Beganovic v. Muxfeldt

• Decision Date: 20 November 2009
• Docket Number: No. 07-1679.,07-1679.
• Citation: 775 N.W.2d 313
• Parties: Mirsad BEGANOVIC and Minka Beganovic, Appellees, v. Joshua MUXFELDT and Lonnie G. Muxfeldt, Appellants.
• Court: Iowa Supreme Court

775 N.W.2d 313

Mirsad BEGANOVIC and Minka Beganovic, Appellees, v. Joshua MUXFELDT and Lonnie G. Muxfeldt, Appellants.

No. 07-1679.

Supreme Court of Iowa.

November 20, 2009.

Matthew J. Haindfield of Bradshaw, Fowler, Proctor & Fairgrave, P.C., Des Moines, for appellants.

Richard O. McConville of Coppola, McConville, Coppola, Hockenberg & Scalise, P.C., West Des Moines, for appellees.

CADY, Justice.

In this case, we must decide if a person named as a co-owner on a certificate of title to a motor vehicle after purchasing the vehicle with another person solely to assist the cobuyer in obtaining financing for the purchase is exempt from the imposition of consent-owner liability under Iowa's owner responsibility law. The district court determined the person was liable as a matter of law, and the court of appeals affirmed. On further review, we affirm the decisions of the district court and the court of appeals.

I. Background Facts and Proceedings.

Lonnie Muxfeldt is a certified public accountant. He owns and operates an accounting firm in Harlan called Muxfeldt Associates CPA, P.C. Lonnie and the corporation were co-owners of a 2001 Dodge Dakota pickup. The pickup was purchased in 2001 for approximately $25,000 and was completely depreciated for tax purposes in the year of the purchase.

In 2004, Lonnie decided to purchase a 2004 Dodge Durango from Harlan Auto Mart. In doing so, he wanted to structure the transaction in a way to minimize the income-tax consequences of the purchase to himself and his corporation and allow his son, Joshua, to purchase the 2001 Dakota with minimal sales tax consequences. Lonnie, however, knew this goal could not be accomplished if he sold the 2001 Dakota to Joshua and purchased the 2004 Durango from Harlan Auto Mart. Instead, Lonnie believed his goal could best be achieved if he first purchased the 2004 Durango from Harlan Auto Mart by trading in the 2001 Dakota, and if Joshua then purchased the 2001 Dakota from Harlan Auto Mart. Lonnie set out to accomplish his plan through a prearranged transaction that occurred on October 1, 2004.

On that date, Lonnie purchased the 2004 Durango from Harlan Auto Mart for an agreed price of $36,325. He paid for the vehicle by making a down payment, trading in the 2001 Dakota, and financing the balance. Lonnie assigned the certificate of title to the 2001 Dakota to Harlan Auto Mart. Even though the 2001 Dakota had a market value of approximately $20,000, Lonnie agreed to a trade-in allowance of $9487.¹ Lonnie and Harlan Auto Mart apparently agreed to pass the undeclared equity in the 2001 Dakota to Joshua by reducing the price Harlan Auto Mart would sell the 2001 Dakota to Joshua to $9180. This plan allowed Joshua to pay state sales tax on the purchase price instead of the true market value, and resulted in a savings to Joshua of approximately $500.

The tax advantages to Lonnie and his corporation under the transaction were largely in the form of a reduction in income tax for the 2004 tax year based on the application of various provisions of the tax code and regulations. The tax savings were basically realized in two ways.

First, Lonnie understood he would be permitted under the Internal Revenue Code and associated Treasury regulations to treat the purchase of the 2004 Durango as a like-kind exchange of a business asset by trading in the 2001 Dakota. As a like-kind exchange, Lonnie and his corporation could avoid recapturing depreciation they had previously declared for tax purposes on the 2001 Dakota. If Lonnie had sold the 2001 Dakota directly to Joshua, the purchase of the 2004 Durango from Harlan Auto Mart would not have qualified as a like-kind exchange, and Lonnie would have been required to recapture that portion of the depreciation he took in 2001 on his 2004 tax return in an amount equal to the value of the 2001 Dakota at the time of the sale. The sale would have resulted in a taxable gain of approximately $20,000 (because Lonnie had fully depreciated the 2001 Dakota), and the gain would have increased the amount of taxable income for the tax year by $20,000. Under applicable tax rates, Lonnie and his corporation would have been required to pay state and federal taxes on the gain of approximately $8000. Thus, Lonnie and his corporation avoided paying this tax by selling the 2001 Dakota to Harlan Auto Mart.

Second, the transaction would allow Lonnie and his corporation to establish a new tax basis in the 2004 Durango based on the depreciated 2001 Dakota (zero) plus the amount of the cash paid (and amount financed) to purchase the Durango, commonly called "cash boot." Based on this new basis, Lonnie and his corporation were permitted to fully depreciate the Durango for tax purposes in an amount equal to the new basis in the year of purchase. Under the applicable tax rates, Lonnie calculated the depreciation deduction would decrease his tax liability on his 2004 tax return by approximately $12,000.² Therefore, the total savings to Lonnie and his corporation under the transaction was estimated to be $20,000.

The transaction took place as planned, with one wrinkle. Joshua intended to purchase the 2001 Dakota from Harlan Auto Mart by trading in his 2000 Dodge Intrepid and financing the balance of the purchase price. The trade-in allowance for the Intrepid was $9180. Joshua, however, still owed $9969 on existing financing for the Intrepid. Thus, the net trade-in allowance was a negative $489, and the transaction required Joshua to obtain financing of $9694 to purchase the 2001 Dakota.

Lonnie wanted the most favorable financing terms available for Joshua to purchase the 2001 Dakota. Joshua, however, did not have an established credit history to obtain the best financing terms on his own. Consequently, Lonnie and Joshua jointly applied for a loan with Chrysler Financial to finance the purchase. This arrangement permitted Lonnie to use his credit history to obtain financing for Joshua. Chrysler Financial agreed to finance the purchase, but only if both loan applicants were also cobuyers of the vehicle.

As a result, the transaction on October 1, 2004, concluded by Lonnie and Joshua jointly purchasing the 2001 Dakota from Harlan Auto Mart. Lonnie and Joshua were both named as cobuyers on the purchase agreement, and Harlan Auto Mart reassigned the certificate of title to Lonnie and Joshua. Lonnie and Joshua also applied for a new title and registration as co-owners of the vehicle. The county treasurer issued a new certificate of title on October 15, 2004. The title named Joshua and Lonnie as co-owners of the 2001 Dakota.

Joshua took possession of the 2001 Dakota following the sale. He acquired automobile insurance for the vehicle and began making monthly payments on the loan. He was the exclusive operator of the vehicle. Lonnie exercised no control over the vehicle.

On December 25, 2004, Joshua was involved in an accident while driving the 2001 Dakota. His vehicle collided with a vehicle driven by Mirsad Beganovic. Mirsad's wife, Minka, was a passenger. The accident resulted in serious personal injuries, and the Beganovics brought a negligence lawsuit against Joshua and Lonnie. Lonnie was sued as a consenting co-owner of the 2001 Dakota driven by Joshua.

The case was tried to a jury in August 2007. Joshua admitted liability for injuries suffered by the Beganovics. Lonnie claimed, as an affirmative defense, he could not be liable under the ownership liability statute because he had made a bona fide transfer of ownership of the vehicle to Joshua under the October 1, 2004 transaction.

The Beganovics filed a motion in limine prior to trial to exclude evidence of the October 1 transaction. They believed such evidence was irrelevant and Lonnie was a consent owner as a matter of law. The district court eventually permitted Lonnie to make an offer of proof outside the presence of the jury to support his claim that the October 1 transaction constituted a transfer of title to Joshua. The district court found the transaction did not constitute a transfer of his interest in the vehicle to Joshua and did not permit Lonnie to introduce evidence of the transaction to the jury. The district court ultimately directed a verdict at the close of the evidence at trial in favor of the Beganovics on Lonnie's affirmative defense that he transferred title to Joshua. The district court held as a matter of law that Lonnie did not transfer title in his interest in the vehicle to his son prior to the accident.

The jury returned a verdict of $952,000 in favor of the Beganovics against Joshua and Lonnie. Joshua and Lonnie appealed. They claim the district court misinterpreted Iowa's ownership liability statute and erred by failing to submit the bona fide transfer defense to the jury.

We transferred the case to the court of appeals. The court of appeals affirmed the judgment of the district court. Lonnie and Joshua sought, and we granted, further review.

III. Standard of Review.

The issue to be decided is whether, under Iowa Code section 321.493(2) (2003),³ the legislature intended for the transaction in this case to qualify as a bona fide transfer exemption. We review the application and interpretation of statutes for errors at law. State v. Green, 680 N.W.2d 370, 372 (Iowa 2004). We are thus bound by the trial court's findings of fact if supported by substantial evidence, but are not bound by the court's determinations of law. Id.

IV. Statutory Background of Consent-Owner Motor Vehicle Liability.

The specific issue presented in this case broadly pertains to the liability of one person for the tort of another, or what is commonly called vicarious liability.⁴ At common law, a person was, generally, only liable for the torts of another in a master-servant setting. See Hartman v. Norman, 253 Iowa 694, 701, 112 N.W.2d 374, 379 (1961). Over the years, however, various exceptions have been crafted to the common-law rule, including the motor vehicle consent st...