IN THE SUPREME COURT OF IOWA
No. 11 / 06-0761
Filed March 21, 2008
GAYLIN R. RANNIGER and JANET L. RANNIGER,
Appellants,
vs.
IOWA DEPARTMENT OF REVENUE AND FINANCE,
Appellee.
Appeal from the Iowa District Court for Crawford County,
Richard J. Vipond, Senior Judge.
Taxpayers appeal district court’s affirmance on judicial review of
agency’s denial of taxpayers’ protest of income tax assessment.
AFFIRMED.
James D. Lohman of Reimer, Lohman & Reitz, Denison, for
appellants.
Thomas J. Miller, Attorney General, and Valencia Voyd McCown,
Assistant Attorney General, for appellee. 2
TERNUS, Chief Justice.
Appellants, Gaylin R. Ranniger and Janet L. Ranniger, protested
an income tax assessment by the appellee, Iowa Department of Revenue
and Finance, claiming entitlement to an exclusion from taxation on net
capital gains from the sale of a business under Iowa Code section
422.7(21) (1999). The department denied the protest, concluding the
taxpayers were not entitled to the capital-gains exclusion because Gaylin
Ranniger’s sale of his interest in an accounting partnership did not
qualify as “the sale of a business” under the statutory definition of that
term. See Iowa Code § 422.7(21). The district court affirmed the
department’s decision on judicial review. For the reasons that follow, we
affirm the district court.
I. Background Facts and Proceedings.
From 1978 until 1989, Gaylin Ranniger (Ranniger) practiced as a
certified public accountant in a partnership with Morrie Heithoff. In
1989 the partnership entered into an agreement whereby the practice
was sold and merged into Darrah & Company, P.C. (Darrah), a
subchapter-S corporation. Ranniger and Heithoff became shareholders
and employees of Darrah. On December 31, 1991, the merger between
the partnership and Darrah was terminated upon Darrah’s failure to
make the payments required under the agreement. All assets that
originated with the partnership were transferred back to the two
partners.
The following day, on January 1, 1992, Ranniger sold his fifty-
percent interest in the partnership to Heithoff, and Heithoff resumed
operation of the accounting practice as a sole practitioner. Heithoff paid
Ranniger for his share of the partnership in annual installment
payments from 1992 through 2000. 3
The sale of Ranniger’s fifty-percent interest in the partnership
resulted in a capital gain to Ranniger and his wife, Janet. They claimed
the Iowa capital-gains exclusion on their Iowa individual income tax
returns for the years 1992 through 2000. The department denied the
exclusion on the taxpayers’ 1999 and 2000 Iowa returns and issued an
assessment for additional taxes, penalty, and interest. The taxpayers
protested the assessment, but their protest was denied by the director of
the department. As noted earlier, this decision was affirmed on judicial
review, and the taxpayers filed this appeal.
II. Scope of Review.
The scope of our review is determined by Iowa’s Administrative
Procedure Act, Iowa Code chapter 17A. See Lange v. Iowa Dep’t of
Revenue, 710 N.W.2d 242, 246 (Iowa 2006). Here, the taxpayers
challenge the department’s interpretation of section 422.7(21). Because
the Department of Revenue and Finance has clearly been vested with
discretion to interpret chapter 422, see City of Sioux City v. Dep’t of
Revenue & Fin., 666 N.W.2d 587, 590 (Iowa 2003), we will reverse the
department’s interpretation of section 422.7(21) only if it was “irrational,
illogical or wholly unjustifiable.” Iowa Code § 17A.19(10)(l).
III. Discussion.
The taxpayers claim they were entitled to exclude from their
taxable income the payments they received for the sale of the partnership
interest. They rely on the exclusion allowed by section 422.7(21) for
[n]et capital gain . . . from the sale of a business, as defined in section 422.42, in which the taxpayer was employed or in which the taxpayer materially participated for ten years, as defined in section 469(h) of the Internal Revenue Code, and which has been held for a minimum of ten years. The sale of a business means the sale of all or substantially all of the tangible personal property or service of the business. 4
Iowa Code § 422.7(21)(a)(1) (emphasis added). The director concluded
the taxpayers were not entitled to this exclusion for several reasons, but
we need only address one: the sale of the partnership interest was not
“the sale of all or substantially all of the tangible personal property or
service of the business.” Id.
The department’s decision to disallow the exclusion was consistent
with its rule interpreting section 422.7(21), which provides in part:
In situations in which substantially all the tangible personal property or service was sold by a partnership, subchapter S corporation, limited liability company, estate or trust, and the capital gains from the sale of the assets flow through to the owners of the business entity for federal income tax purposes, the owners can exclude the capital gains from their net incomes if the owners had owned the business for ten or more years and the owners had materially participated in the business for ten years prior to the date of sale of the tangible personal property or service, irrespective of whether the type of business entity changed during the ten-year period prior to the sale. .... Capital gains from the sale of an ownership interest in a partnership, limited liability company or other entity are not eligible for the capital gain exclusion.
Iowa Admin. Code r. 701—40.38(8) (emphasis added).
The taxpayers contend the department’s interpretation of section
422.7(21) is too narrow. They rely on the statutory definitions of
“business” and “person” to support their position. In 1999 and 2000,
Iowa Code section 422.42 defined a “business” as “any activity engaged
in by any person or caused to be engaged in by the person with the
object of gain, benefit, or advantage, either direct or indirect.” Iowa Code
§ 422.42(2) (now found at Iowa Code § 423.1(4) (2007)). The income tax
division of chapter 422 defined “person” to “include[] individuals and
fiduciaries.” Id. § 422.4(14); see also id. § 422.42(11) (defining “person”
to include “any individual, firm, copartnership, joint adventure, 5
association . . . or any other group or combination acting as a unit
. . . .”). The taxpayers claim Ranniger’s fifty-percent partnership interest
was itself a “business” and, because Ranniger sold one hundred percent
of that business, he qualified for the exclusion.
We do not accept the taxpayers’ broad interpretation of section
422.7(21). The taxpayers contend “a more inclusive interpretation” than
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IN THE SUPREME COURT OF IOWA
No. 11 / 06-0761
Filed March 21, 2008
GAYLIN R. RANNIGER and JANET L. RANNIGER,
Appellants,
vs.
IOWA DEPARTMENT OF REVENUE AND FINANCE,
Appellee.
Appeal from the Iowa District Court for Crawford County,
Richard J. Vipond, Senior Judge.
Taxpayers appeal district court’s affirmance on judicial review of
agency’s denial of taxpayers’ protest of income tax assessment.
AFFIRMED.
James D. Lohman of Reimer, Lohman & Reitz, Denison, for
appellants.
Thomas J. Miller, Attorney General, and Valencia Voyd McCown,
Assistant Attorney General, for appellee. 2
TERNUS, Chief Justice.
Appellants, Gaylin R. Ranniger and Janet L. Ranniger, protested
an income tax assessment by the appellee, Iowa Department of Revenue
and Finance, claiming entitlement to an exclusion from taxation on net
capital gains from the sale of a business under Iowa Code section
422.7(21) (1999). The department denied the protest, concluding the
taxpayers were not entitled to the capital-gains exclusion because Gaylin
Ranniger’s sale of his interest in an accounting partnership did not
qualify as “the sale of a business” under the statutory definition of that
term. See Iowa Code § 422.7(21). The district court affirmed the
department’s decision on judicial review. For the reasons that follow, we
affirm the district court.
I. Background Facts and Proceedings.
From 1978 until 1989, Gaylin Ranniger (Ranniger) practiced as a
certified public accountant in a partnership with Morrie Heithoff. In
1989 the partnership entered into an agreement whereby the practice
was sold and merged into Darrah & Company, P.C. (Darrah), a
subchapter-S corporation. Ranniger and Heithoff became shareholders
and employees of Darrah. On December 31, 1991, the merger between
the partnership and Darrah was terminated upon Darrah’s failure to
make the payments required under the agreement. All assets that
originated with the partnership were transferred back to the two
partners.
The following day, on January 1, 1992, Ranniger sold his fifty-
percent interest in the partnership to Heithoff, and Heithoff resumed
operation of the accounting practice as a sole practitioner. Heithoff paid
Ranniger for his share of the partnership in annual installment
payments from 1992 through 2000. 3
The sale of Ranniger’s fifty-percent interest in the partnership
resulted in a capital gain to Ranniger and his wife, Janet. They claimed
the Iowa capital-gains exclusion on their Iowa individual income tax
returns for the years 1992 through 2000. The department denied the
exclusion on the taxpayers’ 1999 and 2000 Iowa returns and issued an
assessment for additional taxes, penalty, and interest. The taxpayers
protested the assessment, but their protest was denied by the director of
the department. As noted earlier, this decision was affirmed on judicial
review, and the taxpayers filed this appeal.
II. Scope of Review.
The scope of our review is determined by Iowa’s Administrative
Procedure Act, Iowa Code chapter 17A. See Lange v. Iowa Dep’t of
Revenue, 710 N.W.2d 242, 246 (Iowa 2006). Here, the taxpayers
challenge the department’s interpretation of section 422.7(21). Because
the Department of Revenue and Finance has clearly been vested with
discretion to interpret chapter 422, see City of Sioux City v. Dep’t of
Revenue & Fin., 666 N.W.2d 587, 590 (Iowa 2003), we will reverse the
department’s interpretation of section 422.7(21) only if it was “irrational,
illogical or wholly unjustifiable.” Iowa Code § 17A.19(10)(l).
III. Discussion.
The taxpayers claim they were entitled to exclude from their
taxable income the payments they received for the sale of the partnership
interest. They rely on the exclusion allowed by section 422.7(21) for
[n]et capital gain . . . from the sale of a business, as defined in section 422.42, in which the taxpayer was employed or in which the taxpayer materially participated for ten years, as defined in section 469(h) of the Internal Revenue Code, and which has been held for a minimum of ten years. The sale of a business means the sale of all or substantially all of the tangible personal property or service of the business. 4
Iowa Code § 422.7(21)(a)(1) (emphasis added). The director concluded
the taxpayers were not entitled to this exclusion for several reasons, but
we need only address one: the sale of the partnership interest was not
“the sale of all or substantially all of the tangible personal property or
service of the business.” Id.
The department’s decision to disallow the exclusion was consistent
with its rule interpreting section 422.7(21), which provides in part:
In situations in which substantially all the tangible personal property or service was sold by a partnership, subchapter S corporation, limited liability company, estate or trust, and the capital gains from the sale of the assets flow through to the owners of the business entity for federal income tax purposes, the owners can exclude the capital gains from their net incomes if the owners had owned the business for ten or more years and the owners had materially participated in the business for ten years prior to the date of sale of the tangible personal property or service, irrespective of whether the type of business entity changed during the ten-year period prior to the sale. .... Capital gains from the sale of an ownership interest in a partnership, limited liability company or other entity are not eligible for the capital gain exclusion.
Iowa Admin. Code r. 701—40.38(8) (emphasis added).
The taxpayers contend the department’s interpretation of section
422.7(21) is too narrow. They rely on the statutory definitions of
“business” and “person” to support their position. In 1999 and 2000,
Iowa Code section 422.42 defined a “business” as “any activity engaged
in by any person or caused to be engaged in by the person with the
object of gain, benefit, or advantage, either direct or indirect.” Iowa Code
§ 422.42(2) (now found at Iowa Code § 423.1(4) (2007)). The income tax
division of chapter 422 defined “person” to “include[] individuals and
fiduciaries.” Id. § 422.4(14); see also id. § 422.42(11) (defining “person”
to include “any individual, firm, copartnership, joint adventure, 5
association . . . or any other group or combination acting as a unit
. . . .”). The taxpayers claim Ranniger’s fifty-percent partnership interest
was itself a “business” and, because Ranniger sold one hundred percent
of that business, he qualified for the exclusion.
We do not accept the taxpayers’ broad interpretation of section
422.7(21). The taxpayers contend “a more inclusive interpretation” than
that adopted by the department is warranted because section 422.7(21)
“is a remedial statute seeking to prevent an unjust Iowa income tax
result due to the change in the method of the taxation of Federal capital
gains.” In addition to the absence of evidence of such a legislative intent,
this argument suffers from a lack of support in Iowa law governing the
interpretation of tax laws. Our cases require that exclusions from
taxation be “construed strictly against the taxpayer and liberally in favor
of the taxing body.” See Iowa Auto Dealers Ass’n v. Iowa Dep’t of
Revenue, 301 N.W.2d 760, 762 (Iowa 1981); accord Heartland Lysine, Inc.
v. State, 503 N.W.2d 587, 588–89 (Iowa 1993). The department’s more
narrow view of the statute is consistent with this rule of statutory
interpretation; the taxpayers’ expansive view is not.
Secondly, we agree with the observation of the district court that
the legislature’s use of the language “tangible personal property or
service of the business” clearly reflected a focus on the sale of the
tangible and intangible assets used in producing and marketing the
business’s products or services, not on the sale of corporate stock or
partnership interests in the business. In the case before us, Ranniger
was engaged in the activity of providing accounting services with the
object of gain within the meaning of the statutory definition of
“business.” Accordingly, the department determined the “business” at
issue for purposes of the capital-gains exclusion was the accounting 6
partnership, not solely Ranniger’s ownership interest in that partnership.
This determination was not irrational, illogical, or wholly unjustifiable.
Focusing, then, on the partnership, it is significant that under
Iowa law “[a] partner is not a co-owner of partnership property and has
no interest in partnership property which can be transferred, either
voluntarily or involuntarily.” Iowa Code § 486A.501. Thus, the sale of a
partnership interest, such as that sold by Ranniger, is not the sale of any
tangible personal property or service of the partnership. We conclude,
therefore, that the department’s ruling that Ranniger did not sell “all or
substantially all of the tangible personal property or service of the
business” so as to constitute “the sale of a business” under section
422.7(21) was not irrational, illogical, or wholly unjustifiable. Id.
§ 422.7(21).
Ranniger claims the department’s interpretation of the capital-
gains exclusion is inconsistent with the federal taxing scheme and
“punishes the taxpayer for the form in which his or her business is
operated.” He asserts the legislature “clearly intend[ed] that federal law
be used as the basis for determining what constitutes a capital asset.”
We note that it is the province of the legislature to determine tax
policy, and absent a successful constitutional challenge to a taxing
statute, our role is to interpret the statute by giving effect to the plain
meaning of the language chosen by the legislature. Lange, 710 N.W.2d
at 247. With respect to section 422.7(21), the legislature did not
expressly require the application of federal law in determining what
constituted “capital gain . . . from the sale of a business,” even though
express reference to the Internal Revenue Code was made elsewhere in
section 422.7(21) with respect to other aspects of this exclusion. Even
more importantly, the legislature chose to define for itself what it meant 7
by “the sale of a business.” As this court has observed many times in the
past, “The legislature is its own lexicographer. So in searching for
legislative intent, we are bound by what the legislature said, not by what
it should or might have said.” Iowa Dep’t of Transp. v. Soward, 650
N.W.2d 569, 571 (Iowa 2002) (citations omitted). A review of what the
legislature said in section 422.7(21) reveals no indication of a legislative
intent that federal law govern whether a particular transaction results in
a capital gain from “the sale of a business” under Iowa law. We think the
department’s straightforward interpretation of the legislature’s definition
of this phrase gave effect to the plain meaning of the statutory language
as required by the rules of statutory construction.
IV. Conclusion.
For the reasons discussed, we hold the department’s interpretation
of section 422.7(21) was not irrational, illogical, or wholly unjustifiable.
Therefore, we affirm the judgment of the district court upholding the
department’s denial of the taxpayers’ protest.
All justices concur except Larson and Hecht, JJ., who take no part.