- When is an LLC a Corporation? When It Seeks a Particular Tax Exemption
- May 20, 2015 | Author: Edward J. Levin
- Law Firm: Gordon Feinblatt LLC - Baltimore Office
- The Court of Special Appeals recently held that a limited liability company may avail itself of the benefit of an exemption from recordation and transfer taxes relating to mergers that the State Department of Assessments and Taxation (“SDAT”) argued was only applicable to corporations. Super-Concrete Corp. v. State Department of Assessments and Taxation, No. 877, Sept. Term 2013 (Md. Ct. Spec. App., Feb. 27, 2015).
In reaching its result, the Court of Special Appeals reversed both the Tax Court and the Circuit Court for Baltimore City.
Section 12-108(p)(2) of the Tax-Property Article of the Maryland Code (“TP”) provides that “an instrument of writing is not subject to recordation tax if [it] is . . . made pursuant to reorganizations described in §368(a) of the Internal Revenue Code [(“IRC”)].” The issue presented arose in the context of a merger between Super-Concrete Corporation, a District of Columbia corporation, and Silver Hill Materials II, LLC, a Maryland limited liability company. In connection with the merger, Super-Concrete filed Articles of Merger and a Certificate of Conveyance with the SDAT and claimed an exemption under TP §12-108(p)(2). The SDAT denied the exemption because one of the parties to the merger was a limited liability company (an “LLC”).
Super-Concrete paid recordation and transfer taxes in the amount of approximately $300,000 on the Articles of Merger. It filed for a claim for refund with the SDAT and lost, appealed to the Tax Court and lost, obtained Judicial Review by the Circuit Court for Baltimore City and lost, and filed an appeal with the Court of Special Appeals. There its losing streak ended.
In its analysis, the Court of Special Appeals noted that IRC §368(a)(1)(A) provides that a reorganization includes “a statutory merger or consolidation.” The Court of Special Appeals stated that this language, if read literally, could extend the exemption for any statutory merger, but that this would render meaningless many related provisions under the Maryland Code. This would, therefore, be too broad of a reading.
Administrative agencies are generally accorded deference by courts when they have adopted and consistently applied rules. However, after analyzing the practice of the SDAT with respect to the taxation of mergers that involved LLCs, the Court of Special Appeals found no long-standing and consistent agency interpretation that is entitled to deference.
The Court of Special Appeals found that the purpose of TP §12-108(p)(2) “has been and remains to be providing exemption from recordation tax for the merger of business entities for no consideration.” Therefore, the court found that this provision and the corresponding provisions dealing with exemptions from transfer tax reflect the intent of the General Assembly to extend an exemption to mergers and consolidations for no consideration to business entities that are similarly situated to corporations. Also, because under Maryland and federal law LLCs are sometimes treated as corporations, the Court of Special Appeals concluded that the claim by Super-Concrete for a refund of recordation and transfer taxes paid was improperly denied.