The opinion of the court was delivered by: Judge Simpson
BEFORE: HONORABLE ROBERT SIMPSON, Judge, HONORABLE ROCHELLE S. FRIEDMAN, Senior Judge, HONORABLE JIM FLAHERTY, Senior Judge.
Michael A. and Sally R. Kosco, husband and wife (Taxpayers), petition for review of a final order of the Board of Finance and Revenue (Board) holding Taxpayers' transfer of real property to themselves as trustees of a family land trust did not qualify for a trust exemption from realty transfer taxes under the relevant provisions of the Tax Reform Code of 1971 known as the Realty Transfer Tax Act (Act).*fn1 Taxpayers assert the Board erred in holding the trust is a non-exempt business trust rather than an ordinary trust because it exhibits none of the features of a business trust delineated in the Act. Discerning no error in the Board's determination, we affirm.
Taxpayers built a retirement home on their property in Westmoreland County near the Seven Springs resort area. Their home is designed to accommodate visits from their four adult children and their families. In February, 2006, Taxpayers executed an irrevocable trust agreement titled the Kosco Family Land Trust (Trust). Taxpayers are the trustees and beneficiaries. Taxpayers' four children are secondary beneficiaries. In May, 2006, Taxpayers transferred their realty by deed to the Trust for "-0-" total consideration. The property's computed fair market value was $312,222.40. Taxpayers initially did not pay any realty transfer taxes; they claimed a full exemption for a transfer to an ordinary trust.*fn2
Thereafter, the Department of Revenue (Department) issued a notice of determination assessing the following taxes: $3,122.22 for the Pennsylvania realty transfer tax, $1,561.11 for a municipality tax and $1,561.11 for the school district taxes, plus interest. The determination also disallowed Taxpayers' claimed exemption because the Trust did not qualify as an ordinary or living trust. Taxpayers appealed the assessment to the Department's Board of Appeals. They argued an intra-family exemption under Sections 1102-C.3(8) and (6) of the Act*fn3 applied because all possible Trust beneficiaries are Taxpayers or their children, and the Trust is an ordinary trust, not a business trust.*fn4 The Board of Appeals found the Trust, as a land trust, had the business characteristics described in the Act's definition of an ordinary trust, and it sustained the assessment. Taxpayers paid the taxes. Thereafter, Taxpayers appealed to the Board, which likewise sustained the assessment. In its decision, the Board concluded the irrevocable [Trust] is a business trust. Article Second Paragraph A of the [Trust] states any beneficiary shall have the power of direction to deal with the title to the property, to "manage and control" the property, and to receive the proceeds from the rental or sale of the property. Paragraph A further states such rights "shall be deemed to be personal property, and may be assigned and transferred as such."
Bd. Order at 7. Taxpayers appeal.*fn5
Taxpayers advance the same arguments here. They contend the conveyance to the Trust qualifies for an intra-family transfer exemption under Sections 1102-C.3(8) and (6) because transfer of the same property would be exempt if made from Taxpayers to all possible beneficiaries entitled to receive property or proceeds from the sale of property under the Trust. Taxpayers also contend the transfer fits within the exemption in Section 1102-C.3(8) because the Trust is an ordinary trust, not a business trust.
II. Intra-Family Transfer
Taxpayers first contend the conveyance to the Trust falls within the exemptions in Sections 1102-C.3(8) and (6) of the Act because all beneficiaries, named or contingent, fall within the intra-family language of Section 1102-C.3(6). See also Department regulations at 61 Pa. Code §§91.193(b)(6)(i)(A)-(F) (transfers between certain family members exempt). Upon Taxpayers' death, the interest in the land, which is the corpus of the Trust, transfers to Taxpayers' four children as secondary beneficiaries. See Trust, Articles THIRD (Secondary Beneficiaries) and FOURTH (Dispositive Provisions). Stipulation of Facts (S.F.), Ex. A at 2. Pursuant to Section 1102-C.3(6) of the Act, "intra-family transfers, without regard to whether consideration is given, are exempt from the realty transfer tax." Leigh v. Commonwealth, 648 A.2d 1346, 1348 (Pa. Cmwlth. 1994) citing Holmes v. Commonwealth, 618 A.2d 1160 (Pa. Cmwlth. 1992) (if all possible beneficiaries are in an exempt category such as intra-family, then no realty tax is due).
In further support of their position, Taxpayers cite Baehr Brothers v. Commonwealth, 487 Pa. 233, 409 A.2d 326 (1979) (only the interest passing to persons other than the actual grantors is subject to realty transfer tax). Here, Taxpayers essentially transferred the property to themselves; no interest in the property passed to persons other than the grantors.
The Commonwealth counters that because the Trust is a business trust, not an ordinary trust, it cannot qualify for a trust exemption under Section 1102-C.3(8). Thus, it is not necessary to determine whether all possible beneficiaries fall within the intra-family transfer exemption in Section 1102-C.3(6). The Commonwealth also urges Section 1102-C.3(6) is inapplicable here because the Trust provides for the possibility of a beneficiary that falls outside the intra-family transfer exemption.
We agree with the Commonwealth that the intra-family exemption in Section 1102-C.3(6) only applies to transfers to a trust if that trust qualifies for an exemption as an ordinary trust under Section 1102-C.3(8) or as a living trust under Section 1102-C.3(8.1).*fn6 As discussed below, the Board properly determined the Trust has sufficient business characteristics to defeat Taxpayers' claim that it is an ordinary trust. Taxpayers acknowledge the Trust is not a living trust. Consequently, the intra-family transfer exemption in Section 1102-C.3(6) is inapplicable here.
The paramount issue in this appeal is whether the Trust qualifies as an "ordinary trust" under the Act. As noted above, the Act defines an ordinary trust as "[a]ny trust, other than a business trust or a living trust, which takes effect during the lifetime of the settlor and for which the trustees of the trust take title to the property primarily for the purpose of protecting, managing or conserving it until distribution to the named beneficiaries of the trust." 72 P.S. §8101-C (emphasis added). This definition further specifies, [a]n ordinary trust does not include a trust that has an objective to carry on business and divide gains, nor does it expressly or impliedly have any of the following features: the treatment of beneficiaries as associates, the treatment ...