Court: Supreme Court of Rhode Island; July 18, 1985; Rhode Island; State Supreme Court
An appeal from a summary judgment against the tax administrator involves the Shepard Company, which failed to pay sales taxes from May to September 1973. Prior to June 1973, Shepard's owed over $2 million to James Talcott, Inc. and approximately $500,000 to Rhode Island Hospital Trust National Bank, secured by inventory and accounts receivable. In June 1973, Shepard's entered into an agreement with General Electric Credit Corporation (GECC) to sell all its accounts receivable, with GECC providing a percentage of collections to both Shepard's and its creditors. Shepard's ceased operations in September 1973 and filed for bankruptcy, leading to the tax administrator suing GECC, Talcott, and the bank for unpaid sales taxes. The Superior Court ruled in favor of the defendants, asserting that under G.L.1956 (1980 Reenactment) 44-19-35, which establishes a trust fund for collected sales taxes, the defendants, as creditors, do not fall under the categories liable for the trust fund obligations. The tax administrator's appeal challenges this ruling.
The tax administrator argues that the defendants are liable for Shepard’s delinquent sales-tax obligations based on their constructive knowledge of Shepard's breach of trust, as outlined in 44-19-35(c). The tax administrator claims that granting the defendants' motion for summary judgment was incorrect because the trial justice applied a strict construction to the statute and mistakenly required actual knowledge of the breach. However, the court upheld the trial justice’s strict interpretation, emphasizing that revenue statutes must be construed strictly in favor of the taxpayer.
Subsection (e) of 44-19-35 establishes that the trust fund is enforceable against individuals who have actual knowledge of a breach of trust, with "knowing" interpreted to mean actual knowledge rather than constructive knowledge. The court rejected the tax administrator’s suggestion to equate "knowing" with constructive knowledge, stating that doing so would imply a meaning not supported by the statute.
The court noted that summary judgment is appropriate only when no genuine issues of material fact exist, and in this case, the record indicated no such issues. Subsection (d) creates a presumption of good faith for the defendants, who lacked actual knowledge of the breach. Therefore, the tax administrator's claim of constructive knowledge is insufficient to enforce the trust against the defendants. Consequently, the court affirmed the summary judgment in favor of the defendants, denied the plaintiff’s appeal, and remanded the case to the Superior Court. Additionally, the court maintained consistency in referring to Talcott, despite its name change to Leucadia National Corporation. As of the judgment date, the viable defendants were GECC, Talcott, and the bank. The definition of a "retailer" under the relevant statute encompasses any individual or entity engaged in retail sales for consumption.
