Welch Oil Co. v. State Tax Assessor

• Decision Date: 28 September 2012
• Docket Number: CIVIL ACTION DOCKET NO. AP-10-43
• Parties: WELCH OIL COMPANY, Petitioner v. STATE TAX ASSESSOR Respondent
• Court: Maine Supreme Court

WELCH OIL COMPANY, Petitioner

v.STATE TAX ASSESSOR Respondent

CIVIL ACTION DOCKET NO. AP-10-43

STATE OF MAINE KENNEBEC, ss SUPERIOR COURT

Dated: September 28, 2012

ORDER ON RULE 80C APPEAL

Before the Court is an action by Petitioner Welch Oil Company pursuant to M.R. Civ. P. 80C and 36M.R.S.A. § 151¹ for a de novo review of the State Tax Assessor's reconsideration decision regarding the assessment made against it in the amount of S3,749.75, plus interest, for a total of S4,170.08. The parties have submitted a joint stipulation of agreed-upon facts in lieu of trial.

FACTUAL AND PROCEDURAL BACKGROUND

Petitioner here is Welch Oil Company, LLC ("the LLC"), which is a Maine limited liability company located in York Harbor, Maine. (Jt. Stip. ¶ 1.) On or about My 21, 2008. lames and Janet Welch, who are husband and wife, formed the LLC with their son, JeffreyWelch. (Jt. Stip. ¶¶ 2-3.) The LLC is in the business of selling and delivering home heating oil (Jt. Stip. ¶ 4.)

On or about April 30, 2007, before the LLC officially existed, James purchased a 2008 Peterbilt 336 motor vehicle ("the Vehicle") under the name "James F. Welch, d/b/a Welch Oil" (Jt. Stip. ¶ 5), and used it for approximately fifteen months to make heating oil deliveries. (Jt. Stip. ¶ 6.) On or about August 19, 2008, James transferred the Vehicle to the LLC pursuant to a casual sale. (Jt. Stip. ¶ 7.) The LLC paid no Maine Sales or Use Tax on the sale. (Jt. Stip. ¶ 8.) In a Maine Use Tax Certificate dated August 19, 2008, James claimed he owned no use tax because he owned 51% of the LLC. (Jt. Stip. ¶ 12.)

In relevant part, the tax provision upon which James relied provides that a use tax must be imposed on all casual sales of motor vehicles except those sold to a limited liability company "when the seller is the owner of a majority , . . of the ownership interests in the . . . limited liability company . . ." 36 M.R.S.A. § 1764 (emphasis added). It is under the umbrella of § 1764 that James proffers he was the owner of the Vehicle, that he transferred the Vehicle to the LLC of which he was a majority owner, and that the transfer should be immune to taxation because the exemption in § 1764 directly applies. (Pet's Br. 7.)

On or about September 23, 2009, the tax assessor ("the Assessor") issued a letter determining that the § 1764 exemption did not apply to the transfer, and assessed a Maine Use Tax of $3,749.75, plus interest, for a total of $4,170.08. (Jt. Stip. ¶ 9; Pet. for Review Pursuant to M.R. Civ. P. 80C and 5 M.R.S.A. § 11001.) In response, the LLC sought timely reconsideration under 36 M.R.S.A. § 151, and on August 2, 2010, the Assessor denied the request. (Jt. Stip. ¶¶10-11.) The Assessor reasoned in its decision that James was not themajority owner of the LLC. (Stip. Exhibit J.J That decision represents the final agency decision here, and it is this decision for which the LLC timely filed its Rule 80C appeal.

The Assessor asserts that James, in fact, did not own a majority interest in the LLC such that he would be exempt form the use tax under § 1764.² The Assessor points to certain contradictions in documents submitted by the parties. The LLC's operating agreement, dated August 1, 2006. indicates that James and Janet together "as joint tenants" own a 51% interest in the LLC, while Jeffrey owns 49%. (Jt. Stip. ¶ 13.) Moreover, the LLC's 2008 federal Tax Return for Partnership Income, as well as a related Schedule K-l form, lists James and Janet as joint tenants with a 51% interest. (Jt. Stip. ¶¶ 16-17.)

However, a 2008 Maine Information Return (Form 1065ME/1120S-ME, with schedules) for the LLC lists the division of profit for 2008 among James, Janet and Jeffrey as: James and Janet (together) received 5.99%, and Jeffrey received 94.01%. (Jt. Stip. ¶ 15.) Additionally, the LLC's Maine Revenue Services and Department of Labor Application for Tax Registration form ("the MRS/DOL Registration"), dated August 1, 2008, lists James as owning 26%, Janet as owning 26%, and Jeffrey as owning 49%.³ (Jt. Stip. ¶ 21.) Further, James wrote a letter to Governor Paul LePage, dated April 21, 2011. In that letter he wrote: "[a]t this time we set up the LLC with my son, owning 49%, my wife 25%, and myself 26%. Therefore I have control of 51% with my wife." (Jt. Stip. ¶ 24.)

It is undisputed that the LLC has never issued any shares, securities, bonds, debentures, or any instruments or documentations reflecting the ownership division stated in the operating agreement. (Jt. Stip. ¶ 14.)

The LLC in its briefs, requests a finding in its favor and a determination that the LLC is exempt for the Agency's tax assessment. Additionally, the LLC asks the Court to award its costs in defense, including reasonable attorney's fees. However, in the absence of statutory authority to award counsel fees (and Petitioner cites to no such authority) the Court cannot order such an award, even if Petitioner is the prevailing party.

STANDARD OF REVIEW

This is an appeal of a final agency action under VI.R. Civ. P. 80C, but because of its special nature as an appeal from the State Tax Assessor under 36 M.R.S.A. § 151, the Court does not follow the usual 80C standard of review of agency action. Instead, under § 151, the Court is instructed to "'conduct a de novo hearing and make a de novo determination of the merits of the case." 36 M.R.S.A. § 151. 'The court shall make its own determination as to all questions of fact or law . . . ." Id.

DISCUSSION

As stated, the LLC brings this action to determine whether the Assessor improperly denied the LLC's claim for a Maine Use Tax exemption under 36 M.R.S.A. § 1764. Such a determination hinges on two primary issues. First, as a matter of law, were James and Janet Welch joint tenants with respect to the 51% interest between them? And, if they were in fact joint tenants, can James individually qualify as a majority owner for purposes of § 1764? Thecourt finds in favor of the Petitioner on both issues; James and Janet Welch qualify as joint tenants with regard to the 51% interest, and as a joint tenant, James individually qualifies as a majority owner under § 1764. Below, the issue of the existence of a joint tenancy is addressed first.

I. Joint Tenancy

In Maine, under the common law rule, a joint tenancy arises only if the four unities of time, title, interest, and possession coincide. See Strout v. Burgess, 144 Me. 263, 268, 68 A.2d 241, 247 (1949). This means "each tenant must have received the same interest, at the same time, conveyed by the same instrument giving each owner the right to full possession of the property." See Milliken v. First National Bank of Pittfield, 290 A.2d 889, 890 (Me. 1972). Additionally, intent to create a joint tenancy must be shown by clear and convincing evidence. See Palmer v. Flint, 161 A.2d 837. 842 (Me. 1960).

The LLC argues, and the Court agrees, that in the present case, James and Janet Welch have satisfied all four essential unities. The LLC claims that James and Janet received the same 51% interest at the same time, with the right to full possession. They claim that the "instrument" conveying title was the operating agreement; as noted above, the State points out that the MRS/DOL Registration, James and Janet's deposition testimony, and the letter to Governor LePage all demonstrate that their intent to form a joint tenancy was "ambiguous at best," far short of the clear and convincing evidentiary standard. (Resp. Br. 6.)

The State's argument—that the additional evidence submitted and admitted to by both parties in the Joint Stipulation is contrary to the formation of a joint tenancy—is not persuasive as to what the parties intended when the owners began their legal relationship. While it is true that the Petitioner has at times expressed different understandings of his ownership status afterthey began operating as an LLC, the Court relies upon the operating agreement to discern their intent, and also finds that the four unities coincide through the operating agreement.

Courts have deferred, both in Maine and out, to LLCs in drafting their own operating agreements. See Dialogo, LLC v. Santiago-Bauza, 425 F.3d 1, 2 (1st Cir. 2005) (referring to the LLC's Operating Agreement as the "controlling document."); Beacon Investments LLC v. Maine PCS, LLC, No. 2:11-cv-00204(JAW), 2012 U.S. Dist LEXIS 44091, at *23 (D. Me. Mar. 28, 2012) (quoting that "the basic approach of the Delaware Act is to provide members with broad discretion in drafting the Agreement."); Bell v. Walton, 2004 ME 146, If 3, 861 A.2d 687, 688 (acknowledging that the LLC's operating agreement was controlling with regard to member withdrawal); Clary v. Borrell, 727 S.E.2d 773, (S.C. Ct. App. 2012) (stating that "[t]he operating agreement of a limited liability company is a binding contract that governs the relations among the members, managers, and the company.").

The State points out, and the Court acknowledges, that Maine law is unsettled, and indeed silent, regarding whether or not a joint tenancy can be established in an operating agreement. Yet, an operating agreement may be controlling for purposes of establishing the management structure of an LLC. See HL I LLC v. Riverwalk, LLC, 2011 ME 29, ¶ 8, 15 A.3d 725, 729 (noting that the operating agreement was the instrument in which procedure for dissolution was established, and it also, among other provisions, addressed issues of membership). While the Law Court has not explicitly ruled on the supremacy of an operating agreement for purposes of establishing a joint tenancy, it has acknowledged that an LLC's operating agreement is the controlling instrument regarding matters of membership, dissolution, and ownership. See id. at ¶¶ 7-9.

With regard to the present matter, the Court finds that the LLC's operating agreement is the controlling instrument transferring title to James and Janet jointly. There does appear to exist true unity in time, title, instrument, and possession necessary to recognize...