Wisconsin Tax Appeals Commission Docket No. 98-T-66

STATE OF WISCONSIN

TAX APPEALS COMMISSION

MALAN REALTY INVESTORS, INC.

c/o Foley & Lardner

P.O. Box 1497

Madison, WI 53701-1497,

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE

P.O. Box 8933

Madison, WI 53708,

Respondent.

DOCKET NO. 98-T-66

DECISION AND ORDER

DON M. MILLIS, COMMISSIONER:

This matter comes before the Commission for a decision on stipulated facts. Both parties have submitted briefs in support of their position. Petitioner is represented by Foley & Lardner, by Attorneys Wayman C. Lawrence and Michael P. Hickmann. Respondent is represented by Attorney Neal E. Schmidt.

Based on the stipulation of facts, the submissions of the parties, and the record in this matter, the Commission hereby finds, concludes, and orders as follows:

FINDINGS OF FACT

As and for its Findings of Fact, the Commission adopts the stipulation of facts, omitting references to exhibits and making minor revisions for form and consistency:

1. Malan Construction Company ("MCC"), a Wisconsin corporation, entered into an Agreement of Sale and Purchase ("Purchase Agreement") with 23 Quebec limited partnerships on November 11, 1993, to acquire 46 improved and nine unimproved properties located in various states ("Properties"). The Purchase Agreement was amended by First, Second, and Third Amendments dated March 17, March 21, and June 15, 1994, respectively.

2. On July 17, 1994, MCC changed its name to Malan Realty Investors, Inc. ("petitioner").

1. Petitioner was the actual purchaser of the Properties, ten of which are located in Wisconsin ("Wisconsin Properties") and were acquired from six partnerships. On June 23, 1994, under the Purchase Agreement, petitioner acquired all of the partnership interests of each Wisconsin partnership. As a result, the Wisconsin partnerships were simultaneously dissolved by operation of law because petitioner was the sole partner of each Wisconsin partnership. Title to each Wisconsin Property was thereupon vested in petitioner by warranty deed.

4. Petitioner was the property manager of the Wisconsin Properties prior to its acquisition thereof.

5. Petitioner was not and is not related to or affiliated with any of the partnerships or partners that were a party to the Purchase Agreement.

6. The total purchase price for the Properties was $112,275,000.

7. The purchase price was allocated among the Properties by agreement of the parties as set forth in an exhibit attached to and made part of the Purchase Agreement.

8. Each Wisconsin partnership paid the real estate transfer fee for the property or properties which it transferred to petitioner based on the allocated amount paid by petitioner for each property pursuant to the terms of the Purchase Agreement.

1. On August 16, 1995, petitioner transferred one of the Wisconsin Properties located in Kenosha, Wisconsin ("Kenosha Property") to Malan Mortgagor, Inc., a wholly owned subsidiary of petitioner.

10. Petitioner paid the transfer fee for the transfer of the Kenosha Property based on the allocated purchase price it paid for that property on June 24, 1994 and as reported on the real estate transfer return.

11. On August 6, 1997, respondent issued to petitioner a Notice of Additional Assessment of Real Estate Transfer Fees in the amount of $65,230.19, plus interest and penalties, for the transfer of the Wisconsin Properties to petitioner. In the assessment, respondent used the assessed value of the Wisconsin Properties (rather than the stated amount paid by petitioner for each property) to calculate the amount of transfer fees allegedly owed by petitioner.

12. Petitioner filed a Petition for Redetermination with respondent dated October 3, 1997, as amended by a letter from petitioner dated November 18, 1997. Respondent denied petitioner's Petition for Redetermination in a Notice of Action dated January 28, 1998.

The Commission makes the following Findings of Facts based on the exhibits attached to the stipulation of facts:

13. The table below compares the assessed value used by respondent to determine the estimated fair market value for each property that is the subject of the assessment, with each property's sales price as set forth in the Purchase Agreement:

Allocated Price as

Grantor Allocated Price Assessed Val. % of Assessed Val.

Hales Corners Partners & Co. $ 3,429,000 $ 6,942,300 49.4

Wisnet Partners and Co. 2,662,000 4,323,400 61.6

Wisgross Partners & Co. 2,680,000 4,223,000 63.5

Wisgross Partners & Co. 1,177,000 2,644,700 44.5

Madison Partners & Co. 4,514,000 5,289,400 85.3

Fort Atkinson Partners & Co. 1,984,506 3,059,800 64.9

Kenosha Partners & Co.* 2,882,000 3,840,900 75.0

Wisgross Partners & Co. 1,832,000 3,904,900 46.9

Wisgross Partners & Co. 948,303 4,782,400 19.8

Wisgross Partners & Co. 6,120,020 8,988,300 68.1

Malan Realty Investors* 2,882,000 4,855,300 59.4

TOTALS $ 31,110,829 52,854,400 58.9

1. On the table set forth in Fact 13, the two entries designated with an asterisk both involve the Kenosha Property. The entry showing "Kenosha Partners & Co." as grantor is the initial transfer under the Purchase Agreement. The entry showing "Malan Realty Investors" as grantor is the subsequent transfer from petitioner to Malan Mortgagor, Inc., described in Fact 9.

2. Petitioner reported the second transfer of the Kenosha Property as a conveyance to a wholly owned subsidiary and not a sale, gift or exchange.

16. Approximately $93,333 was paid in transfer fees based on the prices of the Wisconsin Properties allocated in the Purchase Agreement. Had the transfer fee been based on the assessed value of each Wisconsin Property, the total transfer fee due would have been $158,563.20.

APPLICABLE WISCONSIN STATUTES

77.21 Definitions. In this subchapter:

* * *

(3) "Value" means:

(a) In the case of any conveyance not a gift, the amount of the full actual consideration paid therefor or to be paid, including the amount of any lien or liens thereon; and

(b) In case of a gift, or any deed of nominal consideration 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.

CONCLUSIONS OF LAW

1. The proper measure of value for the Wisconsin Properties transferred on June 24, 1994 is the full and actual consideration as allocated in the Purchase Agreement, not the assessed or estimated fair market value. Wis. Stat. § 77.21(3)(a).

1. With respect to the conveyance of the Kenosha Property from petitioner to Malan Mortgagor, Inc., we must affirm the value assigned by respondent because petitioner has submitted no evidence to rebut the presumption that respondent's assessment is correct.

OPINION

Unlike most transfer fee cases, this case does not involve an exemption to the real estate transfer fee. Rather, the only issue presented is the proper measure of value for calculating the transfer fee owing on the conveyances at issue.

Section 77.21(3) sets forth two methods to determine the value of real estate conveyed. Section 77.21(3)(a) provides that when the conveyance is something other than a gift, the value equals the "full actual consideration paid". Section 77.21(3)(b) provides that when the conveyance is a gift, a deed of nominal consideration or an exchange of property, value equals the "estimated price the property would bring in an open market".

Most of the conveyances at issue were made pursuant to the Purchase Agreement. Subsequent to the transfer of the Wisconsin Properties, one of these properties--the Kenosha Property--was conveyed from petitioner to Malan Mortgagor, Inc., its wholly owned subsidiary. We will first look at the conveyances made pursuant to the Purchase Agreement and then look at the subsequent conveyance of the Kenosha Property from petitioner to its wholly owned subsidiary.

Purchase Agreement Conveyances

Because the conveyances under the Purchase Agreement were not gifts, deeds of nominal consideration or exchanges of property, the only inquiry is: What is the "full and actual consideration paid" with respect to each conveyance?

The parties stipulated that the Purchase Price was allocated among the Properties by agreement of the parties, and such allocation is set forth in the Purchase Agreement. The values used to calculate the transfer fee with respect to each conveyance were taken directly from the Purchase Agreement. The record supports petitioner's position that the values set forth in the Purchase Agreement represent the full and actual consideration paid.

In its assessment, respondent claimed that the proper measure of value required by section 77.21(3) is the "full value of the property conveyed." Respondent cited Department of Revenue v. Mark, 168 Wis. 2d 288 (Ct. App. 1992), to support its position.

Respondent's assertion is contrary to section 77.21(3)(a) because, as shown above, this statute refers to the "full and actual consideration paid" with no reference to the "value" of the property conveyed. Likewise, the court in Mark was not concerned with the "full value of the property conveyed" but, rather, the full and actual consideration paid:

Second, the department's assessment of the transfer fee is actually less than the "full actual consideration" required by sec. 77.21(3), Stats.

Mark, 168 Wis. 2d at 295-96, n.7 (emphasis supplied).

Therefore, the relevant inquiry is not the value of the property conveyed, but the full and actual consideration paid. This is not to say that respondent must always accept at face value the amount of consideration recited in a deed, purchase contract or other instrument of conveyance. Perhaps some grantors may seek to understate the amount of consideration in such documents. If the consideration reported is not the full and actual consideration paid, the relevant inquiry is to determine the amount of the full and actual consideration. However, this may not be the same as determining the estimated fair market value at the time of conveyance.⁽¹⁾

In this case, we cannot conclude that the full and actual consideration paid is anything other than the amounts set forth in the Purchase Agreement. Petitioner has the burden to show that the assessment is incorrect. Woller v. Dep't of Revenue, 35 Wis. (2d) 227, 233 (1967). The record contains substantial documentation of the transactions at issue, and this documentation shows that the amounts set forth in the Purchase Agreement represented the full and actual consideration paid. Respondent has presented virtually no evidence to rebut this documentation.

The only evidence from which the Commission might infer that the amounts listed in the Purchase Agreement did not represent full and actual consideration were the assessed values of the Wisconsin Properties involved and the fact that petitioner was manager of the properties at the time of the purchase. This evidence does not impeach the documentation showing that the full and actual consideration for each of the Wisconsin Properties was set forth in the Purchase Agreement.⁽²⁾

Respondent cites the Commission's decision in Lee v. Dep't of Revenue, Docket No. 96-T-657, 1997 Wisc. Tax LEXIS 26 (WTAC, Oct. 17, 1997), for the proposition that the equalized assessed fair market value is the proper measure of value. In Lee, the Commission concluded that the conveyance was a deed of nominal consideration and, therefore, that the measure of value set forth in section 77.21(3)(b) controlled. Id., 1997 Wisc. Tax LEXIS 26 at 16-17. The holding in Lee is not relevant because the proper measure of value in this case is found not in section 77.21(3)(b) but in section 77.21(3)(a).

Respondent also relies on a small claims case, Kim v. Dep't of Revenue, Docket No. 97-T-32-SC (WTAC, Mar. 27, 1998). This case does not support respondent's position. In Kim, the petitioners sold a motel for a total sales price of $555,000. When petitioners filed their real estate transfer return, they claimed the value of the real estate conveyed was $350,000 and the value of the personal property conveyed was $205,000. Respondent relied upon assessment records to determine that the value of the real estate was much greater. Id., slip op. at 1-2. Unlike the present case, the petitioners in Kim had no transactional documents to show the sales price attributed to personal property and real estate. In fact, petitioners could provide no credible evidence to rebut respondent's determination. Id. at 3.

The petitioner in this case is not in the same position as the petitioners in Kim. In this case, petitioner has the transactional documents that show the price paid for each Wisconsin Property.

Second Conveyance of the Kenosha Property

The record provides very little information about the conveyance of the Kenosha Property from petitioner to Malan Mortgagor, Inc. All we know is that the conveyance was a transfer other than a sale, gift or exchange to a wholly owned subsidiary. The record does not provide sufficient information to determine whether the measure of value is controlled by section 77.21(3)(a) or section 77.21(3)(b). Therefore, the Commission has no choice but to affirm that portion of respondent's action on the petition for redetermination, including respondent's assessment of a penalty under section 77.26(8), with respect to the return filed with respect to this conveyance.

ORDER

The respondent's action on the petitioner's petition for redetermination: (1) with respect to the conveyance between petitioner and Malan Mortgagor, Inc., is affirmed and (2) with respect to the remaining conveyances is reversed.

WISCONSIN TAX APPEALS COMMISSION

Dated at Madison, Wisconsin,

this 27th day of May, 1999. (Concurs)

Mark E. Musolf, Chairperson

Don M. Millis, Commissioner

(Concurs in part; dissents in part)

Thomas M. Boykoff, Commissioner

ATTACHMENT: "NOTICE OF APPEAL INFORMATION"

CHAIRPERSON MUSOLF, CONCURRING:

I concur in the decision but would additionally affirm the respondent's determination of value on the conveyance of the Kenosha Property from petitioner to Malan Mortgagor, Inc., under § 77.21(3)(b). Because this was not a sale but a transfer from petitioner to its wholly owned subsidiary, it was obviously a "deed of nominal consideration" so that the property value for transfer fee purposes is the estimated price the property would bring in an open market arm's-length sale. The respondent used such a value, viz., the assessed value as of January 1, 1995. See, Wis. Stat. § 70.32. Without a showing by petitioner that this assessment was flawed, we cannot adopt the stale value at the time of petitioner's purchase on June 24, 1994.

___________________________________

Mark E. Musolf, Chairperson

COMMISSIONER BOYKOFF, CONCURRING IN PART AND DISSENTING IN PART:

I dissent from the majority's first Conclusion of Law. I also concur in the result of the second Conclusion of Law and join in the Concurring Opinion of Chairperson Musolf.

The majority opinion is correct in stating that this represents an uncommon real estate transfer fee case before this commission. Most recent transfer fee cases have involved a claimed exemption from the transfer fee. The different issue here is: What is the proper measure for calculating the correct transfer fees for the transactions under review?

If the majority view on the first Conclusion of Law prevails, disputes over the proper measure of transfer fees may become very common. These disputes could tax the resources of the Department of Revenue and this commission.

Some of the stipulated facts bear restating:

Under the terms of a November 11, 1993 Agreement of Sale and Purchase, on June 23, 1994 petitioner acquired from several partnerships 55 properties in several states. The purchase price of the 55 properties was $112,275,000. (Finding 6)

Ten of the 55 properties are located in Wisconsin. (Findings 1 and 3) Of the total purchase price, dollar amounts were "allocated" to each of the 55 properties by agreement of the parties; the dollar amounts "allocated" to the Wisconsin properties are set forth in an exhibit in the majority opinion. (Finding 7)

Petitioner was not and is not related to or affiliated with any of the partnerships or partners that were parties to the purchase agreement. (Finding 5) The partnerships dissolved after the property transfers. (Finding 3)

The majority appears to begin its analysis by relying on two significant facts: (1) the 10 Wisconsin properties were acquired under an Agreement of Sale and Purchase entered into by petititioner, and (2) petitioner was not "affiliated" with the sellers of the properties. From this, the majority appears to conclude that the dollar amounts which were "allocated" to each Wisconsin property were "negotiated" and "at arm's length." But these two concepts do not appear in the stipulated and supplementary Findings of Fact or in the record.

In its initial brief, petitioner states: "The purchase agreement clearly was an extensively negotiated document. In short, the sale by Sellers to Petitioner was a sale of the Wisconsin properties in an open market under then prevailing market conditions between parties conversant with the Wisconsin properties." (Brief, page 5) (This writer added the italics; "was" was underscored by petitioner.)

However, the record does not reflect that: (1) the Agreement was "extensively negotiated" (only that it was "entered into"); or that (2) it was entered "in an open market under then prevailing market conditions" (only that the Wisconsin partnerships were simultaneously dissolved upon the transfer of the properties; no facts about the condition of the market are stipulated).

Adopting the majority opinion's logic -- that the "allocated" dollar amounts were negotiated, so they must be accepted here as the measure of the transfer fees -- respondent is required to accept the "allocated" amounts because it appears that they were "negotiated", although the record does not so reflect. But what if a nominal value (ex., $100) were assigned to each Wisconsin property and the balance of the overall purchase price of the 55 properties were assigned to out-of-state properties? Under the majority's logic, are these $100 values correct and are they automatically the best evidence of value because they were "allocated" by non-affiliated parties? Of course not; that would be absurd. This potential for arbitrary allocation of purchase prices to individual properties illustrates the weakness of petitioner's argument: it approves the subjective assignments as "full actual consideration paid" (§ 77.21(3)(a)) for each property as long as the total of all the amounts "allocated" to the 55 properties add up to the recited total purchase price.

Consider another situation: When both real and personal property (such as a hotel, store, movie theater or apartment building) are sold for one agreed upon price, what would prevent the parties from allocating the total sales price to real property (a small amount) and personal property (a larger amount)?⁽³⁾ Under the majority opinion, would respondent be required to accept these allocations and be required to measure the transfer fee by the real property allocation agreed upon by the parties? If so, respondent could be flooded by transfer fee forms reciting allocations. Would it be precluded from challenging the allocations under the majority opinion?

If the allocated dollar amounts are not the correct "full actual consideration paid", what is the proper alternative? Respondent offers, as the alternative, the assessments for each property as determined by municipal local assessors. In this writer's view, this is a reasonable alternative.

As the majority opinion notes, it is axiomatic that respondent's assessments are presumed to be correct and that any person challenging them has the burden of showing that an assessment is incorrect. Woller v. Wisconsin Dept. of Revenue, supra. Applying that axiom to the current case, respondent's assessment of additional transfer fees, based on local assessors' determinations of value, is presumed to be correct. To meet its burden of showing these amounts as incorrect, petitioner offered the amounts "allocated" to each property in the 1993 Agreement of Sale and Purchase. For the above reasons, I believe that this does not meet petitioner's burden of proof.

Thomas M. Boykoff, Commissioner

¹ For example, the full and actual consideration paid may be less than the fair market value in a distressed sale.

² It seems very unlikely that, in a transaction worth more than $110 million, the parties would tinker with the values in order to avoid a transfer fee of $65,000. Such a conclusion is even more unlikely when one considers that the price paid for individual properties has other tax implications that are many times greater than the transfer fee at issue here.

³ These hypothetical facts parallel the situation in the small claims case Kim v. WDOR, supra. That case is not cited as authority here because Wis. Stat. § 73.01(4)(dn) provides, in part: "Decisions in small claims cases are not precedents.