Filed March 8, 2007. Opinion by Judge Theodore G. Bloom (retired, specially assigned), dissent by Judge James A. Kenney, III.
In a case decided upon a fine weighing of real property principles, the judgment below was REVERSED and the case REMANDED to the Circuit Court for Montgomery County for entry of a judgment reversing the decision of the Tax Court.
The matter arose from the determination below that a refund was due for recordation and transfer taxes imposed and paid upon the recordation of a deed in 2003. That deed had conveyed certain property, owned and titled of record in various percentage interests and to various family members and trusts for the benefit of family members (collectively, the "Aubinoe Family"), to a limited liability company (the "LLC") whose members were the same family members and trusts who held membership interests in the LLC in the same proportion as their prior direct ownership of the real property.
The deed recited that, for several years prior to the 2003 transfer, the Aubinoe Family had operated as a family general partnership, and thus the transfer should not be subject to recordation and transfer taxes under the Tax-Property Article of the Maryland Code. Nonetheless, payment of such taxes was required before the deed would be accepted for record, and they were paid under protest and the deed recorded.
The LLC then sought a refund of recordation and transfer taxes required at recording, on the grounds that the deed was exempt as a transfer to the LLC from a predecessor entity under Section 12-108(y)(2) and Section 13-405(c) of the T-P Article. Denied relief by the Montgomery County Department of Finance, the LLC appealed to the Maryland Tax Court, which ordered the requested refund. Montgomery County then appealed to the Circuit Court, which affirmed the Tax Court's decision, and this appeal followed.
Noting that in 1766, execution and recordation of a deed had replaced livery of seisin as the sole means of transferring title to real property in Maryland, the court further noted that, by contrast, transfer of ownership of real property need not be in writing, citing for that proposition the 1958 case of Vlamis v. Deweese, in which it was held that a transfer of a one-half interest in real property to a business partner was effective as a transfer to, and disposition as, partnership property, notwithstanding the record title interest. The court then traced the history and current language of the recordation and transfer tax statutes, noting that the tax was imposed upon instruments that were required to be recorded to transfer title to property, and the exemption in Section 12-108(y)(2) is limited to instruments of writing that transfer title to property, and further noting that such exemptions are to be narrowly construed.
The court then went on to note that the Aubinoe Family could have avoided recordation and transfer taxes on the deed in question if they had first transferred title to the property to the general partnership, and then to the LLC, but then noted that the first transfer of title (from the individual and trust owners of record to the family general partnership) would have been taxable at the same rate avoided on the second transfer. Since the family general partnership did not have title to the property to transfer, merely ownership, the deed was not entitled to the exemption. Therefore, the court held that the imposition of taxes was justified, and consequently reversed the decision below, and remanded the case for entry of an order reversing the Tax Court's decision.
In dissent, Judge Kenney cited the Tax Court decision, several Court of Appeals decisions and other authority for the proposition that property does not have to be titled in the name of a partnership to in fact be partnership property, and that the majority's reliance on a crucial distinction between "title" and "ownership" to resurrect an "empty technicality" that had long been put to rest by case and statutory law. Judge Kenney found both the statutory intent and the specific statutory language for the exemption to have been satisfied here, and would have affirmed the decision of the Tax Court.
The majority and dissenting opinions are available in PDF format.
Monday, March 12, 2007
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1 comment:
I don't generally make it a practice to comment on my own posts, but this case just cried out for commentary, which I did not feel comfortable placing in the case post itself (we at le3ast try to stay neutral!). With that said:
I have strong disagreements with both the majority opinion and dissent. I agree with the dissent (written by a good personal friend and top-notch legal scholar, BTW and IMHO respectively!) that the distinction between "title" and ownership" cited in the majority opinion is overly formalistic and needlessly arcane. What I think the majority was really reaching for is the relatively commonplace distinction between "bare legal title" (such as is held by a contract vendor after the contract is executed but before settlement) and "equitable or beneficial title" (such as that held by the contract purchaser prior to settlement). That would IMHO more easily explain the distinction between the record title holder and the party (in this case, the family general partnership) for whose benefit the record title holder holds title.
Moreover, I think the majority, even given their distinction, was just flat wrong in saying that the deed did not convey title to the property. Although not entirely transparent in the opinion, I strongly suspect that the deed was in fact signed by the record title owners, additionally reciting their roles as the members of the family general partnership. If so, they almost certainly would have effectively conveyed full title, bare legal and beneficial/equitable, to the LLC with the deed, and the majority's rationale for imposing taxation falls apart.
On the other hand, I do not agree with the dissent that the exemptions should apply in this case. This case is IMHO distinguishable from the earlier cases like Vlamis v. DeWeese where the transfer of the property was contemporaneous with creation of the partnership, and therefore the "individual" ownership was from the very beginning merely a means and form of holding the real property as partnership property. Here, by contrast, the partnership was at best a concept that evolved over the years, the partnership agreement being memorialized in writing only the day before the deed was executed, while the individual interests had been conveyed as individual in a gradual process that began sometime after 1962, when the first members of the family acquired title and thereafter conveyed apparently *individual* interests to their children and grandchildren.
As such, there was in fact a post-acquisition "transfer" from the individual and trust owners to the partnership. Though I agree that this off-record rolling transfer of the beneficial/equitable ownership of the property was not taxable as such (since no "instrument of writing" was required or required to be recorded), it could not serve as the basis of an exemption, since the transfer to the "prior entity" had neither been memorialized nor taxed. Looked at in a different fashion, the off-record "transfer" to the partnership *became* taxable when the acknowledgment of that transfer (in the recitations in the proffered deed) was recorded, much the way an unrecorded lease may become taxable when a memorandum of that lease is recorded. Note that this result would *not* apply if the record owners had originally taken title as holders for the benefit of a partnership or other entity, existing or to be formed (since there was no later conversion or transfer of that interest to entity form), or if the property had been transferred without reference to the beneficial ownership, but only where, as here, there was an off-record transfer of an interest that would have been taxable if on the record, upon the recording of an instrument effecting a public acknowledgment of that earlier (off-record) transfer.
But, they haven't asked me to be a judge yet, so what do I know? ;-)
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