STATE OF WISCONSIN
TAX APPEALS COMMISSION
RIDGEWOOD ASSOCIATES, a
Wisconsin General Partnership
c/o Attorney Robert J. Welcenbach
Welcenbach & Widmann, S.C.
2001 N. Mayfair Road, Suite 102
Milwaukee, WI 53226
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8933
Madison, WI 53708
|DOCKET NO. 99-T-90
DECISION AND ORDER
This matter was submitted to the Commission on stipulated facts and briefs of the parties.
Petitioner is represented by Attorney Robert J. Welcenbach of Welcenbach & Widmann, S.C. Respondent ("Department") is represented by Attorney Neal E. Schmidt.
Based on the stipulated facts, related exhibits, and briefs of the parties, the Commission finds, concludes, and orders as follows:
STIPULATED FINDINGS OF FACT
The Commission adopts and summarizes the following facts as stipulated by the parties, making minor changes and omitting references to exhibits:
1. On September 18, 1998, a multi-family apartment complex located at 2001 Post Road, 3301 Leopold Way, 2102 High Ridge Trail in the City of Fitchburg, Dane County, Wisconsin ("Property") was deeded from petitioner to Ridgewood Associates II, LLC, a Wisconsin limited liability company ("LLC").
2. The deed was recorded on September 22, 1998 with the accompanying Wisconsin Real Estate Transfer Return.
3. The Wisconsin Real Estate Transfer Return identified the total value of real estate transferred to be $31,200,000. Petitioner claimed that the transaction was exempt from the Wisconsin real estate transfer fee under Wis. Stat. § 77.25(10). Petitioner had owned the Property since November 18, 1987.
4. Harry A. Marek, Jerry J. Marek, and Daniel F. Pieper are the general partners of petitioner. They have been the only partners of petitioner.
5. Prior to September 18, 1998, petitioner had granted a mortgage on the Property to Whitehall Funding, Inc. ("Whitehall Funding"). The balance of that mortgage on September 18, 1998 was approximately $21,000,000.
6. Prior to September 18, 1998, a dispute arose between petitioner and Whitehall Funding relating to payments of the mortgage by funds held in escrow.
7. In a letter dated July 14, 1997, Whitehall Funding declared petitioner in default under the terms of the mortgage. Petitioner denied being in default on July 21 and August 14, 1997, and requested an itemization of payments.
8. Petitioner continued to make mortgage payments and was again assessed a late fee of $6,382.01 on August 18, 1997. Petitioner maintained that the payment was late due to no fault of its own and again denied that it was in default under the terms of the mortgage.
9. On September 4, 1997, petitioner requested that $110,550.81 be released from replacement reserves in order to complete necessary repairs to the Property. Whitehall Funding refused this request, and petitioner withheld $110,550.81 from the December 1997 mortgage payment to complete the necessary repairs.
10. Whitehall Funding denied petitioner's request for reimburse-ment of the $110,550.81 because petitioner was deemed in default on the mortgage.
11. On July 27, 1998, petitioner refused to make further monthly payments, as Whitehall Funding refused to identify the nature of any alleged default. Petitioner stated it would hold the monthly payments in an escrow account which would be disbursed per court order. Petitioner then stated it would commence a lawsuit against Whitehall Funding and the U.S. Department of Housing and Urban Development ("HUD") to determine its right to receive replacement reserve funds.
12. On April 17, 1998, petitioner's attorney requested that Whitehall Funding and HUD either declare petitioner in default or forward the reserve for the replacement account within 10 days.
13. Whitehall Funding again replied on April 30, 1998 that petitioner was in default and that they would not be able to reinvest a portion of the replacement reserve in another Treasury Bill.
14. Because petitioner continued to be deemed by Whitehall Funding to be in default as of April 1998, petitioner pursued a mortgage loan from a new lender in order to avoid the risk of losing the Property in a foreclosure action.
15. On May 4, 1998, HUD requested that Whitehall Funding take the necessary steps to bring the loan with petitioner into compliance.
16. On September 10, 1998, Whitehall Funding demanded the entire balance of $22,195,927.11 due immediately.
17. Prior to August 5, 1998, petitioner applied for a mortgage loan from Dover House Capital, Inc., a subsidiary duly authorized to act on behalf of Morgan Guaranty Trust Company of New York (collectively "Morgan") for a first mortgage loan of $31,200,000, which loan would be secured by a first mortgage position on the Property.
18. In response to the application submitted by petitioner to Morgan, Morgan extended a mortgage loan commitment to petitioner.
19. As a condition of granting the mortgage loan, the mortgage loan commitment required the borrower/petitioner to be a "Special Purpose, Bankruptcy Remote Entity" ("Special Purpose Entity") with an independent director acceptable to Morgan. The borrower was required to satisfy all Special Purpose Entity requirements.
20. The mortgage loan commitment document identifies the three forms of Special Purpose Entity which would be acceptable to Morgan as follows: A) a corporation whose sole business and purpose is to conduct, promote, and engage solely in the ownership and operation of the Property; B) a limited partnership whose sole business and purpose is to conduct, promote, and engage solely in the ownership and operation of the Property; and C) a limited liability company whose sole business and purpose is to conduct, promote, and engage solely in the ownership and operation of the Property.
21. The general partnership form of ownership of petitioner was not an acceptable form for Morgan and would not satisfy Morgan's requirement of a Special Purpose Entity.
22. On September 16, 1998, Articles of the LLC were filed with Morgan, identifying Jerry J. Marek as its registered agent. The only members of the LLC are Jerry J. Marek, Harry A. Marek, and Daniel F. Pieper.
23. Under date of November 16, 1998, the Department mailed to petitioner a Notice of Additional Assessment of Real Estate Transfer Fee. The Department disallowed the exemption from fee claimed by petitioner in connection with the Property and assessed petitioner $120,538.85.
24. Under date of January 12, 1999, petitioner timely filed a petition for redetermination with the Department.
25. Under date of March 4, 1999, the Department denied petitioner's petition for redetermination.
ADDITIONAL FINDING OF FACT
26. Petitioner filed a timely appeal with the Commission.
Is petitioner's September 18, 1998 conveyance of real estate in the City of Fitchburg, Wisconsin, exempt from the real estate transfer fee under Wis. Stat. § 77.25(10)?
APPLICABLE WISCONSIN STATUTE
77.25 Exemptions from fee. The fees imposed by this subchapter do not apply to a conveyance:
* * *
(10) Solely in order to provide or release security for a debt or obligation.
CONCLUSION OF LAW
The subject conveyance of real estate is exempt from the real estate transfer fee under Wis. Stat. § 77.25(10).
The issue before us has been addressed by the Commission at least two times in the past, both in 1995. In both cases, the petitioners only transferred the property to avoid foreclosure and because their new lenders required it, and in both cases the petitioners asserted that their transfers were exempt from the real estate transfer fee under § 77.25(10) because they were made "solely in order to provide ... security for a debt or obligation."
In the first case, Marek, Marek and Pieper v. WDOR, Wis. Tax Rptr. (CCH) ¶ 400-111 (WTAC 1995), nonacq., the Department assessed a transfer fee when the petitioners transferred three parcels of real estate to a partnership. The Commission voided the assessment, holding that the exemption applied because, although petitioners "strongly favored ownership/title as tenants in common, they only deviated from that form of ownership when required to do so in order to provide security for a mortgage." (p. 30,380).
In the second case, Ronald Treml, Robert Treml, and Alan Treml v. WDOR, Wis. Tax Rep. (CCH) ¶ 400-163 (WTAC 1995), the Department assessed a transfer fee when the Tremls transferred a parcel of real estate to a corporation in which they were the sole shareholders. The Commission affirmed the assessment and held that § 77.25(10) applies only to conveyances that create security for a debt or obligation. Commission Chairperson Musolf dissented, arguing that the exemption language in § 77.25(10) requires only that the conveyance be made to provide securityfor a debt, not to create such security.
Although these two 1995 cases had similar facts and cited the same authorities, the Commission reached different conclusions. The Tremlmajority rejected the rationale in Marek, stating that "... we do not follow the holding of Marek, and limit its application to the particular facts and parties presented in Marek" (p. 30,528). Ironically, the parties in interest in Marek and in the case currently before the Commission are the same.
Applying the language of § 77.25(10) to the stipulated facts before us, we are compelled to conclude, as the Commission did in Marek, that the conveyance at issue is exempt from the transfer fee.(1)
The language of the exemption is unambiguous. The statute exempts from the transfer fee conveyances "solely in order to provide ... security for a debt or obligation." "Provide" means "to make preparation to meet a need." Webster's Ninth New Collegiate Dictionary (1991), p. 948. The subject conveyance was made solely in preparation for new financing needed to avoid the risk of foreclosure. Fact 14, supra. The financing could not have been obtained without the security provided by the subject conveyance. This satisfies the exemption language of § 77.25(10).
In Treml, the majority concluded that this exemption "applies only to conveyances that create security for a debt or obligation" (p. 30,528, emphasis supplied). In so concluding, the majority changed the word "provide" to "create," thereby crafting a new definition to narrow the unambiguous statutory exemption language. Only the Legislature and Governor have the authority to change statutory language; the Commission does not.
In its brief, the Department asserts that the transfer was not "solely" to obtain financing because other incidents of ownership arose from the LLC, and Ridgewood's partners "acquired better protection from lawsuits and more beneficial rights." (p. 8)
Virtually any change to a different entity will result in some different rights or obligations. But that is irrelevant where a conveyance qualifies for a specific statutory exemption from the transfer fee, as it does here.
The Department also cites other entity-to-entity transfers to which the transfer fee has been applied for lack of an exemption in § 77.25. This commission is no stranger to these cases, including the recent decision in Esther Miller v. WDOR, Docket No. 98-T-126 (WTAC March 19, 1999). However, the issue here is whether the entity-to-entity conveyance was solely to provide security for new indebtedness, not simply whether an entity-to-entity transfer occurred. The § 77.25(10) exemption was not even claimed in the cases the Department cites; e.g., Wolter v. Wisconsin Department of Revenue, (Ct. App. Dist. II, Nov. 24, 1999).
IT IS ORDERED
That the Department's action on petitioner's petition for redetermination is reversed.
Dated at Madison, Wisconsin, this 24th day of April, 2000.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
COMMISSIONER BOYKOFF, CONCURRING:
In our majority opinion, we recognize the principle that "administrative agencies are not bound by stare decisis...." Nelson Bros. v. Revenue Dept., 152 Wis. 2d 746, 756 (Ct. App. 1989).
After that statement, the Court of Appeals decision continues:
Consistency, of course, is a virtue both in administrative and in judicial determinations but inconsistencies in determinations arising by compar-ison are not proof of arbitrariness or capriciousness." Robertson Transport Co. v. Public Serv. Comm., 39 Wis. 2d 653, 661, 159 N.W.2d 636, 640 (1968).
Supra, p. 746.
In Marek, Treml, and the instant Ridgewood Associates case, the Commission has reached opposite successive conclusions based on similar facts. I am concerned that this may not give landowners and their advisors guidance in structuring their financial transactions. Also, it may not allow the Department to accurately predict its future revenue collections.
Thomas M. Boykoff, Commissioner
DON M. MILLIS, COMMISSIONER, DISSENTING:
The majority complains that the Commission's decision in Treml v. Dep't of Revenue, Wis. Tax Rep. (CCH) ¶ 400-163 (WTAC 1995), amended the provisions of section 77.25(10). I vehemently disagree and, therefore, dissent. It is the majority that is altering the meaning of this statute by construing it in the most expansive manner possible.
The majority concludes that the language of the exemption is unambiguous.(2) The crucial term in the statute is "provide," as in "provide security for a debt or obligation." In explaining how this term is unambiguous, the majority selected the third of seven alternate definitions provided by Webster's Ninth New Collegiate Dictionary. The seven definitions include:
1. To take precautionary measures;
2. To make a proviso or stipulation;
3. To make preparation to meet a need;
4. To prepare or get ready in advance;
5. To supply or make available;
6. To make something available;
7. To have as a condition.
Webster's Ninth New Collegiate Dictionary 948.
In explaining this choice, the majority provides:
The subject conveyance was made solely in preparation for new financing needed to avoid the risk of foreclosure. The financing could not have been obtained without the security provided by the subject conveyance. This satisfies the exemption language of § 77.25(10).
Opinion at 8 (citation omitted).
A more reasonable construction of the term "provide" in section 77.25(10) is to use the fifth definition described above: "To supply or make available." In short, the conveyances that are exempt under this statute are those where the conveyance itself is given for security. This statute does not exempt conveyances that are predecessors to such transactions or that do more than provide security.
In Marek, the Commission held--as does the majority today--that a conveyance need not actually itself give security:
[W]here evidence in the record clearly shows that the sole reason for the conveyance was to provide security for a debt or obligation, even though the conveyance was not itself given for security as such, we hold that petitioners have met their burden of showing themselves to be clearly within the exemption language.
Marek, ¶ 400-112 at 30,381 (emphasis in original). The majority of the Commission rejected this reasoning in Treml:
The language of the statute and the implications flowing from the Marek decision make it clear that [section 77.25(10)] applies only to conveyances that create security for a debt or obligation.
Treml, ¶ 400-163 at 30,528 (emphasis supplied). What the majority in Treml intended was to reverse the holding of Marek, to wit: the exemption applies only to conveyances that themselves were given for security.
The majority here cites the use of the term "create" italicized in the Treml quote above to claim that Treml departed from the language of the statute. As indicated, the Treml majority sought to reverse the holding in Marek, and it articulated this by using the phrase "create security for a debt or obligation."(3) The majority in this case is resting its position on semantics, not substance. The intent of the Treml majority--and of this dissent--is the same.
Whether you describe a conveyance as one that creates, gives or conveys security for a debt or obligation, the substantive point is that if a security interest is the sole result of the conveyance, it is exempt; otherwise, it is not. If a conveyance is but the first step in obtaining financing or of giving/creating security, then it is not exempt.
There are numerous problems with the construction offered by the majority. Many of these problems were highlighted by the majority opinion in Treml.
Intrusiveness. The majority's construction will require respondent, and ultimately the Commission, to delve into the intent of the parties to the conveyance. Even under the majority's construction, the admitted purpose of the conveyance must "solely" be to provide security. If the parties have another purpose in making the conveyance, it is not exempt. As the majority in Treml explained, none of the other transfer fee exemptions turn on the intent or purpose of the conveyance.
The construction favored by the Treml majority and this dissent avoids the need to intrude into the intent of parties to the transaction. One need only look at the conveyance document. If the only result of the conveyance is a security interest, the conveyance is exempt; otherwise, it is not.
Broad Construction. Perhaps the biggest problem with the majority's construction is its breadth. In fact, the majority has selected the broadest possible interpretation of this exemption. Apparently, in order to qualify for the exemption, all one must do is apply for financing that cannot occur without some sort of conveyance.(4) Imagine the possible transactions that will now be exempt:
1. Alan, Brad, and Calvin (all unrelated) own an apartment building as tenants in common and they want to buy another. (Calvin is the ex-husband of Alan's sister.) Alan asks his father to finance the deal, explaining that the three buddies would be willing to pledge their existing apartment building as security. The father responds that, while he would be happy to help out, he despises Calvin for the way he treated Alan's sister. The father will not lend to any project in which Calvin is involved. Calvin conveys his interest in the existing apartment building for consideration at market value.
2. Denise and Edith are limited partners and Francine the general partner in a limited partnership that owns three commercial buildings. The three unrelated women have financed the acquisition of these buildings with a series of five-year notes. During negotiations over a new note, Francine's husband wipes out their net worth with day trading over the Internet. Francine and her husband file a chapter 7 bankruptcy petition. Needless to say, the lender will not lend to the partnership as long as Francine is a general partner. Moreover, the lender now wants both Denise and Edith to be general partners. As required by their lender, Denise and Edith buy out Francine, form a general partnership, and convey the commercial buildings to the general partnership.
3. Greg, Herman, and Ira (all unrelated) are co-owners of a large parcel of land the three hope to develop into a landfill. The three have a lending commitment from a large bank to finance the development of the landfill once the necessary approvals are obtained from the state. The state is prepared to approve the landfill but for the fact that Ira owns an interest in another landfill that has been cited for environmental violations. Under the "Bad Actor" statute, Ira must divest in order for the landfill to be approved. Ira sells his one-third share to the others for consideration at a fair market value.
4. Subsidiary, Inc. is a wholly-owned subsidiary of Multi-National Corporation. Multi-National is a very profit-able worldwide conglomerate that counts its profits in the billions. Subsidiary wants to build a $100-million plant on land it owns. Its lender will provide financing at a reduced rate if the borrower is Multi-National instead of Subsidiary. In order to get the lower rate, Subsidiary conveys its land for market consideration to Multi-National and enters into a long-term lease of the new plant.
Under the majority's holding, each of the conveyances described above could be exempt from the transfer fee. Each of the conveyances described was necessary to obtain the financing desired. I cannot believe that the Legislature intended the exemption in section 77.25(10) to be so broadly construed. This construction violates the mandate that exemptions be narrowly construed. See, Ramrod, Inc. v. Dep't of Revenue, 64 Wis. 2d 499, 504 (1974).
Inconsistency. Such a broad reading of "provide" is inconsistent with the parallel term used in the exemption: "release." The statute exempts conveyances that "release security for a debt or obligation." On its face, this part of the exemption is fairly narrow, limited to conveyances that release a security interest, such as a satisfaction of mortgage. If this is the case, the majority's expansive construction of "provide" is inconsistent with the relatively narrow construction of "reason."
It seems odd that any preliminary conveyance that was necessary to obtain financing would be exempt, yet only a conveyance that actually releases a security interest would be eligible for the exemption under section 77.25(10). Perhaps a real estate developer conveys certain lots to a creditor to satisfy a debt that is secured by a mortgage against other lots still owned by the developer. Hopefully, one would not construe section 77.25(10) to include such a conveyance under section 77.25(10). This example, however, points out the inconsistency occasioned by the majority's construction of this exemption: a very broad exemption for conveyances related to the creation of a security interest, but a very narrow construction when it comes to the termination of a security interest.
For these reasons, I would affirm the action of respondent on the petition for redetermination.
Don M. Millis, Commissioner
2 I disagree that the term "provide" is unambiguous. At a minimum, the statute is susceptible to two different, reasonable interpretations. Therefore, the statute is ambiguous. State v. Anderson, 160 Wis. 2d 435, 439 (Ct. App. 1991).
4 It is important to note that the test enumerated by the majority is not that the conveyance is necessary for the only possible financing option but, rather, any of a number of possible financing options considered by the taxpayer. In this case, the facts do not show that Whitehall Funding was the only lender that was willing to lend to petitioners.