Baltimore County v. DeChiaro Ltd. Partnership

WENNER, Judge. Appellants, Baltimore County, Maryland, and the Director of the Office of Finance of Baltimore County, Maryland, filed suit in the Circuit Court for Baltimore County to recover unpaid real estate transfer taxes from appellees, DeChiaro Limited Partnership, Lawrence R. Rachuba, Anthony P. Rubino, and Ralph DeChiaro Enterprises, Inc. The trial court ruled in favor of the appellees on the ground that the transfer in question was not a taxable event under the applicable county ordinances. The sole question on appeal is whether that ruling was erroneous. We think it was and shall reverse.

In his ruling, the trial judge aptly noted that without the agreed statement of facts filed in this case it would be difficult to follow the “convoluted transaction involved.” The pertinent facts according to that statement are as follows. In August of 1960 Ralph DeChiaro Enterprises, Inc. (Enterprises), was formed to engage in the business of real estate development. The sole stockholder of Enterprises was Ralph DeChiaro. In 1963 DeChiaro created the 1963 ⁶⁷⁴ Trust for the benefit of his daughters and transferred all of his stock in Enterprises to the 1963 Trust.

In 1972 DeChiaro created the 1972 Trust, also for the benefit of his daughters. The 1972 Trust owned a voting debenture issued by Enterprises. In November of 1975 Ralph DeChiaro Enterprises B., Inc., (Enterprises B) was formed. The stockholders were Enterprises and Anthony Rubino.

Enterprises and Enterprises B owned real estate in Baltimore County valued at nearly $16 million, the transfer of which is the subject of this litigation. In 1984 DeChiaro Limited Partnership (the Limited Partnership) was formed. Since its formation, the Limited Partnership has been engaged in real estate development. The general partners are the 1972 Trust and Rubino.

The limited partner is the 1963 Trust. The partners organized the Limited Partnership by contributing as capital their interest in Enterprises and Enterprises B. After the Limited Partnership was formed, Enterprises B liquidated into Enterprises and Enterprises liquidated into the Limited Partnership. The liquidation of Enterprises B into Enterprises was accomplished by Articles of Merger. The liquidation of Enterprises into the Limited Partnership was accomplished by Articles of Transfer.

The Articles of Transfer were filed with the State Department of Assessments and Taxation, and a Confirmatory Deed from Enterprises to the Limited Partnership was recorded among the Land Records of Baltimore County. There was no monetary consideration for these transactions. The event which prompted the appellants to bring the suit which spawned this appeal was the transfer of the Baltimore County real estate owned by Enterprises and Enterprises B from Enterprises to the Limited Partnership upon the liquidation of Enterprises. Appellants contend that the transfer is subject to the property transfer tax imposed by the Baltimore County Code, Title 11, Art. IX, § ll-74(a) ⁶⁷⁵ (1978, 1984 Cum.Supp.).

Section ll-74(a) of the County Code provides that: ... a special tax is hereby levied and imposed upon the transfer of any estate or inheritance or freehold, or any declaration or limitation of use, or any estate above seven (7) years, in the county, at the rate of one and six-tenths (1.6) per cent of the value of the property transferred. Section 11-73 of the County Code defines a “transfer” as “... the act of the parties, or of the law, by which the title to any estate or inheritance or freehold, or any declaration or limitation of use, or any estate above seven (7) years, is conveyed from one person to another.” In light of those two provisions of the County Code, we have no difficulty in holding that the transfer in the case sub judice was subject to transfer tax liability. The transfer upon the liquidation of Enterprises into the Limited Partnership is one within the definition of “transfer” contained in § 11-73 and is therefore a taxable event under § ll-74(a). However that may be, the trial court did not stop there in its analysis.

It went a step further and considered § ll-74(b) which provides that “[ejxcept as provided in section ll-85(j), the transfer tax shall apply to transfers of a corporation’s real property to its shareholders on the liquidation, dissolution or termination of that corporation____” We do not think § ll-74(b) is applicable to the transfer in this case because the transferee, the Limited Partnership, was not a shareholder of Enterprises, the liquidating corporation. The court then examined the provisions of § 11—85(j) which exempt certain transfers from the tax imposed by § ll-74(b). Because it found that the transfer fit within those exemptions, it held that the transfer was not a taxable event. We conclude that in so holding the lower court erred.

Section 11—85(j) provides for three exemptions from the transfer tax imposed by § ll-74(b): ⁶⁷⁶ (j) The transactions described in section ll-74(b) shall not be taxed to the extent that: (1) Property is conveyed to a person who was an original shareholder or partner of the entity involved; (2) Property is conveyed to a direct descendant or