LKS PIZZA, INC. v. COMMONWEALTH OF KENTUCKY, SECRETARY, FINANCE AND ADMINISTRATION CABINET
Annotate this Case
Download PDF
RENDERED:
JULY 15, 2005; 2:00 P.M.
TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-001200-MR
LKS PIZZA, INC.
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE ROGER L. CRITTENDEN, JUDGE
ACTION NO. 04-CI-00144
COMMONWEALTH OF KENTUCKY,
by and on relation of R.B. RUDOLPH,
SECRETARY, FINANCE AND ADMINISTRATION
CABINET
APPELLEE
OPINION
REVERSING AND REMANDING
** ** ** ** **
BEFORE:
KNOPF, TAYLOR, AND VANMETER, JUDGES.
VANMETER, JUDGE:
Under KRS 139.670 and 139.680, sales tax
liability is imposed upon a purchaser of assets of a business
for any such taxes the seller has failed to remit to the Revenue
Cabinet.
We must decide whether such liability attaches in the
event the assets are repossessed by a secured creditor, who then
transfers the assets to a separate corporation which proceeds to
operate a similar business.
As we hold that it does not, we
reverse the decision of the Franklin Circuit Court.
The facts of this case are relatively straightforward
and are not disputed by the parties.
PJDoughboy, Inc., a
Kentucky corporation, operated a Papa John’s pizza franchise in
Russellville.
At the time the business started, its officers,
Robert Jones and Cheryl Jones, individually executed a security
agreement with Shane Harris in order to purchase equipment for
use in the business.
that equipment.
Harris retained a security interest in
In 2003, PJDoughboy was failing, and Harris
exercised his right to repossess the equipment, which he then
transferred to LKS Pizza, Inc., a Pennsylvania corporation.
LKS
then began operation of its own Papa John’s franchise at the
same Russellville location.
In January 2004, the Kentucky Finance and
Administration Cabinet filed a complaint in the Franklin Circuit
Court alleging that LKS is the business successor to PJDoughboy.
PJDoughboy’s delinquent sales tax liability is approximately
$45,000, including tax, penalties and interest.
filed motions for summary judgment.
Both parties
The trial court, relying
upon Bank of Commerce v. Woods1 and In re Western Resources,
1
585 S.W.2d 577 (Tenn. 1979).
-2-
Inc.,2 held that “successor liability attaches to an entity that
takes over a delinquent company, regardless of whether cash
exchanged hands, if the entity continues to operate the business
for any period of time.”
Consequently, the trial court entered
summary judgment in favor of the Finance Cabinet.
This appeal
followed.
The Finance Cabinet seeks to impose liability pursuant
to KRS 139.670 and 139.680.
KRS 139.670 provides:
If any retailer liable for any amount under
this chapter sells out his business or stock
of goods, or otherwise quits business, his
successors or assigns shall withhold
sufficient of the purchase price to cover
such amount until the former owner produces
a receipt from the cabinet showing that it
has been paid or a certificate stating that
no amount is due.
KRS 139.680(1) provides in pertinent part:
If the purchaser of a business or stock of
goods fails to withhold the purchase price
as required, he becomes personally liable
for the payment of the amount required to be
withheld by him to the extent of the
purchase price, valued in money.
As an initial matter we note that the interpretation
of a tax statute is a matter of law for the court to decide.3
And in general, the “tax statutes creating liability are to be
2
114 B.R. 621 (Bankr. S.D. Ind. 1990).
3
Laurel Run Resources, Inc. v. Revenue Cabinet, 853 S.W.2d 905, 906 (Ky.App.
1992); Gillis v. Preston, 746 S.W.2d 77, 79 (Ky.App. 1987).
-3-
strictly construed against the taxing authority,”4 and “all
doubts and ambiguities resolved in favor of the taxpayer.”5
Under the plain wording of the statute, the
legislature clearly sought to impose successor liability on a
successor who buys into a business.
The theory is that such a
successor, who pays a consideration for the taxpayer’s business
or stock in trade, is in a better position than the Finance
Cabinet to make sure that any delinquent sales taxes are paid.6
Our review of case law from other jurisdictions
indicates that if a secured creditor acquires assets as a result
of a foreclosure in which no consideration changes hands, that
creditor does not thereby become liable for the debtor’s unpaid
sales taxes.7
As stated by the Arizona Supreme Court:
4
Popplewell's Alligator Dock No. 1, Inc. v. Revenue Cabinet, 133 S.W.3d 456,
463 (Ky. 2004); Stoner Creek Stud, Inc. v. Revenue Cabinet, 746 S.W.2d 73, 75
(Ky.App. 1987).
5
Stoner Creek 746 S.W.2d at 75.
6
Revenue Cabinet v. Triple R Food A Rama, 890 S.W.2d 638, 640 (Ky.App. 1994).
7
See, e.g., Northern Lights Inn v. Employment Sec. Div., 695 P.2d 723, 725
(Alaska 1985) (secured creditor acquiring hotel at a foreclosure sale created
no fund from which to pay unpaid unemployment premiums); In re McKeever, 169
Ariz. 312, 314-15, 819 P.2d 482, 484-85 (1991) (lessor’s/secured creditor’s
reentry to leased premises and operation of business did not entail a
purchase); Mountain’s Shadow Inn v. Colorado Dep’t of Labor, 672 P.2d 522,
524 (Colo. 1983) (lessor’s re-entry of restaurant premises and operation of
business until a new lessee could be obtained did not involve a purchase);
Lloyds Bank PLC v. State, 109 Nev. 1111, 1116, 864 P.2d 298, 301 (1993)
(creditor gaining ownership of secured property by foreclosure did not
generate funds from which to withhold delinquent unemployment premiums;
transaction was not a sale as contemplated by statute); State v. Standard
Oil Co., 39 Ohio St.2d 41, 313 N.E.2d 838 (1974) (secured creditor assuming
ownership pursuant to security agreement did not result in a purchase to
which successor liability could attach).
-4-
The key to determining whether a
"purchase" has occurred for the purposes of
determining successor liability, therefore,
is determined by an analysis of the
underlying transaction. A person acquiring
property cannot withhold "purchase money"
unless the transaction generates purchase
consideration such that the "purchaser" is
in a position to account for his
predecessor's tax liability. See, e.g.,
Knudsen Dairy, 12 Cal.App.3d at 54, 90
Cal.Rptr. at 539 ("successor liability
cannot be imposed when the duty to withhold
... cannot possibly be performed by the
successor").
In the instant case, the Debtors
exercised their statutory rights under their
landlord's lien and repossessed the business
premises after the Summerlets defaulted on
the lease. A repossession of a leasehold is
not a "purchase"; the Debtors merely
exercised their rights to possession of the
business premises upon default. No
consideration of any kind was generated by
this transaction, and thus the Debtors could
not have withheld the tax due. Therefore, no
successor liability attached. The Debtors
were similarly entitled to take possession
of the fixtures, equipment and inventory
pursuant to their rights under the security
agreement. Again, no successor liability
attached because no purchase consideration
was generated.
The fact that the repossessed property
was subsequently sold to satisfy the lien is
immaterial to this analysis. Successor
liability is measured by the mechanism used
to acquire the property, not by the fact
that it is subsequently sold. Clearly, a
cash transaction results in successor
liability because the purchaser can withhold
from the purchase price the amount of tax
due. Similarly, in the case of a promissory
note or debt cancellation, the amount of the
-5-
note or debt can be adjusted to take into
account the amount of tax liability. But
where, as here, there is a repossession of a
business or enforcement of creditor's rights
under a security agreement, and nothing
more, there is no source from which to
withhold purchase money. See State v.
Standard Oil Co., 39 Ohio St.2d 41, 45-46,
313 N.E.2d 838, 841 (1974) (foreclosure of
defaulting debtor's property by a creditor
holding a perfected security interest in
such property was not a "sale" within the
meaning of successor liability statute); but
see Woods, 585 S.W.2d at 580-82 (bank held
to be successor when it chose to purchase
the store instead of foreclosing on its
security interest).8
The cases cited by the Finance Cabinet do not mandate
a different result.
Most if not all of those cases involved
either some consideration, i.e., a fund, from which the
delinquent taxes could have been withheld,9 or the structure of a
purchase/sale which served some purpose beneficial to the
creditor,
10
or a more broadly written successor liability
statute.11
8
In re McKeever, 169 Ariz. at 314-15, 819 P.2d at 484-85.
9
Bates v. Director of Revenue, 691 S.W.2d 273 (Mo. 1985) (successor purchased
motel property directly from delinquent taxpayer).
10
Knudsen Dairy Products Co. v. State Bd. of Equalization, 12 Cal.App.3d 47,
90 Cal.Rptr. 533 (1970) (secured creditor became sole shareholder of
delinquent taxpayer and structured transfer of taxpayer’s assets to another
subsidiary corporation in exchange for a credit in the amount owed to
creditor equal to the value of the assets transferred, and subsidiary
corporation thereafter operated the business); Bank of Commerce v. Woods, 585
S.W.2d 577 (Tenn. 1979) (secured creditor “purchased” equity of delinquent
taxpayer in food store and operated business in order to avoid foreclosure).
-6-
The Finance Cabinet’s reliance on In re Western
Resources, Inc.12 is similarly misplaced.
As an initial matter,
we note that we are not bound by a federal court’s
interpretation of state law.13
However, we believe the case is
factually distinguishable from the present case.
The facts of
Western Resources were that an unsecured creditor, apparently
under common management with the delinquent taxpayer, agreed to
purchase certain of the taxpayer’s assets, equipment, and
vehicles in exchange for a reduction in debt.
In return, the
creditor leased the assets back to the taxpayer.
The bankruptcy
court, relying upon an administrative regulation which has since
been repealed,14 held that “a purchase price was paid in money by
the forgiveness of a monetary debt and by the assumption of
liabilities.”15
11
New Jersey Hotel Holdings, Inc. v. Director, Division of Taxation, 15 N.J.
Tax 428 (1996) (N.J.S.A. 54:32B-22(c) imposes successor liability upon “any
purchaser, transferee, or assignee” of a delinquent taxpayer’s assets).
12
114 B.R. 621 (Bankr. S.D. Ind. 1990).
13
Embs v. Pepsi-Cola Bottling Co., 528 S.W.2d 703 (Ky. 1975); Bruck v.
Thompson, 131 S.W.3d 764, 766 (Ky.App. 2004).
14
103 KAR 31:150(1). The regulation stated that the purchase price could
include “money or property or providing for the assumption of liabilities.”
That same regulation, as noted by the court, provided that “transfers such as
‘assignments for the benefits of creditors, foreclosures of mortgages . . .’
do not trigger the requirement that sufficient amounts be withheld from the
purchase price to cover tax liabilities of the transferrer.” 114 B.R. at 625.
15
Id. at 625.
-7-
In the instant case, Harris repossessed the equipment, as
was permitted under the security agreement.16
The transaction
was not structured as a purchase, as was the transaction in
Western Resources.
We find it curious that the Finance Cabinet
concedes that “Mr. Russell [sic] (LKS) could have repossessed
and removed his equipment without successor liability
attaching. . . ,” but nevertheless asserts that LKS, in
acquiring the equipment from Harris, thereby incurred successor
liability.
The Finance Cabinet argues that “this court must
decide . . . whether Harris can take the entire assets of
PJDoughboy and run the pizza business as his own without also
addressing the sales tax liability of its predecessor.”
The
record, however, does not support any finding that LKS was the
alter ego of Harris, or that LKS assumed the lease obligations
or the franchise agreement of PJDoughboy.
The order of the Franklin Circuit Court is reversed,
and this matter is remanded to that court for proceedings
consistent with this opinion.
ALL CONCUR.
16
See also KRS 355.9-609 (secured party’s right to take possession of
collateral after default); KRS 355.9-620 (secured party’s right to accept
collateral in full or partial satisfaction of obligation).
-8-
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Timothy J. Crocker
Mark A. Thurmond
Crocker & Wilkey, Attorneys
Franklin, Kentucky
Stephen J. Crawford
Finance & Administration
Cabinet, Department of Revenue
Frankfort, Kentucky
-9-
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.
