Wisconsin Tax Appeals Commission Docket No. 97-T-314

STATE OF WISCONSIN

TAX APPEALS COMMISSION

HARRY MACCO

4144 County Road W

De Pere, WI 54115

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8933

Madison, WI 53708

Respondent.

DOCKET NO. 97-T-314

DECISION AND ORDER

THOMAS M. BOYKOFF, COMMISSIONER:

This matter was submitted to the Tax Appeals Commission ("Commission") on stipulated facts and briefs of the parties.

Petitioner is represented by Attorney Thomas V. Rohan, of Schober & Ulatowski, S.C., Waukesha, Wisconsin. Respondent is represented by Attorney Neal E. Schmidt of the Wisconsin Department of Revenue, Madison, Wisconsin.

Based on the stipulated facts, related exhibits, and briefs of the parties, the Commission finds, concludes, and orders as follows:

STIPULATED FINDINGS OF FACT

As and for its Findings of Fact, the Commission adopts the following pertinent facts as stipulated by the parties, with minor changes for form and omitting references to exhibits:

1. Petitioner is an adult individual who resides at 4144 County Road W, De Pere, Wisconsin 54115.

2. Respondent, State of Wisconsin Department of Revenue ("Department"), is an administrative unit of the government of the State of Wisconsin, the duties of which are, among other things, to administer the statutes and to levy and collect taxes.

3. Harry Macco is the father of Ann E. Bossmeyer, David J. Macco, Mark G. Macco, Robert A. Macco, Thomas W. Macco, Janet M. Secora, Mary C. Strenski, and Elizabeth J. Wright (the "Macco Children").

4. Prior to the Subject Conveyance, Harry Macco was the owner of a parcel of property located in the City of De Pere, Brown County, Wisconsin, which is here in issue (the "Subject Property"), which was conveyed to Harry Macco by warranty deed from Hillcrest Lumber, Inc. The conveyance was exempt under Wis. Stat. § 77.25(15).

5. Harry Macco granted Valley Bank a $2 million mortgage.

6. As a part of the transaction with Valley Bank referred to in Finding 5 above, Harry Macco and Hillcrest Lumber, Inc., received a Partial Release of Real Estate Mortgage from Kellogg-Citizens National Bank of Green Bay.

7. At the time of the Subject Conveyance to the Macco Children, the Subject Property had a fair market value of approximately $1,960,000.00.

8. Coincident with the recording of the warranty deed for the Subject Property, the following documents pertaining to the Subject Property were recorded and are set forth in order of document number from 1468259 through 1468263:

A. Affidavit excluding Subject Property from Park River Associates.

B. Warranty Deed of Subject Property from Harry Macco to his eight children. The deed was dated July 1, 1995 and recorded on September 28, 1995. (This is the conveyance deed on appeal.)

C. Warranty Deed from Ann Bossmeyer to C.P. Legacy L.L.C. (Exempt under Wis. Stat. § 77.25(15s).)

D. Warranty Deed from David J. Macco to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

E. Warranty Deed from Thomas W. Macco, Mary C. Strenski, Elizabeth J. Wright, Mark G. Macco, Janet M. Secora, and Robert A. Macco to C. P. Legacy L.L.C. (Exempt under § 77.25(15s).)

9. Adjacent to the Subject Property is a parcel of property which was formerly owned by Hillcrest Lumber, Inc. (the "Other Property").

10. A Warranty Deed was executed from Hillcrest Lumber, Inc., to Hillcrest Partnership No. 1, a Wisconsin general partnership consisting of the Macco Children, conveying the Other Property.

11. A Business Note was entered into, evidencing a mortgage from Hillcrest Partnership No. 1 to Associated Bank Green Bay, National Association, dated December 10, 1993, for $2,300,000 for the construction of a 53-unit apartment project on the Other Property.

12. In addition to the documents identified in Finding 8, the following documents pertaining to the Other Property were recorded and set forth in order of document number from 1468264 to 1468274:

A. Warranty Deed from Hillcrest Partnership No. 1 to the eight children. (Exempt under § 77.25(15s).)

B. Warranty Deed from Thomas W. Macco to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

C. Warranty Deed from Ann E. Bossmeyer to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

D. Warranty Deed from David J. Macco to C.C.(sic.) Legacy L.L.C. (Exempt under § 77.25(15s).)

E. Warranty Deed from Mary C. Strenski to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

F. Warranty Deed from Janet M. Secora to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

G. Warranty Deed from Elizabeth J. Wright to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

H. Warranty Deed from Mark G. Macco to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

I. Warranty Deed from Robert A. Macco to C.P. Legacy L.L.C. (Exempt under § 77.25(15s).)

J. Mortgage to C.P. Legacy L.L.C. in the principal amount of $4,400,000 on the Subject Property from AMI Capital, Inc.

K. Assignment of Mortgage from AMI Capital, Inc., to Federal National Mortgage Association.

13. The mortgage satisfaction for Harry Macco on the Subject Property was recorded on October 19, 1995.

14. Harry Macco signed a termination statement of personalty under the Uniform Commercial Code on October 10, 1995.

15. A federal gift tax return was filed by petitioner.

16. The transfer of the Subject Property from the Macco Children to C.P. Legacy L.L.C. is an exempt transfer under § 77.25(15s).

17. On May 15, 1997, Harry Macco was sent a Notice of Additional Assessment of Real Estate Transfer Fee.

18. By letter dated July 8, 1997, the petition for redetermination was sent to respondent.

19. Respondent's Notice of Action letter was mailed August 14, 1997.

APPLICABLE WISCONSIN STATUTES

77.21 Definitions. In this subchapter:

(1) "Conveyance" includes deeds and other instruments 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.

* * *

(3) "Value" means:

* * *

(b) In case of a gift, or any deed of nominal considera-tion or any exchange of properties, the estimated price the property would bring in an open market and under the then prevailing market conditions in a sale between a willing seller and a willing buyer, both conversant with the property and at prevailing general price levels.

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... .

77.25 Exemptions from fee. The fees imposed by this subchapter do not apply to a conveyance:

* * *

(8) Between parent and child, stepparent and stepchild, parent and son-in-law or parent and daughter-in-law for nominal or no consideration.

CONCLUSIONS OF LAW

1. The conveyance of real estate from petitioner, a father, to his eight children for nominal or no consideration is exempt from the real estate transfer fee by Wis. Stat. § 77.25(8). The subject conveyance from a father to his children for no consideration falls under this exemption.

2. The existence of a mortgage on the Subject Property, under which petitioner continues to be liable, but his children are not liable, does not remove the Subject Conveyance from this exemption from the transfer fee.

OPINION

This case is not as complex as the lengthy stipulated facts and the parties' briefs suggest. Petitioner conveyed the Subject Property to his eight children in equal shares (the "Subject Conveyance"). The deed was dated July 1, 1995 but not recorded until September 28, 1995, at which time the Macco Children conveyed the property to C.P. Legacy, LLC (and refinanced the mortgage).

At the time of the Subject Conveyance, the Subject Property had a fair market value of $1,960,000; the value was later adjusted by respondent to $1,940,000 when respondent made the assessment at issue here. The Subject Property secured a mortgage loan which at the time of the Subject Conveyance was the obligation of petitioner, not the Macco Children. Petitioner continued his obligation for mortgage payments for several months after the conveyance, until his children refinanced it on September 28, 1995.

The parties agree that the exemption at issue is Wis. Stat. § 77.25(8). This exemption from the real estate transfer fee ("transfer fee") reads: § 77.25 (intro.) "The fees imposed by this subchapter do not apply to a conveyance:" "(8) Between parent and child, stepparent and stepchild, parent and son-in-law or parent and daughter-in-law for nominal or no consideration."

The Macco Children did not give their father any money or other thing of value in exchange for the Subject Property. The facts appear to fall within the exemption.

In order to qualify for the exemption under § 77.25(8), the conveyance must be for nominal or no consideration. Respondent argues there was consideration because the Subject Property was encumbered by a $2 million mortgage. Other transfer fee exemptions make it clear that assuming a debt does not constitute consideration. See Wis. Stat. §§ 77.25(15), (15m), and (15s). The exemption at issue here does not exclude assumption of debt from the definition of "consideration." Thus, if the Macco Children assumed a debt as part of the Subject Conveyance, there was consideration and the exemption in § 77.25(8) does not apply.

Several earlier decisions of the Commission have held that taking title to real estate that is encumbered by an obligation or mortgage is not sufficient to constitute assumption of debt or consideration for purposes of the transfer fee statute. Harry and Charlotte Macco v. Wisconsin Department of Revenue, Wis. Tax Rep. (CCH) ¶ 400-168 (1995) (WTAC 1995), involved this petitioner and his wife (the "Maccos"). In Macco, respondent attempted to impose the fee on a conveyance by the Maccos of encumbered real estate to a partnership in which Mr. Macco and his nine children were partners. The real estate was valued at $1,593,100; it was the security for a $993,100 mortgage; and it had a net value of $600,000. Upon the conveyance of realty by the Maccos to the partnership, a number of units were created in the partnership equal to the fair market value of the property, less liens, encumbrances, and other liabilities, divided by $10,000. Thereafter, each unit was worth $10,000 and could be gifted to his children to avoid the gift tax. Id. at pp. 30,543-30,544.

The Maccos claimed an exemption from the transfer fee under § 77.25(15) which exempted a conveyance: "Between ... a partnership and its ... partners if ... all of the partners are spouses or lineal ascendants or descendants of each other, if the transfer is for no consideration except ... an interest in the partnership...." Respondent asserted there--as it does here--that the exemption did not apply to a conveyance of real estate subject to indebtedness because that would constitute consideration. The Commission rejected respondent's argument. Macco, at p. 30,546. See also, Hale Park Realty Co. v. Dept. of Revenue, Wis. Tax Rep. (CCH) ¶ 400-229, p. 30,578 (1995) (holding that merely accepting title to property that is subject to a mortgage is not assuming a debt and does not constitute consideration).

Another case on point is Valex Limited Partnership v. Wisconsin Department of Revenue, Wis. Tax Rep. (CCH) ¶ 203-282 (WTAC 1991); aff'd Valex Limited Partnership v. Wisconsin Department of Revenue, Case No. 92-2455 (Ct. App. 1993) (unpublished decision). In Valex, the Commission was presented with a situation similar to this case: a husband conveyed to his wife his interest in property that was subject to a nonrecourse obligation. In exchange, the wife relinquished her interest in the partnership that formerly was the owner of the property. Id. at pp. 15,233-15,234. The Commission rejected an identical argument made by respondent and concluded that the existence of a mortgage (either recourse or nonrecourse) was irrelevant to the issue of consideration under § 77.25(15). The Commission specifically rejected respondent's contention that the reference in Wis. Stat. § 77.21(3)(a) to the amount of a lien in defining "value" was relevant to the issue of consideration for the purpose of the exemption at hand. Id. at pp. 15,234-15,236. The position was affirmed by the Circuit Court and by the Court of Appeals.

Respondent cites Ronald, Robert and Allen Treml v. Wisconsin Department of Revenue, Wis. Tax Rep. (CCH) ¶ 400-163 (1995) (WTAC 1995), to support its contention. This reliance is misplaced. The holding in Treml centered on whether the taxpayers had conveyed property solely in order to provide security for a debt or obligation and thus qualified for the exemption under § 77.25(10). Id. at pp. 30,527-30,528. Language cited by respondent relating to consideration was not central to the holding in Treml and should be considered dicta.

Therefore,

IT IS ORDERED

That respondent's action on petitioner's petition for redetermination is reversed.

Dated at Madison, Wisconsin, this 19th 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"

April 16, 1999 Department of Revenue non-acquiesced under § 73.01(4)(e)2