Properties v. Dep't Of Taxes, 09-124.

Citation2010 VT 41,998 A.2d 1047
Decision Date22 June 2010
Docket NumberNo. 09-124.,09-124.
PartiesPOLLY'S PROPERTIES, LLCv.DEPARTMENT OF TAXES.
CourtUnited States State Supreme Court of Vermont

Michael B. Clapp, Burlington, for Plaintiff-Appellant.

William H. Sorrell, Attorney General, and Suzanne M. Monte, Assistant Attorney General, Montpelier, for Defendant-Appellee.

L. Randolph Amis of L. Randolph Amis, P.C., Burlington, Kevin T. Brennan of Vince & Brennan, P.C., Bristol, John P. Crowley of Kulig & Sullivan, P.C., Rutland, Marilyn F. Hand of Whalen, Hand & Gilmour, PLC, Manchester Center, Allen D. Webster of Lisman, Webster & Leckerling, P.C., Burlington, Paul P. Hanlon, Montpelier, James J. Jamele, Plainfield, Jeffrey P. Kilgore of Kilgore Law Offices, Waterbury, Mark A. Langan, Brian R. Murphy and Karen McAndrew of Dinse, Knapp & McAndrew, P.C., Burlington, Thomas P. Wright of Wright & Reeves, PLC, Woodstock, C. Robert Manby, Jr. of Manby & Babcock, LLP, White River Junction, Mark E. Melendy of Mark E. Melendy, PLLC, Woodstock, John C. Newman of Kenlan, Schwiebert Facey & Goss, P.C., Rutland, Frank V. Petrosino of Paul Frank + Collins P.C., Burlington, Wm. Roger Prescott of Downs Rachlin Martin, PLLC, Burlington, Steven E. Schindler of Schindler Law Office, PLC, Rutland, and Stephen A. Unsworth of Unsworth & Barra PLC, Essex Junction, for Amici Curiae.

Present: REIBER, C.J., DOOLEY, JOHNSON, SKOGLUND and BURGESS, JJ.

SKOGLUND, J.

¶ 1. Polly's Properties, LLC (taxpayer) appeals from a superior court judgment upholding the Department of Taxes' assessment of a property-transfer tax on two parcels of real property transferred to taxpayer as its start-up capital. Taxpayer contends the trial court erred in concluding that, because the transfers did not occur at the time of, or within ninety days thereafter, the filing of taxpayer's articles of organization it was not entitled to a transfer-tax exemption under 32 V.S.A. § 9603(24). For the reasons set forth below, we reverse.

¶ 2. On July 6, 2006, taxpayer filed its articles of organization as a limited liability company (LLC) with the Secretary of State. On May 21, 2007, some ten months later, taxpayer's principal organizers transferred two real estate parcels to the LLC. It is undisputed that the properties represented the LLC's initial capital. Taxpayer sought a transfer-tax exemption under 32 V.S.A. § 9603(24), which provides an exemption for [t]ransfers made to a limited liability company at the time of its formation pursuant to which no gain or loss is recognized under the Internal Revenue Code, except where the commissioner finds that a major purpose of such transaction is to avoid the property transfer tax.” The Department of Taxes denied the claimed exemption on the ground that the transfer was not made at the time of the LLC's “formation” or within the subsequent “ninety-day window” allowed by the Department. The Commissioner of Taxes upheld the Department's decision and its assessment of taxes, interest, and penalties which totaled, at the time of the ruling, $2,632.37 and $3,311.82 on each parcel respectively.

¶ 3. Taxpayer appealed the Commissioner's ruling to the superior court. The court concluded that the LLC was “formed” on July 6, 2006, when its articles of incorporation were filed, and that any qualifying transfer under § 9603(24) technically should have occurred at that time. At the same time, however, the court recognized the “dilemma” created by applying a “literal application of § 9603(24) since “simultaneity [of formation and filing] would usually be impossible.” Nevertheless, the court concluded that the Commissioner's “informal ‘practice’ of allowing a 90-day period” for qualifying transfers was within his authority and affirmed the denial of the exemption as outside the ninety-day window. This appeal by taxpayer followed.

¶ 4. The facts here are uncontested. The issue turns entirely on the proper interpretation of the transfer-tax exemption statute, a question of law for which the Commissioner is entitled to some deference so long as his reading “represents a permissible construction of the statute.” Tarrant v. Dep't of Taxes, 169 Vt. 189, 195, 733 A.2d 733, 738 (1999). The Department's argument here is relatively simple. The statutes governing LLC's unambiguously provide that [o]ne or more persons may organize a limited liability company ... by delivering articles of organization to the office of the secretary of state.” 11 V.S.A. § 3022(a); see also id. § 3022(b) ( “Unless a delayed effective date is specified, the existence of a limited liability company begins when the articles of organization are filed.”). The statutes employ the terms “form” and “organize” interchangeably. See, e.g. id. § 3012(a) (“A limited liability company may be organized under this chapter ....” (emphasis added)); id. § 3012(b) (“A limited liability company ... engaging in a business subject to any other provisions of law ... may be formed or authorized to transact business under this chapter only if permitted by, and subject to all limitations of, the other statute.” (emphasis added)). Therefore, the “formation” of an LLC for purposes of qualifying for the transfer-tax exemption necessarily occurs when it is “organized” by means of filing articles with the Secretary of State. It thus follows that the property transfers at issue here-which occurred some ten months after taxpayer filed its articles-were untimely and ineligible for the tax relief afforded by the statute. Indeed, the Department maintains that this result is compelled by the “clear and unambiguous” language of the statutes.

¶ 5. Like the trial court below, however, the Department acknowledges that neither taxpayer nor any other LLC could literally comply with the plain terms of the statute because property transfers to an LLC must logically follow its organization. To avoid this conundrum, the Department recognizes tax-exempt transfers if they fall within a ninety-day “grace” period following the filing of the articles of organization, relief which was nevertheless unavailable to taxpayer here because its transfer was outside that window. As noted, the trial court found this to be a reasonable reading of the statute in order to avoid the “dilemma” created by applying its “literal” terms.1

¶ 6. With all due deference, the Department's reasoning does not withstand scrutiny. “At the time of its formation” either means at the time of “organization” or it means something else. If the so-called plain meaning is logically impossible-as the Department and trial court acknowledge-then we must search for a different meaning. See TD Banknorth, N.A. v. Dep't of Taxes, 2008 VT 120, ¶ 32, 185 Vt. 45, 967 A.2d 1148 (noting the general “presumption ... against a statutory construction that would lead to ... absurd results” (quotation omitted)). This search is what we traditionally refer to as statutory interpretation, and we typically look to a variety of sources for meaning, including the legislative history, purpose, context, and effects. See In re Carroll, 2007 VT 19, ¶ 9, 181 Vt. 383, 925 A.2d 990 (our paramount “objective in construing a statute is to effectuate the Legislature's intent,” and where “doubts exist” arising from the language itself [t]he intent should be gathered from a consideration of the whole statute, the subject matter, its effects and consequences, and the reason and spirit of the law” (quotation omitted)).

¶ 7. Without adequately explaining why, the Department has-as noted-fixed on a ninety-day window for tax-exempt property transfers, and the trial court here found nothing objectionable in this rule-of-thumb. It is difficult, however, to discern the statutory principle underlying the Department's approach. Why ninety days? Why not sixty or 120? In essence, the Department has rewritten the statute to provide for what it deems to be a reasonable timeframe with no reference whatsoever to any underlying legislative purpose or justification. 2 As noted, the trial court accepted this rewriting as a well-intentioned effort to address the “dilemma” posed by the “literal application of the statute without confronting the inherent problem posed by the Department's interpretation or its questionable exercise in legislative re-drafting. See In re Agency of Admin., 141 Vt. 68, 76, 444 A.2d 1349, 1352 (1982) (where a statute is inherently ambiguous and “an agency seeks to define it” we must “consult not only the bare statutory language, but ... seek out the interpretation intended by the statute's drafters to assure that the statute is being construed, rather than constructed anew”).

¶ 8. In contradistinction to the Department's approach, taxpayer-supported by a group of eighteen amici curiae tax and business attorneys-attempts to define a timeframe for tax-exempt transfers by reference to the underlying purpose of the statute and general business practice. They note that the basic purpose of the federal tax statutes referenced in § 9603 is to provide for the nonrecognition of gain or loss where the property transfer “is a mere change in form.” Long v. United States, 652 F.2d 675, 679 (6th Cir.1981). Thus, as one leading tax commentator has explained, [c]ontributions to a partnership or limited liability company as the start-up capital are, generally, nonrecognition events.” 9 Mertens Law of Federal Income Taxation § 35F:5 (2009). The same principle clearly informs § 9603, which provides a state sales-tax exemption for transfers of property to corporations, partnerships, and LLC's where “no gain or loss is recognized” under the Internal Revenue Code. 32 V.S.A. § 9603(11), (15) & (24).3

¶ 9. While an LLC may become a “legal” entity when its articles of organization are filed, it is apparent that for tax-relief purposes the “formative” event is the initial transfer of capital, or capitalization of the company, which typically occurs at some point in time after the filing of the articles of organization, the...

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  • Forming the LLC
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    • James Publishing Practical Law Books The Limited Liability Company - Volume 1-2 Volume 1
    • April 1, 2022
    ...the Internal Revenue Code. The Court of Appeals upheld the check-the-box regulations. Polly’s Properties LLC v. Department of Taxes , 998 A.2d 1047 (Vt. 2010). A transfer of real property to an LLC ten months after formation qualified for a transfer tax exemption applicable to transfers mad......

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