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Conveyance from LP to LLC is taxable

Fine

“Simply put, had the legislature intended to grant the exemption the companies seek, it could have done so easily — without relying on alchemic, albeit ingenious, statutory deconstruction.”

Hon. Ralph Adam Fine Wisconsin Court of Appeals

The transfer of real estate between a limited partnership and a limited liability company is not exempt from the real estate transfer fee, even though the limited partnership is the limited liability company’s only member, the Wisconsin Court of Appeals held on Dec. 23.

F.M. Management Company is a Wisconsin limited partnership. F.M. Real Estate Company is a Wisconsin limited liability company, whose sole member is F.M. Management.

In 1998, F.M. Management deeded to F.M. Real Estate approximately 67 acres of real property. The consideration for the transfer was F.M. Management becoming the only member of F.M. Real Estate in return for approximately 25 acres that remained after F.M. Real Estate immediately deeded back to F.M. Management 42 acres. No money passed hands in connection with either transfer.

The companies claimed the transfers were exempt from the real estate transfer fee, pursuant to sec. 77.25(15s). The Department of Revenue disagreed, and assessed the transfer fee, plus 25 percent penalty.

The Wisconsin Tax Appeals Commission affirmed the Department’s assessment, as did Milwaukee County Circuit Court Judge Maxine A. White. The companies appealed, but the court of appeals affirmed in a decision by Judge Ralph Adam Fine.

The Statutes

Section 77.22(1) imposes a real estate transfer fee on “every conveyance not exempted or excluded.” Section 77.21(1) defines “conveyance” as “deeds and other instruments for the passage of ownership interests in real estate, including contracts and assignments of a vendee’s interest therein.”

Section 77.23(15s) provides that the fee does not apply to a conveyance “Between a limited liability company and one or more of its members if all of the members are related to each other as spouses, as linear ascendants, lineal descendants or siblings, whether by blood or by adoption, or as spouses of siblings and if the transfer is for no consideration other than the assumption of debt or an interest in the limited liability company.”

What the court held

Case: F.M. Management Co., LP, & F.M. Real Estate Co., LLP, v. Wisconsin Department of Revenue, No. 03-1536.

Issue: Is a transfer between a limited partnership (LP) and a limited liability company (LLC) exempt from the real estate transfer fee, pursuant to sec. 77.25(15s), if the LP is the only member of the LLC?

Holding: No. Subsection (15s) applies only to human persons, not legal persons.

Counsel: Lawrence A. Trebon, Milwaukee, for appellant; F. Thomas Creeron III, Madison, for respondent.

Human vs. Legal “Persons”

The court concluded that the transfers met two of the three requirements to satisfy the exemption: the conveyance was between “a limited liability company and one or more of its members”; and the transfer was “for no consideration other than … an interest in the limited liability company.”

However, the court held that the transfers failed to meet the second requirement — that all the members of the limited liability company be “related to each other” in one of the specified ways.

Applying “great weight deference” to the reasoning of the Commission, the court held that it acted reasonably in holding that the exemption is applicable only if the member of the limited liability company is a human person, and not a “legal person,” such as a limited partnership.

The companies argued that, where there is only one member of a limi
ted partnership, that member need not be human, because neither humans nor legal entities can be “related” to themselves.

Rejecting the argument, the court concluded, “the legislature’s use in sec. 77.25(15s) of words and concepts that can only be applied to humans is strong evidence that it did not intend that subsection to also apply to non-human entities. … If the legislature had intended the sec. 77.25(15s) exemption to apply to non-humans when, as here, that non-human entity was the only member of the limited liability company involved in the real estate transfer, the legislature could have easily so provided.”

In a footnote, the court acknowledged that the term “person” in Chapter 183 — which governs limited liability companies — includes other limited liability companies and partnerships. Nevertheless, the court found, “we are unaware of anything in either law or human experience that equates ‘spouses,’ ‘linear ascendants,’ ‘lineal descendants,’ or ‘siblings,’ with non-human entities or that declares that non-human entities can be related to one another by either ‘blood’ or ‘adoption.’”

The court also noted that sec. 77.25 is replete with exemptions for transactions between entities: “pursuant to mergers of corporations”; “pursuant to partnerships registering as limited liability partnerships”; “pursuant to the conversion of a business entity to another form of business entity”; and “by a subsidiary corporation to its parent for no consideration, nominal consideration or in sole consideration of cancellation, surrender or transfer of capital stock between parent and subsidiary corporation.”

Links

Wisconsin Court of Appeals

Related Article

Case Analysis

The court reasoned, “Simply put, had the legislature intended to grant the exemption the companies seek, it could have done so easily — without relying on alchemic, albeit ingenious, statutory deconstruction.” Finding the Commis-sion’s interpretation reasonable, the court affirmed it.

Penalties

The court also affirmed the imposition of the 25 percent penalty. The companies argued that, because their interpretation of the exemption was reasonable, they should not have to pay.

Finding that the statute provides that the penalty “shall” be imposed, rather than “may,” the court concluded the DOR has no discretion not to impose the penalty, and affirmed.

Click here for Case Analysis.

David Ziemer can be reached by email.

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