Summary
discussing the nature of a partner's interest in a limited partnership and the transferability of that interest
Summary of this case from Hillman v. HillmanOpinion
C.A. No. 99C-09-140 WCC.
Submitted: February 29, 2000.
Decided: June 30, 2000.
Motion to Dismiss-GRANTED
John C. Phillips, Jr., Esquire, 1200 North Broom Street, Wilmington, Delaware, 19806. Attorney for Plaintiff, The City of Wilmington.
Barry M. Klayman, Esquire and Todd C. Schiltz, One Rodney Square, Suite 300, 920 King Street, Wilmington, Delaware 19801. Attorney for Defendants, Bassett Partners, L.P., Basplaz Corporation and Wilmington Centre G.P., Inc.
ORDER
Bassett Partners, L.P. ("Bassett"), Basplaz Corporation ("Basplaz"), and Wilmington Centre G.P., Inc. ("Wilmington Centre") (collectively the "Defendants") filed a motion to dismiss the City of Wilmington's (the "City") complaint for failure to state a claim upon which relief may be granted under Superior Court Civil Rule 12(b)(6). The Defendants argue that the March 1998 transfer of partnership interests was not a taxable transfer under the Wilmington City Code at the time of the transaction, and, as such, the City has no claim to demand a transfer tax. After hearing oral arguments and reviewing further briefing, the Court grants the motion for the reasons set forth below.
Because the Court specifically stated that there would be no reply submissions after each party had an opportunity to brief, the Court will not consider the Defendants' supplemental letter that responded to the City's brief.
BACKGROUND
Bassett, a Delaware limited partnership, owns real estate at 1201 North Market Street in Wilmington, Delaware, known as the Chase Manhattan Centre (the "Property"). Prior to March 2, 1998, Basplaz was the general partner of Bassett, and Valacal Company ("Valacal"), anon-party, held all of the limited partnership interests in Bassett. On January 30, 1998, Basplaz and Valacal signed an "Agreement Regarding Purchase of Partnership Interests and Escrow Instructions" (the "Agreement") whereby they agreed to transfer their partnership interests in Bassett to Wilmington Centre for $72 million. On March 2, 1998, the purchase and sale of the partnership interests in Bassett were consummated under a "Limited Warranty Transfer and Assignment of Partnership Interest" (the "Limited Warranty"). Wilmington Centre became Bassett's general partner, and non-party Yarmouth Capital Partners L.P. II ("Yarmouth") became the limited partner. Following the March 1998 transaction, the Defendants paid the realty transfer tax to the State of Delaware pursuant to 30 Del. C. § 5401 but did not pay a realty transfer tax to the City of Wilmington, which at the time of the transaction, was one percent. As such, the City seeks payment of its real property transfer tax based on the March 2, 1998 transfer in the amount of $1,080,000, plus interest at the legal rate from March 2, 1998, plus counsel fees and costs.
Due to the Defendants' allegedly knowing and willful refusal to pay the transfer tax, the City argues that they should be forced to pay the transfer tax at the new rate of 1.5 percent, which was effective on July 1, 1998.
The Defendants move for dismissal under Superior Court Civil Rule 12(b)(6), asserting that there is no claim because the Wilmington City Code (the "City Code"), which is separate from the State's tax statute, did not tax such transfers. In response, the City argues that the transfer was, in reality, a transfer of the Property to new, nonrelated owners, evidenced by the provisions of the Limited Warranty and the Agreement. In addition, the City claims that the Defendants were avoiding the real estate transfer tax by improperly couching the transaction in terms of a transfer of partnership interests and not a transfer of property, making the tax a nullity.
3O Del. C. § 5401 et al.
At the conclusion of the oral argument, the Court requested further briefing and asked the parties to focus on whether Wilmington City Code, § 44-82 applied and whether the transaction was a true transfer in partnership interests and not, in essence, a property transfer.
STANDARD OF LAW
For a motion to dismiss for failure to state a claim upon which relief can be granted, all allegations in the complaint must be accepted as true. In addition, such a motion will be denied if the-plaintiff may recover under any reasonably conceivable set of circumstances susceptible of proof under the complaint.DISCUSSION
The City's levy of a real property transfer tax is addressed in Wilmington City Code § 44-82, which provides in part:
(a) Every person who makes, executes, issues or delivers any document, or in whose behalf any document is made, executed, issued or delivered, shall pay therefor and in respect thereof, or for and in respect of the vellum, parchment or paper upon which such document is written or printed, a tax at the rate of one percent of the value of the property represented by such document, which tax shall be payable at the time of the making, execution, issuance or delivery of such document; provided, however, no more than one percent tax shall be levied on any single transfer of property.
Wilmington City Code § 44-82(A). In July 1998, the tax was increased to 1.5%.
A "document" is defined, in part, as follows under § 44-81:
Document means any deed, instrument or writing whereby any real estate within this city, or any interest therein, shall be quitclaimed, granted, bargained, sold or otherwise conveyed to the grantee . . .
Wilmington City Code § 44-81.
Thus, the issue before the Court is whether the transaction that took place in March 1998 constituted a transfer of real estate which could fit within the definition of "document" provided in Wilmington City Code, § 44-81. The Court finds that it does not.
The Court finds guidance in Director of Revenue v. Disabatino. In that case, the partners of a limited partnership conveyed their partnership interests to buyers whereupon an apartment building was the sole asset of the partnership. While the Court stated that the partners were basically conveying the apartment building, the interests in the partnership constituted personal property. As such, the Court found that the transaction was not taxable as income. The Court went on to say that if the transaction had been structured as a sale of the partnership real estate, then the non-resident partners would have been liable for Delaware income tax. But the Court reasoned that the partners were entitled to convey their partnership interests, and "no provision of the income tax or partnership law authorizes the taxing authority to ignore the form of the transaction."
Del. Super., C. A. No. 87A-FE-11, Babiarz, J. (Sept. 8, 1989) (Mem. Op.).
Id. at 2.
The Court also finds persuasion in the statutory definition of partnership interest found in Chapter 17 of Title 6. According to 6 Del. C. § 17-701, "[a] partnership interest is personal property" and "[a] partner has no interest in specific limited partnership property." The significance of this concept was outlined by the leading practitioners in this area as follows:
A partnership interest in a Delaware limited partnership is personal property. This is the case with respect to both a general partner interest and a limited partner interest. It is important to recognize that under Section 17-101 (12), a partnership interest means a partner's share of the profits and losses of a limited partnership and the right to receive distributions of the limited partnership's assets (see § 2.1 above; § 17-101 (12)). Thus, a partner's share of the profits and losses and right to receive distributions constitutes personal property of the partner. The characterization of a partnership interest as personal property has important legal consequences to the partners. For example, a partner who owns a partnership interest in a limited partnership the assets of which consist solely of real estate does not have an interest in the partnership's real property. Rather, the partner possesses a partnership interest that is personal property which entitles the partner to its pro rata share of the profits and losses of the real estate partnership and the right to receive distributions of the real estate partnership's assets. Thus a partner of a Delaware limited partnership has no interest in specific partnership property. Regardless of the type of property (real, personal or mixed) that a limited partnership owns, the general partners and limited partners of the partnership have no interest in specific partnership property.
M. Lubaroff P. Altman, Lubaroff Altman on Delaware Limited Partnerships § 6.1 at 6-1 (2000 Supp.).
Under the Agreement dated January 30, 1998, Basplaz and Valacal agreed to transfer, assign and set over all their rights, title and interests as partners in Bassett to Wilmington Centre. In addition, the Agreement stated "Buyer [Wilmington Centre] and Sellers [Basplaz and Valacal] acknowledge that the Partnership [Bassett] is the fee simple titleholder of that certain real property located in the City of Wilmington, County of New Castle, State of Delaware, commonly known as Chase Manhattan Centre . . . (the "Real Property")." Furthermore, in the Limited Warranty, Basplaz and Valacal transferred, conveyed, assigned and set over all their rights, title and interests, including their interests as general partner and limited partner of Bassett, the Partnership, and each of their respective rights to all assets and properties of the partnership to Wilmington Centre and Yarmouth. As such, the interests that were transferred from Basplaz and Valacal to Wilmington Centre and Yarmouth were the partnership interests, not the interests in the partnership's real estate. Consequently, the transfer constituted personal property, which was not taxable under City Code § 44-82.
See 6 Del. C. § 17-701.
What is particularly disturbing to the Court is that the unique difficulty of taxing the transfer of interests in partnership arrangements where the primary asset of the partnership is real estate was recognized as a problem twelve years before this transaction occurred, and no action was taken by the City to rectify it. Prior to 1986, the State statute and the City Code were practically identical with regard to taxing realty transfers. But, in 1986, the General Assembly modified 30 Del. C. § 5401, to add the following subpart:
Except as provided in paragraphs b. and c. of this subdivision, where beneficial ownership in real estate is transferred through a conveyance or series of conveyances of intangible interests in a corporation, partnership or trust, such conveyance shall be taxable under this chapter as if such property were conveyed through a duly recorded "document" as defined in subdivision (1) of this section . . .
When the General Assembly added Section 5401(7)(a) in 1986, the synopsis of the bill for the amendment stated:
This Act will close existing loopholes in the realty transfer tax.
Taxpayers have utilized corporations, partnerships and trusts as a means of conveying real property without being subject to realty transfer tax. Under present law, only the conveyance of real estate is subject to tax. This Act will amend the scope of the tax so that it will include instruments which purport to transfer an interest in intangible personal property, when the transfers are properly characterize as a conveyance of real estate.
While Section 5401(7) was added in 1986, this language was not added to City Code § 41-81 until May 1999, which was after the transaction in question.
See Wilmington City Code § 41-81(7)(a).
The City argues that the legislative history of 30 Del. C. § 5401 should not be considered because legislaitive history is only to be consulted when the language of the statute is ambiguous and because it represents an entirely different legislative body. This argument misses the point.
The Court finds guidance in the reasoning behind the amendment to 30 Del. C. § 5401 in evaluating the state of the law during the time when this transaction occurred. The synopsis of the amended City Code, made in May 1999, stated that the amendment was done so that "the City's real property transfer tax provisions will more closely parallel the State's current real property transfer tax provisions." As such, the Court can confidently assume that in adopting the State's tax provisions, the City was also embracing the General Assembly's intent behind the amendment in that it would "close existing loopholes in the realty transfer tax."
The City also argues that the decision in Pennsylvania's Commonwealth Court in Equitable Life Assurance Society v. Murphy, Pa. Commw. Ct., 621 A.2d 1078 (1993), is applicable to the issues at hand. The Court disagrees. Equitable Life addresses the City of Philadelphia's Ordinance imposing a realty transfer tax on a transfer of all the stock purchased for a Delaware corporation. As a result of the transaction, the purchasers owned 100% of another entity whose only tangible asset was the real estate and building located at 8 Penn Center in Philadelphia. The validity of the tax was upheld. But, the City of Philadelphia had amended its tax ordinance attempting "to close perceived loopholes in its realty transfer tax law." Id. at 1081, n. 3. The court went on to say that:
Prior to its enactment, the City of Philadelphia did not impose realty transfer tax on transfers of interests in corporations or partnerships holding Philadelphia real estate if legal title to the real estate remained in the name of the holding entity. Thus, taxpayers were able to circumvent the tax by transferring interests in corporations or partnerships holding real estate. This effectively transferred property rights in the real estate without transferring the real estate itself. By enacting Bill No. 567, later superseded by Bill No 1259, City Council intended to ensure that all transfers of real estate, however, effected, would be subject to tax.Id. The court explained further that by enacting the bill, Philadelphia sought to tax real estate transfers that previously went untaxed because they were accomplished through the creation of corporate entities, whose stock could be transferred in lieu of deeds to realty. Id. at 1084. While Wilmington's City Code and the Philadelphia Ordinance both have similar language defining a taxable "document," the Philadelphia Ordinance also required persons selling or accepting securities or shares of any real estate corporation, which in effect transferred ownership of real estate situated within Philadelphia, to pay realty transfer taxes. As such, Equitable Life shows exactly why the transaction is not taxable in this case. The Philadelphia Ordinance had the language which was needed by the City of Wilmington in March 1998. Like 30 Del. C. § 5401, the Philadelphia Ordinance addressed the loopholes.
The effect of these closed loopholes is to tax instruments that purport to transfer an interest in intangible personal property when the transfers are properly characterized as a conveyance of real estate. That is precisely the situation here. There is no doubt that the Defendants tried to avoid the transfer tax under the City Code by legally creating the transfer in partnership interests. However, good lawyering does not make the transaction illegal or void. The Court is left with no recourse where the City Code, as written in 1998, did not explicitly tax such a transaction.
Without the added language that is now present in City Code § 44-81(7)(a), the Court cannot find that the March 2, 1998 transfer was taxable. As such, the Defendants' motion is granted. The Court is somewhat relieved to know that under the current City Code, such transactions will now result in the clear imposition of this tax. IT IS SO ORDERED.