Rosse v. Comm'r of Revenue, 121399
| Decision Date | 13 December 1999 |
| Docket Number | No. SJC-08057,SJC-08057 |
| Citation | 720 N.E.2d 791 |
| Parties | (Mass. 1999) THOMAS A. ROSSE & another <A HREF="#fr1-1" name="fn1-1">1 v. COMMISSIONER OF REVENUE |
| Court | United States State Supreme Judicial Court of Massachusetts Supreme Court |
Appeal from a decision of the Appellate Tax Board.
Suffolk County
Taxation, Income tax, Abatement, Gross income, Deduction from income. Statute, Construction.
Words, "Active conduct of trade or business."
The Supreme Judicial Court on its own initiative transferred the case from the Appeals Court.
William E. Halmkin (David B. Mack with him) for the taxpayers.
Pursuant to G. L. c. 58A, § 13, the taxpayers appeal from a decision of the
Appellate Tax Board (board). The board affirmed the Commissioner of Revenue's
(commissioner's) denial of the taxpayers' applications for abatement of their 1989 and 1990
personal income taxes. The taxpayers, Thomas and Florence Rosse, sought to apply excess
deductions against dividend income under G. L. c. 62, § 2 (c). The board determined that
an abatement should not be granted because the dividend income was not earned in the active
conduct of a trade or business and because the dividend income was not "effectively connected
with the active conduct of a trade or business of the taxpayer." G. L. c. 62, § 2 (c). We
affirm the decision of the board.
1. Facts. a. Rosse Enterprises, Ltd. In 1983, Allied-Signal, Inc. (Allied), acquired Instrumentation
Laboratory, Inc., a medical and scientific instrumentation company founded by Thomas Rosse
(Rosse). In connection with the acquisition, Rosse exchanged his shares in Instrumentation
Laboratory for approximately one million Allied shares at a basis of less than one cent per share.
Because the Allied shares were worth significantly more than one cent, Rosse would have
realized large capital gains if he sold any of the stock and would have incurred significant taxes
on those gains. Therefore, as of 1989 and 1990, Rosse retained almost all of the Allied shares. In
1989 and 1990, Rosse's only connection with Allied was his ownership of the Allied shares and
his receipt of dividend payments from Allied.
In 1983, the year that Allied acquired Instrumentation Laboratories, Rosse established a sole
proprietorship, Rosse Enterprises Limited (REL). REL provided financing and consulting
services for startup companies, slow-growth companies, and other ventures that appeared to have
long-term potential for growth. Rosse hoped to earn money through REL in three ways: (1)
through interest income from companies to which he loaned money; (2) through increases in the
value of his equity position in companies to which he advanced money; and (3) through fees for
management consulting services provided by REL.
the taxpayers received approximately $2.3 million in Allied dividends. The dividends were wired
directly into the Kidder account. Other income also flowed into this account, including capital
gains from the sale of various stocks and from the sale of Rosse's yacht. Rosse drew on the
account both to capitalize REL and to pay personal expenses.
Rosse also funded REL by pledging some of the Allied shares as surety for various bank loans.
Rosse retained unrestricted use of the dividends from the pledged shares.
Occasionally, Rosse needed additional capital to fund REL. In these instances, Kidder, Peabody
advanced money at a margin against the contents of the Kidder account, which included the
Allied shares and their dividends, as well as other dividends.
interest and net capital gains (with various exceptions). § 2 (b) (1). Part B gross income
consists of "the remainder of the Massachusetts gross income." § 2 (b) (2).
In 1989 and 1990, the tax rates for Part A income and Part B income varied significantly.2 Part
A income was taxed at a rate of 10% in 1989 and a rate of 12% in 1990. G. L. c. 62, § 4, as
amended through St. 1975, c. 684, § 41, and G. L. c. 62, § 4, as amended through St.
1990, c. 121, §§ 24-26. Part B income was taxed at a rate of 5% in 1989 and a rate
of 5.2% in 1990. Id. The more than $2 million of Allied dividends were Part A income, taxed at
the higher rate. The taxpayers sought to reduce the taxes on their Part A income.
The taxpayers sought an abatement under G. L. c. 62, § 2 (c). Generally, under G. L. c. 62,
a taxpayer may apply business and various other expenses as deductions against Part B income.
According to the taxpayers, the dividends from the Allied shares which were pledged for loans in
connection with REL were "effectively connected" with the "active trade or business" of REL.
The commissioner disagreed and denied both abatement applications. The taxpayers appealed to
the board, which upheld the commissioner's denial of the abatements.
2. The board's findings of fact. General Laws c. 58A, § 13, limits the scope of our review
of the board's findings of fact: "The decision of the board shall be final as to findings of fact."
However, "the court may consider whether the evidence in the case is sufficient to support the
board's conclusion of law." Kennametal, Inc. v. Commissioner of Revenue, 426 Mass. 39, 43
(1997), cert. denied, 523 U.S. 1059 (1998), citing Assessors of Weymouth v. Curtis, 375 Mass.
The taxpayers make two claims as to the board's findings of fact. The first claim involves the
board's finding that the taxpayers' evidence as to the number of Allied shares pledged against
loans to REL was unsupported by the record. The board found that the taxpayers had presented
evidence that approximately one-half of the Allied shares were committed as pledges against
loans to REL during the 1989 and 1990 tax years. The taxpayers argue that the board's finding is
contrary to the evidence presented. We disagree.
After reviewing the documentation provided by the taxpayers, we conclude that the board's
findings of fact are sufficiently supported by the evidence.3 The board's decision carefully sorts
through copious loan documents to determine which pledges were substantiated in writing. The
board properly exercised its discretion in not crediting the testimony of REL's accountant that
more shares had been pledged than were explicitly evidenced in writing.
The taxpayers also claim that the board's findings as to the extent of Rosse's involvement with
the companies in which he invested were contrary to the evidence presented. We disagree.
The board found that Rosse was, at times, actively engaged in providing advice and assistance to
a few of the companies with which REL had a relationship. However, the board properly
exercised its discretion in not crediting oral testimony that this involvement continued
throughout 1989 and 1990. Nothing in the record contradicts the board's finding that Rosse's
involvement was not regular and continuous throughout the tax years in question.
which accords with the record, the board's conclusion that Rosse's activities did not rise to the
level of "active conduct" was correct.
We also note that REL was not a "venture capital firm" or "business promoter" as those terms
generally are understood. General Laws c. 62, § 1, provides that "[w]hen used in this
chapter . . . 'Trade or business' shall have the same meaning as in section sixty-two of the
[Internal Revenue] Code." A number of decisions under the Code clarify when investments and
other activities constitute a "trade or business."
"Devoting one's time and energies to the affairs of a corporation is not of itself, and without
more, a trade or business of the person so engaged." Whipple v. Commissioner of Internal
Revenue, 373 U.S. 193, 202 (1963). In the context of deductions for bad debts connected with a
trade or business of a taxpayer, the Tax Court has noted that "the management of one's
investment, regardless of how extensive, is not a trade or business, and a loan from a shareholder
to a corporation for the purpose of protecting or enhancing the shareholder's investment in the
corporation is a nonbusiness debt." Bell v. Commissioner of Internal Revenue, T.C. Memo.
1998-136 (1998).
On the other hand, the "business of promoting business entities" has been recognized under the
Code. Id. "To be engaged in a trade or business of promoting business entities, a taxpayer must
seek compensation 'other than the normal investor's return' and must conduct the activity for a fee
or...
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