The Circuit Court for Baltimore County recently held that the portion of a sale of three senior living facilities relating to the business’ goodwill was subject to recordation and transfer taxes. In the Matter of Shelter Senior Living IV, L.L.C. v. Montgomery County, Clerk of the Circuit Court for Montgomery County, Baltimore County, and Clerk of the Circuit Court for Baltimore County, Circuit Court for Baltimore County, Case No. 03-C-18-009042 (Aug. 2, 2019).
The owner of senior living facilities in Rockville, Towson and White Marsh sold them in July 2014 for a total of $93,400,000. Of that amount, the owner claimed that $48,114,221 was for the goodwill of the enterprises and was not subject to recordation or transfer tax. The owner also claimed that these taxes were not due on $3,143,579, the price for the tangible personal property, because sales tax was applicable to that.
Recordation and transfer taxes were tendered with the deeds based on the consideration of $40,142,200 for the real property. The clerks rejected that. To get the deeds recorded, tax was paid on $90,256,421 (the purchase price less the value of the tangible personal property). The taxpayer filed for a refund, which was denied, so it appealed to the Maryland Tax Court, which sided with the taxing authorities. On further appeal, the Circuit Court for Baltimore County affirmed the decision of the Tax Court.
The circuit court relied on two cases. The first, Pritchett v. Kidwell, 55 Md. App. 206 (1983), involved the conveyance for $60,000 by two partners of their interests in a parcel of real property that had been used by their partnership. The buyers agreed to hold harmless the sellers from loss arising from a mortgage on the property, for which all of the partners were liable. The Court of Special Appeals held that the indemnity and relinquishment of the claims for contribution were elements of the consideration for the conveyance, and that recordation and transfer taxes were payable on that.
In the second case, Dean v. Pinder, 312 Md. 154 (1988), the Court of Appeals held that recordation and transfer taxes were due on the transfer of title from the sole shareholders of a corporation to the corporation because the value of the corporation’s stock increased upon the conveyance.
We think that the Shelter Senior Living case was wrongly decided. Recordation and transfer taxes are imposed on the consideration for real property that is transferred by the recordation of a deed. Documents that convey title to or create liens on real property are taxed under the recordation and transfer tax laws. If other types of property, including goodwill and tangible personal property, are simultaneously transferred, the taxes on a deed should not be affected. The circuit court implicitly recognized this when it permitted the exclusion of the tangible personal property from the total amount of consideration paid for the facilities. In Maryland’s tax statutes, there is no explicit credit for or exclusion from recordation or transfer taxes because a sales tax is due.
Goodwill is frequently a component of the price paid for a business. It represents the value of the enterprise over that represented by the other components, including the real property. The seller and the buyer of a business should agree on the value of goodwill at the time of the sale. There are federal income tax ramifications to each of them based on their valuation of goodwill.
The two cases cited by the circuit court do not address whether recordation and transfer taxes should be imposed on goodwill. The result in Pritchett v. Kidwell can best be explained by the rule that taxable consideration on a transaction includes the amount of any mortgage assumed or taken subject to. There the sellers conveyed their three-quarter interest in a parcel of real property, which was encumbered by a mortgage. The Court of Special Appeals held that the clerk was entitled to collect tax on three-quarters of the amount of the mortgage, in addition to tax on the cash consideration. The court said that as part of the payment for the real property the purchaser would make the future payments on the mortgage, which the court called an “economic fact.” In Dean v. Pinder the Court of Appeals recognized that a corporation is an entity separate from its shareholders, and that the transfer of real property from the shareholders to the corporation was taxable based on the value of the real property. These cases do not stand for the proposition that a component of a sale of a business that is not real property can be subject to recordation and transfer taxes.
Shelter Senior Living has been appealed to the Court of Special Appeals.
Edward J. Levin, a member of the Real Estate Practice Group at Gordon Feinblatt LLC, can be reached at [email protected] or 410-576-1900. Douglas T. Coats, head of the Tax Practice Group at Gordon Feinblatt, contributed to this article. He can be reached at [email protected] or 410-576-4002.