before the Board, Arbern and the Director entered into a stipulation of the following facts:

1. Petitioner [Arbern] was incorporated on July 8, 1980.

2. Petitioner purchased the apartment building located at 1401 Pennsylvania Avenue (the "Building") on January 30, 1981 for a purchase price of $4,820,000.

3. Petitioner determined to convert the Building from rental units to condominium units at the time of purchase of the Building. As soon as the various legal requirements to effectuate such a conversion were accomplished, petitioner commenced selling units in the Building pursuant to the Unit Property Act to tenants, investors or other persons. One hundred eighty four units were sold by the close of 1983. The total consideration received by petitioner for all the units in the Building sold during 1981, 1982 and 1983 was $8,836,407, of which $6,003,572 was received in 1981, $1,818,011 was received in 1982, and $1,014,824 was received in 1983. The 1983 receipts included $120,000 received from the sale of 1021 Park Place, which was received as a trade-in on a unit purchased in the Building.

4. Prior to the conversion of the Building to condominiums, petitioner hired Kerand Management Company to manage the Building.

5. The total cost of renovations of all units in the Building sold during 1981, 1982 and 1983 as reported by petitioner on its federal and Delaware income tax returns, copies of which are attached hereto, was $924,444 of which $526,826 was incurred in 1981, $222,667 was incurred in 1982, and $174,951 was incurred in 1983 (including $98,000 paid for the 1021 Park Place trade-in property).

6. The total cost of renovations referred to in paragraph 5. above consists of the following categories of costs:

a. Repairs and improvements. Petitioner made repairs and improvements to the Building in order to facilitate sales of condominium units. Most of the repairs and improvements were made by persons unrelated to petitioner or any of its shareholders, which persons furnished labor or both labor and materials to the job. Such persons are defined as a "contractor" under 30 Del.C. § 2501(1). The principal items furnished by contractors included the following:

(i) carpeting lobby and halls

(ii) concrete masonry

(iii) weatherproofing

(iv) landscaping

(v) window glazing

(vi) electrical

(vii) plumbing

(viii) carpentry

(ix) roofing

(x) boiler work

(xi) painting

(xii) flooring

(xiii) elevator work

(xiv) drywall

b. Professional fees and taxes. Petitioner also paid fees to architects and engineers, and paid City of Wilmington condominium conversion taxes.

c. Tangible personal property items. Petitioner purchased ranges, refrigerators and air conditioners for units as required, as well as lobby furniture, pictures and other tangible personal property items.

7. The total cost of renovations for the years 1981 through 1983 is allocated among the various categories of expense as follows:

                Total cost of renovations reported on income tax returns    $924,444
                Less cost of trade in unit"1021 Park Place                    98,000
                                                                            --------
                Balance                                                                $826,444
                a.              Repairs and improvements by subcontractors   588,968
                b.              Professional fees and taxes                   27,948
                c.              Tangible personal property                   209,528
                                                                            --------
                Total                                                                  $826,444
                

8. During the year 1981 and a portion of 1982, petitioner employed personnel as maids, parking attendants, doormen and maintenance personnel. The number of maintenance personnel serving at any one time were between one and two. During 1982 and 1401 Condominium Association assumed responsibility for maintenance of the Building, and such personnel were thereupon removed from petitioner's payroll.

In a written decision dated July 3, 1990, the Board determined that Arbern was not a contractor subject to taxation of gross receipts pursuant to 30 Del.C. § 2501(1), nor was Arbern subject to the general services provision of the occupational license tax imposed by 30 Del.C. § 2301(b).

On appeal, the Superior Court agreed with the Board that Arbern was not a contractor within the meaning of 30 Del.C. § 2501(b) because it was an owner/developer, not hired by another to furnish labor and/or materials for a project. With respect to the occupational tax, however, the Superior Court, in reversing the Board, ruled that Arbern was in the "business" of making improvements to real property and thus fell within the catch-all language of 30 Del.C. § 2301(b). ¹ Arbern has appealed the Superior Court ruling that it is subject to the occupational tax while the Director has cross-appealed from the determination that Arbern is not required to secure a contractor's license and pay the gross receipts tax attributable to that status.

II

Although the initial appeal in this matter was at the behest of Arbern, contesting the Superior Court's ruling on the occupational tax, we will approach the questions posed, as did the Board and the Superior Court, by focusing first on the Director's claim that Arbern's activities justified the imposition of a contractor's tax under 30 Del.C. § 2501(1).

The Director contends that Arbern is a contractor because it furnished labor and materials in connection with the alteration and development of real property, therefore the funds received by Arbern in exchange for the condominium units should be taxed as gross receipts. Delaware law provides that all contractors are subject to a tax based on the aggregate gross receipts paid to the contractor. 30 Del.C. § 2502(c)(1). Section 2501 of Title 30 defines "Contractor" and "Gross receipts" as follows:

(1) 'Contractor' includes every person engaged in the business of furnishing labor or both labor and materials in connection with all or any part of the construction, alteration, repairing, dismantling or demolition of buildings, roads, bridges, viaducts, sewers, water and gas mains and every other type of structure as an improvement, alteration or development of real property; a person is a contractor regardless of whether he is a general contractor or a subcontractor, or whether he is a resident or a nonresident.

(2) 'Gross receipts' includes all sums received by a contractor for any work done or material supplied in connection with any real property located in this State, but does not include sums paid to subcontractors by the contractor; provided said subcontractor is subject to the provisions of this chapter with respect to these sums; and provided that a written agreement exists between the contractor and subcontractor stating the exact sums payable to said subcontractor.

When interpreting statutes, courts must apply well established rules of construction. The Delaware Code itself directs that "[w]ords and phrases shall be read with their context and shall be construed according to the common and approved usage...." 1 Del.C. § 303. If there is doubt regarding the breadth of a taxing statute, the court must construe the statute against the taxing authority and in favor of the taxpayer. Consolidated Fisheries Co. v. Marshall, Del.Super., 32 A.2d 426 (1943), aff'd, Del.Supr., 39 A.2d 413 (1944). "The general principle is well settled...