The Wonderful Mr. Olds

In January 2011, Mr. Olds filed an application to renew his business license reporting “actual gross receipts” of $58,432.46 for the period January 2010 to December 2010 (the business license tax is based on the prior years gross receipts) and paid a business license fee of $460.40.

In May of 2011, the City contacted Mr. Olds and advised him that he had not included the sale of 123 Evergreen Magnolia Avenue in his computation of actual gross receipts and that he owed an additional $468.00 in business license fees. Mr. Olds paid the additional business license fee under protests and appealed the City’s imposition of the additional fee.

Mr. Olds argued that the City erred in imposing a business license fee on gross receipts rather than on his gross income. (Mr. Olds essentially argued that the business license fee should not be imposed on the return of capital.)

The Circuit Court granted summary judgment in favor of the City. The Court of Appeals affirmed the Circuit Court. Undeterred, Mr. Olds appealed to the Supreme Court.

The Supreme Court reversed, and in ruling in favor of Mr. Olds examined the meaning of the term “gross income.” S.C. Code Ann § 5-7-30 authorizes municipalities to levy a business license tax on “gross income.” The City of Goose Creek’s Business License Ordinance provided that the license fee shall be computed based upon the gross income for the preceding calendar or fiscal year. The ordinance went on to define “gross income” as “the total revenue of a business received or accrued.” The ordinance also provided:

The Gross Income for business license purposes shall conform to the gross income reported to the State Tax Commission or the State Insurance Commission.

The Supreme Court noted that South Carolina has adopted for income tax purposes the definition of “gross income” under the Internal Revenue Code (S.C. Code § 12-6-1110) and that Section 61(a)(3) of the Internal Revenue Code provides “gross income means all income from whatever source derived, including (but not limited to) . . . (3) Gains derived from dealings in property.”  The Supreme Court looked further at Treasury Regulation 1.61-6(a) which provides in relevant part:

Gain realized on the sale or exchange of property is included in gross income, unless excluded by law . . . .
Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged . . . .

Mr. Olds principally argued that the City’s ordinance requiring that a taxpayers “gross income” for business license tax purposes must “conform” to the gross income reported to the State Tax Commission (now the Department of Revenue). Following this reasoning the Court held:

Thus, under the facts of this case, South Carolina gross income (for income tax purposes) is equal to federal gross income (for income tax purposes). Since Section 61(a)(3) of the I.R.C. defines gross income as “[g]ains derived from dealing in property,” the plain language of this narrow provision in the ordinance required Olds to report the same gross income figure to the City as he would report to the IRS and SCDOR. His gross income under the ordinance is therefore equal to his “[g]ains derived from dealings in property.”

In closing the Court noted two other things. First, of the forty municipalities with business license ordinances in the State, thirty-one do not include the language that gross income “for business license purposes shall conform to the gross income reported to the Tax Commission / SCDOR or the IRS.” Second, Mr. Olds also argued much more broadly that the phrase “total revenues” should be defined as not total receipts but rather should be defined as only gains realized. The Court refused to address that issue.

Why is Mr. Olds wonderful? Mr. Olds is wonderful because he refused to pay an unwarranted and improperly imposed $468.00 business license fee and elected instead to appeal the matter through the court system to the Supreme Court where, after considerable personal expense, he was proved correct. As noted by the Court the broader issue of whether the return of Capital should be included in computing “gross receipts” remains an open issue.