Were proceeds from Company B's and Company C's sales of telecommunications-operation assets subject to Rhode Island business corporation tax or gross earnings tax?

Plain-English summary

Company B and Company C did not owe Rhode Island business corporation tax or gross earnings tax on receipts from selling assets devoted to their telecommunications operations. They were taxed as public service companies under chapter 44-13 rather than as ordinary business corporations under chapter 44-11, and the gross-earnings definition reached sales of property not devoted to utility operations rather than the utility assets sold here.

Company B was a partnership owned by Company X and Company Y and held telecommunications assets in the greater Providence area. Company C held similar cellular-telecommunications assets in the greater Newport area. The ruling states that all assets being sold by B and C were devoted to their telecommunications businesses.

R.I. Gen. Laws § 44-11-1 excluded public service corporations covered by chapter 44-13 from the business corporation tax. Because both sellers were subject to chapter 44-13, the Division concluded that chapter 44-11 did not apply to their sale receipts.

Section 44-13-1 included in gross earnings revenue from transferring, selling, or leasing property not devoted to utility operation. The Division read that language to exclude receipts from B's and C's sale of property that was devoted to telecommunications operations, citing Blackstone Valley Electric Co. v. Clark, AA 94-14 (1994).

What this means for you

Telecommunications and utility businesses

The asset's operational use was decisive. The ruling distinguished property devoted to utility operations from nonutility property whose sale revenue could enter gross earnings.

Deal and finance teams

Document how each asset was used before sale. The holding rested on the representation that every asset sold by Company B and Company C was devoted to telecommunications operations.

Accountants and tax professionals

First identify the seller's tax chapter, then analyze the asset-sale receipts under that chapter. The chapter 44-11 exclusion and chapter 44-13 gross-earnings rule performed different jobs in the analysis.

Common questions

Why did business corporation tax not apply? Company B and Company C were public service taxpayers under chapter 44-13, which § 44-11-1 excluded from chapter 44-11.

Why did gross earnings tax not apply to the sale proceeds? Every asset sold was devoted to telecommunications operations, while the quoted gross-earnings provision covered sale revenue from property not devoted to utility operation.

Would the result necessarily cover nonutility assets? No. The ruling's reasoning specifically distinguished assets not devoted to utility operations.

Did the final ruling decide the treatment of Company X and Company Y? The request named them in its second issue, but the final ruling's conclusion names only Company B and Company C.

How long did the ruling remain valid? Until the applicable statutes were amended in a way requiring a different result.

Citations and references

• R.I. Gen. Laws § 44-11-1 — corporation definition and exclusion for chapter 44-13 public service corporations.
• R.I. Gen. Laws § 44-13-1 — gross earnings and property-sale revenue rule.
• R.I. Gen. Laws § 44-13-2.1 — public service company definition and tax.
• R.I. Gen. Laws § 44-13-4 — corporations referenced by the public-service provisions.
• Blackstone Valley Electric Co. v. Clark, AA 94-14 (1994) — authority cited by the Division for utility-operation asset sales.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1995-03

Original ruling text

Ruling Request No. 95-03

Declaratory Rulings

Ruling Request No. 95-03

Re: Regarding the Sale of Assets Under the Gross Earnings Tax

Request for Ruling

You requested a ruling on behalf of your client, Company A, regarding the sale of assets devoted to telecommunications operations by two related entities, Company B and Company C.

Facts

Company B is a partnership whose partnership interests are held by Company X and Company Y.

Company B holds assets with a greater Providence area situs, which assets are devoted to its telecommunication business.

Company C holds similar assets devoted to the cellular telecommunications business in the greater Newport area.

Company B and Company C will be selling those assets devoted to their respective telecommunications businesses.

All the assets which are being sold by Company B and Company C are devoted to their telecommunications operations.

Rulings Requested

1. The business corporation tax under Title 44, Chapter 11 of the General Laws of Rhode Island will not be imposed on the gross receipts from the sale by Company B and Company C of assets devoted to the cellular communications business in Rhode Island.

2. Gross receipts from the sale of assets devoted to the telecommunications operations of Company B, Company C, Company X, and Company Y, will not be subject to tax under Title 44, Chapter 13 of the General Laws of Rhode Island.

Discussion

The pertinent provisions of R.I.G.L. 44-11-1, 44-13-1 and 44-13-2.1 read as follows:

44-11-1. Definitions. -- For the purpose of this chapter:

(a) The term "corporation" means and includes every corporation , joint-stock company, or association, wherever incorporated, and also a trustee or trustees conducting a business wherein interest or ownership is evidence by certificates or other written instruments, deriving any income from sources within this state or engaging in any activities or transactions within this state for the purpose of profit or gain, whether or not an office or place of business is maintained in this state, or whether or not such income, activities, or transactions are connected with intrastate, interstate, or foreign commerce, except :

(1) State banks, mutual savings banks, federal savings banks, trust companies, national banking associations, building and loan associations, credit unions, and loan and investment companies organized under chapter 20 of title 19;

(2) Public service corporations included in chapter 13 of this title ; (emphasis added)

44-13-1. Domestic corporations subject to tax -- "Gross earnings defined -- Deductions. --(a) Every corporation enumerated in Section 44-13-4, incorporated under the laws of this state shall annually pay a tax or excise to the state for the privilege of existing as such during any part of the preceding calendar year...

(b) "Gross earnings" shall include all income of the same types as operating revenues by the public utilities control authority in the uniform systems of accounts prescribed by the authority for operations, whether or not the corporation is regulated by the public utilities control authority, except those subject to the Rhode Island business corporation tax, within the tax year and, with respect to each company, all income classified with respect to each company, all income classified in the uniform systems of accounts as income from merchandising, jobbing, and contract work, income for nonutility operations and revenues from transfer, sale, or lease of tangible, intangible, or real property not devoted to utility operation,... (emphasis added)

44-13-2.1. Public service companies subject to tax. -- Every public service company hereinafter defined, foreign or domestic, engaging in any of the same businesses within this state of any corporation enumerated in Section 44-13-4 shall annually pay a tax or excise to the state for such privilege of carrying on or being authorized to carry on business within this state during any part of the preceding calendar year...

For purposes of this chapter "public service company" means and includes every joint stock company, association, partnership (limited or general), joint venture or other entity or individual formed for or engaged in any business which, when engaged in by a corporation, is subject to tax under this chapter. (emphasis added)

Pursuant to R.I.G.L. 44-11-1(a) public service corporations are not subject to the tax imposed under Chapter 44-11. Both Company B and Company C are subject to tax under Chapter 44-13; therefore, they are not subject to tax under Chapter 44-11.

Under the facts set forth in the request, all the assets which are being sold by Company B and Company C are devoted to telecommunications operations. As a result the gross receipts derived by those two entities from the sale of those assets would not be included in gross earnings subject to tax under Chapter 44-13. See Blackstone Valley Electric Co. v. Clark , AA 94-14 (1994).

Ruling

1. The business corporation tax under Title 44, Chapter 11 of the General Laws of Rhode Island will not be imposed on Company B or Company C as a result of receiving gross receipts from the sale of their assets devoted to the cellular communications business in Rhode Island.

2. Gross receipts from the sale of assets devoted to the telecommunications operations of Company B and Company C will not be subject to tax under Title 44, Chapter 13 of the General Laws of Rhode Island.

This ruling may be relied upon by this taxpayer and shall be valid until the applicable statutory provisions are amended in a manner requiring a different result.

**R. Gary Clark

Tax Administrator

June 2, 1995**