Pennsylvania Builders Ass'n v. Com., Dept. of Revenue

• Citation: 552 A.2d 730,122 Pa.Cmwlth. 493
• Parties: PENNSYLVANIA BUILDERS ASSOCIATION; G. Keith Constructors, Inc.; David G. Heisey Development Company, Inc., and David G. Heisey, Inc., Petitioners, v. COMMONWEALTH of Pennsylvania, DEPARTMENT OF REVENUE, Respondent.
• Decision Date: 06 January 1989
• Court: Pennsylvania Commonwealth Court

Page 730

552 A.2d 730

122 Pa.Cmwlth. 493

PENNSYLVANIA BUILDERS ASSOCIATION; G. Keith Constructors, Inc.; David G. Heisey Development Company, Inc., and David G. Heisey, Inc., Petitioners, v. COMMONWEALTH of Pennsylvania, DEPARTMENT OF REVENUE, Respondent.

Commonwealth Court of Pennsylvania.

Argued Sept. 16, 1988.

Decided Jan. 6, 1989.

Loudon L. Campbell, Donald J. Murphy, Calkins & Campbell, Harrisburg, for petitioners.

James W. Bruce, Acting Chief Counsel, Donald J. Murphy, Paul S. Roeder, Dept. of Revenue, Ronald H. Skubecz, Dep. Atty. Gen., Harrisburg, for respondent.

Before DOYLE and PALLADINO, JJ., and BARBIERI, Senior Judge.

DOYLE, Judge.

Before us for consideration are cross-motions for summary judgment filed by the Pennsylvania Builders Association and several individual builder-developers (Petitioners), and the Commonwealth of Pennsylvania, Department of Revenue (Department). Petitioners commenced this action by filing a petition for review in the nature of a complaint and subsequently filed an amended petition for review in the nature of a complaint within our original jurisdiction¹ seeking relief pursuant to the Declaratory Judgments Act, 42 Pa.C.S. §§ 7531-7541. Therein, Petitioners ask that we declare invalid or unconstitutional a provision of the Realty Transfer Tax Article of the Tax Reform Code of 1971² (Code) which provides that some contracts for improvements to real estate are taxable.

In their petition, Petitioners allege that "widespread uncertainty" has arisen with respect to the rights and duties of the parties to separate construction contracts and real estate conveyances, and claim that they are uncertain whether these contracts for home construction are subject to the transfer tax. Petitioners seek declaratory relief and request that we grant summary judgment in their favor by finding that contracts for improvements to real estate are not subject to taxation under the 1986 amendments to the Code. The Department asks that we grant its cross-motion for summary judgment and find that the actual monetary worth of executory construction contracts is a constituent part of the value of a taxable document under the transfer tax provision of the Code, and that the inclusion of executory construction contracts in the value base for tax computation is in accord with constitutional, statutory, and decisional law.

The parties have stipulated to the following facts for purposes of our consideration of the cross-motions for summary judgment. Petitioners are builders and developers of real estate who are subject to the realty transfer tax provisions of the Code. They are engaged, individually or with others, either in (a) the development of real estate by the sale of building lots, with an ownership interest in the construction enterprise which follows, or, (b) the construction of houses with an ownership interest in the enterprise which developed and sold the lots on which the houses were built. Further, "some [Petitioners] engaged in the development of real estate and sale of building lots will not sell such building lots unless the purchaser first enters into a contract with a designated construction company." (Stipulation of Fact No. 14.) This type of total integrated agreement creates the situation where, either simultaneously with, or prior to, the transfer and conveyance of the building lot to its purchaser, the purchaser enters into a contract for the construction of a house on that lot with the developer or with another construction company in which the developer has an ownership interest or is otherwise closely related.

To illustrate the problem, consider two alternate arrangements. In the first, the developer subdivides an entire tract and allows the buyer to choose the lot and then enters into one contract for the sale of a new home for a fixed price which includes the cost of the ground. The entire consideration, or "value," is subject to the transfer tax because the deed at settlement conveys the real estate now improved by the addition of a new home. In the second arrangement, the developer subdivides and improves a tract and sells individual lots. The purchaser makes settlement and receives a deed for the unimproved real estate and may either then, or later, contract with a builder to build a home on his lot; or he may never develop the lot. In this situation, only the value of the unimproved lot is subject to the transfer tax.

The issue now confronting this Court in this case involves a scenario which fits into neither of the above illustrations, but lies somewhere in between.

Pa.R.C.P. 1035(b) provides that summary judgment may be granted only "if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact." We hold that the pleadings in this matter, taken together with the stipulation of facts agreed upon and filed by the parties, establish that there are no genuine issues of material fact. It therefore remains for us to determine which, if either, of the parties is entitled to judgment as a matter of law.

Section 1102-C of the Code, 72 Pa.S. § 8102-C, imposes a one percent tax on the "value" of real estate represented by a "document," such as a deed, presented for recording. Section 1101-C of the Code, 72 Pa.S. § 8101-C, defines both "document" and "value." Prior to the 1986 amendments to the Code, the value of a document was determined by one of two methods. The first method applied to cases of a bona fide arms-length sale of real estate where the value was the actual monetary worth of the land or the actual consideration paid therefor. Reference to the contract of sale was allowed where the document of conveyance set forth nominal consideration. The second method was applied in the case of a transfer by gift or any other document without consideration, and value was determined to be the actual monetary worth of the property granted, sold or otherwise conveyed with the proviso that such value could not be less than the highest assessment of the land for local tax purposes.

In 1986, the General Assembly amended the transfer tax provisions of the Code. The amendment relative to this matter included changes in the definition of "document,"³ and added two additional definitions of "value." The third valuation method, the first added by the 1986 amendments, is applied when value cannot be determined under the two previously existing methods. Here, reference is made to the actual monetary worth of the easement or other interest conveyed. In the event that value cannot be determined by any of the previous methods, the fourth method, or the second added by the 1986 amendments, applies. It is this fourth valuation provision that Petitioners ask us to invalidate.

The fourth valuation method found in Section 1101-C defines value as:

The actual consideration for or actual monetary worth of any executory agreement for the construction of buildings, structures or other permanent improvements to real estate between the grantor and other persons existing before the transfer and not removed thereby, or between the grantor, the agent or principal of the grantor or a related corporation, association or a partnership and the grantee existing before or effective with the transfer.

Under the Department's interpretation of this fourth method, the phrase "between the grantor and other person existing before the transfer and not removed thereby" applies where the seller has contracted to have improvements made to his or her house (e.g., a contract to add an extra room) and the buyer agrees to buy the house even though the contract has not been completed. While the contract is being carried out, the real estate is conveyed. Because the grantee in this situation did not request the grantor to cancel the contract for improvements, it is not removed thereby. In this instance, the Department submits that the actual consideration or actual monetary worth of the contracted improvements is an integral part of the true value of the real estate represented by the deed, or "document," to be recorded.

The phrase "between the grantor, the agent or principal of the grantor or a related corporation, association or partnership and the grantee existing before or effective with the transfer" is interpreted by the Department to apply to Petitioners' activities as stipulated herein. The Department argues that under this scenario, the buyer never intends to receive less than a consolidated home and the developer (Petitioners herein) never intends to sell less than a home. The contract to build is entered into by the developer-grantor who is related to the builder through common ownership, and the contract is executed prior to or concurrent with the developer deeding the property to the buyer. The contract is not "removed" because the buyer has bargained for a house he or she wishes to have built. The Department thus submits that the true value of the real estate represented by the deed recorded in this instance is the total package of the lot and house, and that the amount to be paid to build that house is a ready and reliable way to determine the full value of the package sold at a new residential development.

With this in mind, we now consider Petitioners' argument that contracts for improvements to real estate are not subject to the realty transfer tax provisions of the Code. Subsumed in this argument are four sub-arguments, two of which raise issues of constitutionality and vagueness. The two remaining arguments, which we address first, concern the interpretation of the language of the taxing provisions themselves.

Petitioners first argue that executory building contracts are not subject to the realty transfer tax provisions of the Code because the contract itself is not an interest in real estate. In Commonwealth v. Passell, 422 Pa. 473, 223 A.2d 24 (1966), our Supreme...