Eastbrook Homes, Inc. v. Dep't of Treasury

• Decision Date: 24 April 2012
• Docket Number: Docket No. 299612.
• Citation: 820 N.W.2d 242,296 Mich.App. 336
• Parties: EASTBROOK HOMES, INC. v. DEPARTMENT OF TREASURY.
• Court: Court of Appeal of Michigan — District of US

296 Mich.App. 336

820 N.W.2d 242

EASTBROOK HOMES, INC.

v.DEPARTMENT OF TREASURY.

Docket No. 299612.

Court of Appeals of Michigan.

Submitted Nov. 9, 2011, at Lansing.

Decided April 24, 2012, at 9:10 a.m. Leave to appeal sought.

McClelland & Anderson, L.L.P., Lansing (by Gregory L. McClelland and Melissa A. Hagen), for Eastbrook Homes, Inc.

Bill Schuette, Attorney General, John J. Bursch, Solicitor General, and Michael R. Bell, Assistant Attorney General, for the Department of Treasury.

Before: TALBOT, P.J., and FITZGERALD and MARKEY, JJ.

PER CURIAM.

Respondent, the Michigan Department of Treasury (Treasury), appeals by right the July 27, 2010, final judgment of the Michigan Tax Tribunal cancelling Treasury's assessments against Eastbrook Homes, Inc. (petitioner), for taxes, penalties, and interest due under the State Real Estate Transfer Tax Act (SRETTA), MCL 207.521 et seq., in the amount of $1,039,854.87 for the tax periods of 2003 through 2006. Petitioner argued in the Tax Tribunal that the real estate transfers at issue were exempt from transfer tax under MCL 207.526(d). After a one-day hearing, briefs, and arguments of the parties, the tribunal issued its final opinion and judgment that MCL 207.526(d) exempted the transfers from taxation and cancelled Treasury's assessments. Because we conclude that the Tax Tribunal erred as a matter of law, we reverse.

I. FACTS AND PROCEEDINGS

Petitioner is a residential building company that constructs and sells new homes. Petitioner builds both speculative and custom-built homes. In the case of a speculative home, petitioner buys a lot or unit from a developer and then builds a house on it with no specific buyer in mind. After the speculative home is complete, petitioner puts the home up for sale on the market. When petitioner sells a speculative home and conveys the property by deed to the buyer, it pays a transfer tax on the value of the land and the value of the home as required under SRETTA, MCL 207.523.

A custom-built home is a home built for a specific, i.e., predetermined, buyer. In the case of a custom-built home, the buyer purchases the unit or lot from a developer and then hires petitioner to construct a house. In the transactions at dispute in this case, each buyer purchased a lot from developer Eastbrook Development Company, Inc. (EDC). EDC would then convey the property to the buyer by warranty deed, and EDC would pay the transfer tax on the value of the undeveloped property at that the time of the conveyance. At the same time the buyer purchased the unit or lot from EDC, the buyer would also contract with petitioner to construct a house or condominium unit. The purchase agreement between the buyer and EDC includes only the value of the real property without the value of the later construction. Similarly, the contract between the buyer and petitioner includes only the cost of construction, not the value of the underlying real property.

As security for the contract price between petitioner and the buyer, petitioner would require the buyer to quitclaim the property to petitioner. Once construction was complete and petitioner was paid the contract price, petitioner would quitclaim the property back to the buyer. Because the quitclaim deeds were made for the purposes of creating a security interest in the property or discharging a security interest, petitioner contends that the quitclaim deeds were exempt from transfer tax under SRETTA pursuant to MCL 207.526(d). Treasury contends that petitioner acted in a coordinated manner with EDC to sell improved property to its buyers without paying the transfer tax on the improved value of the property. In Treasury's view, the warranty deeds between EDC and the buyers were unnecessary and simply being used as a tax-avoidance device. Consequently, Treasury asserts that the quitclaim deeds from petitioner to the buyers are subject to the transfer tax under SRETTA.

Treasury audited petitioner for the years 2003–2006 and, as a result of the audit, assessed petitioner tax deficiencies with interest and penalties totaling $1,039,854.87. Petitioner contested the assessments and requested an informal conference, which was held on May 7, 2008. The hearing referee recommended that the assessments be upheld. Treasury issued a final decision and order of determination affirming the assessments on February 3, 2009. Petitioner appealed the decision in the Tax Tribunal on March 2, 2009, arguing that the quitclaim deeds at issue are exempt from SRETTA because they were made for the purpose of discharging a security interest in the property.

After discovery, a hearing was conducted on April 15, 2000, before a Tax Tribunal hearing officer. At the hearing, the parties stipulated with regard to the admission of four exhibits, which were “typical or prototype documents for all the transactions subject to the various assessments.” After the exhibits were admitted, Michael McGraw, Chief Executive Officer of petitioner, testified regarding the transactions. McGraw was the only witness. On the basis of the hearing, the Tax Tribunal made the following findings of fact:

1. Petitioner (i.e., the Building Company) is in the business of residential construction.

2. The Development Company (i.e., Eastbrook Development Company, Inc.) is in the business of taking raw unimproved land and developing it into divisible parcels of property.

[296 Mich.App. 341]3. The Building Company and the Development Company are separate and distinct entities.

4. Mr. McGraw, as an individual owner, has interests in both entities and a legitimate business purpose, other than avoiding transfer tax, to maintain the Building Company and Development Company as separate entities including but not limited to the provisions set forth in the Condominium Act, MCL 559.101 et seq., and Land Division Act, MCL 560.101 et seq., and tort liability.

5. Pursuant to Paragraph 21 of the Building Contract, Petitioner and the Buyers expressly intended to use the Buyer's quit claim deed for a specified parcel of property, as security for payment of improvements made.

6. During the course of construction, Petitioner has a legitimate business interest to maintain physical possession of the property including but not limited to the lack of a certificate of occupancy (see Paragraph 13 and 14 of the Building Contract), tort liability, and expeditious completion of the project.

7. The parties acted consistent with their intentions set forth in the transaction documents and Building Contract; Petitioner did not act as though he possessed fee simple title in the property and the Buyers still retained an interest in the property by paying the property taxes, and making additional decisions with regard to change orders and addendums made during the course of construction.

8. As expressed in the Building Contract, upon completion of the home Petitioner “would release its security and quit claim title back to the Buyer.”

9. The Buyers' quit claim deeds and Petitioner's quit claim deeds both indicate on their face the parties' intention to use the deed as a security; the deeds corroborated the parties intentions set forth in the transaction documents contained in Petitioner's exhibits.

10. The Buyers' quit claim deeds are found to be an effective method of making certain that the Builder is paid in full upon completion of construction of a home, and provides a strong form of security. [Final Opinion and Judgment (MTT Docket No. 359471, July 27, 2010), pp 14–15.]

The Tax Tribunal invoked the doctrine of equitable mortgages to grant petitioner relief, writing with respect to its conclusions of law as follows:

The quit claim deeds from Petitioner to its respective customers are clearly deeds or instruments of conveyance of property or any interest in property, which are subject to the tax imposed under the SRETTA, but for the fact that the quit claim deeds were given as security or an assignment or discharge [ of ] the security interest and thus exempt under § 6 of the SRETTA [.]

It is apparent from clear unambiguous language used within the documents in Petitioner's Exhibits that the parties intended the conveyance of property interests, by way of quit claim deeds from the Buyers to Petitioner and from Petitioner to the Buyers, were to be treated as creating a security interest in the properties. More specifically, Petitioner and the Buyers expressly intended in their respective Building Contracts that the Buyers' quit claim deeds be given to Petitioner as “security during construction.” Furthermore, Buyers' quit claim deeds expressly corroborate the parties' intentions by stating “This transfer is made for security purposes” on the face of the deed, and by specifically identifying the property used to secure the debt. Therefore, the Tribunal finds that the Buyers' quit claim deeds to Petitioner created a security interest (i.e., an equitable mortgage) on the Buyers' respective parcel of property.

* * *

The statute is clear and unambiguous that written instruments that transfer property given as security and the assignmentor discharge of the security interest are exempt from SRETT[A]. MCL [207.526(d) ]. The statute does not require the security interest be created by way of mortgage in order to be exempt. If the Legislature would wish to limit the exemption contained in § 6 of the SRETTA to mortgages it is free to do so.

Notwithstanding the above, Petitioner's relationship with the Buyers, as their builder and financier, further supports the conclusion that Buyers' quit claim deeds served as an equitable mortgage. Accordingly, Petitioner's quit claim deeds back to the Buyers are a release of said security. Therefore, Petitioner's quit claim deeds to the Buyers are exempt from State transfer tax pursuant to MCL 207.526(d). [Final Opinion and Judgment (MTT Docket No. 359471, July 27, 2010), pp 15–17.]

On the basis of the foregoing findings of fact and conclusions of law, the Tax Tribunal...