1. Applicability of G.L. c. 64D, § 1 to Limited Equity Residential Cooperatives
Chapter 64D of the General Laws (St. 1951, c. 710, effective January 1, 1952) imposes an excise on each "[d]eed, instrument, or writing, whereby any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers." G.L. c. 64D, § 1.
In matters of taxation, substance must prevail over form. See Karlsberg v. Commissioner of Revenue A.T.B. Docket No. 146461 (1988), citing McNichol's Estate v. Commissioner of Internal Revenue, 265 F.2d 667, 671 (3rd Cir. 1959). The question of whether any transaction is a mere matter of form or has substance for tax purposes can be determinative of whether a tax attaches. The application of this principle frequently results in the imposition of a tax where, on form and appearance, none is due. See S.C.A. Disposal Services of New England, Inc. v. State Tax Commission, A.T.B. Docket No. 75056 (1980), citing Gregory v. Helvering, 293 U.S. 465 (1935). The Massachusetts Supreme Judicial Court has indicated that judicial inquiry is not limited by the forms or methods employed, but looks beyond to ascertain the real substantial nature of the transaction that resulted in the transfer of property. See Commissioner of Corporations & Taxation v. Dalton, 304 Mass. 147, 150 (1939).
While the form of what is purchased and sold by a tenant-stockholder is stock and a proprietary lease, the substance of the transfer is the right to occupy a specific apartment, with maximum incidence of ownership. See South Bridge Park Inc. v. Fort Lee Borough, 4 N.J. Tax. 30 (1981). In effect, the purpose of buying stock is not for profit, but for home ownership. See Wilmont v. Tellone, 137 So. 2d 610 (Fla. Dist. Ct. App. 1962); Brothers v. McMahon, 351 Ill. App. 321, 115 N.E. 2d 116 (1953); State v. Silberberg, 166 Ohio St. 101, 107, 139 N.E. 2d 342, 246 (1956). Viewing the transaction as a whole, the primary interest of a stockholder in the Cooperative is in acquiring the long term proprietary lease. The stock is incidental to the purpose of tenant-shareholder occupancy and simply affords a practical means of combining an ownership interest with the method of sharing proportionately the assessments for maintenance and taxes. See Penthouse Properties, Inc. v. 1158 Fifth Ave., Inc. 256 App. Div. 685, 11 N.Y.S. 2d 417 (1939).
By definition, a "proprietary lease" is "an agreement between a cooperative housing corporation and its stockholders for occupancy of a dwelling unit owned by the cooperative housing corporation." G.L. c. 157B, § 4. An ordinary lease of real property is a contract by which one party for consideration, i.e., rent, permits another to use and occupy certain premises. See Miller v. Berk, 328 Mass. 393, 397 (1952). The only difference between a proprietary lease and an ordinary lease of real property is the provisions for "rent." This difference does not affect the bundle of interests conveyed to a purchaser of a proprietary lease; the purchaser obtains a leasehold interest in a dwelling unit owned by the corporation. For purposes of G.L. c. 64D, a proprietary lease is substantially the same as an ordinary lease of real property.
The Department has ruled previously that, under certain circumstances, leases of real property and assignment of such leases constitute tax conveyances subject to the deeds excise. A leasehold interest is considered "realty" for purposes of G.L. c. 64D, § 1. In letter ruling 79-52, the Department adopted the federal rules pertaining to taxable leasehold interests under the then current federal documentary stamp tax. The Commissioner ruled that ... "deeds, instruments, and writings subject to the excise imposed by Chapter 64D are those documents by which the following interests are conveyed to, or vested in, the purchaser or purchasers -
a. Those interests in real property which endure for a period of time, the termination of which is not fixed or ascertained by a specific number of years, including, but not limited to, an estate in fee simple, life estates, and perpetual easements; and
b. Those interests enduring for a fixed period of years but which, either by reason of the length of the term, or the grant of right to extend the term by renewal or otherwise, consist of a bundle of rights approximating those of the class of interest set forth in subparagraph (a) above."
These rules were adopted by the Department in determining whether or not the transfer or assignment of an ordinary lease of real property is subject to the deeds excise. We rule that they also apply to the transfer of a proprietary lease, in conjunction with the transfer of a tenant-shareholder's shares of stock in the cooperative. Accordingly, the transfer of stock along with the appurtenant proprietary lease by a Cooperative tenant-stockholder is a taxable transfer and is therefore subject to the Deeds Excise.
2. Calculation of Deeds Excise
Under Massachusetts law, the Deeds Excise is based on the consideration given for the property and applies whenever the consideration, exclusive of the value of "any lien or encumbrance remaining" on the property at the time of sale, is greater than $100. G.L. c. 64D, § 1. The tax is paid by the person making or signing the deed and is evidenced by an affixed stamp. G.L. c. 64D, § 2. In DOR Directive 88-18, the Department indicated the rules for computation of the excise when conveyances of real property involve the following encumbrances: 1) new mortgages; 2) novations; 3) deeds in lieu of foreclosure; 4) assumptions of prior existing mortgages; and 5) property taken "subject to" prior existing mortgages. The amount of the mortgage debt may not be deducted before calculation of the deeds excise in conveyances involving new mortgages, novations, and deeds in lieu of foreclosure. See DOR Directive 88-18. However, the amount of the mortgage debt is deductible where there is an assumption of a prior existing mortgage or where property is taken "subject to" such a mortgage. Id.
The rules announced by the Commissioner in DOR Directive 88-18 apply to conveyances of cooperative apartments. However, when computing the amount of excise due, the taxpayer may deduct only the amount of mortgage debt attributable to the particular apartment transferred and not the amount of mortgage debt encumbering the building as a whole.
3. Payment of Deeds Excise
Massachusetts General Laws Chapter 64D requires that the tax imposed be paid by the person who makes or signs the deed, instrument or writing, or for whose benefit the same is made or signed. The payment of the tax must be denoted by adhesive stamps affixed to the deed, instrument or writing, or to the vellum, parchment or paper upon which it is written or printed. See G.L. c. 64D, § 2.
The Deeds Excise is payable at the Registry of Deeds in the jurisdiction in which the Cooperative is located, by the affixation of the appropriate adhesive stamp on the proprietary lease, whether or not the proprietary lease is recorded. For purposes of investigating and ascertaining whether the excise due is paid, the Commissioner may examine any books, papers, or memoranda bearing upon the amount of the excise. See G.L. c. 64D, § 6.
Very truly yours,
Stephen W. Kidder
Commissioner of Revenue
January 19, 1990