Read v. Supervisor of Assessments

CATHELL, Judge. This case presents two issues of first impression before this Court: the effect of the withdrawal and subsequent sale, closely related in time, of property subject to a Forest Conservation and Management Agreement and the applicability of the step transaction doctrine. Because the Tax Court proper ³⁸⁷ ly upheld the imposition of a rollback tax with respect to appellant’s withdrawal and conveyance of property subject to a Forest Conservation and Management Agreement, we shall affirm. I. Facts In 1972, appellant Kenneth F. Read and his now deceased wife, Sondra D. Read, entered into a Forest Conservation and Management Agreement (FCMA or agreement) with the Department of Forests and Parks, which is a part of the Department of Natural Resources (DNR), 1 involving appellant’s 34.5 acre tract of waterfront woodland area located in Anne Arundel County.

This agreement provided that appellant’s property tax assessment on the tract of land would be frozen during the term of the agreement, which was four years. 2 In return, appellant agreed to preserve his property in its wooded state under a woodland management plan developed by the Department of Natural Resources. Under the past and current provisions of the FCMA program, if FCMA property or a portion thereof is conveyed to another owner and the agreement is not assumed by the new owner, that portion of the conveyed property would be reassessed at market value and a rollback tax imposed. 3 ³⁸⁸ Appellant renewed the agreement for a period of ten years on July 17, 1976. The FCMA was amended in 1980 to reflect the withdrawal of a one-acre home site from the agreement, thereby reducing the FCMA acreage to 33.5 acres. 4 In 1983, appellant renewed the FCMA for a twenty-year term beyond the previous expiration year of 1986 to 2006. Additionally, the acreage was reduced by 0.4 acres, the site of six existing cabins, which decreased the acreage subject to the FCMA to. approximately 33 acres. 5 In 1986, appellant began subdividing an area covered by the agreement.

The subdivision was approved in 1989. In 1988, section 8-211 was amended to “clarify” that an owner’s removal of land from the FCMA prior to the expiration of the agreement would not enable the owner to avoid the rollback tax. See Md.Code (1985, 1994 RepLVol., 1998 Cum.Supp.), § 8-211(i)(l)(iv) of the Tax-Property Article. 6 Appellant and his wife received notification of this amendment in 1988 or 1989. In 1990, the FCMA again was amended to reflect a decrease in acreage because appellant had sold and conveyed a subdivided lot (lot three) from the property subject to the FCMA.

A rollback tax was imposed pursuant to section 8—211(i)(l)(iii). Appellant paid the rollback tax. 7 Two other Cherrystone lots were listed for sale by a realtor in March 1991. Sales contracts were executed for lot four on ³⁸⁹ December 30,1991, and on lot two on February 7,1992. After the contracts for sale were formalized, appellant’s attorney drafted two letters to DNR, one on July 23, 1992, and the other on August 12, 1992, requesting DNR to withdraw lots two and four, respectively, from the FCMA.

Thus, at the time of withdrawal, the sales contracts had been executed. Shortly thereafter, lot two was conveyed on July 30,1992, for $385,000 and lot four was conveyed on November 13,1992, for $500,000. The assessed value on the lots with the frozen assessment woodland basis would have been $2,668 for lot two and $3,289 for lot four. The FCMA subsequently was amended formally in January of 1993 to reflect appellant’s withdrawal of three lots, including lots two and four.

The Supervisor of Assessments of Anne Arundel County (Supervisor), appellee, imposed a rollback tax for two of the lots for the period 1972 to 1992, in the amount of $38,695.70 for lot two and $39,358.55 for lot four. This tax was imposed based upon the Supervisor’s determination that the lots were sold prior to their withdrawal from the FCMA because they were sold before the agreement amending the FCMA was signed in January 1993. Appellant paid the taxes assessed but requested a refund. The Supervisor denied the refund request and affirmed the assessment.

Appellant appealed to the Maryland Tax Court. There he claimed that the rollback tax should not have been assessed because he had withdrawn lots two and four before they were sold based on the letters submitted by his attorney in 1992; therefore, he alleged, the amendment to the FCMA should have been retroactive to the requests for "withdrawal made in July and August 1992. Appellant also argued the 1988 amendment was inapplicable to his FCMA and an unconstitutional impairment of his contract. The Tax Court affirmed the Supervisor’s denial in an October 28, 1994, order and found that the lots had been conveyed prior to the January 1993 amendment to the FCMA.

Appellant then sought judicial review in the Circuit Court for Anne Arundel County. That court affirmed the Tax Court in a written opinion and order dated September 7,1995. ³⁹⁰ Appellant appealed the circuit court’s judgment to the Court of Special Appeals. In an unreported opinion, that court held that appellant’s removal of the lots from the FCMA was effective retroactively to the date of the letters requesting removal. Turning to the issue of whether the 1988 statutory amendment applied to appellant, the court stated that under the pre-1988 law, appellant could not be assessed the rollback taxes if the lots were withdrawn from the FCMA prior to sale.

Because the Tax Court had not addressed the Contract Clause issue, the Court of Special Appeals reversed and remanded the case for factual determinations to be made regarding the application of the 1988 amendment to appellant’s FCMA. Upon remand, the Tax Court found that the 1988 amendment to section 8-211 did not unjustifiably impair appellant’s contract rights. Appellant again sought judicial review in' the circuit court and that court affirmed. Appellant noted an appeal to the Court of Special Appeals and presented the following question: Did the 1988 amendment of Md.Code Ann., Tax-Prop. § 8-211(h) [sic] by the Maryland Legislature constitute an unconstitutional impairment of the Appellant’s existing contractual rights under a 1983 Forest Conservation and Management Agreement with the Maryland Department of Natural Resources?

This Court issued a writ of certiorari on its own motion before the Court of Special Appeals heard arguments to consider the important issues raised by this appeal. We shall affirm the judgment of the circuit court, but for reasons articulated differently than those stated by the Tax Court, the circuit court, and proffered by the parties in their briefs. 8 We hold that the Contract Clause is not impli ³⁹¹ cated here because, regardless of the effect of the 1988 amendment to section 8-211, withdrawals of property from the FCMA for the purpose of a conveyance to a new owner always have been subject under the statute to the rollback tax, whether the tax actually had been imposed or not. By applying the step transaction doctrine, the transactions by appellant in subdividing his property, listing the lots with a realtor, accepting sales contracts, withdrawing the property from the agreement, and conveying the property without transferring the FCMA obligations to the buyer all constituted essential and interdependent parts of the conveyances on July 30 and November 13, 1992. When appellant withdrew his property from the FCMA, he did so with the intent to convey the property, an act subject to the rollback tax under the statute.

Accordingly, because the 1988 amendment had no effect on appellant’s contract with the state, we need not address the constitutional issue raised by appellant.

II

Discussion A. Standard of Review We begin by noting the appropriate standard of review. The Maryland Tax Court is an administrative agency. See Prince George’s County v. Brown, 334 Md. 650 , 658 n. 1, 640 A.2d 1142 , 1146 n. 1 (1994). Maryland Code (1988, 1997 Repl.Vol.), section 13-532(a) of the Tax-General Article, provides that the final order of the Tax Court is subject to judicial review as provided in sections 10-222 and 10-223 of the State Government Article, which govern the standard of review for decisions of administrative agencies.

The standard of review for Tax Court decisions are generally the same as that for other administrative agencies. Accordingly, ³⁹² [ujnder this standard, a reviewing court is under no statutory constraints in reversing a Tax Court order which is premised solely upon an erroneous conclusion of law. See, e.g., Supervisor of Assess. v. Carroll, 298 Md. 311 , 469 A.2d 858 (1984); Comptroller v. Mandel Re-Election Com., 280 Md. 575 , 374 A.2d 1130 (1977). On the other hand, where the Tax Court’s decision is based on a factual determination, and there is no error of law, the reviewing court may not reverse the Tax Court’s order if substantial evidence of record supports the agency’s decision.

Ramsay, Scarlett & Co. v. Comptroller of the Treasury, 302 Md. 825, 834 , 490 A.2d 1296, 1301 (1985). Furthermore, the reviewing court may not substitute its own judgment for that of the Tax Court if supported by substantial evidence. See CBS Inc. v. Comptroller of the Treasury, 319 Md. 687, 698 , 575 A.2d 324, 329 (1990); Rouse-Fairwood Ltd. Partnership v. Supervisor of Assessments, 120 Md.App. 667, 685 , 708 A.2d 19, 27 (1998); see also Comptroller of the Treasury v. Disclosure, Inc., 340 Md. 675, 682-83 , 667 A.2d 910, 913 (1995); Director of Finance v. Charles Towers Partnership, 104 Md.App. 710, 716-17 , 657 A.2d 808, 812 (1995), aff'd sub nom., Chesapeake & Potomac Tel. Co. v. Director of Finance, 343 Md. 567 , 683 A.2d 512 (1996).

There is no substantive dispute as to the facts of this case. The appeal before us, therefore, presents only a question of law in which we must interpret the provisions of the statute at issue at the time appellant entered into the FCMA, the step transaction doctrine, and the legal effect of appellant’s multiple transactions in subdividing, listing, selling, withdrawing, and conveying lots two and four. B. Statutory Interpretation Before we discuss the applicable rule of law, we turn first to the canons of statutory construction. We have said that “[tjhe cardinal rule of statutory interpretation is to ascertain and effectuate the intention of the legislature.” Oaks v. Connors, 339 Md. 24, 35 , 660 A.2d 423, 429 (1995).

Legislative intent must be sought in the first instance in the actual language of the statute. Marriott Employees Fed. Credit ³⁹³ Union v. Motor Vehicle Admin., 346 Md. 437, 444-45 , 697 A.2d 455, 458 (1997); Stanford v. Maryland Police Training & Correctional Comm’n, 346 Md. 374, 380 , 697 A.2d 424, 427 (1997) (quoting Tidewater v. Mayor of Havre de Grace, 337 Md. 338, 344 , 653 A.2d 468, 472 (1995)); Coburn v. Coburn, 342 Md. 244, 256 , 674 A.2d 951, 957 (1996); Romm v. Flax, 340 Md. 690, 693 , 668 A.2d 1, 2 (1995); Oaks, 339 Md. at 35 , 660 A.2d at 429 ; Mauzy v. Hornbeck, 285 Md. 84, 92 , 400 A.2d 1091, 1096 (1979); Board of Supervisors v. Weiss, 217 Md. 133, 136 , 141 A.2d 734, 736 (1958). Furthermore, where the statutory language is plain and free from ambiguity, and expresses a definite and simple meaning, courts do not normally look beyond the words of the statute itself to determine legislative intent. Marriott Employees, 346 Md. at 445 , 697 A.2d at 458 ; Kaczorowski v. Mayor of Baltimore, 309 Md. 505, 515 , 525 A.2d 628, 633 (1987); Hunt v. Montgomery County, 248 Md. 403, 414 , 237 A.2d 35, 41 (1968).

In Tracey v. Tracey, 328 Md. 380, 387 , 614 A.2d 590, 594 (1992), however, this Court opined, in construing an alimony statute: While the language of the statute is the primary source for determining legislative intention, the plain meaning rule of construction is not absolute; rather, the statute must be construed reasonably with reference to the purpose, aim, or policy of the enacting body. The Court will look at the larger context, including the legislative purpose, within which statutory language appears. Construction of a statute which is unreasonable, illogical, unjust, or inconsistent with common sense should be avoided. [Citations omitted.] When there is a “lack of relevant legislative history, we must rely substantially on the language of the statutes in the context of the goals and objectives they seek to achieve.” Subsequent Injury Fund v. Teneyck, 317 Md. 626, 632 , 566 A.2d 94, 97 (1989) (citing Kaczorowski, 309 Md. at 513-16 , 525 A.2d at 632-33 ). Finally, where a statute is plainly susceptible of more than one meaning and thus contains an ambiguity, courts consider ³⁹⁴ not only the literal or usual meaning of the words, but their meaning and effect in light of the setting, the objectives and purpose of the enactment____ [T]he court ... may consider the consequences resulting from one meaning rather than another,' and adopt that construction which avoids an illogical or unreasonable result, or one which is inconsistent with common sense.

Tucker v. Fireman’s Fund Ins. Co., 308 Md. 69, 75 , 517 A.2d 730, 732 (1986) (citations omitted). The legislative history for the original statutory provision enacting the FCMA program is sparse.- Nonetheless, the language of the statute, when read in conjunction with its broad purpose to protect the environmental and economic interests of the landowners, the State, and the people of Maryland makes clear that the Legislature did not intend land subject to an FCMA to be withdrawn and promptly conveyed 4to a new owner without either the transfer of the obligations of the agreement or the imposition of rollback taxes. The Conservation of Woodland Areas program was created by legislative enactment in 1963.

The Act provided that the program was designed to encourage the people of this State to keep or develop lands for productive woodland purposes, to increase the income of the citizens of the State from the sale of timber, to prevent floods and the wasting of the State’s soil, to provide open and wooded areas for the use and enjoyment of residents and sojourners in this State, and to promote the welfare and assets of the people of Maryland. 1963 Md. Laws, Chap. 884, § 1. The 1963 enactment provided a general scheme under which landowners could contract with the DNR for the tax assessment value of woodland areas to be frozen for the period of the contract in exchange for complying with a forest conservation and management program. See id. The statute also mandated that [a]t the end of the period covered by the contract, or at the time part or all of the timber is harvested, or at the time part or all of the tract is conveyed to a new owner, whiehev ³⁹⁵ er is the earliest date, there shall be a new valuation of the tract, or portion thereof.

Id. If only a portion of the tract were harvested or conveyed, the new valuation would be assessed proportionately. Id. The statute went on to provide that although a tract of land subject to the agreement could be conveyed without the new valuation made and rollback tax assessed, this was possible only if the FCMA were transferred to the buyer and the buyer assumed the obligations of the contract.

Id. The statute was silent as to withdrawals of property when there was no evidence of intent to convey the property. 9 As we read Chapter 884, notwithstanding that no other provisions specifically forbade the withdrawal of property from the FCMA, the Legislature clearly intended to deter the premature conveyance of property subject to the agreement by mandating that a rollback tax be assessed. The tax, however, would not be assessed if the property were conveyed subject to the agreement. By assessing the rollback tax to landowners who conveyed property subject to the agreement before the agreement terminated, the State provided an incentive for the landowners to uphold their end of the contract in protecting the woodland areas while receiving the cost-saving benefit of a frozen tax assessment.

The Legislature permitted the conveyance of property subject to the agreement without the imposition of the rollback taxes if the contractual obligations were transferred to the buyer. Such provisions demonstrated the Legislature’s intent to deter sale of property subject to an agreement without transferring that agreement’s obligations to the buyer, Failure to abide by this resulted, and still results under present section 8-211 of the Tax-Property Article, in the imposition of a rollback tax. Therefore, any conveyance of property subject to the FCMA, free of its restrictions, results in the assessment of rollback taxes. ³⁹⁶ In 1988, the Legislature passed an amendment to address the perceived problem of landowners’ attempts to subvert the imposition of rollback taxes by withdrawing property from the agreement and then conveying it. The amendment provided that a woodland area covered by the FCMA shall be reassessed, that is, a rollback tax imposed, any time the agreement is ended “at the request of the owner.” 1988 Md. Laws, Chap. 179, § 1; § 8—211 (i)(l)(iv).

This provision, the Legislature explained, “clarifie[d] the rights and obligations of landowners having Forest Conservation and Management Agreements with the Department of Natural Resources.” House State Economic and Environmental Affairs Committee, Bill Analysis for House Bill 209 (1988). Appellant argues that because this amendment was enacted subsequent to the 1986 renewal of his FCMA, the application of the amendment and accompanying rollback tax assessment violates the Contract Clause of the United States Constitution. Regardless of whether the 1988 amendment applies to appellant’s agreement, his conveyances of lots two and four were subject to the rollback tax. This is true because even though appellant withdrew the lots from the agreement before the date of the actual conveyances, all of the transactions entered into by appellant before and after the withdrawal, when stepped together, were made in furtherance of the conveyances to the buyers without transferring appellant’s obligations under the agreement.

Therefore, for purposes of the assessment of the rollback tax and under the circumstances of this case, appellant’s withdrawal, as we shall explain, was made with the purpose of completing already contracted-for sales and conveyances. Such transactions are, and have always been, subject to the rollback tax under the statute. C. The Step Transaction Doctrine The Supreme Court and the federal circuits long have recognized the principle that form will not prevail over substance in federal tax matters. That is, taxpayers cannot escape tax liability by disguising the true nature of transac ³⁹⁷ tions with mere formalisms.

In Minnesota Tea Co. v. Helvering, 302 U.S. 609, 612 , 58 S.Ct. 393, 394 , 82 L.Ed. 474 (1938), the issue before the Supreme Court was whether petitioner’s delivery of cash to stockholders, who thereafter paid an equal sum of cash toward petitioner’s debts, constituted a distribution pursuant to the Internal Revenue Code. The Court explained that the Code established that, in respect of any cash received and not “distributed,” there was a taxable gain to petitioner. And, quite as plainly, payment of the debts by petitioner, if made directly by petitioner to the creditors, would not have been a distribution under the statute; for that contemplates a distribution to stockholders, and not payment to creditors. If, then, petitioner had followed the simple course of retaining in its own hands the sum here in question, and subsequently paying it directly to the creditors, it necessarily would result that liability of petitioner for a tax on the amount of gain could not be avoided.

And, obviously, this is the effect of what was done, although circuitously. Id. at 612-13 , 58 S.Ct. at 394 , 82 L.Ed. 474 . The Court went on to hold that even though petitioner took a “roundabout process,” it achieved the same benefit it would have received had it retained the amount of the distribution and applied that sum to reduce its indebtedness. Id. at 613 , 58 S.Ct. at 395 , 82 L.Ed. 474 .

The Court concluded that “[p]ayment of indebtedness, and not distribution of dividends, was, from the beginning, the aim of the understanding with the stockholders and was the end accomplished by carrying that understanding into effect. A given result at the end of a straight path is not made a different result because reached by following a devious path.” Id. (emphasis added). See also Gregory v. Helvering, 293 U.S. 465, 469, 470 , 55 S.Ct. 266, 267, 268 , 79 L.Ed. 596 (1935) (noting that although “[t]he legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted,” allowing sham transactions to escape tax liability would “exalt artifice above reality.”). ³⁹⁸ The Court later clarified this axiom in Commissioner v. Court Holding Co., 324 U.S. 331, 334 , 65 S.Ct. 707, 708 , 89 L.Ed. 981 (1945): The incidence of taxation depends upon the substance of a transaction.

The tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the■ commencement of negotiations to the consummation of the sale, is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature, of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress. [Emphasis added.] [Footnote omitted.] The “step transaction doctrine,” as the principle later was to become known, was specifically recognized by the Supreme Court in Commissioner v. Clark, 489 U.S. 726 , 109 S.Ct. 1455 , 103 L.Ed.2d 753 (1989).

In that case the Court examined a substantial cash payment made in connection with a stock-for-stock exchange to determine whether it had the effect of a distribution of a dividend, and was taxable as ordinary income or whether it was subject to capital gains. The Court reviewed the language and history of the Internal Revenue Code provision at issue', applied “a commonsense understanding of the economic substance of the transaction,” and declared that a determination whether the exchange had the effect of distributing a dividend should be resolved “by examining the effect of the exchange as a whole.” Id. at 738 , 109 S.Ct. at 1462 , 103 L.Ed.2d 753 . Going on, the Court stated: Our reading of the statute as requiring that the transaction be treated as a unified whole is reinforced by the well-established “step-transaction” doctrine, a doctrine that the Government has applied in related contexts, see, e.g., Rev. Rul. 75-447, 1975-2 Cum. Bull. 113, and that we have expressly sanctioned, see Minnesota Tea Co. v. Helvering, ³⁹⁹ 302 U.S. 609, 613 , 58 S.Ct. 393, 394 , 82 L.Ed. 474 (1938); Commissioner v. Court Holding Co., 324 U.S. 331, 334 , 65 S.Ct. 707, 708 , 89 L.Ed. 981 (1945).

Under this doctrine, interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction. By thus “linking together all interdependent steps with legal or business significance, rather than taking them in isolation,” federal tax liability may be based “on a realistic view of the entire transaction.” 1 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶ 4.3.5, p. 4-52 (1981). Id. at 738, 109 S.Ct. at 1462-63 , 103 L.Ed.2d 753 . The federal circuit courts of appeal have explicitly recognized and applied the step transaction doctrine, recognizing three tests used to determine whether transactions should be “stepped” together and considered not as isolated incidents, but as components in an overall plan.

See, e.g., Kornfeld v. Commissioner, 137 F.3d 1231 (10th Cir.), cert. denied, — U.S. -, 119 S.Ct. 171 , 142 L.Ed.2d 139 (1998); G.M. Trading Corp. v. Commissioner, 121 F.3d 977 (5th Cir.1997); Greene v. United States, 13 F.3d 577 (2d Cir.1994); Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517 (10th Cir.1991); Brown v. United States, 782 F.2d 559 (6th Cir.1986); Security Indus. Ins. Co. v. United States, 702 F.2d 1234 (5th Cir.1983); McDonald’s Restaurants v. Commissioner, 688 F.2d 520 (7th Cir.1982); Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652 (5th Cir.1968); Penrod v. Commissioner, 88 T.C. 1415 , 1987 WL 49335 (1987); King Enters., Inc. v. United States, 189 Ct.Cl. 466 , 418 F.2d 511 (1969). In Associated Wholesale Grocers, 927 F.2d at 1522 , the Court of Appeals for the Tenth Circuit identified the “end result,” “interdependence,” and “binding commitment” tests.

Although the end result and interdependence tests are the most frequently used, see id., federal courts have not required the taxpayer to meet all three nor have many courts applied all three. See Kornfeld, 137 F.3d at 1235 ; Greene, 13 F.3d at 583-85 ; Associated Wholesale Grocers, 927 F.2d at 1523 . Nonetheless, although there are distinct differences between ⁴⁰⁰ each of the step transaction tests, “each is faithful to the central purpose of the step transaction doctrine; that is, to assure that tax consequences turn on the substance of a transaction rather than on its form.” King Enters., 418 F.2d at 517 . The narrowest and most seldom applied test, the binding commitment test, see Kornfeld, 137 F.3d at 1235 ; Associated Wholesale Grocers, 927 F.2d at 1522 n. 6, provides that a transaction will be stepped together if, at the first step of the transaction, a binding commitment was entered into to undertake later steps.

See Penrod, 88 T.C. at 1429 . The test is of limited applicability because it appears to have been formulated to address a transaction that spanned several tax years. See McDonald’s Restaurants, 688 F.2d at 525 . Another court has described the Supreme Court’s application of this test as limited to the circumstances of that case and further noted the Court gave no indication that it intended the binding commitment test to be “the touchstone of the step transaction doctrine in tax law.” King Enters., 418 F.2d at 518 (discussing Commissioner v. Gordon, 391 U.S. 83 , 88 S.Ct. 1517 , 20 L.Ed.2d 448 (1968)).

The interdependence test, a variation on the end result test, focuses on whether the steps in the transaction are so interdependent that “the legal relations created by one transaction would have been fruitless without a completion of the series.” Greene, 13 F.3d at 584 ; Associated Wholesale Grocers, 927 F.2d at 1523 ; Penrod, 88 T.C. at 1430 . The interdependence test concentrates on the relationship between all of the steps. Associated Wholesale Grocers, 927 F.2d at 1523 ; Penrod, 88 T.C. at 1430 . In applying this test, courts must look at whether each individual step had some “ ‘independent significance or whether they had meaning only as part of the larger