               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.
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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.
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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.

      AFFIRMED.

      All justices concur except Larson and Hecht, JJ., who take no part.
