C. W. Matthews Contracting Co., Inc. v. South Carolina Tax Commission

Decision Date16 November 1976
Docket NumberNo. 20311,20311
Citation267 S.C. 548,230 S.E.2d 223
CourtSouth Carolina Supreme Court

Harvey G. Sanders, Jr., Leatherwood, Walker, Todd & Mann, Greenville, for appellant.

Atty. Gen. Daniel R. McLeod and Asst. Atty. Gen. John C. von Lehe, Columbia, for respondent.

GREGORY, Justice:

This appeal comes from an order dismissing the action brought by Matthews Corporation (hereinafter Matthews) for the recovery of taxes under § 65--2662 of the S.C.Code (Cum.Supp.1975).

The controversy began when appellant, a Georgia corporation specializing in road-building, took deductions in 1969 and 1970 for losses sustained in 1965, 1966 and 1967. Appellant relied on § 65--259(12) of the Code (1962), which allows 'taxpayers who have established a new business or industry in this State' to carry forward losses suffered during their first three years of operation for a period of three years following each loss year. The Tax Commission (hereinafter Commission) disallowed the deduction, pronouncing that Matthews had not established a new business or industry in the State. Matthews paid the taxes under protest under § 65--2661, Code (Cum.Supp.1975), and then brought the recovery action. The trial judge heard the case without a jury although appellant sought a jury trial. The questions on appeal are whether the judge erred in (1) denying a jury trial, (2) refusing to consider evidence of Matthews' activity in the State after 1965, and (3) finding that Matthews had not established a new business in 1965.

The facts are, with few exceptions, undisputed. Appellant is incorporated under the laws of Georgia and has its home office in Marietta. It engages in road-building both within and without Georgia. Sometime in 1964 company officials discussed the possibility of subcontracting for a Greenville firm in the construction of I--20 in Richland County. On January 4, 1965 appellant started the job, with the Greenville firm. This was the first construction work appellant had undertaken in South Carolina.

Matthews spent considerable sums in start-up costs for the project. The company hired local labor and bought equipment at local dealers. The only office the company had in South Carolina in 1965 was the typical mobile-home office found at most construction sites. The supervisor for the job lived near the job site during the week and returned to Georgia on weekends. Some One Million Four Hundred Thousand ($1,400,000.00) Dollars was received by Matthews in 1965 in connection with the I--20 project; the accounting for 80--90% Of this money was done at the on-the-job-site office. The I--20 job was the only construction work the company did in South Carolina in 1965. The only other activity of Matthews in South Carolina during that year was the submission of bids for other contracts.

The company qualified to do business in South Carolina, by filing with the Secretary of State, on November 29, 1965. From 1965 to 1974 Matthews operated continuously in the State, engaging in about seven construction contracts in addition to the I--20 one. During this period appellant filed income tax returns with respondent for each year. Appellant lost a total of about Seven Hundred Twenty-Two Thousand ($722,000.00) Dollars during 1965 through 1968; in 1969 the company turned a profit of about One Hundred Seven Thousand ($107,000.00) Dollars and in 1970, Two Hundred Fifty-Seven Thousand ($257,000.00) Dollars.

The I--20 job was a major project, lasting about three and one-half years for appellant. Mr. Robert E. Matthews, now president of Matthews Corporation, testified that it was the intent of company officials, in 1964 and 1965, to go into business in South Carolina on a permanent basis.

Appellant's first argument is that Article I, Section 25 of the South Carolina Constitution requires a jury trial in this case. That section provides, 'the right of trial by jury shall be preserved inviolate.' The section has been interpreted by this Court as securing the right to a jury only in cases in which that right existed at the time of the adoption of the constitution in 1868; if the case is a statutory action, a jury will be allowed only if the action is in the nature of a suit triable at common law in 1868. McGlohon v. Harlan, 254 S.C. 207, 174 S.E.2d 753 (1970); Richards v. Columbia, 227 S.C. 538, 88 S.E.2d 683 (1955); State v. Gibbes, 109 S.C. 135, 95 S.E. 346 (1918); Smith & Co. v. Bryce, 17 S.C. 538 (1882).

The right to recover taxes from the sovereign was not recognized by this Court in 1868. The question remains whether the § 65--2662 action is in the nature of a common law suit. The nature of the §§ 65--2661 and 65--2662 remedy has not been determined by this Court. The lower court found one case from another jurisdiction that construed a constitutional provision and a recovery statute, both similar to those of this State. In Dexter Horton Building Company v. King County, 10 Wash.2d 186, 116 P.2d 507 (1941), the court found the tax recovery suit to be based on an equitable principle, 'constructive fraud', and upheld the hearing of the suit before a judge alone. Finding the suit as one in equity was important because of statutes that required a jury trial in all actions at law on issues of fact. See 116 P.2d at 509--511. The appellant argued that the action was one of debt, triable before a jury at common law. The court held that the constructive fraud doctrine applied and that the taxing agency held the paid-in taxes in trust, therefore equity was the exclusive avenue of relief. As further rebuttal to appellant's argument, the court cited one of its previous decisions in which it said that the state was not entitled to interest on delinquent taxes, absent a statutory provision. The reason the state was not entitled to interest, the court said, was because a tax 'is not a debt in the ordinary sense of the term.' (116 P.2d at 511, the court paraphrasing language from its earlier decision).

Matthews also argues that its action is like a common law debt action. We think Dexter Horton is helpful, but not dispositive, in refuting this argument. However, the U.S. Supreme Court held in Wickwire v. Reinecke, 275 U.S. 101, 48 S.Ct. 43, 72 L.Ed. 184 (1927), that the Seventh Amendment to the Constitution did not require a jury trial in a statutory action to recover taxes allegedly unjustly collected. And the Ninth Circuit Court of Appeals said specifically that a statutory action to test the validity of penalties assessed by the IRS was not like a common law action of debt, and therefore was not required by the Seventh Amendment to be tried before a jury. Olshausen v. C.I.R., 9 Cir., 273 F.2d 23 (1959), cert. denied, 363 U.S. 820, 80 S.Ct. 1256, 4 L.Ed.2d 1517. These federal cases offer better reasoning than does Dexter Horton. The principle of constructive fraud is a broad one and we would not rest our holding exclusively upon it. See generally 3 J. Pomeroy, Equity Jurisprudence § 922 et seq. (S. Symons, 5th ed. 1941).

The right to recover taxes from the State was created by statute, and was created after the adoption of our constitution. The right is not in the nature of a common law action; the cases cited above recognize that the statutory recovery of taxes paid to the government is a unique proceeding. We conclude that the trial judge did not err in refusing appellant's demand for trial by jury.

Appellant's second argument is that the trial judge erred in not considering its activities in South Carolina after 1965. Matthews reasons that evidence of these activities is relevant to whether, in 1965, company officials intended to set up a contracting business on a permanent basis in South Carolina. It is necessary to pay attention to this 'intent' of the company because of the language of the statute:

(12) With respect only to taxpayers who have established a new business or industry in this State during the calendar year 1955 and thereafter, in addition to other deductions allowed by this chapter, there shall be allowed as a deduction from gross income a net operating loss carryover under the...

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