Centex Int'l, Inc. v. S.C. Dep't of Revenue

• Decision Date: 20 September 2013
• Docket Number: No. 27288.,27288.
• Citation: 750 S.E.2d 65,406 S.C. 132
• Parties: CENTEX INTERNATIONAL, INC. and Affiliates, Appellant, v. SOUTH CAROLINA DEPARTMENT OF REVENUE, Respondent. Appellate Case No. 2011–196887.
• Court: South Carolina Supreme Court

406 S.C. 132

750 S.E.2d 65

CENTEX INTERNATIONAL, INC. and Affiliates, Appellant,

v. SOUTH CAROLINA DEPARTMENT OF REVENUE, Respondent.Appellate Case No. 2011–196887.

No. 27288.

Supreme Court of South Carolina.

Heard April 17, 2013.

Decided July 24, 2013.

Rehearing Denied Sept. 20, 2013.

Burnet Rhett Maybank, III, of Nexsen Pruet, LLC, of Columbia, for Appellant.

Milton Gary Kimpson, Adam Nicholas Marinelli, of Columbia; Harry A. Hancock, of Dean B. Bell Law Firm, LLC, of Hilton Head, for Respondent.

Justice BEATTY.

Centex International, Inc. (Appellant) filed consolidated income tax returns for its three corporate affiliates that wholly owned the general partnership of Centex Homes, a developer of residential communities. Appellant appeals the Administrative Law Court's (ALC's) order upholding the South Carolina Department of Revenue's (the Department's) denial of its claim for infrastructure tax credits for the 2002–2005 income tax years. Appellant contends the ALC erred in: (1) concluding the corporate affiliates of Appellant were not eligible to claim the infrastructure tax credit as partners of Centex Homes; (2) its interpretation and application of the aggregate and entity theories of partnership taxation; and (3) concluding that Appellant and its affiliates are not a single taxpayer that may claim the infrastructure tax credit on its consolidated tax return. This Court certified the appeal from the Court of Appeals pursuant to Rule 204(b), SCACR. We affirm.

I. Factual/Procedural History

The underlying facts of the instant case are not in dispute. Centex Homes is a general partnership that operates in South Carolina and is wholly owned by Appellant's three corporate affiliates. Centex Homes acquires and develops land for the purpose of establishing communities and constructing single-family homes in South Carolina and other states. As a result of constructing developments within this state, Centex Homes incurred infrastructure project expenses of approximately $68,000,000.

In 2007, Appellant filed amended corporate income tax returns for tax years 2002 to 2005, which included amended partnership returns for Centex Homes. In these returns, Appellant claimed tax credits in the amount of $5,113,040 based upon the expenses incurred by Centex Homes for the development of roads and water and sewer lines. Appellant sought these credits pursuant to section 12–6–3420 of the South Carolina Code, which provides in pertinent part:

(A) A corporation may claim a credit for the construction or improvement of an infrastructure project against taxes due under Section 12–6–530 for:

(1) expenses paid or accrued by the taxpayer;

(2) contributions made to a governmental entity; or

(3) contributions made to a qualified private entity in the case of water or sewer lines and their related facilities in areas served by a private water and sewer company.

S.C.Code Ann. § 12–6–3420(A) (2000) (emphasis added) (the “Infrastructure Credit Statute”).¹

The Department conducted a Field Audit of Appellant for the South Carolina corporate income tax periods ending March 2002 through March 2005. The Department's audit, which was dated July 25, 2007, determined Appellant: (1) incorrectly calculated its South Carolina corporate income by failing to apportion the amounts of revenue from the out-of-state intangibles generated from activity in South Carolina; and (2) was not entitled to the claimed infrastructure tax credits as the credits were earned by the partnership, Centex Homes, rather than the corporation.

On October 23, 2007, Appellant filed a written protest in response to the Department's audit and notice of proposed assessment. On December 4, 2009, the Department issued Appellant its final Determination in which it confirmed the Field Audit and set forth the legal basis for its adjustments and denial of the claim for credits. Specifically, the Department denied Appellant's claim for the infrastructure tax credits because “Centex Homes was not eligible for the corporate tax credit as a general partnership and therefore could not pass through the credit to its individual corporate partners.”

Upon receipt of the Determination, Appellant requested a contested case hearing before the ALC to dispute the Department's determination. The Department filed a Motion for Partial Summary Judgment on the infrastructure tax credit issue. In response, Appellant filed a Cross–Motion for Summary Judgment on the same issue. Both parties stipulated that no issue of fact remained on the infrastructure tax credit issue.

Following a hearing, the ALC granted the Department's motion and denied Appellant's cross-motion by order dated June 2, 2011. In so ruling, the ALC initially determined the Infrastructure Credit Statute mandated that a corporation directly incur the expenses that generate the claimed tax credit. The ALC reasoned that section 12–6–3420, when read in its entirety, limited “the taxpayer” in subsection (A)(1) to the “corporation” attempting to claim the credit under subsection (A). Because the infrastructure expenses were directly incurred by Centex Homes, a general partnership, the ALC concluded Appellant could not claim the credit “based upon its indirect involvement in the partnership's business activity.” Additionally, the ALC found this conclusion was consistent with the Department's long-standing policy that “a credit must be used by the taxpayer that earns it.”

Despite this conclusion, the ALC acknowledged a statutory exception that “would allowan avenue for indirect expenditures to create access to tax credits.” Specifically, section 12–6–3310(B)(1) outlines a “pass-through” provision, which states:

Unless specifically prohibited, an “S” corporation, limited liability company taxed as a partnership, or partnership that qualifies for a credit pursuant to this article may pass through the credit earned to each shareholder of the “S” corporation, member of the limited liability company, or partner of the partnership.

S.C.Code Ann. § 12–6–3310(B)(1) (Supp.2010) (emphasis added) (the “Pass–Through Statute”).² The ALC interpreted this code section to mean that “a tax credit may only be passed through to individual partners after the partnership itself qualifies for the tax credit.” Because the ALC found the infrastructure tax credit was limited solely to corporations, the court concluded that a partnership cannot qualify to claim the credit. The ALC explained that, “[i]n order for the flow through provisions to remain consistent with the corporate limitations of § 12–6–3420, the word ‘claim’ must be interpreted as synonymous with ‘generate.’ ” Thus, the ALC concluded that “because the partnership was not qualified to claim the tax credit in the first place, none of its corporate partners may do so under § 12–6–3310(B)(1).”

In reaching this ultimate conclusion, the ALC rejected Appellant's contentions that: (1) provisions for partnerships in the Internal Revenue Code, which have been adopted by South Carolina,³ dictate that the tax credit be treated as if the individual corporate partners generated the credits directly under a modified “aggregate theory”; and (2) disallowance of the infrastructure credits would be inequitable as the corporate partners “spent over 68 million dollars on infrastructure and have to pay corporate income taxes on their distributive share from the partnership.”

Subsequently, Appellant filed a timely motion for reconsideration pursuant to Rule 59, SCRCP. After hearing arguments from the parties, the ALC denied Appellant's motion for reconsideration and specifically confirmed each of the prior rulings. Additionally, the ALC rejected Appellant's contention that it was entitled to claim the infrastructure credit because it filed a consolidated return and, thus, all of its affiliates constituted a single taxpayer for purposes of the credit. The ALC reasoned that, “[i]n order for a consolidated group to claim the credit on a consolidated basis, § 12–6–3420 requires that at least one corporation of the group must first be entitled to the credit.” Although the ALC acknowledged that a credit can be applied on a consolidated basis, it found the corporate partners in the instant case were never entitled to the credit in the first place.

Appellant filed a timely appeal with the Court of Appeals. This Court certified the appeal pursuant to Rule 204(b), SCACR.

II. Standard of Review

Because the parties presented this tax case in the posture of a motion for summary judgment, it is governed by Rule 56(c) of the South Carolina Rules of Civil Procedure. This rule provides a motion for summary judgment shall be granted “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” Rule 56(c), SCRCP.

“Tax appeals to the ALC are subject to the Administrative Procedures Act (APA).” CFRE, L.L.C. v. Greenville County Assessor, 395 S.C. 67, 73, 716 S.E.2d 877, 880 (2011). “The decision of the Administrative Law Court should not be overturned unless it is unsupported by substantial evidence or controlled by some error of law.” Original Blue Ribbon Taxi Corp. v. S.C. Dep't of Motor Vehicles, 380 S.C. 600, 604, 670 S.E.2d 674, 676 (Ct.App.2008); see Media Gen. Commc'ns, Inc. v. S.C. Dep't of Revenue, 388 S.C. 138, 144, 694 S.E.2d 525, 528 (2010) (“A reviewing court may reverse the decision of the ALC where it is in violation of a statutory provision or it is affected by an error of law.” (citing S.C.Code Ann. § 1–23–610(B)(a), (d) (Supp.2009))). However, “[q]uestions of statutory interpretation are questions of law, which we are free to decide without any deference to the court below.” CFRE, 395 S.C. at 74, 716 S.E.2d at 881.

“The cardinal rule of statutory interpretation is to ascertain and effectuate the intention of the legislature.” Sloan...