Fleet Nat. Bank v. Clark

• Decision Date: 24 June 1998
• Docket Number: No. 95-696-M,95-696-M
• Citation: 714 A.2d 1172
• Parties: FLEET NATIONAL BANK v. R. Gary CLARK, Tax Administrator for the State of Rhode Island. P.
• Court: Rhode Island Supreme Court

Page 1172

714 A.2d 1172

FLEET NATIONAL BANK v. R. Gary CLARK, Tax Administrator for the State of Rhode Island.

No. 95-696-M.P.

Supreme Court of Rhode Island.

June 24, 1998.

Alfred S. Lombardi, Providence, for Plaintiff.

Marcia McGair Ippolito, Providence, Bernard J. Lemos, Cumberland, for Defendant.

Before WEISBERGER, C.J., and LEDERBERG, FLANDERS and GOLDBERG, JJ.

OPINION

FLANDERS, Justice.

This case requires us to determine whether certain offshore commercial-bank deposits were exempt from Rhode Island's bank-deposits tax during the tax years ending November 1986 through 1988. The deposits in question were located at a Grand Cayman branch of the respondent Fleet National Bank (Fleet), which was then a Providence-based banking institution. These types of deposits were known as Eurodollar time deposits (Eurodollar deposits or Cayman deposits). ¹ Historically Fleet had offered such deposits to its high-end commercial-banking customers as a riskier but potentially more profitable investment option than domestic deposits. Because these Cayman deposits were located offshore in a foreign jurisdiction, they were not subject to the more restrictive Federal Reserve and insurance requirements applicable to Fleet's domestic deposits, nor were they saddled with the lower interest rates payable on such deposits. Thus Fleet was able to offer its qualified commercial customers a higher potential rate of return on these Eurodollar deposits than they might otherwise have realized from domestic deposits. The question presented in this case is whether for the three tax years in question these Eurodollar deposits qualified for a tax exemption under Rhode Island's bank-deposits tax. To resolve this issue, we must interpret the applicable tax legislation and consider where these offshore deposits were "made" and where they were "payable" to depositors upon their maturity.

Following two administrative hearings, petitioner R. Gary Clark, the Rhode Island Tax Administrator (tax administrator), twice disallowed Fleet's attempts to qualify the Cayman deposits for a tax exemption under Rhode Island's bank-deposits tax law. The tax administrator concluded that the deposits failed to qualify because (1) they were not made at a branch outside Rhode Island and (2) they were payable only from Rhode Island. Fleet appealed to the District Court, and after a trial de novo a District Court judge sustained its appeal and held that the Cayman deposits were indeed exempt from the Rhode Island Tax on Bank Deposits Act, G.L.1956 chapter 15 of title 44 (the Bank Deposits Tax Act or the tax act). For the reasons set forth below, we affirm the District Court's judgment.

Facts and Travel

In 1972 Fleet's Providence-based predecessor-in-interest, the Industrial National Bank of Rhode Island (Industrial), filed an application with the Board of Governors of the Federal Reserve System, seeking permission to establish an offshore branch office in Grand Cayman, British West Indies. Later that year the Federal Reserve Board (the Board) granted approval for the offshore branch (the Cayman branch or Cayman facility) subject to several conditions. The branch was to have no contact with the local public; its quarters, staff, and bookkeeping could be supplied by a separate service provider; and its facility had to be subject to continuing federal audits. The Board also informed Industrial that deposits "payable only at a branch * * * located outside of the States of the United States" would be exempt from any limits on interest rates and from certain reserve requirements prescribed by federal regulations. Testimony at trial revealed that the Federal Deposit Insurance Corporation (FDIC) and the Board had conducted annual audits of the Cayman facility since the branch's inception and that the Cayman deposits had maintained their exempt status under these federal regulations.

During the tax period relevant to this case (1986-1988), Fleet advertised the opportunity to invest in its Cayman deposits via a circular mailed to its commercial customers. The circular listed Eurodollar deposits as one of four types of money-market instruments offered by Fleet at that time and explained the deposits' attendant risk-reward factors. ² Two features were common to the major portion of Fleet's Eurodollar deposits at issue here: (1) the depositor was a Fleet commercial customer who maintained at least $100,000 in a Fleet checking account in Providence, and (2) the depositor authorized the transfer of funds from this account for investment in Grand Cayman. Nevertheless, the maintenance of a commercial checking account in Providence apparently was not an absolute requirement to participate in Fleet's Cayman deposits program. As one witness testified, there "could be payment by a cashier's check. The customer could have another maturing investment, a CD that they could roll into the Eurodollar deposit." Or money could be directly wired by an investor into a deposit in Grand Cayman.

Much of the testimony at trial and the banking records proffered there by Fleet centered upon the sequence of events in one particular type of Eurodollar investment transaction: the aforementioned situation where funds utilized for such transactions came from a customer's Fleet checking account (also known as a demand deposit account). ³ In such situations, the commercial customer either already maintained an existing checking account with Fleet in Providence at the time of placing a Eurodollar order or that customer opened such an account to initiate the Eurodollar transaction. Once the customer had placed the requisite moneys into the checking account, the Eurodollar transaction proceeded as follows.

First, the customer would place a Eurodollar deposit order with a sales representative in Fleet's Money Management Division in Providence. The sales representative would write up a sales memorandum (containing the trade date, settlement date, maturity date, principal amount, accrued interest, fees, net amount due, and specification for delivery of proceeds at maturity) and forward the paperwork to an operations team at Fleet. This team would place the order by inputting it into Fleet's computer system. The deposit sums were then withdrawn (debited) by Fleet from the customer's account in Providence and internally reclassified into a Eurodollar liability account in the Cayman branch. Significantly, Fleet would make contemporaneous accounting-book entries upon the debiting of customer accounts in Providence and the subsequent transfer of funds to the Eurodollar accounts in Cayman. Thus, Fleet's accounting records reflected the transactions as liabilities of the Cayman branch. ⁴ At the same time, each Eurodollar transaction was also entered as a liability on Fleet's overall general balance sheet. Ultimately, these funds were deposited in a liability account in Cayman, and the various customer moneys were invested in Eurodollars. ^{5 5}

Upon the maturity date, Fleet would withdraw (debit) the total amount of the commercial customer's principal and accrued interest from the bank's Cayman liability accounts. Again, Fleet's accounting records would record this transaction to show an increase in the liability of Fleet Providence to the commercial depositor. Thereafter, Fleet would credit the money to the individual customer's account in Providence (or to whatever other location the customer desired) and then would send a confirmation slip to the commercial depositor.

Fleet maintained three separate Eurodollar investment accounts in its Cayman branch. Two of those accounts were "time deposit" accounts that contained commercial customer deposits (accounts 22210 and 22213). Both these accounts were interest-bearing and each had its own maturation dates for their respective deposited funds. The funds in account 22210 matured in a period of greater than seven days while the funds in account 22213 matured in less than seven days. ⁶ Fleet's third account in Cayman, account 22214, was a computer-generated "sweep account" which did not earn interest. This account differed from accounts 22210 and 22213 in another critical respect. The funds that were "swept" into account 22214 emanated from accounts belonging to Fleet and not to its individual commercial customers. Therefore, movement of funds from Fleet Providence to Cayman was "an intercompany transaction" and did not require a sales memorandum from the Money Management Division.

Fleet did not report these Eurodollar deposits contained in accounts 22210, 22213, and 22214 on its Rhode Island bank-deposits tax return for the tax years ending November 1986, 1987, and 1988. Their exclusion triggered an audit by the tax administrator, which in turn resulted in the issuance of three notices of deficiency to Fleet, assessing it $673,362.40 for outstanding tax liability. Thereafter Fleet requested administrative review of the assessments. After a formal administrative hearing on December 17, 1990, a hearing officer determined that the Eurodollar deposits did not qualify for a tax exemption under the tax act. The tax administrator thereafter adopted the hearing officer's rationale that the Eurodollar deposits were investments made with dollars already deposited in Rhode Island and were therefore not deposits made by customers at a branch or an office outside the state. Instead, he concluded, "The money is 'deposited' in Rhode Island, and the 'investment' (called a time deposit) is made from Rhode Island." Fleet subsequently paid the additional assessments and accrued interest thereon.

On September 29, 1992, Fleet requested a refund of the tax assessments. After undertaking a second administrative review based upon the submission of a stipulation of facts, the tax administrator again denied Fleet's refund claims. Fleet then filed a complaint in District Court seeking de novo review pursuant to G.L.1956 § 8-8-24. After a trial on December 20-21, 1994, the District...