Matter of Seafarer Fiber Glass Yachts, Inc.

• Citation: 475 F. Supp. 1097
• Decision Date: 06 September 1979
• Docket Number: No. 78 C 1722.,78 C 1722.
• Parties: In the Matter of SEAFARER FIBER GLASS YACHTS, INC., Debtor.
• Court: U.S. District Court — Eastern District of New York

475 F. Supp. 1097

In the Matter of SEAFARER FIBER GLASS YACHTS, INC., Debtor.

No. 78 C 1722.

United States District Court, E. D. New York.

September 6, 1979.

Michael J. Saltser, of Battle, Fowler, Lidstone, Jaffin, Pierce & Kheel, New York City, for plaintiff.

Paul E. Dahlman, Asst. Atty. Gen., for Attorney General of the State of New York, New York City, for defendant.

MEMORANDUM AND ORDER

GEORGE C. PRATT, District Judge.

The New York State Tax Commission (Tax Commission) appeals from a decision of Bankruptcy Judge Rudin dated June 20, 1978, and an order dated June 30, 1978, which disallowed the Tax Commission's claim against Seafarer Fiber Glass Yachts, Inc. (Seafarer). For reasons set forth below, Judge Rudin's decision and order are affirmed in part and reversed in part.

FACTS

Seafarer is a New York corporation which makes and sells customized fiberglass yachts. To avoid New York sales tax, Seafarer and its out-of-state customers frequently arranged delivery by one of two means: (1) "sailaway" delivery, in which a Seafarer employee and the buyer sail the boat from Huntington Harbor to Long Island Sound and into Connecticut waters, where delivery is officially accomplished; or (2) "pick-up" delivery, in which the buyer hires a trucker to pick up the boat in Huntington and deliver it to the buyer out of state.

On November 14, 1974, Seafarer filed a petition for arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701 et seq. and on November 19, 1974, Bankruptcy Judge Rudin authorized Seafarer to continue operations as debtor-in-possession. In April, 1975, the Tax Commission filed a proof of claim for $398,535.40 for taxes due from December 1, 1969 through August 31, 1974. After reaudit, the Tax Commission reduced its claim to $151,524.90 plus interest. The claim was for unpaid sales and use tax on yachts delivered to out of state residents by either "sailaway" deliveries or "pick-up" by non-ICC truckers (the Tax Commission concedes that pick-ups by ICC truckers are not subject to sales or use tax.)

Seafarer moved to expunge and disallow the claim. A hearing was held on January 17, 1977, and a decision issued on May 17, 1977, in which Judge Rudin sustained Seafarer's objections to the Tax Commission's claim. On appeal, this court reversed and remanded. The Second Circuit affirmed this court's decision. On remand, Judge Rudin held a second hearing, April 19, 1978, and issued a second decision, June 20, 1978, sustaining Seafarer's objections once again, but on different grounds. After Judge Rudin's order of June 30, 1978, the Tax Commission brought the instant appeal.

DISCUSSION

The parties agree that this appeal presents four questions: (1) the placement of the burden of proof; (2) the taxability of the "sailaway" deliveries; (3) the taxability of the non-ICC pick-ups; and (4) the applicability of the three year discharge provision. On each of these issues, the decision of the bankruptcy judge must be affirmed unless clearly erroneous. Bankruptcy Rule 810.

THE BURDEN OF PROOF

The proper placement of the burden of proof for tax claims in bankruptcy proceedings is explained by the court in In re Avien, 390 F.Supp. 1335 (E.D.N.Y.1975), aff'd 532 F.2d 273 (CA2 1976):

While the burden of proof with respect to deductions claimed is normally on the taxpayer citations omitted that is not the case in bankruptcy proceedings where the burden of establishing its claim rests on the government citation omitted. The government is aided, however, by a strong presumption which arises in its favor by the filing of a sworn proof of claim; a prima facie case is established and the burden of going forward with rebutting evidence is on the debtor. citations omitted. The ultimate burden of persuasion remains on the government. 390 F.Supp. at 1341-42.

Without disputing the above statement on placement of the burden of proof, the parties disagree about whether additional burden of proof advantages should be accorded to the claimant in this proceeding. Because the existence or absence of these additional advantages would not affect the outcome of this appeal, the court declines to consider the issue, and accepts as sufficient the explanation of the burden of proof set forth in Avien above.

THE TAXABILITY OF "SAILAWAY" DELIVERIES

Judge Rudin held that the "sailaway" deliveries were non-taxable, based on his finding of fact # 8:

The sailaway deliveries of boats to some nonresidents of the State of New York was made by sailing the vessel from Huntington Harbor to a point in Long Island Sound beyond the geographical limits of the State of New York and within that of the State of Connecticut where the boat was turned over to the customer.

On this appeal, the Tax Commission argues that it was "not reasonable * * * to conclude that "delivery" took place in Connecticut." Brief of Tax Commission, at 20. The issue, according to the Tax Commission, is "where delivery, in the legal sense, actually occurred * * *. The fiction of delivering the boat on the other side of a buoy in the middle of Long Island Sound, is no more an actual delivery than the delivery of a car in New Jersey by the signing of the piece of paper that was condemned in another case." Reply brief of Tax Commission at 8. The question of the place of delivery is a question of fact, on which the finding of the bankruptcy judge must be upheld unless clearly erroneous. Bankruptcy Rule 810. The Tax Commission called no witnesses and produced no evidence at the trial before the bankruptcy judge on this factual issue. As noted in Judge Rudin's decision,

The evidence is uncontroverted that in all cases of non-residents furnishing the non-resident documents, sailaway delivery would be made by sailing the vessel to that part of Long Island Sound beyond the jurisdiction of the State of New York and within the jurisdiction of the State of Connecticut where delivery would be made to the purchaser.

Decision of Judge Rudin dated June 20, 1978 at 6-7.

The Tax Commission questions the evidence adduced by the debtor on this issue. However, the debtor's evidence stands uncontroverted, and the Tax Commission has not shown Judge Rudin's findings on this issue to be clearly erroneous. Accordingly, Judge Rudin's decision and order expunging and disallowing the Tax Commission's claims as to the sailaway deliveries are affirmed.

THE TAXABILITY OF NON-ICC PICK-UPS

Judge Rudin held that the non-ICC pickups were non-taxable. In finding of fact # 9, Judge Rudin recognized that the non-ICC truckers were the employees of the non-resident purchasers, and that the boats were delivered to the buyers' employees in New York. However, Judge Rudin found the non-ICC pick-ups to be non-taxable on the following reasoning:

Where the trucker holds an ICC trucking license, this delivery is accepted by the Tax Department as a tax free sale. Why the distinction between "pick-ups" by ICC trucker and a non-ICC trucker is made by the state has not been explained. It appears to be an arbitrary and unreasonable distinction.

Decision of Judge Rudin dated June 20, 1978 at 7.

Judge Rudin's decision on this point is contrary to law. Given Judge Rudin's finding that the delivery occurred in New York to an employee of the buyer,¹ the non-ICC pick-ups are subject to New York sales tax. F & M Schaefer Brewing Co. v. Gerosa, 4 N.Y.2d 423, 176 N.Y.S.2d 276, 151 N.E.2d 845 (1958); Matter of Prince Motors, Inc. v. Commissioner of Motor Vehicles, 15 A.D.2d 708, 223 N.Y.S.2d 668 (3d Dep't 1968). The failure to assess sales tax on ICC pick-ups does not bar the Tax Commission from assessing sales tax on non-ICC pick-ups. The Tax Commission is not put to the choice of taxing either all sales or none. Since the non-ICC pick-ups are clearly taxable, Judge Rudin's decision and order on this issue are reversed.

THE APPLICABILITY OF THE THREE YEAR DISCHARGE PROVISION

Judge Rudin held that the Tax Commission's claims for taxes payable before November 14, 1971 (three years before the debtor filed its Chapter XI petition) were discharged under 11 U.S.C. § 35(a)(1). This holding was based on In re Michaud, 317 F.Supp. 1002 (W.D.Pa.1970), and on Judge Rudin's finding of fact # 13:

That the debtor did not file false or fraudulent tax returns or wilfully attempt in any manner to evade or defeat the collection of taxes.

Ignoring the above finding of fact, the Tax Commission argues that one of three exemptions remove the Tax Commission from the three year limit of 11 U.S.C. § 35(a)(1).

First, the Tax Commission cites 11 U.S.C. § 35(a)(1)(d), arguing that the debtor wilfully attempted to evade or defeat taxes. This position is precluded by Judge Rudin's finding of fact # 13, quoted above, which is not clearly erroneous and is, therefore, accepted by this court.

Second, the Tax Commission cites 11 U.S.C. § 35(a)(1)(e), which lifts the three year limit if the debtor has collected tax and withheld it from the government. The Tax Commission, however, fails to show that the debtor in fact collected any sales tax. Therefore, 11 U.S.C. § 35(a)(1)(e) does not apply.

Finally, the Tax Commission cites 11 U.S.C. § 35(a)(1)(c), which lifts the three year limit if the debtor (i) fails to report taxes on its return and (ii) these taxes "were not assessed prior to bankruptcy by reason of a prohibition on assessment pending exhaustion of administrative or judicial remedies available to the bankrupt."

On point (i), the Tax Commission correctly asserts that the defendant's failure to report the amount of tax liability constitutes a failure to report taxes on a return, despite the fact that debtor's return correctly reported gross sales. On this point, Judge Rudin erroneously relied on a case which had been reversed on the exact point in issue, In re Michaud, 317 F.Supp. 1002 (W.D.Pa.1970), supra, reversed 458 F.2d 953 (CA3 1972), cert denied 409 U.S. 876, 93 S.Ct. 125, 34 L.Ed.2d 129 (1972). See also Wukelic v. United States, 544...