Spouting Rock Ass'n v. Tax Commissioners

Case on the petitioner's exception to the decision of the Superior Court confirming a tax assessment made by the respondents, tax commissioners of the State of Rhode Island, against the petitioner, as a corporation carrying on business in this State for profit.

Is the petitioner a corporation carrying on business for profit within this State, within the meaning of Sec. 9, Chap. 769, Pub. Laws 1912, or is it, as claimed by the petitioner, a corporation organized for social purposes and consequently exempt from taxation on its intangible property, called its corporate excess, as provided for by Sec. 47 of said chapter. In considering the nature of this corporation we will examine first the powers given to the corporation by its charter, and its organization thereunder, and then the acts of the corporation.

The Bailey Beach Association was incorporated by a special act of the General Assembly on February 5, 1897, and the name was changed to the Spouting Rock Beach Association by amendment May 20, 1897. The charter is as follows:

"Section 1. Robert Goelet, Henry A.C. Taylor and I. Townsend Burden, and their associates and successors, are hereby created a corporation by the name of the BAILEY BEACH ASSOCIATION, for the purpose of buying, selling, leasing, holding and improving real and personal property, bathing privileges, and other rights and of undertaking such measures as may promote the welfare of the City of Newport as a resort for summer residents and owners of cottages, and for the transaction of any business connected therewith and incidental thereto, with all the powers and privileges, and subject to all the duties and liabilities set forth in Chapter 177 of the General Laws, and of all acts in amendment thereof and in addition thereto.

"Section 2. The said Corporation shall have power to make and ordain such Constitution and By-Laws not repugnant to the Constitution and laws of this State and of the United States, as it may think proper, and the same to modify and repeal at pleasure, to take, hold and convey real and personal property to an amount not exceeding two hundred thousand dollars, and which real and personal property may be divided into such number of shares and of such amount as may be determined from time to time by said Corporation and which shall be deemed personal property and be transferred as such according to such rules and conditions as the said Constitution and By-Laws of said Corporation may prescribe.

"Section 3. No stockholder shall sell or transfer his stock or any portion thereof without first giving said Corporation the right to purchase the same at the lowest price for which he is willing to sell such stock, and said Corporation may provide by By-Laws in what way such right of pre-emption shall be exercised by said Corporation.

"Section 4. This act shall take effect from and after its passage."

By the constitution of the corporation the amount of the capital stock is fixed at $200,000, divided into shares of $500 each, with stock certificates in the usual form, signed by the treasurer and secretary.

Clause 5 is as follows: "No assignee of stock in the Corporation, shall be entitled to the privileges of membership, or to a voice in the affairs of the Corporation, until he shall have been regularly elected a member, as herein provided." Without passing on the question of the legality of this particular by-law, it is apparent that the capital stock of this corporation is similar to the capital stock in the ordinary business corporation. It is personal property which can be bought and sold, is transferable and assignable, and on the decease of a stockholder the stock is the property of the estate of such member unless disposed of by will. Ownership of the stock, however, does not carry with it the privilege of membership and the social enjoyment of the use of the property.

In the constitution are the following provisions: "`members' shall be all persons who, having been duly elected and being Stockholders, are members of the Corporation. Every member, except the Corporators and original members, shall be elected by the Governing Committee." No person shall be elected a member unless he is the owner of at least one share of stock. Every member has one vote for each share of stock held by him, at all meetings of the corporation. The control of the business of the corporation, except the sale or mortgage of its real estate, is vested in a governing committee of nine members with power to make rules and regulations which have the force of by-laws, and the by-laws of the corporation may be amended or repealed by the governing committee. The by-laws also provide for the use of the property by "Subscribers" who, upon payment of a subscription and on vote of the executive committee, are entitled to the privileges of members, for the time subscribed for.

In Article III of the Constitution is the following provision:

"Each original member (or subscriber) being the owner of four shares of the capital stock, shall have the privilege at any time of having from one to four bathhouses built and conveyed to him (or to such member as he may designate) by payment to the Treasurer of one hundred dollars for each house desired.

"Said houses to be built by the Association and to be similar to those previously erected on the beach, and to be conveyed to the member by deed or grant, containing same covenants, etc., as in deeds of bathhouses made by Bailey and Smith, the former owners of said beach."

Coming now to the consideration of the acts of the corporation the following facts appear from the statement of the corporation for the year 1914, which was filed by the corporation under protest:

"Total amount of authorized capital stock ........................... $200,000.00 1. Amount issued and outstanding ..................... 107,500.00 Number of shares outstanding ...................... 215 Par value of shares ............................... 500.00 Average fair cash value ........................... 250.00

2. a. Rate of annual dividends paid ..................... none.

2. b. Rate of annual dividends earned ................... none.

3. Amount of bonds, debentures or outstanding indebtedness ..................................... none.

4. Gross receipts within and without R.I. 7,220.35

5. Assets: Real Estate and improvements ......... $93,934.14 Cash ................................. 184.62 Securities ........................... 11,387.10 Profits and loss ..................... 1,994.14 ___________ $107,500.00 Liabilities: Capital Stock ........................ $107,500.00 ___________

6. Assessed valuation: Real Estate. Assessed and Fair Cash value, $41,800.00 Tangible Personal: Assessed and Fair Cash value, $2,000.00

7. Securities: Certificate of deposit, Newport Trust Co. ........................................ $3,000.00 Seven Bonds. C., B. Q.R.R. ............... 7,387.10 One Bond. N.J. Zinc Co. .................... 1,000.00 __________ $11,387.10"

The manner of conducting the affairs of the corporation was thus described by Mr. Paine, the assistant treasurer of the corporation: (Cross-examination). "Q. 74. And from time to time since the purchase of the land, have you given rights to members by giving them also an easement in the real estate? Is that the theory of the Association? A. They purchased stock and that entitled them to bath houses or more, according to the number of shares taken. Q. 79. They assign a bathhouse from time to time, either this one or that one, or any other, from year to year, to the different members, and so long as they have a bathhouse it makes no difference? A. No. It is strange I can't remember. We do ______ Q. 79. Don't you know your method of granting these privileges to members? A. Yes; we do. I was afraid that I might not state it exactly; you see the reason that I hesitate; but we do give a deed to that particular portion of the beach. Q. 80. Occupied by the bathhouse? A. Occupied by the person who purchases it. Q. 81. To the purchaser? A. To the person who ______ Q. 82. Is the owner of the stock? A. Who owns the stock. The Court — A deed in writing? A. A deed in writing. Q. 83. You give a deed in writing? A. In writing. Q. 84. What does that deed convey? A. That conveys — I am stating now as well as I can recall so I shall not make any mistake — that conveys a bathhouse of such a number, we have them all numbered, it conveys that particular number to the person purchasing. The Court — Then what you give is a deed to a particular bathhouse, and the personal use of the beach; is that put on, too? A. A particular bathhouse on the beach. Q. 94. They pay $10 for each house, and the Association takes care of all the houses? A. It does. Q. 95. Now, do you charge admission to come onto the beach? A. Nobody can come on the beach unless by the invitation of a member. Q. 96. The member doesn't have to pay to come on the beach? A. The member doesn't have to pay. Q. 97. Suppose they have guests, what system have you, to entertain a guest? A. A member pays 25 cents for each guest that he brings in. Q. 117. All your revenue comes from the privileges granted at the beach? A. From the dues and privileges. Q. 118. The different privileges at the beach? A. Yes, sir."

The corporation owns ten acres of land on the other side of the street from the bathing beach, also another strip of land on the water side of the street near the beach.

In regard to the finances of the corporation, Mr. Paine testified as follows: "Q. 126. Now you have accumulated some assets which consist of a certificate of deposit of $3,000; that is in the bank at Newport; you have that in hand now? A. In the bank at Newport. Q. 127. You also have seven shares of C., B. Q. property, seven bonds? A. Bonds. Q. 128. Of the C., B. Q.? A. Yes, sir. Q. 130. And you have one other bond of $1,000 face value; is that all of your assets? A. That is all. Q. 131. That is money assets, besides the property at the beach? A. That is all that I am aware of. Q. 132. What do you do with your income from this property? A. We carry it, what there is. Q. 133. Do you keep it in the bank? A. Keep it in the bank; or if it amounts to anything worth while the treasurer buys some stock or something, and deposits it. What we have on hand has been stated, I believe. Q. 134. You try to keep your assets, these assets, the intangible assets, you try to keep them apart as a reserve fund? A. As a reserve fund for any purpose, anything that happens. Q. 135. You attempted to get enough revenue from different privileges at the beach, to pay all the expenses at the beach; is that correct? A. Yes, sir. Q. 136. Have you some cash on call besides these items? A. We have not, only what little cash may be in the bank. Q. 137. A running account? A. A running account. Q. 138. Have you ever sold any of the real estate that the Association originally bought? A. We have never sold any that I am aware of."

In 1897, when this special charter was granted, corporations formed by general law were incorporated in accordance with the requirements of General Laws of 1896, Chap. 176, now Gen. Laws of 1909, Chap. 212. In said Chapter 176 it was provided: "The several classes of corporations shall be formed according to the methods herein prescribed."

"Class I. — Business Corporations."

"Class II. — Insurance and Banking Corporations."

"Class III. — Literary and Scientific Corporations and Miscellaneous Corporations."

The method provided for the creation of a social organization is distinctly set forth in Section 11: "All libraries, lyceums, fire-engine companies, and corporations formed for religious, charitable, literary, scientific, artistic, social, musical, agricultural or sporting purposes, not organized for business purposes, and all other corporations of like nature not hereinbefore otherwise provided for, shall be created in the following manner."

Five or more persons may associate by written articles which shall express their agreement to form a corporation, the name by which it shall be known, the purpose for which it is constituted, and the location. This agreement must be filed with the Secretary of State, and upon payment of a fee of five dollars the Secretary of State issues a certificate and the incorporators are then authorized to carry out the purpose of their agreement as a corporation.

Class I. — Business Corporations, with certain specified exceptions such as railway, quasi-public corporations, etc., are formed in a similar way, with this difference that the written articles of the associates must contain a statement of the amount of capital stock and the par value of each share, and the fee for incorporation in this class is $100.

The apparent purpose of this statute was to provide a simple method of incorporation for Class I. and Class III. corporations, without imposing upon the incorporators the burden and expense of a special application to the legislature, and also to provide for the creation of corporations at times when the legislature was not in session. This corporation at the time of its formation belonged either in Class I. — Business Corporations, or Class III. — Literary and Scientific Corporations, and Miscellaneous Corporations. If the attempt had been made to incorporate under the general law under Class III. and the proposed articles of agreement had contained the statement of the purpose for which the proposed corporation was constituted, as set forth in Sec. 1 of the charter and also the provision for capital stock, it is clear that the Secretary of State could not have issued a certificate of incorporation, as for a corporation formed for social purposes not organized for business purposes. The parties would have been required to incorporate under the Class I. — Business Corporations, and the fact that the corporation was created by special act does not change the nature of the corporation. The language of this charter neither expresses nor implies in any way the formation of a corporation for a social purpose. The instrument is silent on the subject of promoting the social welfare of its members. It states nothing from which it may be inferred that the corporation is constituted for any social object or purpose. The clause "and of undertaking such measures as may promote the welfare of the city of Newport as a resort for summer residents and owners of cottages" is incidental and subsidiary in this section of the charter and does not change the general business character of the powers granted. Social clubs are not organized for the purpose of buying and selling and improving real and personal property. By general law, and without special authority of the State (Sec. 13, Chap. 176, Gen. Laws 1896, now Sec. 13, Chap. 212, Gen. Laws 1909), a social club is entitled to "take, hold, transmit and convey real and personal estate to an amount not exceeding in all one hundred thousand dollars." This power is given to such organizations as an incident to the main purpose, which is the social enjoyment of the members and to enable such social club to provide the place and means for social enjoyment. It is a much more restricted power than the power of buying and selling given by this charter.

The organization of this corporation is different in many respects from that of the ordinary social organization, in which members have equal rights of control. In this corporation the members have a share in the control, and a property interest in the corporation proportionate to their stock holdings. By purchase, gift or inheritance a person may become a stockholder and part owner of the property of the corporation without thereby becoming entitled to any enjoyment of the social privileges of members. Three classes are created by the constitution and by-laws. The stockholders who are the owners of the property, members who are also owners but who must be elected to membership, and pay an initiation fee and dues in order to enjoy the social privileges, and subscribers who are allowed temporarily the social privileges on payment therefor.

There is a distinction drawn between the stockholders, the owners of the property, and the persons who may enjoy the social privileges of its use.

The actual conduct of the corporation affairs discloses the existence of a corporation doing business to a limited extent for the benefit of the stockholders and also engaged in rendering services to a particular class of persons, which latter group constitutes the social organization. The statement, supra, shows that the corporation has acquired a surplus which it calls a reserve and with the surplus it has invested in bonds. The policy of the corporation apparently is to accumulate a surplus and not to divide it in the form of dividends. The result of either method is of benefit to the stockholders and the fact that no dividends have been paid is not material. It is argued that by the use of the words in the tax act "a corporation carrying on business for profit" it was the intent of the legislature to impose the tax on a class of corporations different from the class of corporations heretofore referred to as "Class I. — Business Corporations." We are unable to discover any such intention after an examination of the statutes in question, but even if this contention was sound, in this case the facts show that the corporation has carried on business for profit, and that thus it comes within the letter of the law as well as its spirit. Granting that the amount of business done is less than might have been done, and that the gain is not large, this does not change the character of the corporate activity.

The question in this case is one which involves the interpretation of the laws of this State and more particularly the provisions of Chap. 769, enacted in 1912. No cases have been called to our attention by counsel which have any decisive bearing on the question involved.

In the case of R.I. Hospital Trust Co. v. Rhodes,37 R.I. 141, decided in 1914, this court has defined the meaning of the phrase "carrying on business" and discussed the general meaning of the act in question. The precise issue in this case, however, was not involved in the decision of that case. In consideration of the intent of the original incorporators, as shown by the application for and acceptance of the charter, and the character of the organization effected and the nature and results of the corporation acts, we are of the opinion that the petitioner is a corporation "carrying on business for profit" and consequently that the tax appealed from was properly assessed.

The petitioner's exception is overruled and the case is remitted to Superior Court.