Dean v. Pinder

• Decision Date: 29 March 1988
• Docket Number: No. 48,48
• Parties: George W. DEAN, et al. v. Earl H. PINDER, Clerk of the Circuit Court for Kent County, Maryland. Sept. Term 1987.
• Court: Maryland Court of Appeals

Page 154

312 Md. 154

538 A.2d 1184

George W. DEAN, et al. v. Earl H. PINDER, Clerk of the Circuit Court for Kent County, Maryland.

No. 48 Sept. Term 1987.

Court of Appeals of Maryland.

March 29, 1988.

Philip W. Hoon (Hoon & Barroll, on the brief), Chestertown, for appellants.

C.J. Messerschmidt, Asst. Atty. Gen. (J. Joseph Curran, Jr., Atty. Gen. and Catherine M. Shultz, Asst. Atty. Gen., on the brief), Baltimore, for appellee.

Argued before MURPHY, C.J., and ELDRIDGE, COLE, RODOWSKY, McAULIFFE, ADKINS and BLACKWELL, JJ.

BLACKWELL, Judge.

There are two separate taxes imposed by the State of Maryland on the transfer of real property. The first is a recordation tax imposed upon the privilege of recording such an instrument, Maryland Code (1957, 1980 Repl.Vol., 1984 Cum.Supp.) Article 81, § 277; the second is a transfer tax imposed directly upon the instrument conveying title, Maryland Code (1957, 1980 Repl.Vol., 1984 Cum.Supp.) Article 81, § 278A. ¹ In addition to these two taxes, Kent County imposes a local transfer tax upon instruments conveying title to real property. Kent County Code 1984, Article II, § 9-25. The assessment of these taxes is based on the "actual consideration paid or to be paid" to the transferor upon the transfer of real property. Article 81, §§ 277(b), 278A(b)(1); Kent County Code Article II, § 9-25.

This case presents the issue of whether the statutorily required "actual consideration" for the imposition of these taxes exists when the owners of real property transfer the title of that property to a corporation of which they are the sole shareholders. For the reasons set forth below, we find that the Court of Special Appeals correctly held that actual consideration was present for the imposition of these taxes.

I. Facts

The facts of this appeal are neither complicated nor in dispute. The Petitioners, George and Jane Dean, (the "Deans") purchased two properties in Kent County, as tenants by the entireties. The first parcel, known as the Buck Bacchus House, was purchased on January 2, 1984, for $130,000. The second parcel was purchased on April 15, 1984, for $175,000 and is known as the Imperial Hotel. On May 14, 1984, the Deans created a Maryland corporation known as The Imperial Hotel, Inc. (the "corporation"). The following month, although the Deans paid no money into the corporation, they caused the corporation to issue 50 shares of stock, 25 shares to each of them. Since the corporation owned no assets, the stock had no real value at the time of issuance.

Two days after the stock was issued, the Deans, acting in their capacity as the board of directors of the corporation, resolved that the corporation would borrow up to $1,375,000 to purchase and develop the properties. By a single deed dated September 14, 1984, the Deans conveyed both the Imperial Hotel and the Bacchus House to the corporation. At the time of the conveyance, the corporation made no payments to the Deans, nor was any additional stock issued.

On September 26, 1984, the Deans offered the deed to the Respondent, Earl H. Pinder, Clerk of the Circuit Court for Kent County (the "Clerk of the Court") for recordation with an appended affidavit of consideration asserting "there is no consideration paid or to be paid for the foregoing conveyance." Relying on certain opinions promulgated by the Attorney General, the Clerk of the Court declined to record the deed without payment of recordation and transfer taxes in accordance with Article 81, § 277 and 278A. ² The Deans then submitted a revised affidavit stating "the consideration paid or to be paid for the foregoing conveyance is Three Hundred and Five Thousand Dollars ($305,000)." This sum was arrived at by adding together the sums the Deans had paid for the two properties earlier in the year. Accordingly, the Clerk of the Court accepted the revised affidavit and the Deans were assessed and paid under protest $4,056.50 for state and county transfer and recordation taxes.

The Deans then filed a claim for the refund of those taxes which was denied by the Clerk of the Court. On March 29, 1985 the Deans noted an appeal from the decision of the Clerk of the Court to the Maryland Tax Court. The Tax Court affirmed the assessment on the ground that the increase in value of the Deans' stock was an economic benefit that constituted actual consideration for the conveyance upon which the recordation and transfer taxes could be assessed. The Deans appealed that decision to the Circuit Court for Kent County (Wise, J.) which reversed the Tax Court finding that the increase in value of the Deans' stock holding did not constitute actual consideration for the conveyance. The Clerk of the Court thereupon appealed to the Court of Special Appeals. The Court of Special Appeals held that the increase in the value of stock was a real and substantial benefit to the Deans which constituted actual consideration for the conveyance of the two properties. Accordingly, the Court of Special Appeals reversed the decision of the Circuit Court and affirmed the judgment of the Tax Court. Pinder v. Dean, 70 Md.App. 252, 520 A.2d 1119 (1987).

The sole issue in this appeal is whether the above mentioned conveyance of property satisfied the "actual consideration" requirement for the imposition of state and county recordation and transfer taxes. The Deans contend that at the time of the conveyance, there was no possible consideration "presently existing in fact" and nothing was paid to them or "given over" by the corporation. As such, the Deans argue that no "actual consideration" existed as required by statute for the imposition of the recordation and transfer taxes. The Deans further contend that the Court of Special Appeals employed an impermissible "step-transaction" analysis by taxing future consideration that may be received for the subsequent sale of their stock. The Clerk of the Court, on the other hand, argues that the actual consideration "paid or to be paid" for a conveyance must be determined for the purpose of the recordation and transfer tax statutes by reference to the "economic facts" of the transaction as set forth in Pritchett v. Kidwell, 55 Md.App. 206, 461 A.2d 57 (1983). Under his theory, the conveyance increased the assets of the corporation, by causing the value of the stock to increase, and therefore the Deans received an actual and genuine economic benefit in return for their conveyance of the properties. The Clerk of the Court further contends that the General Assembly's use of the word "actual" in Article 81, §§ 277 and 278A did not limit the meaning of "consideration" to money alone, rather, this language was used to emphasize that the consideration on which recordation and transfer taxes are to be based is the "real economic benefit" to the grantor, in whatever form that benefit may take.

II

In 1937, the General Assembly enacted § 213 of Article 81 of the Annotated Code of Maryland under the subtitle "Tax on the Recordation of Instruments in Writing." 1937 Md. Laws Sp.Sess., Ch. 11, § 213. Since its enactment, this provision has been repealed and reenacted several times and was codified as Maryland Code (1957, 1980 Repl.Vol., 1984 Cum.Supp.) Article 81, § 277 at the time this dispute arose. This 1984 provision provided in pertinent part:

(a) Written instruments.--(1) Except as otherwise provided in this section, a tax is hereby imposed upon every instrument of writing conveying title to real or personal property, or creating liens or encumbrances upon real or personal property, offered for record and recorded in this State with the clerks of the circuit courts of the respective counties....

(b) Instruments conveying title or securing debts.--(1) In the case of instruments conveying title to property, the tax shall be at the rate of 55 cents for each $500 or fractional part thereof of the actual consideration paid or to be paid; in the case of instruments securing a debt, the tax shall be at the rate of 55 cents for each $500 of the principal amount of the debt secured. (Emphasis added.)

Although this tax is computable on the amount of consideration transferred, it is not considered a tax on property but rather an excise tax imposed upon the privilege of recording the deed. Central Credit v. Comptroller, 243 Md. 175 182, 220 A.2d 568, 572 (1965); Pittman v. Housing Authority, 180 Md. 457, 459, 25 A.2d 466, 469 (1942).

In 1969, the General Assembly added § 278A to Article 81 (1965 Repl.Vol., 1968 Cum.Supp.) 1969 Md. Laws, Ch. 403 § 10, which permitted a transfer tax to be imposed directly on the instrument conveying title. Section 278A provided in pertinent part:

(a) Except as otherwise provided in this section, a tax is hereby imposed upon every written instrument conveying title to real property, or a leasehold interest therein, offered for record and recorded among the land records in the State, and on the transfer of title to real property or a leasehold interest therein on the filing with the State Department of Assessments and Taxation of articles of sale,....

(b)(1) The tax imposed by this section shall be levied at the rate of .5 percent of the actual consideration paid or to be paid for the conveyance of title and shall be collected by the clerks of the circuit courts of the counties or the Department of Assessments and Taxation. (Emphasis added.) ³

Maryland Code (1957, 1980 Repl.Vol., 1984 Cum.Supp.) Art. 81 § 278A.

Kent County Code (1984) § 9-25 imposed a similar local transfer tax and provided in pertinent part:

(a) The County Commissioners may impose a tax upon every instrument of writing conveying title to real property offered for record and recorded in Kent County with the Clerk of the Circuit Court,....

(b) The tax authorized by this section shall be levied at the rate of not more than one-half of one percent (0.5%) of the actual consideration paid or to be paid for the conveyance of title and shall be collected by the Clerk of the Circuit...