In a reported opinion that provides a tutorial on Maryland recordation and transfer taxes, the Court of Special Appeals of Maryland (our second-highest court) has confirmed what most of us have long understood Maryland law to be: that these taxes apply only to the consideration that the parties to the sale of a business that includes real estate assets agreed was attributable to the sale of the real estate.
The case involved the sale of three senior living facilities (a going concern) located in Baltimore and Montgomery Counties. The parties had agreed to an allocation as required by federal income tax law of the overall consideration among the real estate, tangible personal property (FF&E), and intangible property – roughly $40 million to realty, $3 million to FF&E, and $50 million for goodwill, licenses, permits, and similar intangible assets.
The parties anticipated paying recordation and transfer taxes on the $40 million of consideration that they had allocated to the realty. But Baltimore and Montgomery Counties would not record the deeds unless the taxes were also paid on the $50 million of consideration allocated to the intangibles. To close their transaction, the parties paid the taxes as required by the counties and then applied for refunds of the tax imposed on the consideration allocated to the intangible assets.
As their core argument the counties asserted that, as used in the MD Tax-Property Article, the word "property" included both real and personal property. Hence, consideration for the intangible property was subject to the recordation and transfer taxes.
The appellate court rejected the counties' position, finding that the parties did in fact bargain for the sales price attributed to the realty and did so in conformity with provisions of federal income tax law requiring them to allocate the price among the different assets being sold. The Court acknowledged that the recording clerks could certainly challenge the consideration stated as being paid for the real property as not representing the fair market value of the properties. But that is a different question than whether any and all amounts that the parties allocate to intangible property are required to be included in the consideration subject to the taxes.
This is likely the end of the case with respect to whether consideration for intangibles can be subjected to the taxes, but we don't know for sure yet. The counties can ask the Court of Appeals to review the case, although the odds of the case being both taken up for review and reversed are low. The case has a bifurcated posture to it, such that it now reverts to the Maryland Tax Court for an evidentiary hearing on the valuation of the assets. The parties will need to establish, among other things, that the allocations they made among the asset classes were the product of good faith, arm's-length negotiations. But at least a fundamental principle of Maryland recordation and transfer taxes has been affirmed: the taxes apply only to the consideration for the real estate as agreed to by the parties to the sale transaction. Shelter Senior Living IV, LLC v Baltimore County, Maryland, et al., No. 1276 (Sept. Term. 2019), Court of Special Appeals of Maryland (decided July 1, 2021).