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Commissioner of Revenue v. Dupee, 423 Mass. 617, 670 N.E.2d 173

Facts

Paul R. Dupee, Jr. and Lizbeth Schiff, nonresidents of Massachusetts, realized a capital gain of $16,712,072 from the sale of a portion of Dupee's interest in Boston Celtics, Inc. (BCI), a Massachusetts Subchapter S corporation. The Commissioner of Revenue denied their application for an abatement of the nonresident income tax on this gain. The Appellate Tax Board found that Dupee did not actively participate in the operations of BCI and that the gain was not derived from a trade or business personally carried on by him in Massachusetts.

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.

Issue

Whether the capital gain realized by Dupee from the sale of his interest in BCI was subject to Massachusetts nonresident income tax.

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.'

Rule

For a nonresident's capital gain to be taxable in Massachusetts, it must be derived from a trade or business personally carried on by the taxpayer in the Commonwealth.

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.'

Analysis

The court analyzed the relevant Massachusetts tax statutes and determined that the source of Dupee's gain was not a trade or business carried on by him in Massachusetts. The court emphasized that the pass-through feature of Subchapter S corporations does not allow the business activities of the corporation to be attributed to the individual shareholders for tax purposes. Additionally, the court found that the step-transaction doctrine did not apply to the transactions involved in the liquidation of BCI.

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 stipulation that Dupee 'did not actively, regularly, or continuously participate in any capacity in the activities constituting the regular operation of [BCI].'

Conclusion

The court affirmed the Appellate Tax Board's decision, concluding that Dupee's capital gain was not subject to Massachusetts tax because he did not personally carry on a trade or business in the state.

The board's ruling on this issue, with which we agree, respects the principle that 'ambiguities in taxing statutes are to be resolved in favor of the taxpayer.'

Who won?

Paul R. Dupee, Jr. and Lizbeth Schiff prevailed because the court agreed with the Appellate Tax Board's conclusion that their capital gain was not taxable in Massachusetts.

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.

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