Opinion
C.A. No. 03C-09-040 WCC.
Submitted: April 7, 2004.
Decided: September 10, 2004.
Upon Plaintiffs' Motion for Summary Judgment. Denied. Upon Defendant State of Delaware Division of Revenue's Motion for Summary Judgment. Granted.
Melvyn I. Monzack, Esquire, Joseph R. Biden, III, Esquire and Michael C. Hockman, Esquire. 1201 North Orange Street, Suite 400, Wilmington, Delaware 19801. Attorneys for Plaintiffs.
Dennis J. Siebold, Esquire. Finance Legal Office, New Castle County Law Department, New Castle County Government Center, 87 Reads Way, New Castle, Delaware 19720. Attorney for Defendant New Castle County.
Joseph P. Hurley, Jr., Esquire. Deputy Attorney General, Division of Revenue, State of Delaware, 820 North French Street, Wilmington, Delaware 19801.
MEMORANDUM OPINION
I. Introduction
This suit involves Plaintiff Acadia Brandywine Town Center, Plaintiff Acadia Market Square and Plaintiff Acadia Brandywine Holdings' (collectively "Acadia Entities" or "Plaintiffs") request for a declaratory judgment that the Delaware Realty Transfer Tax (the "Realty Transfer Tax") did not apply to the merger with Market Square at the Town Center, B.T. Center Associates and B.T. Center Arc (collectively "Rollins Entities"). Presently before the Court is Plaintiffs' Motion for Summary Judgment and Defendant State of Delaware, Division of Revenue's ("DOR") Motion for Summary Judgment, both filed pursuant to Delaware Superior Court Civil Rule 56. Upon review of said motions and upon consideration of the oral arguments made by counsel, it appears to the Court that Plaintiffs' Motion for Summary Judgment should be DENIED and Defendant DOR's Motion for Summary Judgment should be GRANTED.
II. Facts
This suit involves a retail complex located in northern New Castle County, Delaware and is commonly known as the Brandywine Town Center and the Market Square. On January 31, 2003, the Rollins Entities and the Acadia Entities, owned by Acadia Realty Trust ("Acadia REIT") entered into an "Agreement and Plan of Merger" (the "Merger"). Pursuant to the merger agreement, all of the rights, privileges and powers of each of the Rollins Entities as well as all of the property, including real, personal and mixed and all debts due to any of the Rollins Entities remained with the Rollins Entities, the survivors of the merger. In contrast, all of the rights, privileges and powers of each of the Acadia Entities vested in the Rollins Entities and accordingly, the Acadia Entities ceased to exist.Notwithstanding that the Rollins Entities were the surviving entities, the names of those entities were changed to reflect the affiliation with Acadia. Following the merger, the Rollins Entities became known as Acadia Brandywine Town Center, LLC ("ATC"), Acadia Market Square, LLC ("AMS") and Acadia Brandywine Holdings, LLC ("ABH") (collectively the "Surviving Entities"). Pursuant to the merger agreement, the outstanding membership interests of each of the Rollins Entities were converted into the right to receive a cash payment from the Surviving Entities and the equity owners of the Rollins Entities, the Rollins family, were cashed out. The Surviving Entities retained the Rollins Entities' federal income tax basis in the real estate and other assets owned by those entities as well as the credit history, Federal EIN and all identifying information of each of the former Rollins Entities.
The ability to retain the federal income tax basis was an essential element of the Merger and was a prime incentive for structuring the Merger as a reverse merger, as the result was significant federal income tax benefits.
Subsequent to the Merger, on July 1, 2003, the Plaintiffs sought a ruling from both New Castle County and DOR as to whether the Merger was exempt from the Realty Transfer Tax. The DOR concluded that the Merger was taxable under 30 Del. C. § 5401(7). Thereafter, on July 2, 2003, the Surviving Entities paid to New Castle County and to DOR amounts equal to the real estate transfer tax required by the Realty Transfer Tax Statute. Specifically, ATC paid $360,000 to New Castle County and $360,000 to DOR. AMS paid $300,000 to New Castle County and $300,000 to DOR and ABH paid $511,095 to New Castle County and $511,095 to DOR.
ATC made these payments will full reservation of rights.
AMS and ABH made these payments with full reservation of rights.
III. Standard of Review
Summary judgment is appropriate when the moving party has shown there are no genuine issues of material fact and that the moving party is entitled to judgment as a matter of law. In considering such a motion, the court must evaluate the facts in the light most favorable to the non-moving party. Summary judgment will not be granted when the record reasonably indicates that a material fact is in dispute or if it seems desirable to inquire more thoroughly into the facts in order to clarify the application of law to the circumstances.IV. Discussion
A) Contentions of PartiesPlaintiffs filed the instant suit asserting that the Realty Transfer Tax does not apply to the Merger and as such, they requested a declaratory judgment and a return of all sums paid to New Castle County and to DOR. Thereafter, both parties filed Motions for Summary Judgment because the facts in this case are not in dispute and each believe they are entitled to judgment as a matter of law.
See Compl.
Plaintiffs' argument relies primarily on the 1984 Tax Regulations, which explicitly state that the Realty Transfer Tax does not apply to a merger where a document pertaining to real estate has not been recorded. Plaintiffs assert that pursuant to the Merger, no documents related to real estate were recorded, as no transfer of real estate occurred. Moreover, they emphasize that under 8 Del. C. § 259(a), "all property, real, personal and mixed, and all debts due to any of said constituent corporations . . . shall be vested in the corporation surviving or resulting from such merger or consolidation," which eliminated the need for a deed to be recorded because by law, the property automatically vested with the surviving entities upon completion of the Merger. Plaintiffs assert that the 1986 Amendments, which provided that the Realty Transfer Tax applies to the transfer of intangible interests, and the 1986 Regulations did not alter the treatment of merger transactions under the Regulations.
See 30 Del. C. § 5401(7).
In response, Defendants assert that 30 Del. C. § 5401(7) triggers Plaintiffs liability for the Realty Transfer Tax because Plaintiffs engaged, through the Merger, in the transfer of beneficial ownership of real estate through a conveyance of intangible interests and there is no significance to the fact that no deed was recorded in connection with the Merger. Further, the Defendants assert that with § 5401(7), the Legislature intended to address situations where beneficial ownership of real property was being transferred through corporate maneuvers that did not require a document to be recorded. In other words, the legislative intent, evidenced by the synopsis to the legislation, was to close a loophole that formerly enabled corporations to evade the Realty Transfer Tax by transferring real property through corporate maneuvers and conveyances.
The synopsis of legislation stated,
[t]axpayers have utilized corporations, partnerships and trusts as a means of conveying real property without being subject to realty transfer tax. Under present law, only the conveyance of real estate is subject to tax. This act will amend the scope of the tax so that it will include instruments which purport to transfer an interest in intangible personal property, when the transfers are properly characterized as a conveyance of real estate.
Defendant Division of Revenue's Brief in Opposition to Plaintiff's Motion for Summary Judgment and In Support of Its Motion for Summary Judgment, Ex. 5 (Synopsis to H.B. 462).
As such, the issue before the Court is two-fold. Initially, the Court must determine whether the Merger can be considered a transfer or conveyance or series of transfers or conveyances of intangible interests. If so, the second inquiry is whether the transfer or conveyance can be properly characterized as a sale of real property. If both are answered affirmatively, the Merger is subject to the Realty Transfer Tax.
B) The Merger
The 1984 Realty Transfer Tax Regulations included a provision, which stated that the transfer tax did not apply to mergers between two corporations where a document related to real estate was not recorded. Subsequently, in 1986 amendments were enacted to Title 30, section 5401(7) of the Delaware Code ("§ 5401(7)"). Subdivision 5401(7)(a) provides:
See Defendant Division of Revenue's Brief in Opposition to Plaintiff's Motion for Summary Judgment and In Support of Its Motion for Summary Judgment, Ex. 4 (Code Del. Regs. 31 200 162, § 4.2(h) (1984)). The focus of the tax was on the "document" being recorded. See Director of Revenue v. Barry, 391 A.2d 216 (Del.Super. 1978).
[e]xcept as provided in paragraphs b. and c. of this subdivision, where beneficial ownership in real estate is transferred through a conveyance or series of conveyances of intangible interests in a corporation, partnership or trust, such conveyance shall be taxable under this chapter as if such property were conveyed through a duly recorded "document" as defined in subdivision (1) of this section. . . .
Additionally, subdivision 5401(7)(c) provides,
[w]here the beneficial owners of real property prior to the conveyance or series of conveyances referred to in this subdivision own 80% or more of the beneficial interest in the real estate following said conveyance or conveyances, such transfers shall not be subject to tax under this subdivision. Where the beneficial owners of real property prior to the conveyance or series of conveyances referred to in this subdivision own less that 80% of the beneficial interest in the real estate following said conveyance or conveyance, such transfers shall not be subject to tax under this subdivision, unless, under regulations promulgated by the Secretary of Finance, such transfer or transfers are properly characterized as a sale of real property.
Id. § 5401(7)(c).
In other words, § 5401(7)(c) taxes transactions of conveyances of intangible interest in a corporation that can be characterized as a sale of real estate. The above section was enacted so that those transfers which may not require the recording of a deed, would still be subject to the Realty Transfer Tax. In making this determination as to the nature of the transaction the statute required the Court to consider the timing of the transaction; beneficial ownership prior to and subsequent to the conveyance or conveyances; the business purpose of the corporation, partnership or trust; and such other factors as may be relevant. As such, the Court first must resolve whether the Merger fits within the "transfer/conveyance of intangible interest" language of the aforementioned statute.
The Plaintiffs do not argue or suggest in their briefing that the 80% conveyance status has any bearing on this issue. As such, the Court will assume that the Plaintiffs agree that the beneficial owners own less than 80% of the beneficial interest in the real estate after completion of the merger.
See id.
A merger is a combination or amalgamation of two or more separate corporations into one. The participating corporations are designated the "constituents" or "constituent corporations" with the constituent whose charter remains operative after the merger being designated the "surviving corporation" or "survivor." Upon the effectiveness of the merger, "all the property, real, personal and mixed" and all the liabilities of each of the constituent corporations are transferred to the surviving corporation as a matter of law.
See DAVID A. DEXLER ET AL., 2 DELAWARE CORPORATE LAW AND PRACTICE, § 35-02 (LexisNexis 1987) (2003).
With this general definition in place, the Court has looked at the statutes involving merger and in particular those involving the merger of limited liability corporations which were involved here. The language in 6 Del. C. § 18-209, the limited liability merger provision, provides some guidance to this question. This section states, in part,
In connection with a merger or consolidation hereunder, rights or securities of, or interests in a domestic limited liability company or other business entity which is a constituent party to the merger or consolidation may be exchanged for or converted into cash, property, rights or securities of, or interests in the surviving or resulting domestic limited liability company or other business entity, . . .
Article II of the merger agreement states in Section 2.1(a) that:
All membership interests of each Survivor shall be converted into ownership interests of the Special Member and the cash payments from the Targets set forth below (the "Survivor LLC Payment") shall be used by the Special Member to pay liabilities of the Survivors assumed by the Special Member and any excess shall be retained by the Special Member and the membership interests of each Target shall cease to be outstanding and shall be converted into the right to receive the membership interest in the applicable Survivor set forth on Exhibit D1 attached hereto. As of the Effective Time, each holder of a membership interest of a Survivor (individually a "Holder" and collectively the "Holders") which immediately prior to the Effective Time represented an outstanding membership interest of a Survivor shall cease to have any rights with respect thereto. The Survivor LLC Payments shall equal the difference between Seventy Eight Million Seventy Three Thousand ($78,073,000.00) Dollars minus the sum of the unpaid principal balances on the Closing Date of Mortgage Note, dated May 31, 2000 executed by Market Square in the original principal amount of $16,500,000; and that certain Mortgage Note dated July 9, 2002 executed by BTCA in the original principal amount of $21,750, 000 (each a "Note" and collectively the "Notes").
While it appears clear to the Court when it reads the entire merger document that the only asset that would give value to the "membership interest" mentioned in the above section is the real estate property associated with the shopping center and the income that is derived from the rentals of that property, to the extent the parties have attempted to craft this transaction as a transfer or conveyance of "membership interest," the Court finds it is the type of "intangible interest" contemplated by the General Assembly when it enacted § 5401(7). In other words, this was simply not a phantom transaction to accomplish some other task but in reality was the actual transfer of assets to the surviving LLC. However the Plaintiff would like to or has attempted to characterize it, the Court cannot imagine it not fitting, at a minimum, the meaning of "intangible interest."
C) Sale of Real Estate
The primary focus of § 5401(7)(c) is not the instrumentality used to accomplish the transfer or conveyance but rather is the determination of whether it is proper to characterize that transfer or conveyance as a sale of real property. Subdivision 5401(7)(c) and the realty tax regulations referenced thereto provides criteria and guidelines to evaluate whether a transfer of intangibles can be characterized as a sale of real estate. The factors to be considered are the following: (1) timing of the transaction; (2) percentage change in interest; (3) transitory ownership status; and (4) business purpose.
See Defendant Division of Revenue's Brief in Opposition to Plaintiff's Motion for Summary Judgment and In Support of Its Motion for Summary Judgment, Ex. 6 (Code Del. Regs. 31 200 126, § III., A (1-4)).
This Court finds that the facts in the instant case support the conclusion that this Merger is properly characterized as a sale of real estate. Under the first factor, timing of the transaction, there is a strong presumption that a sale of real estate occurred when property is conveyed to the surviving entity. Here, it appears that the Acadia Entities were created just before the merger for the sole purpose of effectuating the Merger and at the conclusion of the Merger, they ceased to exist. In spite of what may be argued by the Plaintiff, this transaction was simply a means to transfer the only valued assets of the deal, real estate. Second, if in a continuous twelve month period, there is greater than a 50% change in interest in an entity, there is a presumption that a sale of real estate has occurred. Here, prior to the Merger, the Rollins Family owned 100% of the Rollins Entities and post-Merger, the beneficial ownership interests of the Rollins Family were transferred to Acadia REIT. The third factor focuses on whether there was transitory status as a partner, shareholder or beneficiary of an entity and if such status occurred, it suggests that the transfer is subject to the tax. Here, the ownership of the Acadia Entities was transitory, as those owners became the owners of the Surviving Entities and the previous owners and managers were cashed out.
See supra note 4.
Lastly, the business purpose, the most important factor, requires consideration of whether, under all the facts and circumstances, the transfer by means of an entity was made for a business purpose more significant than conveyance of beneficial ownership in Delaware real estate. Under the instant facts, the sole motive or business purpose behind the Merger was to sell the Rollins Family's ownership interests and to acquire real estate on behalf of Acadia REIT. A simple review of some of the provisions of the merger agreement (emphasis added) makes this clear:
Section 3.1 The Survivors represent and warrant to the Targets that the Survivors own all of those certain Properties more particularly described on Exhibit F annexed hereto, which legal descriptions shall be in such form as to be insurable by the Title Company.
Section 3.2 The Survivors represent and warrant to the Targets that the Survivors' own good, insurable and marketable title to the Properties . . .
Section 5.2 No third party (including any tenant under any lease or ground lease) has any option to purchase or right of first refusal to acquire the Properties.
Section 5.4 There are no leases, licenses or other occupancy agreements affecting any portion of the Properties, . . .
Section 5.5 . . . there are no pending actions, suits, proceedings or investigations to which the Survivors, are a party before any court or other governmental authority with respect to any of the Properties, and to the best of the Survivors' knowledge, no other actions, suits, proceedings, or investigations have been threatened.
Section 5.6 . . . no tenant, licensee or occupant under any of the Leases is or, as of the Closing, will be entitled to any free rent, abatement, or concessions with respect to periods after Closing nor any construction allowances, rebates, payments or reimbursements of tenant improvement costs, or refunds payable after Closing, and no tenant, licensee or occupant under any of the Leases has or, as of the Closing, will have prepaid any rents or other charges for more than one (1) month.
Section 5.8 The Survivors have no knowledge of any request by any insurance carrier, insurance broker or agent, or Board of Fire Underwriters for any alterations to any of the Properties, nor have they received any notice that any defective condition exists in, on or about any Properties from any such party.
Section 5.9 There is no pending, or to the best of the Survivors' knowledge, threatened or contemplated condemnation, assessment or similar proceeding affecting any of the Properties or any part or portion thereof, and the Survivors have not received any written notice of any such proceedings.
Section 5.11 Except for severance obligations which will be paid on or before the Closing Date by the Survivors, there are no labor contracts, union contracts, collective bargaining agreements, or any other employee agreements, written or oral, affecting any portion of the Properties . . .
Section 5.13 There are not now, nor will there be at the Closing Date, any individuals employed in connection with the management, operation or maintenance of the Properties that cannot be terminated . . .
Section 5.14 . . . there are no pending, or to the best of the Survivors' knowledge, threatened or contemplated violations, or notices of any violations of any applicable laws, ordinances or building, fire, health, and safety or zoning codes with respect to any of the Properties.
Section 5.15 There is no, and the Survivors have not received any written notice from Lender or Servicing Agent of any, default or of any event that with the passage of time would constitute a default under the Loan Documents, or of any requirement for work to be performed at the Properties.
Section 5.17 For purposes of this Agreement, assets shall include all of the respective Survivors's right, title and interest (" Assets ") in and to the following:
(i) For each respective Property, that portion of the Land applicable to it as set forth in the Recitals and in Exhibit F attached hereto;
(ii) Other than tenant fixtures or any Building which may be owned by tenant (or predecessor in interest of tenant) pursuant to the terms of such party's Lease, all Buildings and fixtures located on the applicable Land;
(iii) Any and all Appurtenant Easements, Personal Property and Appurtenant Interests pertaining to such Land or Buildings;
(iv) the landlord's interest in any Leases and Contracts with respect to the Property;
(v) tenant security, utility, service and similar deposits in the form of cash or bonds.
Section 5.21 To the Survivors' knowledge, there are no pending or threatened actions or lawsuits under any Environmental Laws (as hereinafter defined), except as disclosed in Exhibit T annexed hereto.
Section 5.22 Complete copies of the following documents and information with respect to the Properties have been delivered, or will be delivered promptly after the date hereof, to the Survivors:
(i) all surveys, as built drawings, plans, specifications, engineering and mechanical data relating to the Properties, which are in the Survivors' possession;
(ii) a copy of all environmental reports in the Survivors' possession with respect to the Properties including without limitation all Phase I and Phase II environmental assessments;
(iii) income and expense statements, year-end financial and monthly operating statements for the Properties for calendar years 2001 and 2002 to date;
(iv) bills issued for the fiscal tax years 2001 and for the expired portion of the current fiscal year for all real estate taxes and personal property taxes for the Properties and a copy of any and all notices pertaining to real estate taxes or assessments applicable to the Properties;
(v) copies of all liability insurance policies covering the Properties, whether obtained by the Survivors or by tenants under leases; and
(vi) an inventory of all equipment, supplies, furniture and other personal property of the Properties (specifying whether owned or leased).
Based upon any reasonable view of the above, it would be folly to try to argue that this transaction is anything more than a legal procedure intended to transfer real estate properties. Therefore, after consideration of the factors in § 5401(7)(c), the Court finds that the Merger is properly characterized as a sale of real estate and in fact is nothing more than that. As such, in spite of 1984 tax regulations, the Merger under this set of facts is clearly subject to the Realty Transfer Tax.
The Court wants to emphasize that this decision is limited to the facts relating to this specific transaction. The decision is not intended, nor does this judge believe, that all mergers are subject to the transfer tax simply because some real estate is involved in the process. There are clearly mergers where the primary business purpose of the transaction is unrelated to real estate and the transfer of such assets is simply a consequence of that business decision. That is simply not the case here.
V. Conclusion
Therefore, for the reasons stated above, the Plaintiff's Motion for Summary Judgment is DENIED and Defendant State of Delaware Division of Revenue's Motion for Summary Judgment is GRANTED.