Cookson America, Inc. v. Clark
| Decision Date | 18 May 1992 |
| Docket Number | No. 90-614-M,90-614-M |
| Citation | 610 A.2d 1095 |
| Parties | COOKSON AMERICA, INC. v. R. Gary CLARK, Tax Administrator, State of Rhode Island, Department of Administration, Division of Taxation. P. |
| Court | Rhode Island Supreme Court |
This matter comes before the court by way of a petition for certiorari that seeks to review an order entered by the Sixth Division District Court vacating a decision rendered by the Rhode Island Department of Administration, Division of Taxation, which rejected a claim by the plaintiff, Cookson America, Inc. (Cookson), that it was entitled to a tax-exempt status. We affirm the trial judge's determination that Cookson is exempt from certain tax treatment.
On October 22, 1985, an administrative hearing was held that afforded Cookson the opportunity to present evidence and arguments that it qualified for exemption from the net-worth tax pursuant to G.L.1956 (1980 Reenactment) § 44-11-2(2)(a), as amended by P.L.1983, ch. 2, art. 8, § 1.
Cookson is a holding company that located its corporate headquarters in Providence in 1982. Cookson acquires and holds securities; it engages in strategic planning concerning present companies owned and potential future acquisitions. Dennis Carvalho (Carvalho), Cookson's corporate controller, described the company's activities. He testified that Cookson supplies all the services relating to the acquisition of a company "from soup to nuts," because it acts as a liaison between its parent company in England and the corporation or individual selling a company that Cookson is acquiring. Cookson provides legal assistance, accounting research, and compliance help that includes filing federal and state tax returns and United States Department of Commerce reports, as well as federal-pension information and hazardous-materials reports. Carvalho noted that these activities are performed on Cookson's behalf and not for its subsidiaries. Cookson does not provide management services; nor does it engage in the day-to-day operations or direct management of any company in which it holds securities.
In 1982 Cookson filed its Rhode Island tax return on a basis separate from affiliated subsidiaries and claimed an exemption from the net worth tax under § 44-11-2(2)(a). Exemption status set forth in this particular section is afforded a company that derives 90 percent or more of its income from activities such as holding, buying, selling, or dealing in securities. In 1983 both Cookson and a subsidiary, SM Metals, Inc. (SM Metals), 1 filed their Rhode Island tax return on a consolidated basis and claimed exemption from the net-worth tax under the same provision, § 44-11-2(2)(a).
An audit was conducted on Cookson's 1982 and 1983 returns filed with the Rhode Island Division of Taxation by Michael Canole (Canole), a certified public accountant and multistate tax auditor. As a result of the audit, the tax division disallowed Cookson and SM Metal's filing from exempt status because Canole determined that they had failed to meet the 90-percent test pursuant to § 44-11-2(2)(a)(ii).
In his review of Cookson's 1982 tax return, Canole certified that Cookson reported $1,220,198 as "net allocations" 2 on its 1982 form. He also noted that what was disclosed as a "negative expense," reimbursements to Cookson by its subsidiaries for various costs of maintaining a corporate headquarters, was reported as net allocations. Canole indicated that the net allocations on the 1982 return closely corresponded to "management fees" reported on the 1983 return. Cookson provided management services that included acquiring credit, obtaining insurance, and filing tax returns for its customers. These "negative expenses," Canole explained, are more properly categorized as an item of income. Canole noted that Cookson reported a sum for what was designated as management fees as "other income" on its 1983 return. Canole also testified that in 1982 approximately 15 percent of Cookson's income derived from this management type of income and thus failed to satisfy the 90-percent test qualifying Cookson for tax-exempt status. However, Canole testified that if the transactions between Cookson and its subsidiaries had been different, so that Cookson's only income had come from dividends, Cookson would have qualified under the 90-percent test.
In reviewing Cookson's 1983 tax return, Canole testified that Cookson reported $1,083,000 as management fees and $390,000 as "group charge-out" income, reported as a total of $1,473,000 categorized as other income on the 1983 return. Canole stated that the management fees arose out of management services Cookson supplied as a broker or dealer and not out of the holding, buying, selling, or dealing in securities as prescribed by § 44-11-2(2)(a). According to Canole's calculations Cookson's income was apportioned as 85-percent dividend and interest income and roughly 15-percent management-fee income. Since the management-fee income would not qualify as income derived from the statutorily mandated activities, the percentage of income failed to satisfy the 90-percent test. Consequently Cookson's exemption was disallowed. Canole then computed Cookson's tax liability on a net-worth basis. On July 30, 1985, Cookson was assessed sums that are at issue in this appeal. 3
Carvalho testified that Cookson is reimbursed for its cash flow from its subsidiaries in several forms of income. Income could be classified as dividend income, management-fee income, and group charge-out and/or interest income. The management-fee classification, Carvalho explained, does not describe moneys derived from management services but instead describes a form of reimbursement for operations conducted at the Providence corporate office. Carvalho indicated that a "management fee," a term inherited from the parent company in the United Kingdom, describes the reimbursement sum as one earmarked for expenses incurred in connection with long-range planning, compliance services and the acquisition and disposition of existing and future subsidiaries.
On April 1, 1986, the tax administrator upheld the auditor's findings and held that Cookson failed the 90-percent test because it received moneys derived from management types of services that it provided and thus failed to qualify for tax-exempt status pursuant to § 44-11-2(2)(a) for the years 1982 and 1983. 4 Cookson appealed the decision to the District Court, Sixth Division; and the appeal was heard as a de novo trial with both Cookson and defendant, R. Gary Clark, tax administrator of Rhode Island (tax administrator), entering into a stipulation of case travel and administrative record in lieu of oral testimony.
On December 12, 1990, 5 the trial judge held that Cookson was exempt from this tax treatment and entitled to a refund. In reversing the decision of the tax administrator, the trial judge observed that unrebutted testimony indicated that Cookson does not provide management services. As such, the trial judge found the income Cookson labeled and reported on its tax returns as management fees, group charge-out, and net allocations are receipts from the buying, selling, dealing in, or holding of securities. Thus Cookson's management-fee income was to be included in the statutory formula in order to satisfy the 90-percent test.
In this solitary issue on appeal, which is dispositive of ancillary issues raised in the tax administrator's brief, the tax administrator contends that the trial judge erred in construing the income reported by Cookson as management fees on its 1982 and 1983 tax returns as income derived from the buying, selling, dealing in, or holding of securities as described in § 44-11-2(a)(i) and (ii). This court is of the opinion that the trial judge was correct in her decision to reverse the findings set forth in the administrative hearing.
To resolve this controversy, we must first note that our scope of review on writs of certiorari is limited to a review of the record. General Laws 1956 (1988 Reenactment) § 42-35-16. Moreover, this court's scope of review properly includes questions of law involving the applicability of a statute to undisputed facts. Rhode Island CATV Corp. v. Clark, 541 A.2d 462 (R.I.1988); George, Inc. v. Norberg, 444 A.2d 868 (R.I.), cert. denied, 459 U.S. 908, 103 S.Ct. 214, 74 L.Ed.2d 170 (1982). When stipulations of fact are involved,...
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Fleet Credit Corp. v. Frazier
...of showing that the language of the statute demonstrates "a clear legislative intent to grant such exemption." Cookson America, Inc. v. Clark, 610 A.2d 1095, 1098 (R.I.1992). The trial justice found that the different statutory interpretations advocated by plaintiffs and the city were both ......