Opinion
Nos. CV 03 0521816S, CV 03 0521815 S, CV 03 0521817 S
May 24, 2005
MEMORANDUM OF DECISION
The three above-entitled tax appeal cases concern real estate conveyance tax assessments issued by the commissioner of revenue services (commissioner) against the plaintiffs, LHI, Inc., Old Farms Associates and Tuttle Road Associates. Specifically, the commissioner issued real estate conveyance tax assessments against LHI, Inc., for the periods September 1, 1997 through May 31, 2000 and October 1, 2000 through February 28, 2001, for properties conveyed in East Hampton and Deep River, against Old Farms Associates for the period February 1, 1998 through May 31, 2000 for properties conveyed in Middletown and against Tuttle Road Associates for the period July 1, 1997 though May 31, 2000 for properties conveyed in Middletown. Each of the plaintiffs brought to this court an appeal of the commissioner's assessments, pursuant to General Statutes § 12-554. On November 22, 2004, the parties filed cross motions for summary judgment in each of the three cases. This memorandum addresses those motions.
General Statutes § 12-554 recites, in part: "Any taxpayer aggrieved because of any order, decision, determination or disallowance of the Commissioner of Revenue Services under the provisions of [chapter 225] may, within one month after service upon the taxpayer of notice of such order, decision, determination or disallowance, take an appeal therefrom to the superior court for the judicial district of New Britain . . ."
General Statutes § 12-502a applies § 12-554 to chapter 223, which imposes the real estate conveyance tax, providing: "The provisions of sections 12-548 to 12-554, inclusive, and section 12-555a shall apply to the provisions of sections 12-494 to 12-504, inclusive, in the same manner and with the same force and effect as if the language of said sections 12-548 to 12-554, inclusive, and section 12-555a had been incorporated in full into said sections and had expressly referred to the tax imposed under said sections, except to the extent that any such provision is inconsistent with a provision of said sections."
The governing statute in these cases, dealing with the imposition of a real estate conveyance tax, is General Statutes § 12-494(a), which recites in part: "There is imposed a tax on each deed, instrument or writing, whereby any lands, tenements or other realty is granted, assigned, transferred or otherwise conveyed to, or vested in, the purchaser, or any other person by his direction, when the consideration for the interest or property conveyed equals or exceeds two thousand dollars . . ."
The facts in each of these three cases are not in dispute. The plaintiffs in these three actions, LHI, Inc., Old Farms Associates and Tuttle Road Associates were, during the periods of time set forth above, owners of residential tracts of land. All of the properties at issue were conveyed by one of two methods. The first method by which property was conveyed was by a contract entitled "Purchase and Construction Agreement." Representative of this method is the sale of 77 Falls Landing Road, Deep River. (See Joint Stipulation of Facts, dated November 10, 2004, ¶ 10.) The second method was by a combination of two contracts, the first entitled "Contract for Sale of Lot," and the second entitled "Construction Agreement and Assignment of Contract for Sale of Lot." Representative of this method is the sale of 83 Morning Glory Drive, Middletown. (See Joint Stipulation of Facts, dated November 10, 2004, ¶ 35.)
The parties filed a joint stipulation of facts on November 10, 2004.
Under a two-part Purchase and Construction Agreement, LHI, Inc., in part one, agreed to convey a building lot to the Kaufmans for the price of $83,000, subject to certain conditions contained in the agreement. In part two, RESC agreed to build a house for the Kaufmans on the lot owned by LHI, Inc., for the price of $263,715. (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1.)
Paragraph fourteen of part one of the Purchase and Construction Agreement recites that parts one and two of that agreement are "independent contracts enforceable, respectively, by the appropriate parties thereto, provided, however, that a default by the Buyer [the Kaufmans] under the terms and conditions of either Part of this Agreement shall be a default under the other." (Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1.)
Paragraph fifteen of part one of the Purchase and Construction Agreement recites that the Kaufmans' inability to obtain a mortgage commitment shall cause the agreement to terminate automatically, in which case LHI, Inc., shall have no obligation to transfer title to the lot to the Kaufmans.
Paragraph sixteen of part one of the agreement recites that when the Kaufmans obtain a mortgage commitment: "Seller [LHI, Inc.] shall permit RESC to enter upon the Lot [77 Falls Landing Road, Deep River] for purposes of constructing the Improvements described in Part Two. Buyer [the Kaufmans] shall have no ownership rights in and to any of the Improvements constructed on the Lot by RESC until Buyer has taken title to the Lot from Seller under the terms of Part One of this Agreement, at which time said improvements shall be deemed to be and shall become a part of the Lot." (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1.)
Part one of the agreement was between LHI, Inc., and the Kaufmans. Part two was between RESC and the Kaufmans. Part two recited that the Kaufmans would pay RESC the contract price of $263,715 for the completion of a house in accordance with the contract documents. The agreement further provided a breakdown of the total combined purchase price, with the price of the lot at $83,000, plus the cost of construction of the improvements amounting to $263,715, for a total price of lot and improvements of $346,715. (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1.)
Paragraph ten of part two of the Purchase and Construction Agreement recites that "[o]n the Closing Date, upon payment of the balance due RESC, RESC shall deliver to Buyer [the Kaufmans] possession of the house constructed by RESC on the Lot and shall deliver to Buyer (i) a Certificate of Occupancy therefor, issued by the appropriate agencies of the Town of Deep River, Connecticut, (ii) a Mechanics Lien Waiver signed by all persons who supplied labor or materials for improvements to the Lot or for construction of the house, and (iii) warranties for appliances included in the house, if any, are applicable." (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1.)
At the closing of the representative sale, LHI, Inc., conveyed the lot at 77 Falls Landing Road, Deep River, to the Kaufmans and paid a conveyance tax on the $83,000 price for the lot only. The lender, however, providing financing to the Kaufmans, took a mortgage covering the house and the lot.
The commissioner, believing that the plaintiffs should have paid a conveyance tax at the closing on the value of the house as well as the value of the lot, levied a conveyance tax assessment against the plaintiffs on the combined value of the sales.
Recognizing that the title to the building lot will not be transferred to the buyer until the builder has constructed a house on the lot and a certificate of occupancy has been issued by the building inspection, the parties to the Purchase and Construction Agreement (LHI, Inc., RESC and the Kaufmans) stipulated that "until the transfer of title to the Lot from Seller to Buyer, all improvements constructed on the Lot by RESC shall be deemed the personal property solely owned by RESC." (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1.) In other words, the ultimate sale of a house and lot to a purchaser under the representative agreement involves a three-party arrangement between a lot owner, a builder and a purchaser. In the agreement, in addition to being contingent on the purchaser obtaining a mortgage commitment, the performance of one is also contingent upon the performance of the other two parties.
In effect, what we essentially have here, is a joint venture by a lot owner and a contractor to build a house for a purchaser.
The arrangement of the parties is not a typical situation where a person purchases a lot and then after taking title, enters into a contract with a contractor to build a house on the lot. On the contrary, as in the present case, the parties had previously agreed that the improvements constructed on the lot would be considered personal property until the transfer of title to the lot so that the real estate conveyance tax would only apply to the sale of the lot as unimproved.
The issue in these cases is whether a real estate conveyance tax attaches to a sale of a lot, as well as the house constructed upon it, even though the lot owner and the builder have agreed that the house should remain personal property at the time of sale.
The plaintiffs' basic argument is that they were not required or obligated to pay a conveyance tax on the consideration paid for the sale of the house at the time of the closing, because it was personal property that they did not own.
The concept developed by LHI, Inc., as the land owner, and RESC as the house builder, has been referred to as a "Land Contract." (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 7, Letter dated August 30, 2001, from attorney Gregory M. Harris to Commissioner Gene Gavin, p. 2.) "Under the Land Contract, the house at no time became the property of the Land Seller. Accordingly, the deed from the Land Seller to Home Buyer did not and could not convey title to the house. One cannot convey what one does not own. Furthermore, the Land Seller never received, directly or indirectly, any consideration other than the Lot Price for the property the Land Seller conveyed to the Buyer by the deed." (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 7.)
The commissioner raises two points in arguing that the conveyance tax should be on the full price of $346,715 and not just on the $83,000 cost of the lot. The first point is that the improvements on the lot and the lot itself cannot be separated, so that when the house was built it became part of the lot. In effect, the real estate conveyed to the Kaufmans consisted of the house and lot, not just the lot. The second point is that the court must look to the substance of the transaction and that the intent of the parties was to transfer, as one unit, a fully built house and lot to the Kaufmans, citing Raccoon Development, Inc. v. United States, 391 F.2d 610 (1968).
Considering the first point, the commissioner relies on Verna v. Commissioner of Revenue Services, 261 Conn. 102, 108, 801 A.2d 769 (2002), for the proposition that a lot with a house on it can not be considered unimproved land. In Verna, the court concluded that the conveyance tax, pursuant to § 12-494, "paid by the conveyor of real property is determined by the condition of the property at the time of conveyance." (Internal quotation marks omitted.) Id., 109. In other words, the conveyance tax is determined at the time of the conveyance, and it cannot be altered by an understanding of the parties prior to the conveyance. Even though the parties had agreed that prior to the conveyance of the lot at 77 Falls Landing Road, Deep River, the house would be personal property, the parties recognized and acknowledged that the house, at the time of conveyance, would be considered as part of the real estate. (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1, Part Two, ¶ 15.) According to Verna, it makes no difference what the prior intentions of the parties were as to the condition of the property, but rather, all that is relevant is the condition of the property at the time of conveyance. Id.
Although it is important to recognize that parties can agree that fixtures attached to real estate may remain personal property in the present cases, the construction of a house on the lot was not simply the addition of a fixture on the lot. As noted in Verna, whether the house is on the property for the benefit of the owner or the builder, "[s]uch subjective reasons . . . are irrelevant, however, to the determination of what tax rate under § 12-494 should apply to the conveyance of a particular parcel of real property." Verna v. Commissioner of Revenue Services, supra, 261 Conn. 109.
See Hartlin v. Cody, 144 Conn. 499, 508, 134 A.2d 245 (1957) (Mechanic's lien law applies to fixtures "which permanently form a part of, and constitute, real estate. It [mechanics lien law] does not apply to fixtures which are personal property . . .")
This court notes that the agreement of the parties required, at the time of the conveyance, a certificate of occupancy issued by the town as well as mechanics' lien waiver "signed by all persons who supplied labor or materials for improvements to the Lot or for construction of the house . . ." (Joint Stipulation of Facts, dated November 10, 2004, Exhibit 1, Part Two, ¶ 10.) In addition, the agreement of the parties was conditioned upon the Kaufmans obtaining a mortgage for the purchase of both the house and lot at the time of closing of title to the lot. This is inconsistent with the notion that at the time of conveyance of 77 Falls Landing Road, the house was personal property. Although the parties are bound among themselves to their agreement that a fixture made a permanent part of real estate shall nonetheless remain personalty, it is only an agreement among parties and does not bind those outside of the contract. Hartlin v. Cody, 144 Conn. 499, 506-07, 134 A.2d 245 (1957). Here, the commissioner has an interest in enforcing the laws of the state of Connecticut as they apply to the collection of legislatively authorized taxes. This interest cannot be defeated merely by the parties agreeing among themselves that the tax should not apply.
The second aspect of the commissioner's argument is that the transactions of the parties should be treated as one and, therefore, the incidence of the conveyance tax should be on the combined price of the lot and the house, and not just the lot. The commissioner relies on Raccoon Development, Inc. v. United States, 391 F.2d 610 (CD. Cir. 1968). In Raccoon, the issue was whether the federal documentary stamp levy imposed on real estate transfers applied to the total price of the lot and house, or only on the portion of the price attributable to the lot where the lot and the house were owned by different parties. The facts in Raccoon are similar to the facts in the present case. In Raccoon, the lot owner conveyed the lot to the buyer and recorded the deed, but held the deed in escrow until the builder put a pre-fabricated house on the lot, at which time the deed was released to the buyer. The court in Raccoon noted that the "attempt to isolate and segregate the acquisition of the lot and the dwelling ignores the actualities of the total situation. This may not be done." Id., 613, citing Higgins v. Smith, 308 U.S. 473, 477, 60 S.Ct. 355, 84 L.Ed. 406 (1940). The Raccoon court also noted that it was "unrealistic to overlook the fact that all corporations involved in the transactions in suit were effectively controlled by a single individual . . ." Id.
The facts in Raccoon, as noted above, are not much different than in this case. The lot owner and the builder in the present cases were not strangers to each other. In each of the corporations or partnerships involved here, whether as lot owners or builders, Edward J. Cole and Robert C. Fusari, Sr., had a piece of the action. Cole and Fusari were the sole shareholders in LHI, Inc. Cole and Fusari also were the sole shareholders of RESC. RESC owned a 50 percent partnership interest in one of the builders, The Meadows at Riverbend Associates, as well as a 13.5827 percent partnership interest in Old Farms Associates and a 7.31 percent partnership interest in Tuttle Road Associates (Joint Stipulation of Facts, dated November 10, 2004, ¶¶ 4-7.)
As a general tax principle, "[i]t is well-established that taxpayers have the right to arrange their affairs so as to minimize the taxes they pay." Griffin v. United States, 42 F.Sup.2d 700, 703 (W.D.Tex. 1998), citing Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935). See also SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220, 234, 585 A.2d 666, cert. denied 501 U.S. 1223, 111 S.Ct. 2839, 115 L.Ed.2d 1008 (1991) ("[u]nlike tax evasion, tax avoidance through careful planning of both transactions and corporate structure is a legitimate right of every taxpayer.")
What the plaintiffs claim here is that they have a right, by contract, to determine when an addition to real estate becomes affixed to it. The plaintiffs consider the contracts between themselves and the builders valid in permitting them to treat a house constructed on a lot as personal property until the closing of title on the lot.
However, if the transaction has no business purpose or an economic effect, the transaction will be looked at as a means of tax evasion and be discarded as a sham. Griffin v. United States, supra, 42 F.Sup. 703.
In the present case, the plaintiffs argue that the distinction here is that the owner of the lot can only convey what it owns. Since the lot owner did not own the house, by contract, the conditions in § 12-494(a) have been met in that the conveyance tax applied exclusively to the "consideration for the interest in real property conveyed by such deed." However, one cannot escape the fact that this case is not about the situation where a person purchases a lot and hires a contractor to build a house on the lot. Rather, this is an arrangement by a lot owner and a contractor, joining together in the nature of a joint venture, to sell a house and lot as one unit. In each of the factual representative cases, there is a buyer for the house and lot, with the intent that the buyer will occupy the house and lot as his or her home. There is no business reason, and certainly no economic benefit, to either the lot owner or the builder in constructing the transaction in this way except to evade the payment of a portion of the conveyance tax by eliminating the value of the house from the sale.
A key element in the plaintiffs' argument is that the agreement provided for the sale of the lot by deed, whereas the sale of the house was not particularly described except for the recitation that possession of the house would be given to the Kaufmans at the closing of title to the lot. The closing documents made no provision for the transfer of title to the house other than to recite that possession was given to the buyers.
The plaintiffs also argue that the bargained-for payment of the price for the lot was the only consideration they received for the deed. In making this argument, the plaintiffs rely on Mandell v. Gavin, 262 Conn. 659, 669, 816 A.2d 619 (2003), in which the court noted that consideration under § 12-494(a) must be the result of a bargained-for exchange. See also Tranfo v. Gavin, 262 Conn. 674, 679, 817 A.2d 88(2003) ("our decision in Mandell rests on the principle that there is no consideration in the absence of a bargained-for exchange.") Essentially, the plaintiffs' argument is that the sum paid for the construction of the house is not part of the consideration it received for the transfer of the lot, and they should therefore not have to pay a conveyance tax on that sum.
Looking at the bargained-for exchange under the facts of the representative sale, the sum total of the contract by both LHI, Inc., and RESC was to sell a house and lot to the Kaufmans, as recited in part two of the Purchase and Construction Agreement, for the sum of $346,715. It was the Kaufmans that bargained with both LHI, Inc., and RESC for the purchase of a home consisting of a house and lot for the consideration of the payment of $346,715. One could not seriously argue that the Kaufmans intended to buy a lot separate and apart from the house, but rather the lot improved with a house. (See Joint Stipulation of Facts, dated November 10, 2004, ¶¶ 27-29.)
LHI, Inc. provided the Kaufmans with a warranty deed "in connection with the sale and transfer of the property known as 77 Falls Landing Road, Deep River . . ." (See Joint Stipulation of Facts, dated November 10, 2004, ¶ 27.) "As required by federal law, a Form HUD-1 was prepared in connection with the sale and transfer of the property known as 77 Falls Landing Road . . ." showing the contract sales price of $349,822.50, corresponding to the total purchase price of the property. (See Joint Stipulation of Facts, dated November 10, 2004, ¶¶ 28-29.)
Turning to the second method of conveyance, the parties describe the Contract for Sale of Lot and Construction Agreement and Assignment of Contract for Sale of Lot in paragraph thirty-five of their joint stipulation of facts as follows: "The other way in which the properties that are the subject of the above-captioned appeals were conveyed was through a sequence of contracts. The first contract, which was entitled Contract for Sale of Lot, was a contract between one of the [p]laintiffs and a related entity. Pursuant to said contract, the [p]laintiffs agreed to sell the related entity the property at an agreed upon price and to convey said property at a fixed date in the future. Prior to the sale and conveyance of the property, the related entity would enter into a second contract, which was entitled Construction Agreement and Assignment of Contract for Sale of Lot, with an unrelated third-party buyer. Pursuant to the Construction Agreement and Assignment of Contract for Sale of Lot, the related entity assigned its rights to purchase the property under the Contract for Sale of Lot to the unrelated third-party buyer, who, like the buyers under Purchase and Construction Agreement, agreed thereunder to purchase the property and to have a house constructed thereon by a related entity of the Plaintiffs."
Simply put, the lot owner entered into an agreement to sell the lot to the builder. The builder constructed a house on the lot and then entered into a sale of the house and lot to a buyer by assigning the builder's right to purchase the lot to the buyer and charging the buyer for the cost of constructing the house on the lot at the time the buyer took title to the lot.
The parties agree that the Contract for Sale of Lot entered into between Tuttle Road Associates and The Meadows of Riverbend Associates, in connection with the sale of 83 Morning Glory Drive, Middletown, is representative of the other Contracts for Sale of Lots at issue in this appeal. (See Joint Stipulation of Facts, dated November 10, 2004, ¶ 35.) The parties also agree that the Construction Agreement and Assignment of Contract for Sale of Lot entered into between The Meadows of Riverbend Associates, acting through RESC, and Wieslaw Piskorski is representative of other such agreements at issue in this appeal.
The distinction between the first representative example and the second, is that in the second, the builder, by entering into an agreement to purchase the lot has acquired an equitable interest in the property. The reason for this conclusion is that when the builder acquired the lot from the seller, the agreement contemplated that the builder would construct a house on the lot and sell the house and assign its interest in the lot to a buyer. In this situation, the lot owner would be paid for the lot and the builder paid for the cost of the construction of the house. Both the lot owner and the builder have a financial interest in the construction of the house and the sale of the lot to a buyer. The principle described here is that where a builder, under an agreement to purchase a lot, constructs a house on the lot and finds a buyer for the house and lot, the builder is improving the land not only for his benefit, but for the lot owner's benefit as well. Under these circumstances, the buyer is considered to have an equitable interest in the lot owner's land. See Centerbrook Architects Planners v. Laurel Nursing Services, Inc., 224 Conn. 580, 588-89, 620 A.2d 127 (1993); New England Savings Bank v. Meadow Lakes Realty Co., 243 Conn. 601, 620, 706 A.2d 465 (1998). This being the case, at the time that the closing of title took place on the representative parcel, 83 Morning Glory Drive, Middletown, to Wieslaw Piskorski, both the plaintiff lot owner and the builder had an interest in the real estate sufficient to come within the terms of § 12-494(a).
From the standpoint of the commissioner, it makes little difference who pays the conveyance tax so long as the conveyance tax is based on the bargained-for consideration between Piskorski on one side and the lot owner and builder on the other. In this case, the bargained-for consideration was $166,850 as recited in the Construction Agreement and Assignment of Contract for Sale of Lot, dated May 21, 1997. (See Joint Stipulation of Facts, dated November 10, 2004, Exhibit 10.)
The purchase price was adjusted at the closing reducing the price from $172,351 to $166,850.
Paragraph two of this contract recited that the "combined purchase price of the Lot (payable to [Tuttle Road Associates]) and the improvements (payable to the [The Meadows at Riverbend Associates]) is $172,351." (Joint Stipulation of Facts, dated November 10, 2004, Exhibit 10.)
The analysis and conclusions made as to the first method of conveyance apply equally to the second method of conveyance, leading this court to the conclusion that the real estate conveyance taxes paid on each sale consisting of a house and lot to a buyer should have been based upon the total purchase price of the house and lot, and not on just the lot alone.
Since the present appeals involve only the plaintiff lot owners and not the builders, it is unnecessary at this time to consider the issue of who bears the responsibility for the full payment of the conveyance tax.
Accordingly, since this court finds that the conveyance tax involved in these cases on appeal were not fully paid, the commissioner's motion for summary judgment is granted and the plaintiffs' motion for summary judgment is denied.
Arnold W. Aronson Judge Trial Referee