ORDERS:
FINAL ORDER
I. Introduction
William L. McRoy (McRoy) and BMK Distributors, Inc. (BMK) seek to have a vessel not taxed by
Colleton County for tax year 1997 since they contend the vessel was not located in South Carolina
for property tax purposes. The Colleton County Auditor (Auditor) opposes McRoy's and BMK's
position. The Auditor argues the vessel is a pleasure boat primarily docked in Colleton County, and,
therefore, is presumed taxable in Colleton County for the 1997 tax year.(1)
After a determination of the facts and an application of the law to those facts, I find that BMK is the
owner of the vessel Therapeutic, that BMK is a not a resident of South Carolina for property tax
purposes, and that the vessel is not taxable for the 1997 tax year. Accordingly, BMK may not be
taxed by Colleton County on the ownership of the vessel Therapeutic for the 1997 tax year.
II. Issue
Is McRoy's and BMK's vessel, Therapeutic, taxable by Colleton County for the tax year 1997?
III. Analysis
1. Positions of Parties
McRoy argues the vessel is not taxable in South Carolina since the vessel, owned by a Delaware
corporation for business use for entertaining customers and pleasure use by corporate officers, has
a situs in Florida where it is docked usually six months of the year. The Auditor, on the other hand,
argues the vessel is a pleasure boat primarily docked at the personal dock of a corporate officer, Mr.
William McRoy, in Colleton County. Further, the corporate entity is not the true owner of the vessel
but rather Mr. McRoy, who is a legal resident of Colleton County, is both the owner and the person
in charge of this boat. Accordingly, the Auditor asserts that since no other taxable situs is shown
outside of Colleton County, Colleton County is the taxable situs of the vessel.
2. Findings of Fact
The documented vessel Therapeutic is a forty-four foot boat registered with the Coast Guard as a
recreational vessel. The vessel's home port is Miami, Florida as verified by the Coast Guard
documentation. That documentation also establishes that the vessel's owner is a Delaware
corporation identified as BMK Distributors, Inc. (BMK). While BMK owns the vessel, BMK does
not pay a property tax on the vessel to Delaware or to any governmental entity including Florida.
Rather, BMK pays only a franchise tax in Delaware and that tax is not a property tax on the vessel.
The corporation BMK is a closely held corporation with two stockholders consisting of William
McRoy and his wife June McRoy. William McRoy is the President and June McRoy is the Secretary
and Treasurer of the corporation. The corporation's principal place of business outside Delaware
is Walterboro, South Carolina. Likewise, Walterboro is the address of the sole stockholders and sole
directors, William McRoy and his wife June McRoy. While the formalities of corporate life have
not been rigorously followed by BMK, the corporation holds a corporate charter from Delaware and
exists solely to own and maintain the vessel Therapeutic.
The vessel Therapeutic is used for two purposes. First, the vessel is used to entertain both existing
customers and potential customers of a related corporation known as BMK Distributors, Inc. of
South Carolina (BMK II). BMK II, whose business is selling and servicing tires, is authorized to use
the vessel as an entertainment facility in an effort to encourage business sales for BMK II. The
second use of the vessel is for the personal use of BMK's stockholders. William McRoy and his
friends and family use the vessel for their personal enjoyment. In fact, the personal use by William
McRoy, his friends and his family is the majority use of the vessel. The vessel is used for both
purposes regardless of whether it is in South Carolina or in Florida.
Given the type of use of the vessel, the craft is not berthed at a single port for an entire year. Rather,
for the 1997 tax year involved in this dispute, the vessel was in Colleton County for the six month
period of May through October and in Florida for the six month period of January through April and
November through December. Such a pattern is consistently followed from year to year since the
vessel is in port in South Carolina rather than in Florida during the months typically associated with
"hurricane season." Consistent with that pattern, the vessel was in Florida on December 31, 1996
and remained in Florida until departing for South Carolina in April of 1997. When the vessel is
moored in South Carolina, it is kept at a docksite on Big Bay Creek, Edisto Beach, Colleton County.
The docksite is owned by William McRoy who has his residence at 315 Lynnwood Rd., Walterboro,
S.C.
Since the Coast Guard documentation and the South Carolina Tax Commission's records listed Mr.
McRoy as the "managing owner," the Auditor sent to Mr. McRoy at his personal residence a
Personal Property Return seeking a valuation for the boat. The Auditor requested that Mr. McRoy
file the return on behalf of BMK. No return was filed.
Accordingly, the Auditor established a value for the vessel of $65,238 based on available market
publications, placed that value for taxation on the 1997 tax rolls, and caused to be issued a tax bill
to BMK in care of Mr. McRoy in October of 1997. Mr. McRoy opposes the Auditor's determination
and brought this matter as a contested case.
3. Conclusions of Law
Based upon the Findings of Fact, the following Conclusions of Law are entered:
The relevant portion of the controlling statutory language is found at S.C. Code Ann. § 12-37-210
(1976):
All real and personal property in this State, personal property of residents of this
State which may be kept or used temporarily out of the State, with the intention of
bringing it into the State, . . . shall be subject to taxation.
As to personal property, this section taxes two categories of property. The first is all personal
property "in this State." The second is property that is not "in this State" but is temporarily out of
the State. The first category has no statutory limitation on whether the property is owned by a
resident or a non-resident. In other words if the property is "in the State" the property is taxable
regardless of the residency status of the owner. The second category, however, does depend upon
the residency status of the owner. The second category taxes personal property even if it is not in
this State so long as the personal property is owned by a South Carolina resident and is kept or used
temporarily out of the State, with the intention of bringing it into the State.
Accordingly, to answer the dispute here two inquires must be made. First, what is the residency of
the owner of the vessel? If the vessel in dispute here is owned by a resident, the vessel is taxable
regardless of whether it is in this State so long as the vessel is "kept or used temporarily out of the
State, with the intention of bringing it into the State." S.C. Code Ann. § 12-37-210 (1976). On the
other hand, if the vessel is owned by a non-resident, the vessel is taxable only if the property is "in
this State." Id. Thus, if the answer to the residency inquiry is that the owner of the vessel is a South
Carolina resident, then, regardless of whether the vessel was in this State, the second inquiry asks
whether the vessel was kept in Florida temporarily with the intention of bringing it back to South
Carolina. However, if the answer to the residency inquiry is that the owner of the vessel is a
Delaware resident, then the second inquiry is whether the vessel was "in this State" for purposes of
1997 property taxes.
A. Residency Inquiry
In determining the residency status of the owner, obviously, that issue requires identifying the owner
first and then establishing the residency of that owner.
1. Identity of Owner
Who is the owner of Therapeutic? The Auditor argues that the true owner of the vessel is William
McRoy, a Colleton County resident. The Auditor reaches this position by asserting that the alleged
corporate owner, BMK, is only a shell corporation that must be disregarded. I cannot agree with the
Auditor. Rather, the owner of the property is BMK, and the corporate structure cannot be
disregarded in a manner that will place ownership in William McRoy.
a. Ownership As Of Record
First, the evidence is clear that BMK is the title owner of the vessel. Mr. McRoy testified that BMK
owned the vessel, the Coast Guard documentation shows BMK as the owner, and the South Carolina
Tax Commission's (now DOR's) property listing identifies BMK as the property owner. No contrary
persuasive evidence refutes this position.
b. Piercing the Corporate Structure
Second, given the fact that title ownership is in BMK, the Auditor seeks to disregard that ownership
by seeking to establish that the corporation is a sham and that, therefore, the assets are really owned
by the two shareholders, William and June McRoy, residents of Colleton County. The evidence here
does not allow a conclusion to disregard the corporation.
Piercing the corporate veil is not to be applied without substantial reflection and the party seeking
to have the corporate identity disregarded has the burden of proving the doctrine should be applied.
Sturkie v Sifly, 280 S.C. 453, 313 S.E.2d 316 (Ct. App.1984). In general, the law will disregard the
corporation and treat the entity as an association of persons when the alleged corporation is used to
protect fraud, justify wrong, or defeat public policy. Id. More specifically, to establish the doctrine,
a two prong test is established:
The first prong of the test looks to the observance of corporate formalities by the
dominant shareholder and consists of the following factors: (1) whether the
corporation was grossly undercapitalized; (2) failure to observe corporate formalities;
(3) non-payment of dividends; (4) insolvency of the debtor corporation at the time;
(5) siphoning of corporate funds by the dominant stockholder; (6) non-functioning
of other officers or directors; (7) absence of corporate records; and (8) the fact that
the corporation was merely a facade for the operations of the dominant stockholder.
Sturke 280 S.C. 453, 313 S.E.2d 316; Multimedia Publishing of South Carolina.
Inc. v. Mullins, S.C. , 431 S.E.2d 569 (1993); Cumberland Wood Products v.
Bennett, 308 S.C. 268, 417 S.E.2d 617 (Ct. App.1992); C. T. Lowndes v. Suburban
Gas & Appliance, 307 S.C. 394, 415 S.E.2d 404 (Ct. App.1991). The second prong
of the test requires that there be an element of injustice or fundamental unfairness if
the acts of the corporation are not regarded as the acts of the individual. In proving
fundamental unfairness, the plaintiff must establish (1) the defendant was aware of
the plaintiff's claim against the corporation; and (2) acted in a self-serving manner
with regard to the property of the corporation and in disregard of the plaintiff's claim
in the property. Sturkie, 280 S.C. 453, 313 S.E.2d 316. The essence of the fairness
test is "simply that an individual businessman cannot be allowed to hide from the
normal consequences of carefree entrepreneuring by doing so through a corporate
shell." Multimedia Publishing, 314 S.C. 551, 556, 431 S.E.2d 569, 573."
Wilson v. Friedberg, 323 S.C. 248, 473 S.E.2d 854 (Ct. App. 1996) Certiorari Granted June 4, 1997.
As to the first prong of the test, the only evidence in this case is the testimony by Mr. McRoy that
the corporate formalities have not been fully observed. However, the evidence is lacking in many
of the other factors. For example no evidence explains whether the corporation is grossly
undercapitalized; whether a non-payment of dividends exists; whether insolvency by the corporation
is a current or potential problem; whether funds have been siphoned from the corporation to a
dominant stockholder; or whether there exists non-functioning officers or directors.
Further, and in any event, the second prong of fairness is also not met. No unfairness or injustice
results from not transforming the corporate acts of BMK into the acts of Mr. McRoy. The only
corporate acts proven in this case are that BMK owns and maintains a vessel. No unfairness results
from leaving those acts as acts of the corporation. For example, it is well settled that a corporation
may with impunity own and operate assets even when done so as a means of avoiding personal
liability. See Bartle v Home Owners Coop., Inc. 127 N.E.2d 832, 833 (N.Y. 1955) ("The law
permits the incorporation of a business for the very purpose of escaping personal liability."). Thus,
BMK and Mr. McRoy are entitled to minimize McRoy's personal liability. Likewise, no unfairness
results by the creation of a corporation in hopes of minimizing taxation since one is free to plan for
reductions in taxation. See Gregory v. Helvering, 55 S.Ct. 266, 293 U.S. 465 (1935) ("The legal
right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid
them, by means which the law permits, cannot be doubted."). Accordingly, the second prong is not
satisfied in that no element of injustice or fundamental unfairness is created by not transferring the
corporation's acts to Mr. McRoy. Thus, BMK is the owner of the vessel and the corporate entity is
not pierced.
2. Residency of Owner
Since personal property of "residents of this State" may be taxable even if the property is not within
the State, a determination must be made of whether BMK is a resident of South Carolina. For
property tax purposes, the answer is no; BMK is not a resident of South Carolina, but rather is a
resident of Delaware.
In reaching this conclusion, I find that S.C. Code Ann. § 12-37-210's use of the term "resident"
means "legal resident" or "domicile." I recognize that a corporate "domicile" in one state does not
preclude residency in another state. See International Mill. Co. v Columbia Transp. Co. 292 US
511, 78 L ed 1396, 54 S Ct 797 (1934) (a corporation may be domiciled in one state and resident in
another since its legal domicil in the state of its creation presents no impediment to its residence in
a real and practical sense in the state of its business activities). However, here, in deciding the intent
of the General Assembly's use of the term "resident," the more persuasive view is that for property
tax purposes the term means the state where the corporation has its "domicile."
While no specific mandate of either a property tax statute or case law requires this conclusion, the
view is consistent with the long standing published interpretation of the Attorney General. Such
views are entitled to respectful consideration. Williams v. Morris , 320 S.C. 196, 464 S.E.2d 97
(1995). For thirty years, the Attorney General's interpretation has equated the property tax law's
use of the term "reside" to mean "domicile." See 1968 S.C. Op. Atty. Gen. 87 ("It is, therefore, the
opinion of this office that the term 'reside,' as used in the statute [12-37-890], means legal residence,
. . . ."). While the opinion addresses a different statute (12-37-890 rather than 12-37-210), the
language interpreted (reside) and the statutes focus (taxation of personal property) are essentially
the same and present persuasive rational. Further, for income tax purposes as well, "residing" has
been construed to be synonymous with "legal resident" or "domicil." Phillips v. South Carolina
Tax Commission, 195 S.C. 472, 12 S.E.2d 13 (1940). Accordingly, BMK is a "resident" of
Delaware as established by the charter issued by that state. See In Ex parte Schollenberger, 96 U.
S. 369, 377 (1877) (A corporation's "residence of its citizenship" is "at the place where it is located
by or under the authority of its charter.").
B. "In This State" Inquiry
Thus, since the vessel Therapeutic is owned by a non-resident, the issue is whether the vessel was
"in this State" for purposes of property taxation for 1997. The practical question arises of how does
one decide when highly mobile personal property such as that of an ocean-going vessel is "in this
State."
While no appellate decision of our State defines the phrase "in this State" as used in S.C. Code Ann.
§ 12-37-210 (1976), at least one decision treats the language as requiring the establishment of a
taxable situs in South Carolina. Atkinson Dredging Co. v. Thomas, 266 S.C. 361, 223 S.E.2d 592,
594 (1976). However, that case does not establish what factors will give rise to a taxable situs for
mobile personal property. Rather, that issue was conceded by the taxpayer and in fact was never in
dispute. Id. (The taxpayer stipulated that its property of at least two barges and four boats had a
taxable situs in Charleston County and that the only issue in dispute was whether the tax on its
property should be apportioned).
While no South Carolina appellate court has set factors determining taxable situs for mobile
property, the broad parameters for such property have been well established.(2)
Personal property may properly be assessed for taxation only in the state in which it
has a situs. By an ancient fiction generally recognized by comity and expressed by
the maxim 'mobilia sequuntur personam,' the situs of personal property of every
description, however ponderous and unwieldy and wherever actually kept or located,
was at the domicil of the owner and subject to the jurisdiction of the owner's
sovereign; in legal contemplation its location changed with every change of the
owner's domicil. This rule expresses a comprehensive and general rule applicable to
the taxation of personal property, especially intangible personal property. Domicil
of the owner is an important and often a controlling factor. It is prima facie the place
of taxation. In the absence of statutes to the contrary, and of anything to show it has
acquired an actual situs elsewhere, the general rule is that for purposes of taxation
all personal property has its situs at the domicil of the owner; unless it has acquired
a definite situs elsewhere, or unless other provision is made by statute, such property
is taxable to the owner in the county, city, or town or other taxing district in which
the owner lives and has his domicil. (Emphasis added)
71 Am. Jur. State and Local Taxation, § 655
In deciding if property has "acquired a definite situs elsewhere" than the owner's domicile, the
general rule is that foreign corporations' vessels that are utilized either exclusively or for an
indefinite period may acquire a taxable situs in a non-domiciliary state but vessels that are in the
state only temporarily do not acquire a taxable situs. 84 C.J.S. Taxation § 115b (1954). Has
Therapeutic acquired an actual situs in South Carolina? No, not under the facts of this case.
At best the vessel is in South Carolina temporarily for the express purpose of avoiding hurricane
season in the state of Florida. Actual situs in South Carolina requires more than a temporary
presence. See Old Dominion S.S. Co. v. Virginia, 198 U.S. 299, 25 S.Ct. 686 (1905) (taxation
found proper by the non-domiciliary state since the vessels had been continuously and exclusively
engaged in navigation in Virginia's waters for years). Further, the mere counting of time between
two or more ports used by the vessel is an unreliable means of determining whether an actual situs
has been acquired. See Southern Pac. Co. v. Commonwealth of Kentucky, 222 U.S. 63, 32 S.Ct.
13 (1911) ("A ship is not intended to stay in port, but to navigate the seas. Its stay in port is a mere
incident of its voyage, and to determine that it has acquired an actual situs in one port rather than
another would involve . . . great uncertainty . . . ."). . Thus, since Therapeutic has only a temporary
presence in Colleton County, the County may not tax the vessel for the 1997 tax year.(3)
IV. Order
The vessel Therapeutic is owned by a non-resident, BMK, a resident of Delaware. As property
owned by a non-resident, Therapeutic is taxable by Colleton County only if the property has a
taxable situs there. Given that the legal situs of the vessel is Delaware, a mere temporary presence
in South Carolina is insufficient to establish an actual situs sufficient to allow taxation. Accordingly,
the Colleton County Auditor is ordered not to tax the vessel Therapeutic for the 1997 tax year.
AND IT IS SO ORDERED.
__________________________
RAY N. STEVENS
Administrative Law Judge
Dated: July 17, 1998
Columbia, South Carolina
1. The Auditor's disagreement with McRoy's determination places jurisdiction in the
Administrative Law Judge Division (ALJD). S.C. Code Ann. § 12-60-2920 (Supp. 1997).
2. No analysis is given here of a commerce clause approach to property taxation. Neither
the taxpayer nor the county raised that provision and that issue is not before me.
3. Decisions exist holding that a non-resident's personal property is not taxable if the
property is outside of the State on December 31 of the year preceding the tax year. See Eugene
F. Young v. Charleston County Auditor, 97-ALJ-17-0150-CC, December 18, 1997 and In re:
John Doe, S.C. Tax Commission Decision #94-8, January 12, 1994. Since the lack of a taxable
situs in this case makes it unnecessary to reach that issue, I do not address either the correctness
or the invalidity of that argument. However, it is noteworthy that Therapeutic was in Florida on
December 31, 1996. |