In re Henry

Decision Date02 October 1991
Docket NumberBankruptcy No. 89-00188,Adv. No. 90-0048A.
Citation135 BR 6
CourtU.S. Bankruptcy Court — District of Vermont
PartiesIn re John A. HENRY, a/k/a Jack Henry, and Patricia A. Henry, Debtors. Raymond J. OBUCHOWSKI, Esq., Chapter 7 Trustee, Plaintiff, v. The STATE OF VERMONT, DEPARTMENT OF TAXES, Defendant.

D. Cardozo, III, Montpelier, Vt., for Vt. Dept. of Taxes.

A. Pastor, Law Offices of R. Obuchowski, Bethel, Vt., for Trustee.

MEMORANDUM OF DECISION ON MOTION FOR SUMMARY JUDGMENT

FRANCIS G. CONRAD, Bankruptcy Judge.

This adversary proceeding1 raises an issue of first impression in our jurisdiction; that is, whether the State of Vermont can impose a land gains tax upon property liquidated in the administration of a bankruptcy estate. Implicit in this issue is the complex interplay between State and Federal law that frequently occurs in bankruptcy. Article 1, § 8, cl. 4 of the United States Constitution authorizes Congress to establish uniform laws regarding bankruptcy. The Bankruptcy Code does not, however, operate in a vacuum. Although State law may not interfere with the execution of Congressional acts2, Bankruptcy Courts adhere to State law precedents and statutes in areas that have not been preempted by the Bankruptcy Code or other Federal statutes.

We conclude that Vermont's land gains tax does not interfere with the administration of a debtor's estate. The imposition of a land gains tax does not impermissibly burden the execution of Federal law. We hold that Trustee must pay the appropriate land gains tax for property sold during liquidation of the estate because 11 U.S.C. § 503(b)(1)(B) and 28 U.S.C. § 960 mandate that any tax incurred by the estate be paid as an administrative expense.

The material facts are not in dispute. Debtors filed their petition for relief under Chapter 7 of the Bankruptcy Code on July 13, 1989. On October 25, 1989, we entered an order approving the sale of certain real property belonging to the estate. Under the order, Trustee sold two properties and retained the net proceeds for distribution to creditors.

Trustee did not file Vermont Land Gains Withholding Tax Returns for either property. To determine the priority of distribution from the sale proceeds, Trustee initiated the present adversary proceeding for declaratory judgment to determine the estate's liability under Vermont's land gains tax statute. Vermont filed a motion for summary judgment.

Trustee argues two primary points. First, Trustee states that Vermont's land gains tax was intended to discourage land speculation or short-term, high-profit transactions. Trustee argues that the legislature did not intend to tax sales of property liquidated in bankruptcy because a bankruptcy trustee is not a land speculator. Trustee's support for this position is derived from Andrews v. Lathrop, 132 Vt. 256, 315 A.2d 860 (1974), a Vermont Supreme Court case that upheld the constitutionality of the land gains tax. Andrews, however, does not discuss the present issue, namely, whether the land gains tax applies to sales of property liquidated in bankruptcy. Second, Trustee alleges that the sale of the properties did not meet the statutory definition of "sales or exchanges" contained in 32 Vt.Stat.Ann. § 10004(b)3 because Trustee, as seller, did not receive the benefit of some lawful consideration from the sale of the land.

Vermont argues that the bankruptcy estate is liable for the land gains tax under 28 U.S.C. § 960 because an agent conducting any business under the authority of a United States Court is liable for State and local taxes to the same extent as any other entity would be. In addition, Vermont cites a recent United States Supreme Court decision, California State Board of Equalization v. Sierra Summit, Inc., 490 U.S. 844, 109 S.Ct. 2228, 104 L.Ed.2d 910 (1989), where the Court held that 28 U.S.C. § 960 gave California the right to assess sales and use taxes on a bankruptcy trustee's liquidation sale. Vermont also cites a factually similar case from Connecticut, Matter of Woodland Builders, Inc., 87 B.R. 774 (Bkrtcy.D.Conn.1988), to support its conclusion that Trustee is liable for the land gains tax.

DISCUSSION

To prevail on a motion for summary judgment, the movant must satisfy the criteria set forth in F.R.Civ.P. 56 as made applicable by Federal Rules of Bankruptcy Procedure Rule 7056. F.R.Civ.P. 56 provides in part:

The judgment sought shall be rendered if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.

See, Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265, (1986); Eastman Machine Company, Inc. v. United States, 841 F.2d 469 (2d Cir. 1988); Hossman v. Spradlin, 812 F.2d 1019, 1020 (7th Cir.1987). The primary purpose for granting a summary judgment motion is to avoid unnecessary trials where no genuine issue of material fact is in dispute. Farries v. Stanadyne/Chicago Div., 832 F.2d 374, 378 (7th Cir.1987). In the matter sub judice, the parties have stipulated to all material facts. We therefore proceed to matters of law.

Chapter 236, Title 32 of the Vermont Statutes Annotated imposes a "tax on the gains from the sale or exchange of land in Vermont." 32 Vt.Stat.Ann. § 10001. The land gains tax applies to land that is held by the transferor less than six years. The "transferor" (defined to include the owner, seller, or other exchanger) is liable for the tax following the sale or exchange of the property. 32 Vt.Stat.Ann. § 10006.

The tax due the State is calculated according to the number of years a property is held and the amount of profit generated from the sale. "The gains tax is a tax on profits in sale, so structured as to place a burden on the taxpayer which increases as his profit increases, and decreases as the period for which he retains the land lengthens." Andrews v. Lathrop, supra, 132 Vt. at 261, 315 A.2d 860. A maximum rate of sixty per cent (60%) is imposed on land held less than one year and sold at a two-hundred per cent (200%) or more gain. At the other end of the tax spectrum, a minimum rate of five per cent (5%) is imposed on land held between five and six years that is sold for a gain of less than ninety-nine per cent (99%). The rate of tax is thus directly proportional to the percentage of gain and inversely proportional to the holding period.

Two Federal statutes outline the relationship between Vermont and Trustee in this matter. First, 11 U.S.C. § 503(b)(1)(B) imposes liability on the bankruptcy estate for "administrative expenses," including "any tax incurred by the estate." Generally, postpetition property taxes are treated as an administrative expense under § 503(b)(1)(B) and are first in priority for payment under 11 U.S.C. § 507(a)(1). In re Trowbridge, 74 B.R. 484, 485 (Bkrtcy. E.D.Pa.1987); In re Carlisle Court, Inc., 36 B.R. 209, 217 (Bkrtcy.D.D.C.1983); 3 Collier on Bankruptcy, § 503.04, pp. 503-32, et seq. (15th ed. 1987).

In addition, Title 28 U.S.C. § 960 subjects Federal officers acting under authority of a United States Court to applicable State and local taxes. Section 960 provides that:

Any officers or agents conducting any business under authority of a United States Court shall be subject to all federal, state and local taxes applicable to such business to the same extent as if it were conducted by an individual or corporation.4

The primary purpose behind § 960 was to equalize the tax status of businesses being operated as going concerns by Federal receivers with the tax status of their competitors. Palmer v. Webster and Atlas National Bank of Boston, 312 U.S. 156, 162-163, 61 S.Ct. 542, 545, 85 L.Ed. 642 (1941); See also, H.R.Rep. No. 1138, 73d Cong., 2d Sess. (1934) and S.Rep. No. 1372, 73d Cong., 2d Sess. (1934). Congress enacted § 960 after a number of Federal trial courts held that Federal receivers who operated businesses were exempt from States' sales tax. Palmer, supra, 312 U.S. at 163, 61 S.Ct. at 545; In re Hubs Repair Shop, Inc., 28 B.R. 858, 868, 10 BCD 581 (Bkrtcy.N.D.Iowa 1983). In light of this purpose and the plain language of the statute, "any doubts are presumed to be resolved in favor of tax liability." In re Penn Central, 325 F.Supp. 294, 298 (E.D.Pa.1970), aff'd, 452 F.2d 1107 (3d Cir. 1971), cert. den., 406 U.S. 944, 92 S.Ct. 2040, 2043, 32 L.Ed.2d 331 (1972).

Both parties cite California State Board of Equalization v. Sierra Summit, Inc., supra and In the Matter of Woodland Builders, Inc., supra in their respective briefs. California State Board of Equalization held that neither the doctrine of intergovernmental immunity nor 28 U.S.C. § 960 proscribes the imposition of a state sales and use tax on a bankruptcy liquidation sale. The Court limited the absolute applicability of the intergovernmental tax immunity doctrine to situations where the States tax the United States directly "or an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities." Id., 490 U.S. at 849, 109 S.Ct. at 2232, citing, United States v. New Mexico, 455 U.S. 720, 735, 102 S.Ct 1373, 1383, 71 L.Ed.2d 580 (1982). Otherwise, the Court opined that the States are free to tax any private party with whom the United States does business, as long as the tax does not discriminate against the United States or those with whom it deals. Id.

Woodland Builders involved a factual situation similar to the present case. Connecticut and the Town of Glastonbury sought payment of real estate conveyance taxes from a Chapter 7 trustee who had liquidated the debtor's estate. The Court concluded that 28 U.S.C. § 960 requires a liquidating trustee selling realty to pay State conveyance taxes. Id., 87 B.R. at 778.

Another key decision, cited in Vermont's brief, is Swarts v. Hammer, ...

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