Kosco v. Com.
| Decision Date | 16 December 2009 |
| Docket Number | No. 766 F.R. 2007.,766 F.R. 2007. |
| Citation | 987 A.2d 181 |
| Parties | Michael A. KOSCO and Sally R. Kosco, Petitioners v. COMMONWEALTH of Pennsylvania, Respondent. |
| Court | Pennsylvania Commonwealth Court |
Lynn R. Emerson, Bridgeville, for petitioners.
Jo Ann P. Collins, Sr. Deputy Attorney General, Harrisburg, for respondent.
BEFORE: SIMPSON, Judge, and FRIEDMAN, Senior Judge and FLAHERTY, Senior Judge.
OPINION BY Judge SIMPSON.
Michael A. and Sally R. Kosco, husband and wife (Taxpayers), petition for review of a final order of the Board of Finance and Revenue (Board) holding Taxpayers' transfer of real property to themselves as trustees of a family land trust did not qualify for a trust exemption from realty transfer taxes under the relevant provisions of the Tax Reform Code of 1971 known as the Realty Transfer Tax Act (Act).1 Taxpayers assert the Board erred in holding the trust is a nonexempt business trust rather than an ordinary trust because it exhibits none of the features of a business trust delineated in the Act. Discerning no error in the Board's determination, we affirm.
Taxpayers built a retirement home on their property in Westmoreland County near the Seven Springs resort area. Their home is designed to accommodate visits from their four adult children and their families. In February, 2006, Taxpayers executed an irrevocable trust agreement titled the Kosco Family Land Trust (Trust). Taxpayers are the trustees and beneficiaries. Taxpayers' four children are secondary beneficiaries. In May, 2006, Taxpayers transferred their realty by deed to the Trust for "-0-" total consideration. The property's computed fair market value was $312,222.40. Taxpayers initially did not pay any realty transfer taxes; they claimed a full exemption for a transfer to an ordinary trust.2
Thereafter, the Department of Revenue (Department) issued a notice of determination assessing the following taxes: $3,122.22 for the Pennsylvania realty transfer tax, $1,561.11 for a municipality tax and $1,561.11 for the school district taxes, plus interest. The determination also disallowed Taxpayers' claimed exemption because the Trust did not qualify as an ordinary or living trust. Taxpayers appealed the assessment to the Department's Board of Appeals. They argued an intra-family exemption under Sections 1102-C.3(8) and (6) of the Act3 applied because all possible Trust beneficiaries are Taxpayers or their children, and the Trust is an ordinary trust, not a business trust.4 The Board of Appeals found the Trust, as a land trust, had the business characteristics described in the Act's definition of an ordinary trust, and it sustained the assessment. Taxpayers paid the taxes. Thereafter, Taxpayers appealed to the Board, which likewise sustained the assessment. In its decision, the Board concluded
the irrevocable [Trust] is a business trust. Article Second Paragraph A of the [Trust] states any beneficiary shall have the power of direction to deal with the title to the property, to "manage and control" the property, and to receive the proceeds from the rental or sale of the property. Paragraph A further states such rights "shall be deemed to be personal property, and may be assigned and transferred as such."
Bd. Order at 7. Taxpayers appeal.5
Taxpayers advance the same arguments here. They contend the conveyance to the Trust qualifies for an intra-family transfer exemption under Sections 1102-C.3(8) and (6) because transfer of the same property would be exempt if made from Taxpayers to all possible beneficiaries entitled to receive property or proceeds from the sale of property under the Trust. Taxpayers also contend the transfer fits within the exemption in Section 1102-C.3(8) because the Trust is an ordinary trust, not a business trust.
Taxpayers first contend the conveyance to the Trust falls within the exemptions in Sections 1102-C.3(8) and (6) of the Act because all beneficiaries, named or contingent, fall within the intra-family language of Section 1102-C.3(6). See also Department regulations at 61 Pa.Code §§ 91.193(b)(6)(i)(A)-(F) (). Upon Taxpayers' death, the interest in the land, which is the corpus of the Trust, transfers to Taxpayers' four children as secondary beneficiaries. See Trust, Articles THIRD (Secondary Beneficiaries) and FOURTH (Dispositive Provisions). Stipulation of Facts (S.F.), Ex. A at 2. Pursuant to Section 1102-C.3(6) of the Act, "intra-family transfers, without regard to whether consideration is given, are exempt from the realty transfer tax." Leigh v. Commonwealth, 168 Pa.Cmwlth. 12, 648 A.2d 1346, 1348 (1994) citing Holmes v. Commonwealth, 152 Pa.Cmwlth. 193, 618 A.2d 1160 (1992) ().
In further support of their position, Taxpayers cite Baehr Brothers v. Commonwealth, 487 Pa. 233, 409 A.2d 326 (1979) (). Here, Taxpayers essentially transferred the property to themselves; no interest in the property passed to persons other than the grantors.
The Commonwealth counters that because the Trust is a business trust, not an ordinary trust, it cannot qualify for a trust exemption under Section 1102-C.3(8). Thus, it is not necessary to determine whether all possible beneficiaries fall within the intra-family transfer exemption in Section 1102-C.3(6). The Commonwealth also urges Section 1102-C.3(6) is inapplicable here because the Trust provides for the possibility of a beneficiary that falls outside the intra-family transfer exemption.
We agree with the Commonwealth that the intra-family exemption in Section 1102-C.3(6) only applies to transfers to a trust if that trust qualifies for an exemption as an ordinary trust under Section 1102-C.3(8) or as a living trust under Section 1102-C.3(8.1).6 As discussed below, the Board properly determined the Trust has sufficient business characteristics to defeat Taxpayers' claim that it is an ordinary trust. Taxpayers acknowledge the Trust is not a living trust. Consequently, the intra-family transfer exemption in Section 1102-C.3(6) is inapplicable here.
The paramount issue in this appeal is whether the Trust qualifies as an "ordinary trust" under the Act. As noted above, the Act defines an ordinary trust as "[a]ny trust, other than a business trust or a living trust, which takes effect during the lifetime of the settlor and for which the trustees of the trust take title to property primarily for the purpose of protecting, managing or conserving it until distribution to the named beneficiaries of the trust." 72 P.S. § 8101-C (emphasis added). This definition further specifies,
[a]n ordinary trust does not include a trust that has an objective to carry on business and divide gains, nor does it expressly or impliedly have any of the following features: the treatment of beneficiaries as associates, the treatment of the interests in the trust as personal property, the free transferability of beneficial interests in the trust, centralized management by the trustee or the beneficiaries, or continuity of life.
Taxpayers assert the Trust is neither a living trust nor a business trust and must therefore be an ordinary trust. Although the Trust provides for centralized management and control, the primary purpose of control is to hold title to Taxpayers' home in order to protect, manage and conserve it for their lifetimes and then pass it on to their four children. Taxpayers stress the settlor's intent must prevail in the interpretation of trust provisions. In re Trust of Hirt, 832 A.2d 438 (Pa.Super.2003). To construe the language of the Trust as a business trust rather than an ordinary trust would directly contravene Taxpayers intent in setting up the Trust.
Taxpayers further argue the Trust does not have any of the features of a business trust set forth in Section 1101-C's definition of an ordinary trust. The Trust's objective is not to carry on a business or divide gains. The Trust does not treat beneficiaries as associates; it does not treat beneficiaries' interests in the Trust as personal property; there is no free transferability of beneficial interests; beneficiaries are restricted as to their interest in the corpus of the Trust; and, there is no centralized management by the trustees or continuity of life. Rather, the trustees manage the property and the Trust continues for a specified period of time.
The Commonwealth counters the Trust is business trust which does not meet the Act's definition of either an ordinary trust or a living trust. It asserts the Trust has all the characteristics of a business trust delineated in Section 1101-C's definition of an ordinary trust. First, the Trust contains lengthy provisions authorizing the trustees to carry on business objectives, including the renting, mortgaging, selling or other disposition of Trust real estate. Second, the Trust contains provisions treating the beneficiaries as associates or partners sharing in the Trust's earnings, avails and proceeds. Third, Trust refers to the beneficiaries' interests as "personal property." Fourth, the Trust specifically states a beneficiary's interest may be freely assigned and transferred. Fifth, the Trust provides for centralized management by trustees, who are granted the power to exercise "absolute discretion" with respect to property held by the Trust. Sixth, the Trust includes several "continuity of life" provisions.
The Commonwealth further contends our recent opinion in Gudzan v. Commonwealth, 962 A.2d 718 (Pa.Cmwlth. 2008), unequivocally supports the Board's decision in this case. In Gudzan, a recently divorced man (Gudzan) purchased his former wife's joint share in 12 parcels of...
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