Opinion
No. 36748-3-II.
August 12, 2008.
Appeal from a judgment of the Superior Court for Thurston County, No. 06-2-01459-3, Christine A. Pomeroy, J., entered August 17, 2007.
Affirmed by unpublished opinion per Van Deren, C.J., concurred in by Bridgewater and Quinn-Brintnall, JJ.
Gary Stowe and Douglas Taylor appeal the trial court's order granting summary judgment to the Department of Revenue (DOR) in this tax refund action under chapter 82.32 RCW. Stowe and Taylor contend that the trial court erred by (1) failing to properly apply state regulations and assess relevant attributes of ownership in determining whether they were speculative or contract builders, (2) failing to recognize that real property may be transferred by oral agreement to a joint venture or partnership, and (3) granting summary judgment when genuine issues of material fact exist about the ownership of the land on which the house was constructed. Finding no error, we affirm.
RCW 82.32.180 states, in pertinent part, that:
Any person . . . having paid any tax as required and feeling aggrieved by the amount of the tax may appeal to the superior court of Thurston county. . . .
The trial in the superior court on appeal shall be de novo and without the necessity of any pleadings other than the notice of appeal. At trial, the burden shall rest upon the taxpayer to prove that the tax as paid by the taxpayer is incorrect, either in whole or in part, and to establish the correct amount of the tax. In such proceeding the taxpayer shall be deemed the plaintiff, and the state, the defendant; and both parties shall be entitled to subpoena the attendance of witnesses as in other civil actions and to produce evidence that is competent, relevant, and material to determine the correct amount of the tax that should be paid by the taxpayer. Either party may seek appellate review in the same manner as other civil actions are appealed to the appellate courts.
FACTS
In November 2000, Gary Stowe and Douglas Taylor formed a partnership known as TS Design to remodel and build homes. In January 2001, Stowe and Taylor engaged in a separate joint venture with Stowe's uncle, Bryan Stowe, and Staatz Bulb Farm, Inc. to construct a single family home on a lot owned by Staatz Bulb Farm. Staatz Bulb Farm was an entity owned by High Cedars Golf Course, Inc., a corporation, which, in turn, was owned by Bryan. Title to the lot remained in Staatz Bulb Farm until the final sale of the single family home. Bryan also provided money for materials and living expenses for Stowe and Taylor while they built the home. Stowe, Taylor, and Bryan sold the finished house for $360,000.00.
Because Bryan Stowe and Gary Stowe share the same last name, we will refer to Bryan by his first name for clarity. We mean no disrespect.
Despite the apparent lack of risk of loss to Stowe or Taylor in the arrangement described herein, DOR, for purposes of its summary judgment motion, stipulated "that a joint venture was formed between [Stowe and Taylor] and Staatz Bulb Farm, and/or Bryan Stowe." Clerk's Papers (CP) at 196 n. 1. But DOR retained the right to contest the issue if the matter proceeded to trial.
Stowe and Taylor paid taxes at the time of the sale based on their belief that the home's construction qualified as speculative construction under chapter 82.04 RCW and WAC 458-20. In 2004, DOR audited Stowe and Taylor and determined that under WAC 458-20-170 the house was not built as speculative construction, and assessed them an additional $45,065.00. Stowe and Taylor filed an administrative appeal. The administrative law judge denied the appeal in pertinent part, because Stowe and Taylor failed to show that they built the home "as a joint venturer on land owned by the joint venture." Clerk's Papers (CP) at 12.
Chapter 82.04 RCW covers business and occupation excise tax. Chapter 458-20 WAC explains the excise tax rules.
Stowe and Taylor paid the tax and then, under RCW 82.32.180, appealed to the Thurston County superior court. DOR moved for summary judgment asserting that, even assuming a joint venture was formed, the joint venture did not own the property and, therefore, Stowe and Taylor were not speculative builders. DOR also sought summary judgment on the amount of the assessment. The superior court granted summary judgment in part, ruling that Stowe and Taylor were not speculative builders and owed the assessment, but denied summary judgment in part as to the amount of the assessment because of a conflict over the underlying value of the land.
In view of DOR's stipulation "that a joint venture was formed between [Stowe, Taylor] and Staatz Bulb Farm, and/or Bryan Stowe," our review of the summary judgment order does not address whether a joint venture was actually formed. CP at 196 n. 1.
Stowe and Taylor argued that the value of the lot was $90,000.00; whereas, DOR asserted the value as $75,000.00. Because the value of the lot is subtracted from the sale price before retail tax is calculated, a higher lot value would reduce the tax owed.
Stowe and Taylor filed a notice of appeal and when we questioned the appealability of the interlocutory order under CR 54(b) due to the remaining valuation dispute, DOR stipulated to the value of the home to facilitate appeal and the superior court entered an order and final judgment. This appeal followed.
The superior court's final order is attached to the amended notice of appeal.
ANALYSIS
I. Standard of Review
We review the trial court's grant of summary judgment and issues of statutory interpretation de novo. Berrocal v. Fernandez, 155 Wn.2d 585, 590, 121 P.3d 82 (2005). "We review a trial court's legal conclusions in a tax refund action de novo." Simpson Inv. Co. v. Wash. State Dep't of Revenue, 141 Wn.2d 139, 148, 3 P.3d 741 (2000).
The issue here is whether, under RCW 82.04.050 and WAC 458-20-170, the joint venture constructed the single family home as a speculative builder. When interpreting statutory language, our goal is to carry out the legislature's intent. Simpson Inv. Co., 141 Wn.2d at 148. "As in statutory interpretation, where a regulation is clear and unambiguous, words in a regulation are given their plain and ordinary meaning unless a contrary intent appears." Silverstreak, Inc. v. Wash. State Dep't of Labor and Indus., 159 Wn.2d 868, 881, 154 P.3d 891 (2007) (plurality opinion). We must avoid unlikely, absurd, or strained results. Berrocal, 155 Wn.2d at 590.
II. Chapter 82 RCW: Excise Taxes
The State of Washington imposes a tax on all retail sales in the state. See RCW 82.08.020(1). There is also a business and occupation tax levied for the act or privilege of engaging in business activities such as retail sales. See RCW 82.04.220. RCW 82.04.050(1) defines "[s]ale at retail" and "retail sale." A "retail sale" includes services rendered in constructing homes for consumers. RCW 82.04.050(2). A builder who constructs a house on real property of or for consumers (1) is engaged in making a "retail sale," (2) must pay retail business and occupation tax, and (3) must collect and remit retail sales tax on the gross amount of the sale. RCW 82.04.050(2)(b); RCW 82.08.020(1); WAC 458-20-170. Such a builder is a "prime contractor" under WAC 458-20-4 170(1)(a). But a person who constructs a house on land that he or she owns (1) is not engaged in a "retail sale," (2) is a "speculative builder" under WAC 458-20-170(2)(a), and (3) is not required to pay business and occupation tax or collect or pay retail sales tax on the value of his or her construction services. See WAC 458-20-170.
III. WAC 458-20-170
Stowe and Taylor do not dispute the applicability of WAC 458-20-170. Nor do they dispute DOR's calculation of the excise taxes under RCW 82.40.050 and WAC 458-20-170. Rather, they contend that the joint venture they formed qualified as a "speculative builder[]" and, therefore, was entitled to the preferential tax treatment afforded to such an entity under rule. Br. of Appellant at 3.
A. Attributes of Ownership of Land
Stowe and Taylor acknowledge the requirements of ownership of the real property in WAC 458-20-170(a):
As used herein the term "speculative builder" means one who constructs buildings for sale or rental upon real estate owned by him. The attributes of ownership of real estate for purposes of this rule include but are not limited to the following: (i) The intentions of the parties in the transaction under which the land was acquired; (ii) the person who paid for the land; (iii) the person who paid for improvements to the land; (iv) the manner in which all parties, including financiers, dealt with the land. The terms "sells" or "contracts to sell" include any agreement whereby an immediate right to possession or title to the property vests in the purchaser.
But they contend that the "`attributes of ownership'" referred to in the statute confirm that it is the substance, not the form, of a transaction that determines ownership. Br. of Appellant at 10 (quoting WAC 458-20-170(2)(a)). Therefore, they assert that, when Bryan pledged the lot to the joint venture, it satisfied the requirements of ownership under WAC 458-20-170. They further assert that ownership of the lot was a material question of fact and ask us to reverse and remand for further proceedings.
We agree that WAC 458-20-170 reflects the general rule that, for tax purposes, courts look to the substance of a transaction over its form. See Diedrich v. Comm'r of Internal Revenue, 457 U.S. 191, 195, 102 S. Ct. 2414, 72 L. Ed. 2d 777 (1982) (noting "that the substance, not the form, of the agreed transaction controls"). But the "attributes of ownership" that Stowe and Taylor rely on are more properly interpreted as suggesting that formal transfer of real property may not be enough to show ownership for purposes of the rule. This becomes clear when WAC 458-20-170(2)(a) is taken in context with subsection (b):
Where an owner of real estate sells it to a builder who constructs, repairs, decorates, or improves new or existing buildings or other structures thereon, and the builder thereafter resells the improved property back to the owner, the builder will not be considered a speculative builder. In such a case that portion of the resale attributable to the construction, repairs, decorations, or improvements by the builder, shall not be considered a sale of real estate and shall be fully subject to retailing business and occupation tax and retail sales tax. It is intended by this provision to prevent the avoidance of tax liability on construction labor and services by utilizing the mechanism of real property transfers.
WAC 458-20-170(2)(b) (emphasis added).
Here, although the parties' intent may be subject to dispute, Staatz Bulb Farm owned the land and Bryan, through his corporation, supplied the lot, the building costs, and living expenses for Stowe and Taylor. Therefore, despite the claim that an oral agreement existed for transfer of the lot to the joint venture, the substance of the transaction — and the attributes of ownership — show that Staatz Bulb Farm owned the lot.
Moreover, Stowe and Taylor do not address WAC 458-20-170(f), which is directly on point and unequivocally states:
Persons, including corporations, partnerships, sole proprietorships, and joint ventures, among others, who perform construction upon land owned by their corporate officers, shareholders, partners, owners, co-venturers, etc., are constructing upon land owned by others and are taxable as sellers under this rule, not as "speculative builders."
Here, it is undisputed that the deed to the lot was held by Staatz Bulb Farm, a co-venturer, thus, under the plain language of WAC 458-20-170(f), a classification of speculative construction is precluded.
B. Informal Transfers of Real Property and Joint Ventures
Stowe and Taylor contend that, even if ownership of the real property by the joint venture is required under WAC 458-20-170, the pledge of an interest in the real property to the joint venture was sufficient because Washington law allows informal transfers of an interest in real property for purposes of forming a joint venture. Stowe and Taylor rely on Malnar v. Carlson, 128 Wn.2d 521, 533, 910 P.2d 455 (1996) for support. At the same time, they acknowledge the applicability of the Revised Uniform Partnership Act, chapter 25.05 RCW: When property is partnership property.
See Malnar, 128 Wn.2d at 523 n. 1 ("Washington case law indicates that a joint adventure is in the nature of a partnership and the rights, duties and liabilities of joint adventurers are generally subject to the rules applicable to partnerships.").
(1) Property is partnership property if acquired in the name of:
(a) The partnership; or
(b) One or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership, whether or not there is an indication of the name of the partnership.
(2) Property is acquired in the name of the partnership by a transfer to:
(a) The partnership in its name; or
(b) One or more partners in their capacity as partners in the partnership, if the name of the partnership is indicated in the instrument transferring title to the property.
(3) Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership or of one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership.
(4) Property acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership and without use of partnership assets, is presumed to be separate property, even if used for partnership purposes.
RCW 25.05.065 (emphasis added). In Malnar, the Washington Supreme Court explained that:
In Washington an oral agreement of partners for the purpose of buying and selling real estate, whereby lands are purchased and held in the name of one partner for profit and resale, is not within the statute of frauds. Such agreements are not contracts for the sale or transfer of interests in land and need not be in writing.
The issue in Malnar was the oral partnership agreement rather than a land sale agreement and, thus, it is distinguishable. There, Ronald Malnar and Robert Carlson formed an informal partnership "to purchase, develop and resell real estate, and to share in the profits." Malnar, 128 Wn.2d at 523. The dispute involved the purchase of acreage for resale by Carlson. After the land was resold, Carlson attempted to withhold profits from Malnar and a lawsuit ensued. Malnar, 128 Wn.2d at 525-27. At trial, Carlson argued that there was no partnership, citing the lack of a written partnership agreement. Malnar, 128 Wn.2d at 533. The issue of whether the real property was partnership property was only indirectly discussed by the Supreme Court when it noted that the land sale agreement was signed in the name of the partnership. Malnar, 128 Wn.2d at 525-26.
C. No Issues of Material Fact Remain
Under RCW 25.05.065(1)-(2), property purchased in the name of the partnership supports a presumption of partnership property. But, here, the property was held in the name of Staatz Bulb Farm, not in the name of the joint venture nor in either Bryan or Stowe's name, nor in Taylor's or TS Design's name. And, under RCW 25.05.065(4), such property is presumed to be separate property, even if used for partnership purposes.
Because DOR stipulated to the existence of a joint venture for purposes of appeal, we need not decide whether a written document was necessary to establish Staatz Bulb Farm's interest in a partnership. The question is whether the joint venture owned the lot — a clear requirement of WAC 458-20-170 — for purposes of the tax advantages provided to speculative builders. And, here, it is undisputed that the deed to the lot was held only by Staatz Bulb Farm; therefore, no issues of material fact remained.
Stowe and Taylor acknowledge RCW 64.04.010, Washington's codification of the statute of frauds as it pertains to real property transfers, which requires that "[e]very conveyance of real estate, or any interest therein, and every contract creating or evidencing any encumbrance upon real estate, shall be by deed." But they argue that the statute does not apply to establishing a partner's interest in a partnership. Again, the existence of the joint venture and Staatz Bulb Farm's interest in that venture is not at issue.
The evidence, in view of the plain language of WAC 458-20-170 and taken in the light most favorable to Stowe and Taylor, shows that, as a matter of law, the joint venture formed by Staatz Bulb Farm, Bryan, Stowe, and Taylor did not construct the single family home as a speculative builder within the meaning of WAC 458-20-170. Thus, the trial court did not err in granting summary judgment to DOR.
We affirm the trial court's grant of summary judgment in favor of DOR.
A majority of the panel having determined that this opinion will not be printed in the Washington Appellate Reports but will be filed for public record pursuant to RCW 2.06.040, it is so ordered.
BRIDGEWATER, J., QUINN-BRINTNALL, J., concur.