On July 1, 2021, the Court of Special Appeals (CSA) held that in a sale of business assets that includes both real property and other types of property, the state recordation and transfer taxes, and the transfer taxes of Montgomery and Baltimore Counties, apply only to the value of the real property. The consideration paid for the other types of property are not subject to these taxes. Shelter Senior Living IV, LLC v. Baltimore County, Maryland, et al., --- Md. App. ---, No. 1276, Sept. Term 2019, 2021 WL 2708948 (July 1, 2021).
In reaching this conclusion, the CSA reversed the opinion of the Circuit Court for Baltimore County, which had affirmed a ruling of the Maryland Tax Court.
In July 2014, the owners of three senior living facilities in Rockville, Towson and White Marsh sold them to the same buyer for a total of $93,400,000. The sellers and buyer claimed that only $40,142,200 was for the real property, and that the balance was for tangible and intangible personal property, including goodwill. The sellers presented deeds for recording in Baltimore and Montgomery Counties, but the taxing authorities refused to accept the deeds unless recordation and transfer taxes were paid on the full consideration for the transaction. Because the sellers needed to have the deeds recorded to conclude the sales, they tendered the full amounts of the taxes claimed by the counties. Then they petitioned the counties for refunds of the amounts of taxes that they had paid in excess of the taxes due only on the real property. The sellers’ petitions were denied by the counties, and they appealed to the Maryland Tax Court.
The Tax Court consolidated the appeals and decided to bifurcate the case. First, the Tax Court would determine whether recordation and transfer taxes could be imposed on the value of the intangible assets. If not, then the Tax Court would determine the value of the real property subject to the taxes.
The Tax Court ruled that the sellers were not entitled to a refund because the applicable state statutes and the county code provisions permit taxation on the consideration paid to the sellers, even if the parties categorized some of the assets as intangible property. The sellers then assigned their claims to Shelter Senior Living IV, LLC, and Shelter appealed to the Circuit Court for Baltimore County. The circuit court affirmed the decision of the Tax Court, and Shelter appealed to the CSA.
The CSA began its analysis by pointing out that nine types of intangible assets were part of the subject transactions. These assets were transferred by unrecorded assignments. The CSA noted that recordation and transfer taxes are excise taxes for the privilege of recording in the land records. Based on its reading of the statutory language, the CSA concluded that these taxes are calculated on the consideration payable for recording instruments of writing, which are documents that convey real property, grant security interests in real property, or grant security interests in personal property. Deeds are instruments of writing, but documents that assign intangible property are not.
The taxing authorities argued that sellers and buyers of businesses might engage in “tax avoidance ploys” in allocating prices to various assets. The CSA pointed out that under Section 1006 of the Internal Revenue Code, the parties are required to allocate the sales prices among asset classes. Moreover, sellers and buyers have divergent interests in allocating prices because of different tax consequences attendant to the allocations. The CSA found that this could produce good faith, arm's-length negotiations over the value of the assets.
The CSA concluded that “in determining the ‘total amount of consideration paid,’ the tax collectors must calculate the tax on the consideration paid only for the subject real property and must exclude consideration paid for other types of assets, such as intangible property, that are not subject to such taxes.” However, the CSA noted that tax collectors are not obliged to accept the consideration stated by the parties. Instead, the tax collectors may examine transactions to determine the actual consideration for the taxable property.
Accordingly, the CSA remanded the proceeding to the Tax Court for a determination of how much of the consideration paid is attributable to the real property, which is the only asset class that is subject to recordation and transfer taxes.
For more information, contact Edward J. Levin.
Editor’s Note: Edward J. Levin and Douglas Turner Coats filed an amicus brief in the subject case supporting the taxpayers, on behalf of American Seniors Housing Association, LifeSpan Network, Maryland Chamber of Commerce, and NAIOP Maryland Chapters.
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