New Hampshire Resident Ltd. Partners v. New Hampshire Department of Revenue AdministrationNew Hampshire Resident Ltd. Partners v. New Hampshire Department of Revenue Administration
The respondent, New Hampshire Department of Revenue Administration (DRA), appeals a decision of the Superior Court
(Vaughan,
J.) ruling that distributions which The Lyme Timber Company (Lyme) made to the petitioners, certain of its limited partners who reside in New
Hampshire, are not taxable income to the individual petitioners because their beneficial interests in Lyme are not “transferable shares” within the meaning of RSA chapter 77.
See
The following undisputed facts are drawn from the trial court’s order and the summary judgment record. Lyme is a limited partnership that owns, develops, and manages commercial real estate and timberland. Lyme’s partnership agreement, in effect during the relevant times, provided in part:
11. Assignment of Partnership Units. A Limited Partner may sell or assign his Partnership Units but only on the following terms and conditions:
(a) The Limited Partner shall furnish the Partnership with an opinion of counsel satisfactory to the General Partner that the sale or assignment is in compliance with applicable securities laws and regulations.
(b) The purchaser or assignee shall consent in writing, in form satisfactory to the General Partner, to be bound by the terms of this Agreement in the place and stead of the Limited Partner.
(c) Such assignment is to another Partner or a member of the Limited Partner’s family or (1) pursuant to a bona fide written offer, (2) the Limited Partner has given the Partnership 60 days to match the offer and (3) thе Partnership has not done so.
In 2005, the DRA’s audit division reviewed Lyme’s distributions to the petitioners and issued notices of assessments to the petitioners for taxes and interest due for the tax years 2002, 2003 and 2004. Although Lyme itself had paid the interest and dividends taxes for these years, the audit division determined that the individual petitioners were responsible for the taxes because their beneficial interests in Lyme were represented by “transferable shares.”
See
The petitioners appealed the DRA’s decision to the superior court.
See
In reviewing the trial court’s summary judgment rulings, we consider the affidavits and other evidence, and all inferences properly drawn from them, in the light most favorable to the non-moving party.
See N. Sec. Ins. Co. v. Connors,
Resolution of this appeal requires us to construe statutes and regulations;
1
we apply the same principles of construction in interpreting both.
Vector Mktg. Corp. v. N.H. Dep’t of Revenue Admin.,
An administrative regulation adopted by an agency pursuant to a statute is
“prima facie
evidence of the proper interpretation of the . . . statute.”
Cagan’s Inc, v. Dep’t of Rev. Admin.,
Under
I. Taxable income is that income received from interest and dividends during the tax year prior to the assessment date by:
(a) Individuals who are inhabitants or residents of this state for any part of the taxablе year whose gross interest and dividend income from all sources exceeds $2,400 during that taxable period.
(b) Partnerships, ... the beneficial interest in which is not represented by transferable shares, whose gross interest and dividend income from all sources exceeds $2,400 during the taxable year ....
(Emphasis added.);
see
Therefore, pursuant to the statutory scheme, a partnership entity is subject to taxation under RSA chapter 77 for income received from interest and dividends when the beneficial interest in the partnership is not represented by transferable shares. But if the beneficial interest in the partnership is represented by transferable shares, the individual limited partners are subject to taxation on such income.
The term “transferable” is not defined by statute. However, during the years at issue, the following DRA regulations were in effect. Rule 901.02 provided, in relevant part: “ ‘Beneficial interest in which is
The superior court found that these regulations contained several ambiguities. First, it determined that use of the term “transferable” under Rule 901.02, and the phrase “freely transferable” under Rule 901.03, created ambiguity in the regulations. It concluded, “[A] reasonable meaning of ‘freely transferable’ is that the limited partner must be able, without any restriction, to dispose [o]f his or her rights and interests by any means of his or her choosing without first obtaining approval. Under this interpretation, the units at issue in this case are not ‘freely transferable’ because transfers are subject to the restrictions and conditions set forth in paragraph 11 of the Partnership Agreement.”
Second, the court ruled that thе definition of “transferable” under Rule 901.17 was ambiguous in that the phrase “by any means” and the term “approval” were subject to multiple reasonable interpretations. It determined that “by any means” could mean that for the shares to be “transferable,” the limited partner must be able to dispose of the shares, without approval, by at least one single means or by all possible means of disposal that might be chosen by the limited partner. It concluded that the latter mеaning favored the petitioners: “Under the Partnership Agreement, a limited partner cannot dispose of his or her interest by any means of his or her choosing because the partnership may instead choose to exercise its option to buy the units. Lyme Timber ean, in effect, veto a limited partner’s choice of transferee.”
Regarding the term “approval,” the trial court remarked that the term was not defined by the regulations, “making it difficult to plainly distinguish under the rules approval from right of first refusal” as well as to determine “whether the partnership agreement or the practice of the partnership guides whether ‘approval’ is required.” It concluded that because “[a]pproval could reasonably refer to whether the limited partnership can block the transfer the limited partner desires to make (by, for example, buying the shares)!,]... paragraph 11 of the Pаrtnership Agreement establishes an approval requirement.” The trial court determined that even considering DRA’s understanding of its own regulations, “the rules are
On appeal, DRA argues that the trial court misinterpreted and misapplied the regulations, failed to consider the legislative history of RSA chapter 77 as well as pertinent federal law, afforded no deference to DRA’s intеrpretations of its own rules, and failed to consider germane portions of Lyme’s partnership agreement. It contends that under Rules 901.02 and 901.17, “an interest is still transferable even if there is some constraint on transferring it, so long as prior member approval of the transfer is not required (and as long as the organization will not dissolve).” According to DRA, the right of first refusal clause under paragraph 11(c) in the partnership agreement requires a limited partner only to provide prior nоtice of, not to gain approval for, the anticipated transfer of units, and “the asserted conditions in the Partnership Agreement [on the transfer of units] do not rise to the level of making the units non-transferable.”
Initially, we note that by its plain terms Rule 901.03 does not apply to this case because that rule covers only entities
other
than partnerships,
i.e.,
various types of trusts and homeowners or condominium associations.
See
N.H. Admin. Rules, Rev 901.03(a). Indeed, the parties do not contend that this rule applies to a limited partnership such as Lyme, but rely upon it for guidance as to the intended meaning of transferable shares under Rule 901.17 and Rule 901.02. However, the trial court appears to have been under the impression that both Rules 901.02 and 901.03 applied to Lyme, and it based its finding of ambiguity in the regulations at least in part on the fact that Rule 901.02 uses the term “transferable” whereas Rule 901.03 uses the term “freely transferable.” Because Rules 901.02 and 901.17 аre the operative rules governing whether the Lyme partnership interests are transferable, and Rule 901.03 had no application to such interests, we fail to see how the use of a different term in Rule 901.03 renders the applicable
rules ambiguous. Indeed, as DRA points out, the only logical reason for the use of different terms,
ie.,
“transferable” versus “freely transferable,” is to suggest some difference in the
degree
of transferability required between the beneficial interests in those entities covered by each rule, and this dichotomy weighs in favor of the construction of Rules 901.02 and 901.17 advocated by DRA. Thus, while beneficial interests in certain trusts and homeowners and condominium associations must be “freely transferable” for interest and dividend distributions to be taxable to the individual interest-holders, beneficial interests in entities covered by Rule 901.02, including Lyme, need only meet the lower standard of “transferable” (without complеte freedom from constraints) for the interest and dividends income to be taxable to the individual interest-holders rather than the entity.
Cf. Winnacunnet Coop. Sch. Dist. v. Town of Seabrook,
We next address the trial court’s finding that Rule 901.17, which defines “transferable,” is ambiguous in two respects. First, we agree with the trial court that the phrase “by any means” in this rule is ambiguous. As the trial court correctly observed, this phrase could be interpreted to mean either that an interest-holder has
The trial court found that the term “approval” was ambiguous, and that it reasonably could be construed to encompass the right of first refusal granted to the partnership by paragraph 11(c) of the partnership agreement when a limited partner desires to sell his or her partnership interest(s) to someone other than another limited partner or а member of the limited partner’s family. The trial court reasoned that the right of first refusal constituted a form of “approval” because, by exercising the right, Lyme had the ability to exercise some degree of control over who would become a member of the partnership. This was error.
The common meaning of “approve” includes “to judge and find commendable or acceptable,” to “have or express a favorable opinion,” to “judge favorably”; and “approval” ordinarily includes “the act of approving.” Webster’s Third New International Dictionary,
supra
at 106. Nowhere in paragraph 11 of the partnership agreement do the words “approve,” “approval,” or any similar terms appear. Instead, paragraph 11(c) merely gives Lyme the option, in the case of a proposed transfer to a non-family member of the transferor and to a non-partner, to purchase the partnership interest on the same terms as that transferee has offered. While the ability to exercise this right of first refusal may in some circumstances allow Lyme to block a transfer of partnership shares to a person the partnership finds undesirable, this is not the equivalent of an “approval” as contemplated by the DRA regulations because it does not represent a significant restraint оn the ability to alienate partnership interests.
See Larson v. Commissioner,
Ready transferability of ownership interests has long been regarded as an important consideration in determining the tax status of collective entities.
See generally Morrissey v. Commissioner.,
The clear purpose of the regulatory scheme established by the legislature under
Finally, the petitioners complain that although the DRA regulations have been in effect since 1988, prior to the audit in this case DRA had nеver sought to collect interest and dividends taxes from individual limited partners rather than from a partnership as an entity. But Lyme does not claim that DRA ever took any affirmative steps that might be viewed as a representation that a limited partnership’s treatment of interest and dividends income as taxable to the partnership was proper, and it is well established that no estoppel arises against a governmental agency merely bеcause of its failure to take enforcement action at an earlier time.
See Town of Windham v. Alfond,
Reversed and remanded.
Notes
As noted by the trial court, various parts of RSA chaptеr 77 have been amended at different times, and changes to DRA rules have also taken effect. The parties agree about which version of the statutes and regulations apply, and this opinion refers to that law as it existed at the times relevant to this litigation.
Former Rule 901.17 became effective on August 10, 2004 and was the operative rule for the 2004 tax year. For the two prior tax years, 2002 and 2003, the operative rule was exactly the same but was designated as Rule 901.18. Currently, former Rule 901.17 again has been designated as 901.18 which includes some changes from former Rule 901.17.
In
North Bay Council, Inc. v. Grinnell,