Commissioner of Revenue v. Dupee

• Citation: 423 Mass. 617,670 N.E.2d 173
• Court: United States State Supreme Judicial Court of Massachusetts
• Decision Date: 25 September 1996
• Parties: COMMISSIONER OF REVENUE v. Paul R. DUPEE, Jr., & another. 1

Page 173

670 N.E.2d 173

423 Mass. 617

COMMISSIONER OF REVENUE v. Paul R. DUPEE, Jr., & another. ¹

Supreme Judicial Court of Massachusetts Suffolk.

Argued Nov. 9, 1995.

Decided Sept. 25, 1996.

Kristin E. McIntosh, Assistant Attorney General, for plaintiff.

Roger M. Ritt, Boston (Gary P. Brady with him), for defendants.

Before LIACOS, C.J., WILKINS, ABRAMS, O'CONNOR and GREANEY, JJ.

O'CONNOR, Justice.

The Commissioner of Revenue (commissioner) denied Paul R. Dupee, Jr., and Lizbeth Schiff's application for abatement of individual nonresident income tax for 1986 on their capital gain of $16,712,072 from the sale of a portion of Dupee's interest in Boston Celtics, Inc. (BCI). Dupee and Schiff (taxpayers) filed a petition for review with the Appellate Tax Board (board). The board concluded that the gain realized by Dupee was not subject to tax in Massachusetts and, accordingly, granted an abatement to the taxpayers in the sum for which they had applied, $835,604. The commissioner appealed pursuant to G.L. c. 58A, § 13 (1994 ed.), and we transferred the case here on our own initiative. We affirm the board's decision.

The case was submitted to the board on a statement of agreed facts and a stipulation with attached exhibits. In addition, one witness testified. On the basis of those documents and the witness's testimony, the board made its findings, which we summarize: The taxpayers were nonresidents of Massachusetts at all relevant times. In 1986, Dupee owned thirty-two per cent of the stock in BCI, the Massachusetts corporation which held the franchise from the National Basketball Association (NBA) to organize and operate the Boston Celtics basketball team. For Federal income tax purposes, BCI was treated as a Subchapter S corporation. BCI became a Subchapter S corporation for Massachusetts tax purposes beginning with its taxable year commencing on July 1, 1986. BCI maintained offices in Boston, where employees handled BCI's day-to-day operations, including acquiring players, selling game tickets, negotiating contracts, and hiring staff. Dupee, who was vice chairman of the board of directors and secretary, "did not actively, regularly, or continuously participate in any capacity in the activities constituting the regular operations of [BCI]," nor did he maintain any office, employees, or place of business in Massachusetts, or purchase goods or services in connection with a trade or business in Massachusetts.

Dupee and the other shareholders of BCI agreed to liquidate BCI and transfer ownership of its assets, including the franchise, to a partnership, which would allow members of the public to obtain interests in the franchise. On December 11, 1986, BCI liquidated in a tax-free exchange under a now defunct provision ² of the Internal Revenue Code (I.R.C.), 26 U.S.C. §§ 1 et seq. (1994), distributing to the shareholders their undivided percentage interests in BCI's assets. Upon receiving an undivided 32 per cent interest in the assets, Dupee made a tax-free exchange under I.R.C. § 721(a) of 14.72 per cent of his assets for an equivalent percentage interest in the new partnership. In an additional transaction rendered tax free under I.R.C. § 351, Dupee exchanged .28 per cent of his interest in the assets for an interest in Celtics, Inc., a new Delaware Subchapter S corporation formed to serve as the general partner of the partnership. The taxability of Dupee's gain on the sale of his remaining interest in BCI's assets to the partnership for $18,602,675, resulting in a long-term capital gain of $16,712,072, is at issue.

General Laws c. 62, § 5A(a), as amended through St.1983, c. 233, § 24, applicable to the relevant tax year, provided as follows:

"The amount of the Part A taxable income and the Part B taxable income of any non-resident of the commonwealth derived from the Massachusetts gross income of such person shall be taxed in accordance with the provisions of section four. The Massachusetts gross income shall be determined solely with respect to items of gross income from sources within the commonwealth of such person and in determining the adjusted gross income of each Part only those deductions shall be allowed which are attributable to items included in Massachusetts gross income as so determined. Items of gross income from sources within the commonwealth are items of gross income derived from or effectively connected with (1) any trade or business, including any employment carried on by the taxpayer in the commonwealth; (2) the participation in any lottery or wagering transaction within the commonwealth; or (3) the ownership of any interest in real or tangible personal property located in the commonwealth. In computing the taxable income of each Part, the non-resident shall be allowed the deductions and exemptions provided as to each Part in section three" (emphasis added).

General Laws c. 62, § 5A(a), sets forth the statutory scheme for income taxation of nonresidents of Massachusetts. At issue in this case is the proper construction of the portion we have emphasized above. The board ruled, favorably to the taxpayers, that, in order for Dupee's capital gain to be taxable by the Commonwealth, the source of the gain would have to have been a trade or business personally "carried on by the taxpayer in the commonwealth" [c. 62, § 5A(a)(1) ]. The board concluded that the source of Dupee's gain was not a trade or business "carried on by the taxpayer in the commonwealth," and that, therefore, the taxpayers were entitled to the abatement for which they had applied.

The commissioner contended before the board, and contends here, that the plain language of G.L. c. 62, § 5A(a)(1), requires only that Dupee's gain on the sale of his BCI interest be "derived from" or "effectively connected with" a Massachusetts trade or business and contains no requirement that the nonresident personally conduct the Massachusetts business giving rise to the income. In addition, the commissioner points to a rule of statutory construction known as the "last antecedent rule," which would limit the application of the words in c. 62, § 5A (a)(1), "carried on by the taxpayer," to the immediately preceding words, "any employment." The commissioner argues that the applicability of the last antecedent rule to § 5A(a)(1) is supported by the lack of a comma between the words "employment" and "carried" in that provision (" any trade or business, including any employment carried on by the taxpayer in the commonwealth"). If we were to apply the last antecedent rule, the words "carried on by the taxpayer" would not modify the words "any trade or business." The capital gain at issue would be taxable simply because its source, BCI, was a business carried on by someone, not necessarily Dupee, in Massachusetts. See Russell v. Boston Wyman, Inc., 410 Mass. 1005, 1006, 574 N.E.2d 379 (1991), quoting United States v. Ven-Fuel, Inc., 758 F.2d 741, 751 (1st Cir.1985) ("last antecedent rule" is that "qualifying phrases are to be applied to the words or phrase immediately preceding and are not to be construed as extending to others more remote").

"The general and familiar rule is that a statute must be interpreted according to the intent of the Legislature ascertained from all its words construed by the ordinary and approved usage of the language, considered in connection with the cause of its enactment, the mischief or imperfection to be remedied and the main object to be accomplished, to the end that the purpose of its framers may be effectuated." Industrial Fin. Corp. v. State Tax Comm'n, 367 Mass. 360, 364, 326 N.E.2d 1 (1975), quoting Hanlon v. Rollins, 286 Mass. 444, 447, 190 N.E. 606 (1934). The last antecedent rule "is only a rule of construction to ascertain the legislative intent." Selectmen of Topsfield v. State Racing Comm'n, 324 Mass. 309, 312, 86 N.E.2d 65 (1949). It does not apply where "there is something in the subject matter or in the expression of the dominant purpose that requires a different interpretation." Id.

Contrary to the commissioner's argument, the Legislature's failure to position a comma between the words "employment" and "carried" as they appear in G.L. c. 62, § 5A(a), does not denote the Legislature's intent to tax all nonresident income from Massachusetts sources regardless of whether the taxpayer personally carries on that business. See Costanzo v. Tillinghast, 287 U.S. 341, 344, 53 S.Ct. 152, 153, 77 L.Ed. 350 (1932) ("It has often been said that punctuation is not decisive of the construction of a statute," citing several cases). We construe the relevant portion of the statute to mean that "[i]tems of gross income from sources within the commonwealth are items of gross income derived from or effectively connected with (1) any trade or business ... carried on by the taxpayer in the commonwealth." Our reading of the statute is consistent with regulations the Department of Revenue promulgated pursuant to the statute, a letter ruling the commissioner issued, and instructions relative to tax forms for the year at issue.

Title 830 Code Mass.Regs. § 62.5A.1(4)(a) (1993) specifically provides that a nonresident, defined in 830 Code Mass.Regs. § 62.5A.1(2) (1993) as an individual whose domicil is outside Massachusetts, carries on a trade or business in Massachusetts

"1. [i]f the non-resident, directly or through agents or employees, maintains or operates or shares in maintaining or operating a desk, a room, an office, a shop, a store, a warehouse, a factory, or any other place in Massachusetts where the business affairs are systematically and regularly conducted; or 2. If the non-resident, directly or through agents or employees, is present for business in Massachusetts as either an employee, sole proprietor, or other self-employed individual."

The board's conclusion that Dupee does not satisfy the criteria in 830 Code Mass.Regs. § 62.5A.1(4) is correct, especially in light of the commissioner's own...