New Hampshire Resident Ltd. Partners v. New Hampshire Department of Revenue Administration, 162 N.H. 98

Background

Lyme Timber Company is a New Hampshire limited partnership; NH residents are petitioners and receive distributions taxed as income depending on transferability of their partnership interests.
RSA 77:3 and RSA 77:4, III tax rules hinge on whether a partnership interest is represented by transferable shares; if transferable, individuals are taxed.
Lyme’s partnership agreement restricts transfers with conditions, including right of first refusal and matching offers, rather than unrestricted transferability.
DRA audited tax years 2002–2004 and assessed individual petitioners for interest and dividends taxes despite Lyme paying the entity-level taxes.
Trial court held the DRA regulations ambiguous and resolved in petitioners’ favor; DRA appealed, urging proper interpretation of transitively applicable rules and Lyme’s agreement.
Issue on appeal: whether Lyme interests are transferable shares under the DRA regulations, making individual petitioners taxable.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Are Lyme interests transferable shares under Rules 901.02/901.17 (and related 901.18)?	Lyme interests are not freely transferable; restrictions render them non-transferable.	Lyme interests remain transferable under the rules even with some constraints, since no required third-party approval or dissolution.	Lyme interests are transferable; regulations interpreted to favor taxpayers not applicable.
Does Lyme's right of first refusal constitute 'approval' under the regulations?	Right of first refusal effectively blocks transfers and constitutes approval.	Right of first refusal is not an 'approval' and does not prevent transferability.	Right of first refusal does not amount to 'approval'; transfers remain transferable.
Should the court defer to DRA interpretations of its own regulations?	Ambiguities should be construed in the taxpayer’s favor; DRA interpretation should be given less deference when ambiguous.	Administrative regulations are prima facie evidence of proper interpretation; deference is due but not unlimited.	Regulatory language is interpreted de novo with skepticism toward ambiguity; not bound by deference when inconsistent with statute.
Does Lyme's partnership agreement affect transferability for tax purposes?	Paragraph 11 imposes constraints that render transfers non-transferable.	Constraints do not equal non-transferability; the regulatory standard does not bind this outcome.	Constraint features did not render transfers non-transferable; Lyme units remain transferable.

Key Cases Cited

EnergyNorth Natural Gas v. Continental Ins. Co., 146 N.H. 156 ((2001)) (ambiguity resolved in favor of insured to some extent; statutory interpretation framework)
North Bay Council, Inc. v. Grinnell, 123 N.H. 321 ((1983)) (treatment of restraints on alienation and enforceability principles)
Winnacunnet Coop. Sch. Dist. v. Town of Seabrook, 148 N.H. 519 ((2002)) (preserve meaning of words and avoid superfluous terms in statutory construction)
Town of Nottingham, 153 N.H. 539 ((2006)) (ambiguity ordinarily not resolved where no construction supports the party's position)
Cagan's, Inc. v. Dep't of Rev. Admin., 126 N.H. 239 ((1985)) (administrative regulation interpretation; deference not absolute)
Pheasant Lane Realty Trust v. City of Nashua, 143 N.H. 140 ((1998)) (interpretation of statutory/regulatory scheme within overall purpose)
Appeal of Union Tel. Co., 160 N.H. 309 ((2010)) (final arbiter of legislative intent; de novo review of statutory/regulatory interpretation)
Appeal of Murdock, 156 N.H. 732 ((2008)) (de novo review of administrative rule interpretation)
Larson v. Commissioner, 66 T.C. 159 ((1976)) (right of first refusal often treated as de minimis restraint on alienation)
Morrissey v. Commissioner, 296 U.S. 344 ((1935)) (collection of income in collective entities and transferability considerations)