Court: Court of Appeals of Washington; March 3, 1987; Washington; State Appellate Court
Ben Browning appeals a Superior Court judgment that denied his request for a refund of business and occupation (B.O.) and use taxes. Browning argues that the trial court incorrectly determined that (1) interest from real estate contracts was subject to B.O. taxes, and (2) he was ineligible for an exemption from a use tax on his airplane. The appellate court found no error in the trial court's conclusions and affirmed the judgment.
The Washington State Department of Revenue had assessed Browning for unpaid B.O. and use taxes for the period from January 1, 1976, to June 30, 1980. Browning had paid the taxes and subsequently filed for a refund under RCW 82.32.180 in Thurston County Superior Court. The trial court's unchallenged findings indicate that Browning started constructing and renting residential properties in 1963, financed through loans. By 1973, he began selling these properties, both outright and via real estate contracts, which required purchasers to pay interest on the unpaid balances. The Department assessed B.O. tax on the interest Browning received during the audit period.
Regarding the use tax, Browning owned a Beechcraft King Air airplane from 1977 to 1980, using it for personal business 15.8% of the time and leasing it to several companies for various purposes, including charter services. Most flights by lessees were in interstate or foreign commerce or outside Washington.
The B.O. tax is imposed on the privilege of engaging in business, defined as activities aimed at gaining benefit or advantage. Gross income includes interest, but deductions for B.O. tax obligations must be narrowly construed, with the taxpayer bearing the burden of proof. The court examined whether Browning's interest from real estate contracts could be considered "derived from investments." Citing a Supreme Court ruling, it concluded that the interest from real estate contracts does not qualify as derived from investments, thus affirming the trial court's decision.
The court in O'Leary assessed whether an investment was "incidental" to a business's main purpose, stating that such a distinction determines which income qualifies for exemption from the B. O tax under RCW 82.04.4281. The court ruled that real estate contracts held by an investment partnership were not incidental investments, and thus their income was not exempt. Similarly, the trial court found that Browning failed to prove entitlement to a statutory deduction, concluding that the interest income from real estate contracts was subject to the B. O tax as part of his gross income. Browning's claim that his business was less developed than that in O'Leary was deemed irrelevant, as the key issue was his qualification for a deduction, which he did not contest.
Regarding the use tax, imposed for using tangible personal property in Washington, Browning sought an exemption for his Beechcraft King Air airplane under RCW 82.12.0254, applicable if the airplane was used primarily in interstate or foreign commerce for hire. The trial court applied the "last antecedent" rule, concluding that the exemption pertained to the act of transporting property and persons for hire, not merely to the airplane itself. Since Browning did not demonstrate that he or his lessees used the airplane for such transporting purposes, the exemption was denied. The trial court's decision was affirmed, emphasizing that leasing the airplane alone did not satisfy the exemption criteria. Unchallenged findings indicated sales of houses during the audit period, but the timing of some sales remained unclear.
