Daily Development for Wednesday, July 26, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

TAXATION; FORECLOSURE PURCHASER'S RIGHTS: Where foreclosure purchaser obtains rights to personal property as well as to real property; and the foreclosure sale results only in a certificate of sale, which ripens into title only when a redemption period has expired, the assignment of such certificate constitutes a "sale of tangible personal property" within the meaning of Colorado's sales tax laws. Telluride Resort and Spa, L.P., v. Colorado Department of Revenue, No. 99CA0034, (Colo. App. 7/20/00)

Mortgagee held a mortgage on the real and personal property consisting of a hotel and spa development. Mortgagor defaulted, and mortgagee concluded a foreclosure sale of both the real and personal property combined through a public trustee. Mortgagee was the successful bidder at that sale. Under Colorado law applicable to this case, the sale was subject to a statutory redemption right, and the winning bidder received a certificate of sale which could be redeemed for the title to the real and personal property upon expiration of the redemption period. (The court appears to assume that the statutory redemption period applied both to the real and personal property under the "combined foreclosure" process in place in Colorado.)

Prior to the expiration of the redemption period, mortgagee assigned its rights under the certificate of sale to a third party purchaser, Telluride. When the redemption period expired, Telluride took ownership of the personal property and title to the real property.

The Colorado Tax Commissioner demanded that the transfer of the sale certificate was subject to a sales tax under and assessed a sales tax of $175,680.11, together with $69,690.10 in interest. Apparently, under the terms of the sale, Telluride was liable for any such tax, and protested the imposition of the tax. The trial court found for Telluride and the Tax Commissioner appealed.

Held: Reversed. The assignment of the certificate was a "sale" within the meaning of the sales tax and no exemption applied.

The taxpayer argued that the certificate was an intangible interest, while the Colorado sales tax applies only to "tangible personal property." Taxpayer argued that no such tangible personal property was transferred by the assignment of the certificate. The court held that ownership of the certificate was tantamount to ownership of the property itself, so that an actual transfer of the personal property did take place. It noted that the fact that the taxpayer's rights to the sale might be subject to prior redemption did not detract from this conclusion:

[T]he terms "sale" or "sale and purchase" are very broadly defined to include installment and credit sales, exchanges, and "every such transaction, conditional or otherwise, for a consideration, constituting a sale . . . ." Section 3926102(10), C.R.S. 1999."

Presumably the value of the property rights transferred would be reflected in the price paid by the taxpayer to the mortgagee, and thus would affect the amount of tax assessed. None of this detail is given in the opinion.

The taxpayer further argued that the transfer was exempt from the tax. It pointed out that one transaction not included in the definition of "sale" is "the repossession of personal property by a chattel mortgage holder or foreclosure by a lienholder." Section 3926102(10)(j). But the court concluded that the taxpayer buyer here was not a lienholder, since it took an assignment of the lienholder's rights after the foreclosure sale, at a time when the lien was extinguished and the mortgagee's rights were those of a foreclosure sale purchaser.

Comment: The case is correct, assuming that the valuation issue (which is not discussed) is properly worked out. At the time of the assignment of the mortgagee's certificate, the assignee was subject to a prior redemption, and this condition on its rights ought to have been reflected in the assignment price. But so long as the tax is levied only on that price, and is not based upon the actual value of the personal property, we do have a sale of an ownership interest in personal property, albeit a conditional one. An opposite interpretation would subvert the apparent purpose of the law to tax transfers of valuable interests in tangible personal property.

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