STATE OF WISCONSIN
TAX APPEALS COMMISSION
SUNSET MEADOWS, PARTNERSHIP
c/o LaRowe, Gerlach & Roy, S.C.
P.O. Box 10
Sauk City, WI 53583-0010
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8933
Madison, WI 53708-8933
|DOCKET NO. 98-T-129
DECISION AND ORDER
THOMAS M. BOYKOFF, COMMISSIONER:
This matter was submitted to the Tax Appeals Commission on stipulated facts. Petitioner is represented by Attorney Harry Sauthoff, Jr., of LaRowe, Gerlach & Roy, S.C., Attorneys, of Sauk City, Wisconsin. Respondent was represented by Attorney Neal E. Schmidt, of Madison, Wisconsin.
Based on the stipulated facts, related exhibits, and briefs of the parties, the Commission finds, concludes, and orders as follows:
FINDINGS OF FACT
The Commission adopts the following facts as stipulated by the parties, with slight modifications and with references to exhibits omitted:
1. Donald L. and Margaret M. Breunig are husband and wife. Timothy A., Terrence H., Vicki L., Kendall G., and Thomas M. Breunig are their children.
2. On April 4, 1996, a Warranty Deed ("original deed") was executed and subsequently recorded on April 16, 1996, in Reel 702 at Image 507 as Document No. 634293, Sauk County Registry. The original deed was from Sunset Meadows, a partnership ("petitioner"), consisting of Donald L., Margaret M., Timothy A., Terrence H., Vicki L., Kendall G., and Thomas M. Breunig, co-partners as grantors to Sunset Meadows, L.L.C. as grantee.
3. Sunset Meadows, L.L.C. is a Wisconsin Limited Liability Company all of whose members are the co-partners in Sunset Meadows, a partnership.
4. The total value of the real estate listed on the Wisconsin Real Estate Transfer Return was $1,278,646.00. The transfer was claimed to be exempt from the fee under § 77.25(15s), Wis. Stats.
5. On January 15, 1998, the Wisconsin Department of Revenue ("respondent") sent a Notice of Additional Assessment of Real Estate Transfer Fee, stating as follows:
The claimed exemption under section 77.25(15s), Stats. has been determined to be improper for the following reasons:
Exemption 15s is between a limited liability company and its members if the members are spouses, lineal ascendants, lineal descendants, siblings, or spouses of siblings of each other.
A conveyance between a partnership and a limited liability company does not meet any of the require-ments of the exemption and requires a transfer fee per s. 77.22(1), Stats.
6. On March 3, 1998, the original deed was re-recorded as Document No. 670967 in the Sauk County Registry ("correction deed"). The correction deed changed the name of the grantee from Sunset Meadows, L.L.C. to Donald L., Margaret M., Timothy A., Terrence H., Vicki L., Kendall G., and Thomas M. Breunig ("the 7 Breunigs"). The correction deed stated that "This deed is being re-recorded to correct the grantee designation."
7. Shortly after the recording of the correction deed, petitioner petitioned respondent for a redetermination, claiming that the issues raised in the assessment dated January 15, 1998, were moot because of the re-recording to correct the grantee designation. The petition for redetermination was denied, and a Notice of Action dated April 2, 1998, was mailed to petitioner's counsel which computed the amount due upon the redetermination.
8. By letter dated April 29, 1998, the transfer fee, including interest and penalty, was tendered to the Wisconsin Department of Revenue, Real Estate Transfer Audits.
9. Respondent's denial was appealed by Sunset Meadows, a partnership, to the Wisconsin Tax Appeals Commission. The Commission has jurisdiction over the appeal.
10. The purpose of recording the correction deed was to avoid the necessity of paying the Wisconsin real estate transfer fee.
11. Both the original deed and the correction deed were executed for no monetary consideration.
77.21 Definitions. In this subchapter:
(1) "Conveyance" includes deeds and other instru-ments for the passage of ownership interests in real estate, including contracts and assignments of a vendee's interest therein and including leases for at least 99 years but excluding leases for less than 99 years, easements and wills.
77.22 Imposition of real estate transfer fee.
(1) There is imposed on the grantor of real estate a transfer fee at the rate of 30 cents for each $100 of value or fraction thereof on every conveyance not exempted or excluded under this subchapter. In regard to land contracts the value is the total principal amount that the buyer agrees to pay the seller for the real estate. This fee shall be collected by the register at the time the instrument of conveyance is submitted for recording. Except as provided in s. 77.255, at the time of submission the grantee or his or her duly authorized agent or other person acquiring an owner-ship interest under the instrument, or the clerk of court in the case of a foreclosure under s. 846.16(1), shall execute a return, signed by both grantor and grantee, on the form prescribed under sub. (2). The register shall enter the fee paid on the face of the deed or other instrument of conveyance before recording, and, except as provided in s. 77.255, submission of a completed real estate transfer return and collection by the register of the fee shall be prerequisites to acceptance of the conveyance for recording. The register shall have no duty to determine either the correct value of the real estate transferred or the validity of any exemption or exclusion claimed. If the transfer is not subject to a fee as provided in this sub-chapter, the reason for exemption shall be stated on the face of the conveyance to be recorded by reference to the proper subsection under s. 77.25.
77.25 Exemptions from fee. The fees imposed by this subchapter do not apply to a conveyance:
* * *
(3) Which, executed for nominal, inadequate or no consideration, confirms, corrects or reforms a conveyance previously recorded.
* * *
(8) Between parent and child, stepparent and step-child, parent and son-in-law or parent and daughter-in-law for nominal or no consideration.
* * *
(15m) Between a partnership and one or more of its partners if all of the partners are related to each other as spouses, lineal ascendants, lineal descendants, siblings, or spouses of siblings and if the transfer is for no consideration other than the assumption of debt or an interest in the partnership.
(15s) Between a limited liability company and one or more of its members if all of the members are related to each other as spouses, lineal ascendants, lineal descendants, siblings, or spouses of siblings and if the transfer is for no consideration other than the assumption of debt or an interest in the limited liability company.
CONCLUSIONS OF LAW
1. The conveyance of real estate by Warranty Deed on April 4, 1996, from Sunset Meadows, a partnership, to Sunset Meadows, L.L.C. (the "original conveyance" or "original deed") is subject to imposition of the Wisconsin real estate transfer fee and is not exempt from that fee.
2. The re-recording on March 3, 1998, of the original deed with a different grantee and with the language "This deed is being re-recorded to correct the grantee designation" did not affect the imposition of the transfer fee on the original conveyance.
3. The statutes cited above and respondent's application of the real estate transfer fee to this transaction does not deny petitioner "equal protection of the laws" as guaranteed by Amendment XIV, Section 1 of the U.S. Constitution.
The basic facts in this case are relatively straightforward:
1) Sunset Meadows, partnership, conveyed real estate to Sunset Meadows, L.L.C. for no monetary consideration, although the real estate's value was stated on the transfer form.
2) Sunset Meadows, partnership, believed the conveyance was exempt from Wisconsin's real estate transfer fee, so it tendered no fee.
3) Respondent disagreed and issued an assessment notice for the fee and interest. The assessment notice stated that the exemption claim was erroneous, and the exemption which was claimed (§ 77.25(15s)) did not apply to this conveyance.
4) Sunset Meadows, L.L.C. then conveyed the real property to the 7 Breunigs with language on the deed that it was re-recorded "to correct the grantee designation". There is no disagreement that this conveyance was exempt from the Wisconsin real estate transfer fee under § 77.25(15s), Stats.
5) The purpose of recording the correction deed was, admittedly, to avoid the necessity of paying the Wisconsin real estate transfer fee.
The original conveyance did not fit within any of the exemptions from the real estate transfer fee, although petitioner claimed an exemption under § 77.25(15s).This conveyance was clearly a transfer of real estate from a partnership to an LLC. No other result appears to have been intended at the time of the conveyance. It achieved the transfer between the parties which they intended. However, it did not achieve the fee-free result they desired because it was clearly not exempt under any of the 24 exemptions in § 77.25.
The correction deed did not and could not nullify the original conveyance for transfer fee imposition purposes, although it was calculated to do so.(1) Upon delivery to the grantee, Sunset Meadows, L.L.C., the conveyance was complete, pursuant to § 706.02(1). At that point it became subject to the fee imposed by § 77.22.
In J. & R. Hotel Partnership v. WDOR, ¶ 400-286 CCH Wis. Tax Rptr. (WTAC 1997), the Commission concluded that a conveyance is exempt from the transfer fee under § 77.25(3) only if it confirms, corrects or reforms a conveyance previously recorded, not if it nullifies a conveyance previously recorded. Here, we make it clear that a "correction deed" cannot nullify the applicability of the transfer fee to a prior conveyance irrespective of whether the
"correction deed" qualifies for exemption from the fee under § 77.25(3).
Three significant cases have held that an entity-to-entity transfer was not exempt from the real estate transfer fee. First, in Wisconsin Deparment of Revenue v. Virchow, Krause & Co., CCH Wis. Tax Reptr. ¶ 203-100 (Oct. 30, 1989), the Dane County Circuit Court overturned the Commission and held that a partnership-to-partnership transfer was subject to the fee. Both partnerships had the same unrelated partners, and they had the same partnership interests.
Second, in Heritage Place Limited Partnership v. Wisconsin Department of Revenue, ¶ 400-162 CCH Wis. Tax Reptr. (WTAC 1995), the Commission held that a limited partnership to a general partnership transfer resulted in a fee as there was no exemption in the statute for such transfer. Third, in J. & R. Hotel Partnership v. Wisconsin Department of Revenue, ¶ 400-286 CCH Wis. Tax Reptr. (WTAC 1997), the Commission held that a partnership to LLC transfer, where a husband and wife had the same interests in each entity, was subject to the fee. The J. & R. Hotel Partnership case parallels the instant case, where a transfer from Sunset Meadows Partnership to Sunset Meadows, L.L.C., is also now held as subject to the fee.
Petitioner asserts that the original transfer -- from the partnership to the LLC -- could have been accomplished by a sequence of two transfers: (1) from the partnership to the 7 Breunigs, then (2) from the 7 Breunigs to the LLC. Because the two transfers are clearly exempt from the transfer fee, petitioner asserts the original, single transfer which achieves the same conveyance result should also be exempt. Just as we rejected that argument in J. & R. Hotel Partnership, supra, we reject it here.
Undoubtedly, the single transfer above and the above sequence of two transfers achieve the same conveyance result. However, the Legislature and the Governor, in enacting the real estate transfer fee, did not treat the two alternatives equally and did not exempt both. Exemptions from this fee should be strictly construed in the same manner as exemptions from a state tax statute. Also, courts have recognized that when legislative enactments raise funds for governmental operations and programs, the presumption is particularly strong. See, Simanco, Inc. v. Dept. of Revenue, 57 Wis. 2d 47, 203 N.W. 2d 648 (1973), and GTE Sprint v. Wisconsin Bell, 155 Wis. 2d 184 (1990). The Legislature and the Governor could amend the law to achieve the result desired by petitioner. But they have not done so to date, and the original transfer is subject to the fee.
Petitioner challenges the preceding conclusion and asserts that imposition of a tax on a direct transfer of real estate, while at the same time exempting two indirect transfers accomplishing the same result, is arbitrary and has no reasonable purpose. This result, petitioner concludes, violates the "Equal Protection Clause" of the 14th Amendment to the U.S. Constitution.
Initially, cases cited by both petitioner and respondent deal with the imposition of a tax. The instant case deals not with a "tax" but with a "fee". For this discussion of authorities, the real estate transfer "fee" is treated the same as a "tax" because both involve a legislative classification, the statutory imposition of an amount due to the state measured by the value of a transfer, and the way exemptions from that classification are treated.
The application of the Equal Protection Clause to a classification and exemptions to it is described in Omernik v. State, 64 Wis. 2d 6, 18-19 (1974) as follows (without footnotes and case citations):
A legislative classification is presumed to be valid. The burden of proof is upon the challenging party to establish the invalidity of a statutory classification. Any reasonable basis for the classifica-tion will validate the statute. Equal protection of the law is denied only where the legislature has made irrational or arbitrary classification.... The basic test is not whether some inequality results from the classification, but whether there exists any reasonable basis to justify the classification.
Judicial response to a challenged legislative classification requires only that the reviewing court locate some reasonable basis for the classification made. The public policy involved is for the legislature, not the courts, to determine....
Respondent identifies two exemptions from the real estate transfer fee as follows: (1) § 77.25(15m) exempts transfers between a partnership and one or more of its partners if all of the partners are related to each other in enumerated ways (which the instant case complies with); and (2) § 77.25(15s) exempts transfers between an LLC and one or more of its members if all the members are related to each other in enumerated ways (the same enumeration as in § 77.25(15m)). This contrasts with a non-exempt transfer from a partner-ship to an LLC even if the members of both legal entities meet the relationship standards of the above statutory subsections.
Respondent asserts that Wisconsin's statutes have a history of favoring transfers between family members or showing a preference to families over other entities. Examples include the married persons income tax credit; joint income tax filing by married persons; exemptions for transfers between spouses from the former inheritance tax and the former gift tax; exemptions from transfers between spouses from the estate tax; and an exemption from the beverage tax for wine, cider, and fermented malt beverages made and consumed by the family (and guests).
The legislative classification involved in this case involves transfers between either a partnership or an LLC comprised solely of family members, with a specified degree of relationship, and one or more of those family members. Under the Omernik case, this classification is presumed to be valid.
In the real estate transfer fee statutes, there is clearly a uniformity of treatment between and among entities. Corporations, partnerships, and LLCs have a legal existence apart from their shareholders, partners or members. They typically exist for business purposes. All transfers between them are subject to the transfer fee. There is no entity-to-entity exemption in § 77.25, Stats. Individuals may choose whether or not to form these entities, and may take the tax consequences into account in doing so. Petitioner acknowledges that its family members could have avoided the fee by so doing. Petitioner has not demonstrated that this classification is irrational or arbitrary. Therefore, it does not violate the Equal Protection Clause of Amendment XIV of the U. S. Constitution.
Current exemptions do not apply to transfers between partner-ships and LLCs, even if members of a family are partners or members of those entities. In this situation, the transfer is between legal entities, not between a legal entity and family members comprising that legal entity.
A reasonable basis exists to exempt transfers between a legal entity (ex., LLC, partnership or corporation) and family members who comprise that legal entity and to not exempt transfers between legal entities. Petitioner has not demonstrated that the Legislature and the Governor have enacted statutes with an irrational or arbitrary classification. Therefore, the classification does not violate the Equal Protection Clause of Article XIV of the U.S. Constitution.
IT IS ORDERED
That respondent's action on petitioner's petition for redetermination is affirmed.
Dated at Madison, Wisconsin, this 5th day of March, 1999.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
1 We also doubt that the "correction" deed nullified the original conveyance as a matter of substantive real estate law. Once the original conveyance was delivered and recorded, actual and record title was in Sunset Meadows, L.L.C. See, generally, Wis. Stats. Ch. 706, which makes no provision for "correction" deeds as such. At that point, only the LLC could convey the real estate.