Shelter Senior Living v. Baltimore County Md.

Shelter Senior Living IV, LLC v. Baltimore County Maryland, et al., No. 1276, September
Term 2019, Argued: October 2, 2020.
TAXATION — PROPERTY TAX — MARYLAND RECORDATION TAX —
CALCULATION — RELEVANT CONSIDERATION
In a transfer of a business through a sale of business assets that includes real property in
addition to other kinds of property, the state recordation tax may only be imposed on the
consideration exchanged for the real property. The state recordation tax may not be
imposed on consideration exchanged for other kinds of assets, such as intangible personal
property, which are transferred together with real property.
TAXATION — PROPERTY TAX — MARYLAND TRANSFER TAX —
CALCULATION — RELEVANT CONSIDERATION
In a transfer of a business through a sale of business assets that includes real property in
addition to other kinds of property, the state transfer tax may only be imposed on the
consideration exchanged for the real property. The state transfer tax may not be imposed
on consideration exchanged for other kinds of assets, such as intangible personal property,
which are transferred together with real property.
TAXATION — PROPERTY TAX — BALTIMORE COUNTY TRANSFER TAX —
CALCULATION — RELEVANT CONSIDERATION
In a transfer of a business through a sale of business assets that includes real property in
addition to other kinds of property, Baltimore County’s transfer tax may only be imposed
on the consideration exchanged for the real property. Baltimore County’s transfer tax may
not be imposed on consideration exchanged for other kinds of assets, such as intangible
personal property, which are transferred together with real property.
TAXATION — PROPERTY TAX — MONTGOMERY COUNTY TRANSFER
TAX — CALCULATION — RELEVANT CONSIDERATION
In a transfer of a business through a sale of business assets that includes real property in
addition to other kinds of property, Montgomery County’s transfer tax may only be
imposed on the consideration exchanged for the real property. Montgomery County’s
transfer tax may not be imposed on consideration exchanged for other kinds of assets,
such as intangible personal property, which are transferred together with real property.
Circuit Court for Baltimore County
Case Nos. 03-C-18-009042; 03-C-18-012380
REPORTED
IN THE COURT OF SPECIAL APPEALS
OF MARYLAND
No. 1276
September Term, 2019
______________________________________
SHELTER SENIOR LIVING IV, LLC,
v.
BALTIMORE COUNTY MARYLAND,
ET AL.
______________________________________
Reed,
Friedman,
Gould,
JJ.
______________________________________
Opinion by Gould, J.
______________________________________
Filed: July 1, 2021
Pursuant to Maryland Uniform Electronic Legal
Materials Act
(§§ 10-1601 et seq. of the State Government Article) this document is authentic.
2021-07-06 12:21-04:00
Suzanne C. Johnson, Clerk
The General Assembly has enacted a statute imposing recordation and transfer taxes
on the transfer of real property. The General Assembly has also delegated to certain
counties—including the two involved here, Montgomery and Baltimore Counties—the
authority to impose transfer taxes on the sale of real property. Neither the General
Assembly nor the county legislative bodies have, however, imposed a tax on the transfer
of intangible property.
This case comes to us in the context of the sale of three senior living facilities. To
accomplish the transaction, the sellers conveyed to the buyers the real property where the
centers operate, as well as specified items of both tangible and intangible property. In each
of the three transactions, the total purchase price was agreed up front in the contracts, and
then prior to closing, the parties were required to agree on an allocation of the purchase
price across the various asset classes, which they did.
The question before us is whether the consideration attributed to the intangible
property may factor into the calculation of the state and county transfer and recordation
taxes—both of which are determined as a percentage of the consideration paid. Here, given
the difficulty associated with valuing intangible property, the tax collectors concluded that
such consideration could not be unbundled from the consideration attributed to the real
property. Thus, they calculated the taxes based on the consideration allocated to both the
real property and intangible property. Although sellers disagreed with the calculation, to
complete the transactions and record the deeds of conveyance, they paid the taxes as
required by the taxing authorities, and then pursued their right to request a refund, which
was denied. The Tax Court upheld the denial of the refund, and the Circuit Court of
Baltimore County affirmed the Tax Court on the sellers’ petitions for judicial review.
We shall reverse. The transfer of intangible property is not taxable under the
relevant statutes and county codes. The occasion of a business transaction involving the
sale of both real property and intangible property does not permit the tax imposed on the
transfer of real property to serve as a Trojan horse for taxing the transfer of intangible
property. Accordingly, for the reasons explained below, we disagree with the Tax Court
and hold that consideration properly attributable to intangible property is not included in
the calculation of the recordation and transfer taxes.
BACKGROUND
In July of 2014, Brightview Rockville, LLC (“Brightview Rockville”), Brightview
Towson, LLC (“Brightview Towson”), and Brightview White Marsh, LLC (“Brightview
White Marsh”) (collectively “Sellers” or the “Brightview LLCs”)1 contracted to sell three
senior living facilities located in Montgomery and Baltimore Counties. The buyer of the
three facilities was SHP, IV, LLC (“Buyer”).
The three transactions were governed by separate contracts. The purchase price for
each transaction was broken down into three asset categories: real property, tangible
personal property, and intangible personal property. The real property was transferred
through deeds, the tangible personal property was transferred through bills of sale, and the
intangible personal property was transferred through written assignments.
1
After the Brightview LLCs filed their petitions for judicial review of the Tax
Court’s decisions, they assigned their claims to Shelter Senior Living IV, LLC (“Shelter”).
2
The purchase prices and allocations across the three asset categories for each of the
three transactions were as follows:
Brightview Brightview Brightview Total
Rockville Towson White Marsh
Real property & improvements $14,519,800 $14,486,000 $11,136,400 $40,142,200
Tangible personal property $1,587,643 $997,127 $558,809 $3,143,579
Intangible personal property $13,392,557 $16,516,873 $20,204,791 $50,114,221
Total $29,500,000 $32,000,000 $31,900,000 $93,400,000
Consistent with the above allocations, the consideration reflected in each of the three
deeds was based on the value attributed to the real property and improvements, as follows:
Brightview Rockville: $14,519,800;
Brightview Towson: $14,486,000; and
Brightview White Marsh: $11,136,400.
Sellers presented the deeds to appellees Baltimore County, Montgomery County,
and the Clerks of Court for Baltimore County and Montgomery County (collectively, the
“Taxing Authorities”) for recording. The Taxing Authorities refused to record the deeds
based on the consideration stated therein. Instead, they insisted that the transfer and
recording taxes needed to be calculated based on the consideration allocated to both the
real and intangible property.2
2
A separate sales tax is imposed on transfers of tangible personal property at a
higher rate. Md. Code Ann., Tax-Gen. §§ 11-102(a), 11-204(a)(2) (1988, 2016 Repl. Vol.).
The Taxing Authorities did not attempt to impose transfer or recordation taxes on
consideration exchanged for tangible personal property, nor did they argue, either at the
Tax Court, the circuit court, or here, that they were entitled to do so.
3
Because Sellers couldn’t get the deeds recorded unless they paid the full amount of
taxes assessed, they paid the taxes and then filed refund requests with the Directors of
Finance for both Baltimore and Montgomery Counties, seeking reimbursement for the
recordation and transfer taxes paid on the consideration exchanged for the intangible
personal property. The requests for reimbursement were denied, and the Sellers
subsequently appealed to the Maryland Tax Court.
The Tax Court bifurcated the proceedings into two phases, described as follows:
First, there will be a discovery phase and evidentiary hearing on the issue of
whether, for the transfer of a senior living community, transfer and
recordation taxes may be charged on the value of the intangible assets of the
going concern. If the Court finds in favor of [Sellers], there will be a second
phase of discovery followed by an evidentiary hearing on the issues of the
value of the intangible assets in transactions that are the subjects of this
appeal and what refund and interest if any, are owed to [Sellers].
The Tax Court resolved the appeal by denying Sellers’ refund request in the first
phase, holding that “State law and the relevant county codes permit the State and local tax
collectors to impose transfer and recordation tax based on the total amount of consideration
paid, including any consideration paid for assets categorized by the buyer or seller as
intangible property.”
Sellers sought judicial review of the Tax Court’s decision in the Circuit Court for
Baltimore County.3 The circuit court affirmed the Tax Court’s decision, and Shelter filed
a timely notice of appeal.
3
Because there were three sellers, three separate appeals to the Tax Court were filed.
The Tax Court, however, adjudicated the three cases in a consolidated manner. When the
Tax Court ruled against them, Brightview Rockville filed a petition for review in the Circuit
4
Shelter now presents us with the following question:
Did the Tax Court err in ruling that where an operating senior living business
is transferred, and the transfer includes both real property transferred by deed
to be recorded in the land records as well as intangible business assets (i.e.,
intangible personal property) transferred by assignment, state and county
transfer taxes and state recordation taxes are imposed based on the total
consideration paid for both the real property and intangible business assets,
given that only the real property is or can be transferred by an “instrument of
writing” under the relevant statutes?
We answer that question in the affirmative and reverse.
DISCUSSION
I.
STANDARD OF REVIEW
“On appeal, we review the decision of the Tax Court, rather than the circuit court.”
Blue Buffalo Co., Ltd. v. Comptroller of Treasury, 243 Md. App. 693, 701 (2019). “The
Maryland Tax Court is an adjudicatory administrative agency[,]” and as such, it “receive[s]
the same judicial review as other administrative agencies.” Gore Enter. Holdings, Inc. v.
Comptroller of Treasury, 437 Md. 492, 503 (2014) (cleaned up). We look through the
circuit court’s decision and concentrate our attention on the Tax Court’s decision. Id. As
the scope of our review is cabined to the Tax Court’s analysis, we “cannot uphold the Tax
Court for Montgomery County, and Brightview Towson and Brightview White Marsh filed
separate petitions for review in the Circuit Court for Baltimore County. The parties to the
Montgomery County action jointly moved to transfer the matter to the Circuit Court for
Baltimore County, which was granted. After the transfer was completed, the parties moved
to consolidate the three cases, which was also granted. Somewhere along the line, the
Sellers assigned their refund claims to Shelter.
5
Court’s decision on grounds other than the findings and reasons set forth by [the Tax
Court].” Id. (internal quotations omitted).
The standard of review we apply turns on whether the Tax Court’s decision was a
question of fact, law, or mixture of both. Id. at 504-05. Here, the Tax Court’s decision
rested entirely on its interpretation of provisions of the Tax-Property Article of the
Maryland Annotated Code. Generally, we will afford “great weight” to the Tax Court’s
legal conclusions regarding the statutes that it administers. Id. at 505. But, as recently
explained by the Court of Appeals, “[t]hat degree of deference . . . is not determinative; ‘a
reviewing court is under no statutory constraints in reversing a Tax Court order which is
premised solely upon an erroneous conclusion of law.’” Travelocity.com n/k/a TVL LP v.
Comptroller of Maryland, No. 14, Sept. Term 2020, slip op. at 8 (Md. April 30, 2021).
Here, the Tax Court’s decision was predicated on statutes that it administers, but it did not
concern a matter that required expertise in tax matters. Rather, the interpretation of the
statutes we adopt here rests on our plain language review of the relevant provisions that,
on their face, do not involve complicated concepts in the law of taxation. Accordingly, we
shall review the Tax Court’s legal conclusion without deference. Id. at 9.
II.
ANALYSIS
There are four taxes at issue in this case: the Maryland recordation tax, the Maryland
transfer tax, the Baltimore County transfer tax, and the Montgomery County transfer tax.
Although the relevant statutes imposing these taxes differ in some respects, the question of
statutory interpretation is virtually the same for each, namely, whether the recordation and
6
transfer taxes incurred in the sale of a business are properly calculated against the value of
both the intangible assets and the real property conveyed in the transaction.
Our journey into the weeds of the relevant statutory provisions will be easier if we
first gain an understanding of what is meant by the term “intangible” assets. The Court of
Appeals has explained:
Intangible property is property which has no intrinsic and marketable value,
but is merely the representative or evidence of value, such as certificates of
stock, bonds, promissory notes, and franchises. Intangible property is quite
different in nature from corporeal property, and there is an obvious
distinction between tangible and intangible property. Intangible property is
held secretly; that is, it cannot be readily located, and there is no method by
which its existence or ownership can be ascertained in the state of its situs
except, perhaps, in the case of mortgages or shares of stock. The value of
intangible property is not easily ascertained . . . Things are either tangible or
intangible. A tangible thing is one which has physical substance. All other
things are intangible.
Neuman v. Travelers Indem. Co., 271 Md. 636, 642-43 (1974) (cleaned up).
In this case, the intangible assets conveyed in the three transactions included: 1) the
goodwill and licensing rights of the property and facility; 2) all trademarked and
copyrighted materials connected with the business, including trade names, logos, and signs,
and all original artistic materials;4 3) all advertising and promotional materials; 4) all
advance rental, security, and other deposits; 5) all up-to-date business records including
mailing lists, tenant and supplier lists and correspondence, accounting records and
operating technology, and employee and management records, manuals, schedules, wage
information, and job descriptions; 6) all contact media, including telephone and fax
4
Except that Seller was permitted to continue to use the “Brightview” name in
connection with other senior living facilities it continued to own and/or operate.
7
numbers, email addresses, websites, domain names and URLs connected to the business;
7) all transferable government licenses, permits, zoning rights, and rights-of-way; 8) all
employment and franchise agreements, patents, licenses, and contract rights connected
with the business, its improvements, and its electronic media; and 9) “Service Mark”
registrations.
With this understanding in mind, we now turn to the principles that guide our
analysis of the relevant statutes. Our objective in statutory interpretation is to understand
and implement the intent of the General Assembly. Bartenfelder v. Bartenfelder, 248 Md.
App. 213, 235 (2020). In doing so, “[w]e start with the statute’s plain language which, if
clear and unambiguous, will be enforced as written. We pay attention to the statute’s
grammar and sentence structure” and avoid constructions that are “illogical, unreasonable,
and inconsistent with common sense.” Id. (internal citations omitted). Further:
We do not read a statutory provision in isolation. Instead, we consider its
purpose, goal, and context as a whole. Examining the context of the statute
includes construing provisions within the same section harmoniously, if
possible. If the words of the statute are ambiguous, we look at its structure
(including its caption), context, relationship with other laws, and legislative
history, among other indicia of intent. Even if the words are unambiguous,
a review of the legislative history may, in certain contexts, be useful to
confirm its interpretation or to rule out “another version of legislative intent
alleged to be latent in the language.”
Id. at 235-36. (internal citations omitted)
Armed with a working definition of “intangible” assets and mindful of the principles
of statutory construction that inform our analysis, we turn to the statutory provisions at
issue here.
8
A.
MARYLAND RECORDATION AND TRANSFER TAXES
State recordation and transfer taxes are set forth in Titles 12 and 13, respectively, of
the Tax-Property Article. We will first address the provisions regarding the recordation
tax.
1.
Maryland Recordation Tax
The efficacy of certain types of instruments depends on whether they have been
recorded. For example, legal title to real property does not transfer until the deed is
properly executed and recorded in the land records maintained on a county-wide basis by
the clerks of their respective circuit courts. Md. Code Ann., Real Property Article (“RP”)
§ 3-101(a) (1974, 2015 Repl. Vol.); RP §§ 3-301 to 3-303 (setting forth the requirements
for county clerks keeping land record books and indexes); see also Kingsley v. Makay, 253
Md. 24, 27 (1969). It is also permissible to record other types of instruments creating
interests in real property, such as mortgages. RP § 3-102. While recording such
instruments is not mandatory, see Kingsley, 253 Md. at 27-28, it certainly has its
advantages. Namely, the recording process provides third parties with constructive notice
of the security interest in the property and establishes priority of such interests based on
the date of recordation. RP §§ 3-201, 3-203; see also In re Levitsky, 401 B.R. 695, 720
(Bankr. D. Md. 2008) (explaining that Maryland is a race-notice jurisdiction, meaning that
if a grantor conveys the same interest to two separate bona fide purchasers, the interest
recorded first takes priority).
9
An instrument granting an interest in real property is recorded in the circuit court of
the county where the property is located. RP § 3-103. The party presenting the instrument
for recording must include an intake sheet which discloses, among other things, “the
amount of consideration payable, including the amount of any mortgage or deed of trust
indebtedness assumed, or the principal amount of debt secured[.]” 5 RP § 3-104(g)(3)(iv).
The party must also include a certification from the county tax collector that all taxes
currently due or owed on the property, including transfer and recordation taxes, have been
properly paid. RP § 3-104(a)(1)(i), (b). If a party fails to demonstrate that all taxes have
been paid, the county clerk is not permitted to record the instrument. RP § 3-104(b). Thus,
in Maryland, “[t]he recordation tax is, inter alia, an excise on the privilege of using the
recording offices of the clerks of the circuit courts” for recording conveyances of real
property and for perfecting security interests in personal property.6 Prince George's Cnty.
v. Brown, 334 Md. 650, 662 (1994).
5
In the alternative, the party may include an endorsement from the assessment office
for the county. See RP § 3-104(a)(1)(ii), (g)(8).
6
Though not addressed above, a security interest in personal property may also be
recorded to perfect the interest. See Md. Code Ann., Commercial Law Article (“CL”) §§ 9-
310, 9-501.1 (1975, 2013 Repl. Vol). This is done by filing a financing statement with the
State Department of Assessments and Taxation (“SDAT”). CL § 9-501(a). The rules for
filing such instruments vary based on the type of personal property securing the underlying
obligation, but they generally serve the same purpose of providing notice and establishing
priority of the interest. See generally CL §§ 9-301 to 9-342.
10
Under the Tax-Property Article, the recordation tax “is imposed on an instrument
of writing.” Md. Code Ann., Tax-Prop. (“TP”) § 12-102 (1986, 2019 Repl. Vol.).7 As
discussed above, the types of instruments that get recorded are those that convey an interest
in real property, or instruments that convey a security interest in real or personal property.
In alignment with this reality, an “instrument of writing” is defined as a written instrument
that either “(i) conveys title to or creates or gives notice of a security interest in real
property; or (ii) creates or gives notice of a security interest in personal property.” TP §
12-101(j)(1). Moreover, the phrase “real property” is defined as “land or any
improvements to land.” TP § 1-101(gg)(1). Here, we are concerned with the recordation
taxes imposed on the deeds conveying the real property where the senior living facilities
operate. Thus, for our purpose, the relevant type of “instrument of writing” is one that
“conveys title to . . . real property,” i.e. title to the land and the improvements on the land.
See TP § 12-101(j)(1). Conveyances of intangible property do not figure into the equation.
The next step is to determine how the recordation tax is calculated. The answer is
found in TP § 12-103, which states that when real property is conveyed, the recordation
tax is calculated as a percentage of the “consideration payable . . . for an instrument of
writing.” TP § 12-103(a)(1). The recordation tax on an instrument of writing that conveys
a security interest, however, is not based on the “consideration payable,” but instead is
calculated as a percentage of “the principal amount of the debt secured[.]” Id. Building
7
TP §12-102 states in full: “[e]xcept as otherwise provided in this title, recordation
tax is imposed on an instrument of writing: (1) recorded with the clerk of the circuit court
for a county; or (2) filed with the Department and described in § 12-103(d) of this title.”
11
upon our understanding of an “instrument of writing” gained in the previous paragraphs,
the recordation tax on a deed conveying real property is calculated as a percentage of the
“consideration payable” for the land and the improvements thereon. We must next
determine what “consideration payable” means.
Fortunately, the answer lies in the statute as well. Under TP § 12-103(a)(2),
“consideration” is defined to include “the amount of any mortgage or deed of trust assumed
by the grantee,” but otherwise “includes only the amount paid or delivered in return for the
sale of the property[.]” TP § 12-103(a) (emphasis added). Leaving nothing to chance, the
statute tells us that the “consideration payable” will be found in one of two places: “(1) the
recitals or the acknowledgement of the instrument of writing; or (2) an affidavit under oath
that accompanies the instrument of writing” signed by a party to the instrument of writing
or the party’s agent. TP § 12-104(a).
Applying these provisions to the facts of this case is straightforward. The
instruments of writing at issue here are the three deeds pursuant to which title to the real
property was conveyed, and thus, the recordation tax should have been calculated as a
percentage of the consideration stated in each of the three deeds.
The Taxing Authorities contend that the clause in TP § 12-103(a)(2)(ii)—stating
that consideration “includes only the amount paid or delivered in return for the sale of the
property”—doesn’t distinguish between real or personal property. The Taxing Authorities
point out that under TP § 1-101(cc), “property” is defined to include both “real property
and personal property.” Thus, their argument goes, because intangible property is a form
12
of personal property, it may be properly included in the calculation of the recordation tax.
We are not convinced.
It is, of course, true that throughout the Tax-Property Article, the word “property”
can refer to both “real” and “personal” property. Whether any particular use of the word
“property” refers to one or both types of property, however, depends on the context. In
TP § 12-103(a)(2)(ii), the word “property” is used in connection with determining the
“consideration payable” for an “instrument of writing.” Again, the type of “instrument of
writing” relevant here is a deed transferring title to the real property. As observed above,
“consideration payable” is a concept used only when calculating the recordation tax on an
instrument of writing that conveys title to real property.8 See TP § 12-103(a)(1). Thus, the
word “property” as used in TP § 12-103(a)(2)(ii) refers only to real property. We therefore
disagree with the Taxing Authorities’ assertion that the text of the statute allows for the
inclusion of intangible property when calculating the recordation tax on the transfer of real
property.9
8
In contrast, to calculate the recordation tax on an instrument of writing that grants
a security interest (in either real or personal property), the relevant figure is the “principal
amount of the debt secured.” TP § 12-103(a)(1).
9
We have our doubts that the Taxing Authorities’ interpretation would withstand a
challenge under Article 14 of the Maryland Declaration of Rights, which states “[t]hat no
aid, charge, tax, burthen or fees ought to be rated or levied, under any pretense, without the
consent of the Legislature.” The parties did not raise this issue, and because we resolve
this case on other grounds, we shall not address it. See Sumpter v. Sumpter, 427 Md. 668,
684 n.10 (2012) (citations omitted) (noting that the doctrine of “[c]onstitutional avoidance”
mandates that a court “will not reach a constitutional argument when an issue may be
decided on a non-constitutional basis”).
13
Our conclusion is bolstered when considered in conjunction with the General
Assembly’s relatively recent amendments to the recordation and transfer tax provisions. A
loophole once existed that allowed buyers and sellers of real property to avoid recordation
and transfer taxes. See Fiscal Note, 1st Spec. Sess., S. B. 2 (Md. 2007). Instead of
transferring title to the property, the parties would transfer the ownership interests of the
entity that owned the property. Id. For example, let’s assume that the real property is
owned by a corporation, and that 100% of the shares of the corporation are owned by one
person. Before the loophole was closed, the recordation and transfer taxes could be
avoided by transferring the stock instead of the property.
In 2008, the General Assembly closed the loophole by imposing recordation and
transfer taxes on such transactions. See TP §§ 12-117, 13-103; see also Fiscal Note, 1st
Spec. Sess., S. B. 2 (Md. 2007). To do so, the General Assembly had to take into
consideration certain realities that differentiate the purchase of the real property from the
purchase of the stock. The one most relevant here is the fact that a business entity, such as
a corporation, may own other assets in addition to the real estate, and the extent of the
business’s value attributable to its real property varies from one business to the next. For
one business, the real property may represent a small part of the company’s overall value,
and in another, it could represent nearly all of its value. The less the real property
contributes to the company’s value, the less the transaction would resemble a ploy to avoid
recordation
14
and transfer taxes. The General Assembly had to draw the line somewhere, and did so by
defining the term “real property entity” as:
a corporation, partnership, association, limited liability company, limited
liability partnership, other unincorporated form of doing business, or trust
that directly or beneficially owns real property that:
1. constitutes at least 80% of the value of its assets; and
2. A. has an aggregate value of at least $1,000,000; or
B. is the product of an untaxed conversion from a sole
proprietorship effected under the exemption provided under § 12-
108(y) of this title.
TP § 12-117(a)(6).10
In addition, the General Assembly had to decide whether the recordation and
transfer taxes would be charged against the entire consideration the purchaser paid for the
stock, or whether to adjust for the value of the other assets owned by the corporation. The
General Assembly’s resolution of this issue is reflected in TP § 12-117(b), which, in
relevant part, states:
(b)(1) The recordation tax is imposed on the transfer of a controlling interest
in a real property entity as if the real property, directly or beneficially
owned by the real property entity, was conveyed by an instrument of
writing that is recorded with the clerk of the circuit court for a county or filed
with the Department under § 12-102 of this title.
10
The form of business entity we use in our example is a corporation, but it would
work just the same if we had used another business form such as a limited liability company
(“LLC”) or partnership. If the entity is an LLC, the change of control is effectuated through
the sale of membership interests in the LLC. Similarly, the change of control of a
partnership is effectuated through a sale of the partnership interests. For our discussion,
we are using the example of a stock sale, but the analysis holds for each type of “real
property entity.”
15
(2)(i) The recordation tax is imposed on the consideration payable for
the transfer of the controlling interest in the real property entity.
(ii) The consideration to which the recordation tax applies includes
the amount of:
1. any mortgage, deed of trust, or other lien on or security
interest in the real property directly or beneficially owned by
the real property entity; and
2. any other debt or encumbrance of the real property entity.
(iii) The consideration to which the recordation tax applies is
reduced by the amount allocable to the assets of the real property
entity other than real property.
(iv) The real property entity has the burden of establishing to the
satisfaction of the Department the consideration referred to in
subparagraph (i) of this paragraph and the amount of any
consideration allocable to assets other than real property referred to in
subparagraph (iii) of this paragraph.
(v) If the real property entity fails to establish the amount of
consideration referred to in subparagraph (i) of this paragraph, the
recordation tax is imposed on the value of the real property, directly
or beneficially owned by the real property entity, determined by the
Department at the date of finality immediately before the date of the
final transfer.
(Emphasis added).11
As Shelter points out, subsection (b)(2)(iii) expressly excludes from the calculation
all assets except real property. Shelter contends that this shows that the General Assembly
11
To close the loophole in the transfer tax context, the General Assembly amended
the transfer tax provisions in the same fashion. See TP §§ 13-103(a) (incorporating the
definition in TP § 12-117 of “real property entity”), 13-103(b)(1) (imposing the transfer
tax using the same words used in TP §§ 12-117(b)(1)), and 13-103(b)(2) (incorporating
provisions of TP § 12-117(b)(2)). Thus, although our analysis is framed in terms of the
recordation tax, it applies to the transfer tax as well.
16
never intended to apply the recordation tax to the conveyance of any asset other than real
property.
The Taxing Authorities look at the same provision and draw the opposite
conclusion. They argue:
Section 12-117 shows that the General Assembly knows how to exempt non-
real-property assets from taxation when it wants to. The tax statutes that
apply to recorded deeds do not contain a similar exemption for non-real-
property assets. See generally [TP] § 12-108 (listing exemptions). The
General Assembly even amended [TP] § 12-103 (the law that governs this
case) after it created [TP] § 12-117 (the inapplicable law) but did not add the
language Shelter now seeks to insert. Under the “long accepted” doctrine of
“expressio unius est exclusio alterius,” the Legislature’s choice to pare down
taxes for control transfers suggests that the [L]egislature chose not to pare
down taxes on recorded instruments.
(Footnotes omitted).
The Taxing Authorities offer possible reasons why the General Assembly excluded
any property other than real property in TP § 12-117. For example, they posit that the
General Assembly wanted “to make corporate-ownership interests easier to alienate; that
the deduction would not affect much intangible property” and that the “SDAT is better
positioned” than county clerks to scrutinize the values assigned to the assets owned by a
real estate entity. We disagree.
The General Assembly telegraphed its intent in the opening words of TP § 12-
117(b)(1), which state that the “recordation tax is imposed on the transfer of a controlling
interest in a real property entity as if the real property. . . was conveyed by an instrument
of writing that is recorded” with the county clerks. (Emphasis added). In other words, the
General Assembly wanted as little daylight as possible between the taxes imposed on a
17
stock sale and the tax imposed on a deed of conveyance. To achieve this goal, the General
Assembly determined that in the entity sale, only the real property mattered, and all other
assets were expressly excluded. No such adjustment is necessary if the real property is
conveyed by an instrument of writing, even if the conveyance of the real property is part
of a transaction in which the entire business is sold. And there is a reason for that.
As explained above, and as was the case here, in the sale of a business, the transfer
of different types of assets is accomplished through different types of instruments. When
title to real property is transferred, the county taxing authorities are presented with a very
specific type of instrument of writing—a deed—that conveys title to a very specific type
of asset—real property. As shown above, the “consideration payable” for the deed is, by
statute, limited to the amount paid for the real property and its improvements. In other
words, the consideration paid for the intangible property was never included in the deed in
the first place. Thus, unlike the statutory provisions relating to the stock sale, no express
exclusion of other types of assets was necessary.
2.
Maryland Transfer Tax
Our analysis of the parallel provisions in the transfer tax statute produces the same
result. As is the case in the recordation tax statute, the transfer tax is imposed on an
“instrument of writing” that is “[r]ecorded with the clerk of the circuit court for a
18
county[.]”12 TP § 13-202. The statute’s definition of an “instrument of writing” is virtually
identical to its counterpart for recordation taxes, although it has some differences worth
noting here. As will be recalled from the discussion above, the priority of a security interest
in real or personal property depends on when notice of the security interest was recorded.
Thus, in the recordation tax statute, an “instrument of writing” includes instruments that
grant or give notice of security interests in real or personal property. See TP § 12-101(j).
In contrast, the transfer tax statute does not apply to transfers of personal property or
security interests in either real or personal property. TP § 13-101(e). Thus, in the transfer
tax statute, an “instrument of writing” is limited to “a written instrument that conveys title
to, or a leasehold interest in, real property.” TP § 13-101(e)(1).
The rest of the analysis of the transfer tax statute tracks the analysis of the
recordation tax statute. The transfer tax is based on a percentage of the “consideration
payable for the instrument of writing.” TP § 13-203(a)(1). For our purposes here,
“consideration includes . . . only the amount paid or delivered in return for the sale of the
property[.]” TP § 13-203(a)(2)(ii). The consideration payable is set forth in “the recitals
or the acknowledgement of the instrument of writing” or in a statement under oath
accompanying the instrument of writing signed by a party to the instrument or the party’s
agent. TP § 13-204. Thus, as with the recordation tax, the consideration stated in the deed
12
TP § 13-202 states in full: “[e]xcept as otherwise provided in this subtitle, a
transfer tax is imposed on an instrument of writing: (1) recorded with the clerk of the circuit
court for a county; or (2) filed with the Department and described in § 12-103(d) of this
article.”
19
is the relevant number for calculating the transfer tax, and the value of the intangible
property conveyed in the underlying transaction is not part of the equation.
3.
County Transfer Taxes
We reach the same result in our analysis of the relevant provisions of the Baltimore
and Montgomery County codes. Baltimore County imposes a transfer tax on “instruments
of writing,” Baltimore County Code (“Balt. Cnty. Code”) § 11-3-203(a), defined as
“written instrument[s] that convey[] title to, or a leasehold interest in, real property.” Balt.
Cnty. Code § 11-3-201(1). The transfer tax is calculated as a percentage of the
“consideration paid or to be paid by the transferee in exchange for the conveyance
evidenced by the instrument of writing[.]” Balt. Cnty. Code § 11-3-203(b). Similarly, the
Montgomery County Code imposes a transfer tax on “each transfer in the County of a fee
simple interest in real property,” which is to be “computed on the value of the full
consideration for each transfer[.]” Montgomery County Code (“Mont. Cnty. Code”) § 52-
31.13
As was the case with Maryland’s recordation and transfer statutes, a plain-language
interpretation of the code provisions from both counties limits the taxes to consideration
13
Montgomery County also imposes a transfer tax on “the initial transfer of stock
or other evidence of ownership in a cooperative housing corporation or similar entity” and
“each transfer of a leasehold interest in real property where the lease or instrument by
which a leasehold interest is transferred contains a covenant for perpetual renewal[.]”
Mont. Cnty. Code § 52-31.
20
paid for the real property. Consideration exchanged for intangible personal property is not
included in these definitions and thus, is not taxable.14
B.
THE RELEVANCE OF THE PARTIES’
ALLOCATION OF THE PURCHASE PRICE
The Taxing Authorities contend that the price allocations by the parties were suspect
and that the Tax Court properly focused on the total consideration paid in the overall
transaction (less the value of the tangible property). In that regard, the Taxing Authorities
maintain that the recordation and transfer taxes are imposed against the “‘actual
consideration’ and direct[ed] tax collectors to tax the entire payment for the elder-care
centers, not just the portion of the payment that Shelter allocated to real property.” As the
Taxing Authorities put it:
The parties to the sale here agreed on one price, then allocated portions of
that price to different assets for income tax purposes. They did not separately
bargain for the sale of real property to reach an arm’s-length deal for only
the land and its improvements. The parties’ after-the-fact effort to clarify
and limit their federal income-tax exposure should not affect their transfer
and recordation-tax exposure.
(Internal citations omitted).
The Taxing Authorities also contend that our interpretation would produce the
unwelcome result of allowing parties to the sale of a business to engage in “tax avoidance
ploy[s]” when allocating purchase price to various assets. They argue that unscrupulous
14
Further bolstering this interpretation is the fact that both county codes expressly
prohibit imposing any tax on intangible personal property. See Balt. Cnty. Code § 11-1-
102(c)(1)(ii); Mont. Cnty. Code § 52-17(b).
21
parties would strive to minimize the recordation and transfer taxes through contrived
allocations of the purchase price, and that the county clerks would lack the resources and
expertise to prevent such mischief because valuing intangible personal property is often
“difficult, and potentially arbitrary.”
Although we agree that an examination of the underlying economics of the
transaction is appropriate to ensure that the parties aren’t engaging in a ploy to reduce
recordation and transfer taxes, the Taxing Authorities’ characterization of the transaction
as a retroactive and self-serving exercise cannot be squared with what the limited record
shows about these transactions.15 It appears that, contrary to the Taxing Authorities’
assertion, the parties did, in fact, “separately bargain” for the sale of the various assets
conveyed in the transactions. For example, in the Rockville Contract, the section covering
the purchase price stated as follows:
At least ten (10) days prior to Closing, Seller shall prepare and submit to
Buyer for its review, comment, and approval an allocation of the Purchase
Price (and all other capitalized costs) among the various assets which
constitute the Property in accordance with Code § 1060 and the treasury
regulations thereunder (and any similar provisions of state and local law, as
appropriate). Seller and Buyer shall work together, in good faith, to reach a
final agreement on such allocation and shall report, act and file Tax Returns
(including, but not limited to, Internal Revenue Service Form 8594) in all
respects and for all purposes consistent with such final allocation agreed
upon by Buyer and Seller. Neither Buyer nor Seller shall take any position
15
The Tax Court record does not include each of the three contracts for the
transactions at issue here. The three transactions were part of a larger transaction in which
ten nursing homes were purchased and sold by the same or affiliated buyers and sellers.
The record includes only the contract from the sale of Brightview Rockville’s facility (the
“Rockville Contract”) and the sixth amendment to the Rockville Contract, which amended
not only the Rockville Contract, but also the contracts for each of the other transactions.
Included within the sixth amendment are the agreed-upon purchase price allocations for
each of the ten transactions.
22
(whether in audits, tax returns or otherwise) that is inconsistent with such
final, agreed allocation unless required to do so by applicable law.
Notwithstanding any provision to the contrary in this Agreement, Closing
shall not occur under this Agreement or any of the Completed Project
Agreements or Development Project Agreements, as applicable, until Buyer
and Seller have agreed upon the allocation of the Purchase Price.
As this section makes clear, the allocation of the purchase price across the three
types of assets was a material term of the contract; indeed, under the last sentence of this
provision, an agreement on the allocation was a condition precedent to closing. Notably,
the record shows that several months after the parties executed the contract and just days
before closing, they entered into a sixth amendment to the contract which, among other
things, established the parties’ agreed-upon allocations for all of the subject facilities,
including the three at issue here.
There was a reason, grounded in federal tax law, that the contracts required the
parties to agree upon the allocation of the purchase price before closing. Under 26 U.S.C.
§ 1060,16 which was referenced in the above section of the contract, and its corresponding
regulations, parties to the sale of a business through an asset sale are required to file a form
with the Internal Revenue Service—Form 8594—setting forth the allocation of the sales
price among the various types of assets. 26 C.F.R § 1.1060-1(e)(1)(ii). This is required
because the tax ramifications of an asset sale may depend on the type of asset and the
16
26 U.S.C. § 1060 is a statute in the United States Internal Revenue Code
establishing “[s]pecial allocation rules for certain asset acquisitions.”
23
seller’s cost basis in the asset.17 For example, gains on some assets are taxed at the ordinary
income tax rate, and gains on other assets are taxed at the capital gains tax rate. See 1
ALAN S. GUTTERMAN, LEGAL COMPLIANCE CHECKUPS § 6:13. Tax matters—
Classification of Assets for Tax Purposes (Jan. 2021 update).
In an asset sale, from a tax standpoint, the interests of the seller and buyer are not
necessarily aligned, and in fact are often adverse. See, e.g., 6A MICH. LEGAL FORMS
§ 25:21. Federal Taxes — Sale of Business Property (Aug. 2020 update) (explaining that
“the seller’s and buyer’s [tax] interests are usually adverse”); Langdon v. Comm'r of
Internal Revenue, 59 F. App’x 168, 170 (8th Cir. 2003) (stating that when parties have
competing tax interests, the courts give greater deference to their allocation of the purchase
price). For example, depending on the nature of the asset, a buyer may favor allocating as
much of the purchase price as possible to depreciable assets with short lives such as
covenants not to compete, whereas the seller may push to allocate as little as possible to
the same asset. See 6A MICH. LEGAL FORMS § 25:21. The more the parties’ interests
diverge, the more likely the resulting allocation reflects an arms-length negotiation. In
fact, when the Internal Revenue Service contests the allocations made by the parties, the
level of scrutiny that federal courts give to the parties’ allocation depends on whether the
parties’ tax interests are adverse or aligned. See Langdon, 59 F. App’x at 170-71.
17
A cost basis is the original price of the property adjusted over time to account for
improvement or depreciation of the property. See 26 U.S.C. §§ 1011-12. The gain or loss
from selling the property is calculated for tax purposes by subtracting this adjusted cost
basis from the sales price. 26 U.S.C. § 1001(a).
24
Here, whether the parties’ interests were aligned cannot be ascertained on this
record, but right now, that is beside the point. The possibility (indeed, likelihood) their
interests were adverse allows for the possibility that their allocations were the product of
good faith, arms-length negotiations over the true value of the various assets. On remand,
as the parties move into the second phase of the bifurcated proceedings, this issue may be
explored.
Although we don’t take lightly the possibility that the allocation process could be
used to understate the value of the real property as a tax avoidance ploy, our holding—that
the value attributed to the intangible assets is not considered in the calculation of the
recordation and transfer taxes—does not mean that the county clerks must blindly accept
the parties’ allocation of the purchase price. To the contrary, the clerks may look through
the stated consideration on the deed to the facts and circumstances of the underlying
transaction to ascertain the actual consideration paid for the real property. See, e.g., Dean
v. Pinder, 312 Md. 154, 162 (1988); Pritchett v. Kidwell, 55 Md. App. 206, 213-14 (1983)
(in determining consideration relevant for calculating recordation and transfer taxes, “we
must give regard to the reasonable expectations of the parties: tax avoidance ploys aside,
what did they consider the bargain to be?”).18
18
The Taxing Authorities contend that these cases support their position because
they both confirmed the county clerks’ authority to examine a transaction to determine the
actual consideration paid for the real property beyond the amount stated by the parties on
the instrument of writing. We agree with that general proposition. But these cases do not
stand for the proposition that the clerks can include in their calculations the consideration
exchanged for other assets.
25
Whether county clerks have the expertise or resources to scrutinize a transaction to
weed out the value of the intangible property is beyond our purview, although we hasten
to point out that they are empowered by their respective county codes to inquire into the
parties’ valuations. If they have reason to second-guess the consideration stated in the
deed, they also may calculate the recordation and transfer taxes on the fair market value of
the property.19 See Balt. Cnty. Code § 11-3-207(d) (“If a taxpayer . . . is unable to show
affirmatively to the Director [of Finance] what the consideration paid or to be paid for the
property is, the Director may base the transfer tax on the market value of the property
transferred.”); Mont. Cnty. Code § 52-36(b) (permitting that “[w]here the director of
finance has reason to believe that the consideration for property or valuation of property is
understated . . . [the director] may request the supervisor of assessments for the county or
a professional real estate appraiser to make an appraisal of the property,” and may consider
such an appraisal when making the ultimate determination of taxes due). These options,
we must presume, reflect a belief by the county legislative bodies that the clerks have the
requisite knowledge and resources to make sure the actual consideration exchanged for the
real property serves as the basis on which the recordation taxes are imposed.20 In any event,
if resources or expertise are lacking, that is a matter for the legislative bodies to address.
19
Maryland state recordation and transfer taxes are collected by the clerks of county
circuit courts alongside the county transfer taxes. See TP §§ 12-110(a), 13-208(a).
20
In addition, as discussed above, the parties are required under federal tax law to
allocate the purchase price across the various asset classes. See 26 U.S.C. § 1060(a); 26
C.F.R. §1.1060–1. A fraudulent allocation carries serious consequences under federal law.
See 26 U.S.C. § 6721(e) (describing penalties imposed for cases of intentional disregard
26
CONCLUSION
The Tax Court made a legal error in its determination that “State and local tax
collectors” are permitted “to impose transfer and recordation tax based on the total amount
of consideration paid, including any consideration paid for assets that are categorized by
the buyer or seller as intangible property.” We hold 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. As noted above, in
so holding, we do not suggest or imply that the tax collectors must blindly accept the
consideration stated by the parties. Rather, tax collectors are permitted to look through the
stated consideration to the underlying bargain to ascertain what the parties actually
“consider[ed] the bargain to be.” Pritchett, 55 Md. App. at 214.
JUDGMENT OF THE CIRCUIT COURT
FOR BALTIMORE COUNTY REVERSED;
CASE REMANDED TO CIRCUIT COURT
WITH INSTRUCTIONS TO REMAND TO
TAX COURT FOR FURTHER
PROCEEDINGS CONSISTENT WITH
THIS OPINION. COSTS TO BE PAID BY
APPELLEES.
for asset allocation reporting requirements, including a fine of up to ten percent of the
aggregate amount of the items required to be reported). In addition, the risk of criminal
penalties associated with fraudulent tax filings provides a check against the impulses some
may have to engage in such mischief. See, e.g., 26 U.S.C. § 7206.
27