Respondent, the Michigan Department of Treasury (Treasury), appeals by right the July 27, 2010, final judgment of the Michigan Tax Tribunal cancelling Treasury’s assessments against Eastbrook Homes, Inc. (petitioner), for taxes, penalties, and interest due under the State Real Estate Transfer Tax Act (SRETTA), MCL 207.521 et seq., in the amount of $1,039,854.87 for the tax periods of 2003 through 2006. Petitioner argued in the Tax Tribunal that the real estate transfers at issue were exempt from transfer tax under MCL 207.526(d). After a one-day hearing, briefs, and arguments of the parties, the tribunal issued its final opinion and judgment that MCL 207.526(d) exempted the transfers from taxation and cancelled Treasury’s assessments. Because we conclude that the Tax Tribunal erred as a matter of law, we reverse.
I. FACTS AND PROCEEDINGS
Petitioner is a residential building company that constructs and sells new homes. Petitioner builds both speculative and custom-built homes. In the case of a speculative home, petitioner buys a lot or unit from a developer and then builds a house on it with no specific buyer in mind. After the speculative home is complete, petitioner puts the home up for sale on the market. When petitioner sells a speculative home and conveys the property by deed to the buyer, it pays a transfer tax on the value of the land and the value of the home as required under SRETTA, MCL 207.523.
A custom-built home is a home built for a specific, i.e., predetermined, buyer. In the case of a custom-built home, the buyer
As security for the contract price between petitioner and the buyer, petitioner would require the buyer to quitclaim the property to petitioner. Once construction was complete and petitioner was paid the contract price, petitioner would quitclaim the property back to the buyer. Because the quitclaim deeds were made for the purposes of creating a security interest in the property or discharging a security interest, petitioner contends that the quitclaim deeds were exempt from transfer tax under SRETTA pursuant to MCL 207.526(d). Treasury contends that petitioner acted in a coordinated manner with EDC to sell improved property to its buyers without paying the transfer tax on the improved value of the property. In Treasury’s view, the warranty deeds between EDC and the buyers were unnecessary and were simply being used as a tax-avoidance device. Consequently, Treasury asserts that the quitclaim deeds from petitioner to the buyers are subject to the transfer tax under SRETTA.
Treasury audited petitioner for the years 2003-2006 and, as a result of the audit, assessed petitioner tax deficiencies with interest and penalties totaling $1,039,854.87. Petitioner contested the assessments and requested an informal conference, which was held on May 7, 2008. The hearing referee recommended that the assessments be upheld. Treasury issued a final decision and order of determination affirming the assessments on February 3, 2009. Petitioner appealed the decision in the Tax Tribunal on March 2, 2009, arguing that the quitclaim deeds at issue are exempt from SRETTA because they were made for the purpose of discharging a security interest in the property.
After discovery, a hearing was conducted on April 15, 2000, before a Tax Tribunal hearing officer. At the hearing, the parties stipulated with regard to the admission of four exhibits, which were “typical or prototype documents for all the transactions subject to the various assessments.” After the exhibits were admitted, Michael McGraw, Chief Executive Officer of petitioner, testified regarding the transactions. McGraw was the only witness. On the basis of the hearing, the Tax Tribunal made the following findings of fact:
1. Petitioner (i.e., the Building Company) is in the business of residential construction.
2. The Development Company (i.e., Eastbrook Development Company, Inc.) is in the business of taking raw unimproved land and developing it into divisible parcels of property.
3. The Building Company and the Development Company are separate and distinct entities.
4. Mr. McGraw, as an individual owner, has interests in both entities and a legitimate business purpose, other than avoiding transfer tax, to maintain the Building Company and DevelopmentCompany as separate entities including but not limited to the provisions set forth in the Condominium Act, MCL 559.101 et seq., and Land Division Act, MCL 560.101, et seq., and tort liability.
5. Pursuant to Paragraph 21 of the Building Contract, Petitioner and the Buyers expressly intended to use the Buyer’s quit claim deed for a specified parcel of property, as security for payment of improvements made.
6. During the course of construction, Petitioner has a legitimate business interest to maintain physical possession of the property including but not limited to the lack of a certificate of occupancy (see Paragraph 13 and 14 of the Building Contract), tort liability, and expeditious completion of the project.
7. The parties acted consistent with their intentions set forth in the transaction documents and Building Contract; Petitioner did not act as though he possessed fee simple title in the property and the Buyers still retained an interest in the property by paying the property taxes, and making additional decisions with regard to change orders and addendums made during the course of construction.
8. As expressed in the Building Contract, upon completion of the home Petitioner “would release its security and quit claim title back to the Buyer.”
9. The Buyers’ quit claim deeds and Petitioner’s quit claim deeds both indicate on their face the parties’ intention to use the deed as a security; the deeds corroborated the parties intentions set forth in the transaction documents contained in Petitioner’s exhibits.
10. The Buyers’ quit claim deeds are found to be an effective method of making certain that the Builder is paid in full upon completion of construction of a home, and provides a strong form of security. [Final Opinion and Judgment (MTT Docket No. 359471, July 27, 2010), pp 14-15.]
The Tax Tribunal invoked the doctrine of equitable mortgages to grant petitioner relief, writing with respect to its conclusions of law as follows:
The quit claim deeds from Petitioner to its respective customers are clearly deeds or instruments of conveyance of property or any interest in property, which are subject to the tax imposed under the SRETTA, but for the fact that the quit claim, deeds were given as security or an assignment or discharge [of\ the security interest and thus exempt under § 6 of the SRETTA[.\
It is apparent from clear unambiguous language used within the documents in Petitioner’s Exhibits that the parties intended the conveyance of property interests, by way of quit claim deeds from the Buyers to Petitioner and from Petitioner to the Buyers, were to be treated as creating a security interest in the properties. More specifically, Petitioner and the Buyers expressly intended in their respective Building Contracts that the Buyers’ quit claim deeds be given to Petitioner as “security during construction.” Furthermore, Buyers’ quit claim deeds expressly corroborate the parties’ intentions by stating “This transfer is made for security purposes” on the face of the deed, and by specifically identifying the property used to secure the debt. Therefore, the Tribunal finds that the Buyers’ quit claim deeds to Petitioner created a security interest (i.e., an equitable mortgage) on the Buyers’ respective parcel of property.
The statute is clear and unambiguous that written instruments that transfer property given as security and the assignmentor discharge of the security interest are exempt from SRETT[A]. MCL [207.526(d)], The statute does not require the security interest be created by way of mortgage in order to be exempt. If the Legislature would wish to limit the exemption contained in § 6 of the SRETTA to mortgages it is free to do so.
Notwithstanding the above, Petitioner’s relationship with the Buyers, as their builder and financier, further supports the conclusion that Buyers’ quit claim deeds served as an equitable mortgage. Accordingly, Petitioner’s quit claim deeds back to the Buyers are a release of said security. Therefore, Petitioner’s quit claim deeds to the Buyers are exempt from State transfer tax pursuant to MCL 207.526(d). [Final Opinion and Judgment (MTT Docket No. 359471, July 27, 2010), pp 15-17.]
On the basis of the foregoing findings of fact and conclusions of law, the Tax Tribunal issued its judgment cancelling Treasury’s assessments. Treasury appeals by right.
ii. standard of review
“Absent an allegation of fraud, this Court’s review of a tax tribunal decision is limited to determining whether the tribunal committed an error of law or applied the wrong legal principles.” AERC of Mich, LLC v Grand Rapids,
III. PERTINENT STATUTORY PROVISIONS
Treasury argues that petitioner’s quitclaim deeds back to buyers after completing construction of a home or condominium unit, and the buyers payment for the added value pursuant to the building contract, is taxable under § 3 of SRETTA, which provides, in part:
(1) There is imposed, in addition to all other taxes, a tax upon the following written instruments executed within this state when the instrument is recorded:
(a) Contracts for the sale or exchange of property or any interest in the property or any combination of sales or exchanges or any assignment or transfer of property or any interest in the property.
(b) Deeds or instruments of conveyance of property or any interest in property, for consideration.
(2) The person who is the seller or grantor of the property is liable for the tax imposed under this act. [MCL 207.523.]
Petitioner contends that the quitclaim deeds of petitioner to the buyers are exempt from taxation under § 6 of SRETTA, which provides, in pertinent part:
The following written instruments and transfers of property are exempt from the tax imposed by this act:
(d) A written instrument given as security or an assignment or discharge of the security interest. [MCL 207.526.]
IV ANALYSIS
We conclude that the Tax Tribunal committed an error of law and relied on the wrong legal principles by granting petitioner the equitable relief of construing
At the outset, we note that Treasury’s primary argument is less than compelling. Treasury argues that petitioner and EDC acted together as a single unit to sell improved property to buyers, specifically structuring the transactions in a manner to avoid paying the transfer tax on the improved value of the land. Treasury argues that other and better methods existed for petitioner to secure its interests and that the transactions at issue were structured as a tax-avoidance device. Because the quitclaim deeds were used as a tax-avoidance device, Treasury asserts, they are not exempt under MCL 207.526(d). Treasury argues that Michigan courts look to the substance of the transaction when the transaction is structured in a tax-dependant manner and is thus a tax-avoidance device. See Charles E Austin, Inc v Secretary of State,
Treasury’s argument is unpersuasive. “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” Gregory v Helvering,
But Treasury also cites a general legal principle regarding the construction
of the taxing unit’.” Ladies Literary Club v Grand Rapids,
“An intention on the part of the [Legislature to grant an exemption from the taxing power of the state will never be implied from language which will admit of any other reasonable construction. Such an intention must be expressed in clear and unmistakable terms, or must appear by necessary implication from the language used, for it is a well-settled principle that, when a special privilege or exemption is claimed under a statute, charter or act of incorporation, it is to be construed strictly against the property owner and in favor of the public. This principle applies with peculiar force to a claim of exemption from taxation. Exemptions are never presumed, the burden is on a claimant to establish clearly his right to exemption, and an alleged grant of exemption will be strictly construed and cannot be made out by inference or implication but must be beyond reasonable doubt.” [Id. at 754, quoting 2 Cooley, Taxation (4th ed), § 672, pp 1403-1404.]
Another legal principle of particular importance to the resolution of this case relates to the Tax Tribunal’s using equity to grant petitioner relief from the plain terms of MCL 207.523(l)(b). Equity may not be invoked — in the absence of fraud, accident, or mistake — to avoid the dictates of a statute. Stokes v Millen Roofing Co,
When they are recorded, MCL 207.523(l)(b) imposes a tax on “[d]eeds or instruments of conveyance of property or any interest in property, for consideration.” By these plain terms, a deed or other instrument by which any interest in property is conveyed for consideration is subject to the tax when the deed or instrument of conveyance is recorded. The phrase “any interest” is best analyzed using the familiar analogy that real property consists of various rights with each right represented as a stick. A person having all possible rights incident to ownership of a parcel of property has the entire bundle of sticks or a fee simple title to the property. Adams v Cleveland-Cliffs Iron Co,
Each of the real estate transactions at issue was preceded by EDO’s conveying
Although each buyer’s quitclaim deed to petitioner contains a statement that “[t]his transfer is made for security purposes” and that “[t]his transfer is exempt from transfer tax pursuant to MOLA 207.505(d)[
Pursuant to the construction contract between the buyer and petitioner, after petitioner completed constructing the buyer’s home or condominium unit and the buyer paid the contract price, petitioner would surrender possession of the home or condominium unit to the buyer. A closing would also occur where petitioner would “release its security and quit claim title back to the Buyer. . . .” (Emphasis added.) Although petitioner’s quitclaim deeds state that they are exempt from the county transfer tax, MCL 207.505(d), and the state transfer tax, MCL 207.526(d), they do not limit the conveyance to only a “discharge of [a] security interest.” Id. The operative words of transfer in the deeds
MCL 207.526(d), as a tax-exemption statute, must be strictly construed for the reasons discussed by Justice COOLEY in his treatise and quoted in Ladies Literary Club,
Michigan has long recognized equitable mortgages. In Abbott v Godfroy’s Heirs,
A court of equity may impose and foreclose an equitable mortgage on a parcel of real property when no valid mortgage exists but some sort of lien is required by the facts and circumstances of the parties’ relationship. Generally an equitable mortgage will be imposed if it is shown that there was an intention to place a lien on the real estate or a promise that the real estate would be used as security but for some reason the intended purpose was not accomplished. ... For example, a defective mortgage may have been executed.
Additionally, an equitable mortgage may arise in other circumstances, for example, where a deed purports to convey a fee simple estate, but the parties intended only a mortgage. Id., § 18.6, pp 683-684; see also Burkhardt,
Further, “[ejquity will create a lien only in those cases where the party entitled thereto has been prevented by fraud, accident, or mistake from securing that to which he was equitably entitled.” Cheff v Haan,
In the present case, there is no basis in equity to reform the parties’ quitclaim deeds. There was no fraud, accident, or mistake that prevented the parties to the real estate transactions at issue from crafting instruments that solely created or discharged a security interest so as to come within the exemption of MCL 207.526(d). As noted already, petitioner’s mistaken belief that the quitclaim deeds were not taxable provided no basis to invoke equitable relief. Burkhardt,
In conclusion, whether petitioner and EDC are separate entities, whether the parties intended to create security interests, whether there are legitimate business reasons to structure the transactions the way they were, and whether petitioner believed the transactions were tax exempt, we conclude that petitioner’s quitclaim deeds were still taxable because they conveyed “any interest” in property for consideration, MCL 207.523(l)(b), beyond just a “discharge of [a] security interest.” MCL 207.526(d). Thus, the value added to the lot or condominium unit by petitioner’s construction of a home on a lot or a condo within the unit is taxable. MCL 207.523(l)(b); MCL 207.532. The Tax Tribunal erred as a matter of law by granting petitioner equitable relief and cancelling Treasury’s assessments.
We reverse.
Notes
MCL 207.505(d) provides an exemption with language nearly identical to MCL 207.526(d) applicable to the tax imposed under the county real estate transfer tax act, MCL 207.501 et seq.
The quitclaim deeds clearly provide strong security because in the event of a buyer’s default, petitioner would not need to foreclose a mortgage or a construction lien since the buyer would already have transferred all of his or her property rights in the lot or condominium unit to petitioner.