STATE OF WISCONSIN
TAX APPEALS COMMISSION
SUNBURST IV LIMITED PARTNERSHIP
2105 Kensington Drive
Waukesha, WI 53187
WISCONSIN DEPARTMENT OF REVENUE
P.O. Box 8907
Madison, WI 53708
|DOCKET NO. 97-T-373
DECISION AND ORDER
THOMAS M. BOYKOFF, COMMISSIONER:
This case comes before the Commission on stipulated facts of the parties. A hearing was also held on October 5, 2000 in Waukesha, Wisconsin.
Petitioner, Sunburst IV Limited Partnership ("Sunburst"), appears by Attorney Barry R. White of Weiss, Berzowski, Brady & Donahue LLP of Milwaukee, Wisconsin. Respondent, Wisconsin Department of Revenue ("Department"), appears by Attorney Neal E. Schmidt.
Based upon the submissions of the parties and the record in this case, the Commission hereby finds, concludes, and orders as follows:
FINDINGS OF FACT
The Commission makes the following Findings of Fact based upon the stipulated facts and clarifications of some facts stipulated to at the October 5, 2000 hearing, omitting references to exhibits and making non-substantive changes for consistency and form:
1. Sunburst is a Wisconsin limited partnership organized on July 15, 1988.
2. Sunburst acquired land in Waukesha, Wisconsin, in 1988 and shortly thereafter began the development of a 278-unit apartment complex known as Westgrove Woods ("the property").
3. The funds for development of the property consisted of money raised from the issuance and sale of tax-exempt municipal bonds issued by the Waukesha Housing Authority ("Housing Authority") of the City of Waukesha. Piper Jaffray & Hopwood ("Piper Jaffray") was the bond underwriter. A favorable interest rate was procured because repayment of the bonds was guaranteed by the U. S. Department of Housing and Urban Development ("HUD").
4. The bonds were issued on or about December 1, 1988, and were due and payable in full on their tenth anniversary in 1998.
5. In 1995, with long-term interest rates at historic lows, and with no assurances that these historic lows would continue, Sunburst's managing partner, Helmut Siewert, investigated refinancing the property and prepaying the then-existing financing.
6. A September 25, 1995 letter was sent to Mr. Siewert from G. Terrence McNellis, managing director of Piper Jaffray, concerning the require-ments of the Federal Housing Administration ("FHA") insured, tax-exempt bond financing. The letter states, in part: "There are also issues that we will need to . . . work through with HUD including creating a single purpose entity. . . ."
7. Under date of July 25, 1995, HUD issued a notice, titled "Requirements for Accepting Limited Liability Companies and Partnerships as Mortgagor Entities for Insured Multifamily Housing Projects," which states, in part:
The entity must be a single-asset entity as described in paragraph 6(f) of the Regulatory Agreement, Form HUD-92466. [Emphasis supplied.]
8. Sunburst owned a number of other assets in addition to the property and, accordingly, could not qualify for refinancing as a "single-asset entity" under the HUD requirements.
9. On October 31, 1996, the FHA, on behalf of the Secretary of HUD, issued its "Commitment to Insure Upon Completion" to Sunburst and its affiliates. This document states, in pertinent part, the requirement as specified in HUD regulations:
. . . that title to the property . . . is vested in the Mortgagor free of all encumbrances other than said Mortgage and all exceptions to title (either junior or prior to said Mortgage) except such as are specifically determined to be acceptable by the [Federal Housing] Commissioner. [Emphasis supplied.]
10. Sunburst determined that a limited liability partnership was the preferred type of entity to hold record title under applicable federal regulations. To assure that the financial interests of the more than 75 limited partners in Sunburst were neither compromised nor diluted, Sunburst's counsel recommended that the new limited liability partnership have as its partners Sunburst and Sunburst's general partner.
11. Westgrove Wood LLP ("Westgrove"), a Wisconsin limited liability partnership, was formed on November 1, 1996.
12. On November 1, 1996, Glaser Financial Group, Inc. ("Glaser"), granted the mortgage to Westgrove, and the mortgage was recorded on November 26, 1996.
13. On November 25, 1996, an unrecorded "Nominee Agreement" was executed between Sunburst and Westgrove, which provides, in pertinent part [emphasis supplied by the Commission]:
WHEREAS, in order to satisfy the single entity requirement of HUD, (A) Sunburst III shall convey its interest in the Common Areas to Sunburst IV; and (B) Sunburst IV shall immediately thereafter transfer record title to the Property to Westgrove LLP to act as its nominee and agent.
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1. The parties acknowledge that Sunburst IV is, and during the entire existence of this Agreement shall remain, the true and actual owner of the Property and shall account for and file its tax returns accordingly, even though Westgrove LLP shall hold record title thereof by the recording of a Quit Claim Deed transferring record title to the Property from Sunburst IV to Westgrove LLP.
2. Solely for the purpose of enabling Sunburst IV to procure the refinancing of the Property, Westgrove LLP agrees to continue to hold record title to the Property for the benefit of Sunburst IV for so long as Sunburst IV shall request and direct. Westgrove LLP acknowledges that its duties or responsibilities with respect to the Property arise solely in its capacity as agent of and nominee for Sunburst IV, that it has no real interest in the Property, that it shall not serve any function with respect thereto other than to perform ministerial tasks at the written direction and instruction of Sunburst IV, and that it shall act as a nominee and agent of Sunburst IV for the purpose of holding record title to the Property.
3. All sums received in connection with the refinancing or the operation of the Property shall be delivered to, for the account of, or in accordance with the instructions of Sunburst IV. Westgrove LLP shall not, under any circum-stances, retain or possess any sums or any portion thereof, nor shall it be entitled to the realization of any profits or the allocation of any losses suffered in connection with its record ownership of the Property. Westgrove LLP acknowledges that it will not be obligated to pay any expenses in connection with its function as the mere record title holder of the Property and the nominee and agent of Sunburst IV. All expenses incurred by or for the account of Westgrove LLP in connection with its function hereunder shall be paid by Sunburst IV.
4. Upon the written direction of Sunburst IV, Westgrove LLP shall execute and deliver to HUD or its servicing agent, Glaser . . ., such documents prepared by Sunburst IV and related to the Property as HUD or Glaser may reasonably request. Westgrove LLP shall have no discretionary authority to exercise any control over the property, or to execute any written instruments in any way relating to the Property, except as set forth herein. It is expressly under-stood that Westgrove LLP shall immediately forward to Sunburst IV all correspondence or other written materials relating to the Property that Westgrove LLP may receive from time to time. At such time as HUD approves, Westgrove LLP shall re-convey record title to Sunburst IV.
14. Sunburst transferred title of the property to Westgrove by quit claim deed, dated November 25, 1996 and recorded on November 26, 1996.
15. On November 25, 1996, Sunburst filed a Wisconsin Real Estate Transfer Return reflecting the transaction.
16. On November 25, 1996, Westgrove refinanced the property through the issuance of FHA insured, tax-exempt bonds, the entire proceeds of which were used as set forth in a "Borrower/Lender Closing Statement." On November 26, 1996, three documents were recorded, titled "Supplemental Land Use Restriction Agreement," "Subordinate Multifamily Mortgage, Assignment of Rents and Security Agreement," and "Regulatory Agreement for Multifamily Housing Projects."
17. Shortly after the November 1996 transactions, Sunburst's counsel contacted the Department's counsel, advising the Department of the filing of the transfer return, the facts and circumstances of the transaction, and the exemption claimed, supplying supporting documentation.
18. Sunburst and the Department disagree on the value of the property transferred. A hearing by this commission would be necessary on the value of the property if the issues regarding the Nominee Agreement do not fully resolve this case.
19. During the Commission's numerous telephone scheduling and status conferences with the parties, it was agreed by the parties that the Department would contact HUD and the Housing Authority. While the Housing Authority has not replied, the response from HUD did not resolve the disagreement between the parties.
20. On April 7, 1997, the Department issued its assessment notice of $66,969.29 (transfer fee, interest, and penalty) to petitioner.
21. Under date of June 6, 1997, Sunburst filed a petition for redetermination of the assessment.
22. On September 9, 1997, the Department denied Sunburst's petition for redetermination.
23. On November 11, 1997, Sunburst timely appealed to this commission.
24. On November 25, 1996, Sunburst refinanced its loan on the property. Instead of the then-current financing rate of 8.1% amortized over 10 years, which expired in 3 years, it obtained an interest rate of 6.3% amortized over 35 years. This also provided Sunburst with cash flow advantages.
25. Sunburst conveyed the property to Westgrove to comply with the requirements of its new lender, Piper Jaffray, that title to the property must be free of all encumbrances other than its first mortgage and that the legal entity holding title to the property would not hold title to any other properties.
26. Sunburst received no money or anything of value for this conveyance.
Is the November 25, 1996 conveyance of the property from Sunburst to Westgrove exempt from the Wisconsin real estate transfer fee under Wis. Stat. § 77.25(9) or (10)?
WISCONSIN STATUTES INVOLVED
77.22 Imposition of real estate transfer fee.
(1) There is imposed on the grantor of real estate a real estate 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. . . .
77.25 Exemptions from fee. The fees imposed by this sub-chapter do not apply to a conveyance:
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(9) Between agent and principal . . . without actual consideration.
(10) Solely in order to provide or release security for a debt or obligation.
CONCLUSION OF LAW
The November 25, 1996 conveyance of property from Sunburst to Westgrove is exempt from the real estate transfer fee under Wis. Stat. § 77.25(9) as a transfer between agent and principal without actual consideration.
Wisconsin Statutes § 77.25(9) exempts a conveyance from the real estate transfer fee if it is "[b]etween agent and principal . . . without actual consideration." Sunburst asserts that, as principal, it transferred the property involved here to its agent Westgrove on November 25, 1996.
The principal/agent relationship, Sunburst asserts, is created by the "Nominee Agreement" signed by both Sunburst and Westgrove. The Commission agrees. This written agreement, no matter what it is called, establishes the rights and obligations of both Sunburst, the principal, and Westgrove, the agent.
The principal/agent relationship of Sunburst and Westgrove appears at the beginning of the Nominee Agreement. Among the "WHEREAS" provisions prefacing the agreement, a portion of the 6th "WHEREAS" provides "in order to satisfy the single entity requirement of HUD . . . Sunburst . . . shall immediately transfer record title to the [p]roperty to Westgrove . . . to act as its nominee and agent; . . . ." [Emphasis supplied.]
The substantive provisions of the agreement provide that Westgrove holds title "[s]olely for the purpose of enabling Sunburst . . . to procure the refinancing of the [p]roperty."(1) The agreement further states: "Westgrove . . . acknowledges that its duties or responsibilities with respect to the [p]roperty arise solely in its capacity as agent of . . . Sunburst . . . [and] that it has no real interest in the [p]roperty."(2)
Additional language in that paragraph provides that Westgrove "shall not serve any function with respect [to the property] other than to per-form ministerial tasks at the written direction and instruction of Sunburst . . . and that [Westgrove] shall act as a nominee and agent of Sunburst . . . for the purpose of holding record title to the [p]roperty." In the following paragraph, numbered "3," Westgrove is also called an "agent" of Sunburst.
The agreement's provisions quoted in the stipulated facts, and the agreement as a whole, make it clear that Westgrove is Sunburst's agent. In effect, Sunburst calls the shots. As the petitioner states: ". . . one can hardly imagine what more Sunburst could have done to establish a principal-agent relationship between Sunburst and Westgrove. . . . If the written agency agreement . . . is insufficient to prove agency, nothing ever could." (Petitioner's initial brief, p. 2.) The Commission agrees.
The Department contends that Westgrove's ownership of the property precludes it from being an agent of Sunburst. However, ownership and agency are entirely compatible. Westgrove is both the property's owner and Sunburst's agent.
The Department also contends that the unrecorded Nominee Agreement transfers the subject property from Westgrove to Sunburst. Because of this, the argument continues, an unrecorded document (the Nominee Agreement) reverses the recorded deed conveying the property to Westgrove. This "would create chaos and limitless skullduggery in real estate ownership and conveyancing." (Department's brief, p 10.) This is not relevant here because the Nominee Agreement is not a conveyance document. It is an agency agreement. In addition, the agreement's not being recorded is of no consequence. It is valid between the parties, recorded or unrecorded, contrary to the Department's assertion.
Both parties cite Washington National Development Co. v. Wisconsin Department of Revenue, 194 Wis. 2d 566 (Ct. App. 1995). The parties agree that the case recognized that there may be conveyances of real estate between a principal and an agent. The case goes further, however, by holding that a person may acquire property as an agent for a principal which is not in existence at the time of conveyance but is formed at a future date. Because the principal (Sunburst) and the agent (Westgrove) were in existence at the time of the subject conveyance, the holding in Washington National is not relevant here.
Both parties also site Kasprzak v. WDOR, Wis. Tax Rptr. (CCH) ¶ 400-494 (WTAC 2000). In that case, the Commission held that a petitoner had not proven the existence of a principal/agent relationship. In the case currently before the Commission, there is no doubt that the principal/agent relationship was established in the Nominee Agreement.
The Department argues that, under § 77.25(9), there was actual consideration in the conveyance from Sunburst to Westgrove because the conveyance relieved Sunburst of substantial indebtedness on the mortgage secured by the property. This assertion overlooks Sunburst's continuing responsibility for all of the property's liabilities and expenses under the Nominee Agreement (esp. under ¶ 3). Sunburst was, therefore, relieved of no indebtedness, and no actual consideration was involved in the conveyance.
The Department also asserts that the conveyance was for actual consideration, by Westgrove's receiving a lower interest rate as a result of refinancing and receiving HUD's guarantee of the loan. We do not agree. It was the refinancing, not the conveyance, that resulted in a lower interest rate.
Because the subject conveyance is exempt from the real estate transfer fee under § 77.25(9), we need not address the § 77.25(10) exemption.
The Department's action on petitioner's petition for redetermination is reversed.
Dated at Madison, Wisconsin, this 26th day of June, 2001.
WISCONSIN TAX APPEALS COMMISSION
Mark E. Musolf, Chairperson
Don M. Millis, Commissioner
Thomas M. Boykoff, Commissioner
ATTACHMENT: "NOTICE OF APPEAL INFORMATION"
DON M. MILLIS, COMMISSIONER, CONCURRING:
I reluctantly concur in the result. My reluctance stems from my belief that the unambiguous language of the exemption in section 77.25(9) has a much greater application than was intended by the legislature.
I suspect that this exemption was primarily intended to apply to those situations in which an agent procures property for its principal when, for any of a variety of reasons, the principal does not want to take title at the outset.(3) It may be that the principal wants to keep its identity secret. Or, as in Washington National, the principal did not exist at the time of the initial conveyance.
The legislature most likely understood that without such an exemption in these situations there would be double taxation. The initial conveyance (from third party to agent) is appropriately subject to the transfer fee, but the subsequent conveyance (from agent to principal) is exempt because it is the principal who was the real purchaser.
This case demonstrates that the exemption is drafted much more broadly than envisioned. Here there is no danger of double taxation. Rather, the property is "parked" with an agent so that the principal can qualify for a more attractive financing arrangement. Perhaps the property will be reconveyed to the principal when ownership by the agent is no longer attractive.
Respondent complains that the result we have reached will "create chaos and limitless skullduggery in real estate ownership and conveyance." This may be. The problem is that the statute appears to allow such skullduggery. It appears that as long as a conveyance is between an agent and principal, there is no transfer fee as long as there is no actual consideration. It is not even clear if the agent-principal relationship need be based on or related to the property conveyed.
While this may be an absurd result that is contrary to the intent of the legislature, we are not allowed to look at such factors because the language of the exemption is clear and unambiguous. The potential for skullduggery will exist unless or until the legislature narrows the scope of this exemption.
Don M. Millis, Commissioner