Bank of Commerce v. Woods

• Court: Tennessee Supreme Court
• Writing for the Court: FONES; BROCK
• Citation: Bank of Commerce v. Woods, 585 S.W.2d 577 (Tenn. 1979)
• Decision Date: 13 August 1979
• Parties: BANK OF COMMERCE, a Tennessee Banking Corp., with offices and principal place of business in Morristown, Hamblen County, Tennessee, Appellant, v. Jayne Ann WOODS, Commissioner of Revenue, State of Tennessee, Nashville, Tennessee, Appellee.

Page 577

585 S.W.2d 577

BANK OF COMMERCE, a Tennessee Banking Corp., with offices and principal place of business in Morristown Hamblen County, Tennessee, Appellant, v. Jayne Ann WOODS, Commissioner of Revenue, State of Tennessee, Nashville, Tennessee, Appellee.

Supreme Court of Tennessee.

Aug. 13, 1979.

H. Scott Reams, Taylor, Tilson, Inman & Reams, Morristown, for appellant.

William M. Leech, Jr., Atty. Gen., Jim G. Creecy, Asst. Atty. Gen., Nashville, for appellee.

OPINION

FONES, Justice.

In a suit by plaintiff, Bank of Commerce, to recover sales taxes paid under protest the trial court granted the Commissioner's motion for summary judgment. The sales taxes were incurred by the owners of a food store. The Bank held a security interest in the inventory, furniture, fixtures and equipment, and after default, the owner-debtor transferred the secured property to the Bank. The Bank operated the food store as a going business for a short time and then sold it to a third party.

The issue is whether the Bank was a successor of, and liable for the sales taxes owed by, delinquent taxpayers who sold or quit a business, within the purview of T.C.A. § 67-3025.

The Bank's principal defense is that it provided no cash "purchase money," as that term is used in the statute, to the taxpayers and thus was not in a position to protect the State's interest because it had no fund from which to withhold the delinquent sales tax. Our analysis of the relevant case law from other jurisdictions, including cases relied upon by the Bank of Commerce, persuades us that the Bank should be held liable for its transferor's sales tax, and we affirm the judgment of the trial court.

The facts of the case are undisputed. Prior to June 1976 the Bank of Commerce made a secured loan of $50,000 to Tucker Enterprises in order to finance the operation of a convenience food store in Morristown. In June of 1976 Tucker Enterprises sold the store to Clifford and Pelle Stepp, who assumed the indebtedness to the Bank, then in the amount of $44,627.59, as part of the purchase agreement. Between June 1976 and February 1977 the Stepps became delinquent in their payments on the note, and in February 1977 the parties restructured the note to include and bring to a current status the principal and interest, a total of $49,200. At all times the Bank of Commerce had a perfected security interest in all inventory, furniture, equipment and fixtures in the Stepps' store.

The Stepps again fell behind on their payments, and when they failed to bring their note to current status by June 1977 the Stepps agreed to transfer their entire interest in the business to the Bank of Commerce in consideration of a settlement of the $49,200 note. The Bank of Commerce contends that it desired to avoid a foreclosure because of the possible harm to the Stepps' credit record, as well as the adverse effect on the store itself. According to the deposition of C. G. Williams, president of the Bank of Commerce, the Bank appreciated the business advantages in avoiding a foreclosure:

"Well, at that particular time, the new convenience store had just opened across the street and this business is located right beside a Holiday Inn, and right at an entranceway to a large subdivision. And we felt that had we closed that business down, that with the neighborhood business they had acquired and had a following from, would immediately shift across the street to the new store. It was tough enough to lose or have the possibility of losing a share of the business anyway as a going concern. But if we closed the doors and they remained closed for some period of time during foreclosure proceedings, we felt we would have serious difficulties getting that business back.

More than that, though, is probably the fear of the drastic reduced value of that inventory during the period it would be closed."

Thus, the Stepps executed a "bill of sale" as "sellers" to the Bank of Commerce as "buyer," and the Bank proceeded to find a new owner for the store. On July 1, 1977, the Bank transferred its interest in the store to the present owner, Leonard Dryer, who agreed to assume the outstanding balance on the Stepps' note. A notice of the state tax lien was recorded in the Registrar's Office of Hamblen County against Clifford and Pelle Stepp on September 16, 1977. The Commissioner of Revenue made a final demand for payment on the Bank of Commerce pursuant to the successor liability provisions of T.C.A. § 67-3025, and on December 21, 1977, the Bank paid $3,634.41 to the Department of Revenue under protest.

The Bank of Commerce filed this lawsuit in January 1978 for a refund plus interest, and after both parties moved for summary judgment based upon the pleadings, the deposition of the president of the Bank of Commerce and supporting briefs, the trial court granted judgment for defendant and ruled that the Bank of Commerce was not entitled to a refund since it was liable under T.C.A. § 67-3025 for the sales tax owed by the Stepps.

T.C.A. § 67-3025 provides as follows:

"67-3025. Settlement of tax on quitting business Collection of tax from debtor or dealer. (a) If any dealer liable for any tax, interest or penalty levied hereunder shall sell out his business or stock of goods, or shall quit the business, he shall make a final return and payment within fifteen (15) days after the date of selling or quitting the business. His successor, successors, or assigns, if any, shall withhold sufficient of the purchase money to cover the amount of such taxes, interest, and penalties due and unpaid until such former owner shall produce a receipt from the commissioner showing that they have been paid, or a certificate stating that no taxes, interest, or penalties are due. If the purchaser of a business or stock of goods shall fail to withhold the purchase money as above provided, he shall be personally liable for the payment of the taxes, interest, and penalties accruing and unpaid on account of the operation of the business by any former owner, owners, or assigns.

(b) In the event any dealer is delinquent in the payment of the tax herein provided for the commissioner may give notice of the amount of such delinquency by registered mail to all persons having in their possession or under their control any credits or other personal property belonging to such dealer, or owing any debts to such dealer at the time of receipt by them of such notice, and thereafter any person so notified shall neither transfer nor make any other disposition of such credits, other personal property, or debts, until the commissioner shall have consented to a transfer or disposition, or until thirty (30) days shall have elapsed from and after the receipt of such notice. All persons so notified must, within five (5) days after receipt of such notice, advise the commissioner of any and all such credits, other personal property, or debts, in their possession, under their control, or owing by them, as the case may be.

(c) Any violation of the provisions of this section shall be a misdemeanor and punishable as such. (Acts 1947, ch. 3, § 7; C.Supp. 1950, § 1248.63 (Williams, § 1328.29).)"

Although there are no decisions construing this statute in Tennessee, cases from other jurisdictions with similar statutes have discussed the purpose behind successor liability statutes. It generally has been recognized that the purpose of such statutes is to insure the collectibility of sales taxes due the state by imposing liability upon the purchasing corporation, which is in a financially better position to collect the tax ordinarily than the vendor corporation, which is quitting the business. The clear intention of statutes such as T.C.A. § 67-3025(a) is to provide that the "tax debt . . . follow the business, its assets or any portion of them" Tri-Financial Corp. v. Department of Revenue, 6 Wash.App. 637, 641, 495 P.2d 690, 692 (Ct.App.1972); See also Annot.:...