In Re Hubs Repair Shop, Inc.
| Citation | 28 BR 858 |
| Decision Date | 04 April 1983 |
| Docket Number | 80-01064,Adv. No. 82-0149,Bankruptcy No. 81-01077,82-0150. |
| Parties | In re HUBS REPAIR SHOP, INC., Debtor. Daniel P. ERNST, Trustee in Bankruptcy for Hubs Repair Shop, Inc., Plaintiff, v. IOWA DEPARTMENT OF REVENUE, Defendant. In re MEYER-PAULY HOME FURNISHINGS, INC., Debtor. Daniel P. ERNST, Trustee in Bankruptcy for Meyer-Pauly Home Furnishings, Inc., Plaintiff, v. STATE OF IOWA DEPARTMENT OF REVENUE, Defendant. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Northern District of Iowa |
COPYRIGHT MATERIAL OMITTED
Mark A. Cody, Dubuque, Iowa, for plaintiff.
James D. Miller, Ames, Iowa, for defendant.
FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDERS, with Memorandum
The matters before the Court involve the determination of whether the bankruptcy liquidation sales of the Debtors' tangible personal property held by the Trustee are subject to Iowa retail sales tax. The parties submitted briefs but waived oral argument. The matters were taken under advisement and the Court, having been fully advised, now makes the following Findings of Fact, Conclusions of Law and Orders:
FINDINGS OF FACT
IN RE HUBS REPAIR SHOP, INC.
1. The bankruptcy proceedings in this matter were commenced by the filing of the Petition by the Debtor on May 21, 1981, under Chapter 7 of Title 11 of the United States Code.
2. The nature of the Debtor's business at the time of filing the Petition in Bankruptcy was that of a dealer in and repair shop for new and used farm equipment and machinery.
3. On September 10, 1981, the Trustee held a public sale of all the Debtor's personal property by means of public auction.
4. On November 17, 1981, this Court approved the Trustee's Report of Sale and Application for Confirmation and Approval of Auction and Public Sale, indicating that there were net proceeds from the sale of the Debtor's personal property in the amount of $78,985.07.
5. On March 5, 1982, the Iowa Department of Revenue served upon the Trustee a Notice of Assessment which showed a total sum due the Iowa Department of Revenue of $3,438.33, said amount arising from the retail sales tax allegedly due from the September 10, 1981, public sale of the Debtor's personal property.
6. The Iowa Department of Revenue revised its assessment and reduced its tax claim to $2,088.81, together with a penalty of $522.20, interest in the sum of $148.31, and a fee in the sum of $1.35, for a total amount due the Department of $2,760.67.
7. To secure its claim, the Iowa Department of Revenue retained the Trustee's State of Iowa personal income tax refund.
IN RE MEYER-PAULY HOME FURNISHINGS, INC.
1. On August 25, 1980, the Debtor filed a Voluntary Petition under Chapter 11 of Title 11 of the United States Code.
2. At the time of the filing of its Petition in Bankruptcy, the nature of the Debtor's business was that of a retail home furnishings dealer.
3. On June 22, 1981, the Debtor's bankruptcy proceeding under Chapter 11 was converted to a proceeding under Chapter 7.
4. On July 19, 1981, the Trustee held a public auction of all of the Debtor's personal property.
5. On July 21, 1981, the Trustee filed his Report of Sale and said Report indicated the receipt of net proceeds from the sale of the Debtor's personal property was in the amount of $32,798.40.
6. On September 11, 1981, this Court approved the Trustee's Report of Sale.
7. On March 9, 1982, an action was commenced to determine whether the public sale of the Debtor's personal property was subject to Iowa retail sales tax.
1. The bankruptcy liquidation sales held by the Trustee in these cases were taxable retail sales within the meaning of Iowa Code § 422.43.
2. All of the property, both inventory and non-inventory assets, sold at the public sales, is subject to the Iowa retail sales tax.
3. Federal law does not bar the Iowa Department of Revenue from assessing and collecting state retail sales tax arising from a bankruptcy liquidation sale.
4. The Trustee is not personally liable for the retail sales tax.
5. The Iowa Department of Revenue is entitled to an administrative expense for the retail sales taxes arising of the liquidation sales pursuant to 11 U.S.C. § 503(b)(1)(B)(i).
6. The Iowa Department of Revenue is not entitled to claim any interest or penalty arising out of the Trustee's refusal to turn over the monies claimed by the department as taxes because there was "reasonable cause" for the Trustee's nonpayment of the tax within the meaning of Iowa Code § 422.58(1).
IT IS THEREFORE ORDERED that the Plaintiffs' Complaints be denied and dismissed.
IT IS FURTHER ORDERED that the Defendant, Iowa Department of Revenue, be given leave to file in each of these bankruptcy estates an administrative expense claim for the retail sales taxes owing to it, said claims to be filed within 25 days from the date of this Order.
MEMORANDUMThe parties before this Court are Daniel P. Ernst, Trustee in Bankruptcy (hereafter the "Trustee"), and the Iowa Department of Revenue (hereafter the "Department"). The Trustee was appointed to oversee the Chapter 7 liquidation bankruptcies of Hubs Repair Shop, Inc., (hereafter "Hubs"), and Meyer-Pauly Home Furnishings, Inc., (hereafter "Meyer-Pauly"), (collectively referred to as the "Debtors"). Both Debtors were engaged in business; the former was a new and used farm equipment dealer and repairman, and the latter was a seller of home furnishings. In the course of administering each estate, the Trustee aggregated the property of each Debtor and held a one-time liquidation auction in each case. The Trustee is now holding the proceeds of these two sales for distribution to the respective creditors of each estate.
The common issues involved in both cases before this Court revolve around the tax status of the liquidation sales of the Debtors' property. In particular, the Department alleges that these liquidation sales are taxable events within the meaning of Iowa's retail sales tax code, and that the State of Iowa is therefore entitled to assess a three percent sales tax on the gross receipts taken in by the Trustee at each sale. Iowa Code § 422.42 et seq. (1981). Further, the Department alleges that the State is entitled to an administrative expense priority under 11 U.S.C. § 503(b)(1)(B)(i) of the Bankruptcy Reform Act of 1978 (hereafter the "Code").
The Trustee contends that the liquidation sales are exempt from Iowa retail sales tax because a one-time business liquidation sale falls within the "casual sales" sales tax exemption created by Iowa Code § 422.45(6). The Trustee further asserts that if the liquidation sale is taxable under Iowa law, the imposition of a retail sales tax upon a bankruptcy liquidation sale would impose an impermissible burden upon the processes of the federal bankruptcy courts.
The Court is explicitly given jurisdiction to determine the applicability of the Iowa retail sales tax to these sales. 11 U.S.C. § 505(a)(1). This Court is, however, required to interpret Iowa law prior to analyzing the federal issue. If the liquidation sales are found to be exempt under Iowa law, then the Court can avoid an unnecessary interpretation of federal law. Siler v. Louisville & Nashville R.R. Co., 213 U.S. 175, 193, 29 S.Ct. 451, 455, 53 L.Ed. 753 (1909).
A. Whether a Bankruptcy Liquidation Sale is a "Retail Sale"
A threshold issue is whether bankruptcy liquidation sales are `retail sales' within the meaning of Iowa Code § 422.43. To resolve this issue, the Court must look to all relevant statutes and applicable administrative rules which are not inconsistent therewith. Des Moines and Central Iowa Ry. Co. v. Iowa State Tax Comm'n., 115 N.W.2d 178, 181, 253 Iowa 994 (1962).
Section 422.42 provides for a tax based upon the gross receipts of retail sales:
There is hereby imposed a tax of three per cent upon the gross receipts from all sales of tangible personal property . . . except as otherwise provided in this division sold at retail . . . to consumers and users. (Emphasis added).
To determine the coverage of this section, resort must be had to the statutory definitions of the terms "sale" and "retail." "Sale" is defined as "any transfer, exchange, or barter, conditional or otherwise, in any manner or by any means whatsoever, for a consideration." Iowa Code § 422.42(2). This definition is clearly broad enough to encompass a public auction of goods going to the highest bidder. Sales of goods are considered to be "at retail" when the goods are sold "to a consumer or to any person for any purpose other than for processing or for resale." Iowa Code § 422.42(3). (Emphasis added).
Goods are sold for "processing" when it is "intended that such property shall by means of fabrication, compounding, manufacturing, or germination become an integral part of tangible personal property intended to be sold ultimately at retail." Iowa Code § 422.42(3). An example of a sale for processing would be a bakery's purchase of flour. The sale of the flour would not include an assessment of the retail sales tax. When, however, the baker's finished products were sold to consumers, a retail sales tax would be imposed. An example of a purchase for resale would be a store owner's purchase of stock from suppliers for the purpose of making these goods available to consumers. The suppliers would not charge the store owner a tax on the initial sale of stock, but the store owner would add a sales tax when those goods were eventually sold to consumers. In light of the statutory definitions, the Court finds that the liquidation sales held by the trustee come within the reach of the retail sales tax to the extent that purchasers at the respective auctions were not buying with the intent to "process" or "resell" the goods.1 The straightforward meaning of the terms "sale" and "retail" encompass liquidation sales held by means of a public auction. S & M Finance Co. Fort Dodge v. Iowa State Tax...
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