2010-399 New Hampshire Resident Limited Partners of the Lyme Timber Company v. New Hampshire Department of Revenue Administration

McLane, Graf, Raulerson & Middleton, P.A.

No. 2010-399

Grafton

Michael A. Delaney

Administration (DRA), appeals a decision of the Superior Court (Vaughan LYNN, J. The respondent, New Hampshire Department of Revenue ___________________________

interests in Lyme are not “transferable shares” within the meaning of RSA not taxable income to the individual petitioners because their beneficial petitioners, certain of its limited partners who reside in New Hampshire, are ruling that distributions which The Lyme Timber Company (Lyme) made to the

attorney general, on the brief and orally), for the respondent.

petitioners. THE SUPREME COURT OF NEW HAMPSHIRE Glahn, III and Steven J. Dutton on the brief, and Mr. Glahn orally), for the

page is: http://www.courts.state.nh.us/supreme. a.m. on the morning of their release. The direct address of the court's home reporter@courts.state.nh.us. Opinions are available on the Internet by 9:00 to press. Errors may be reported by E-mail at the following address: editorial errors in order that corrections may be made before the opinion goes Hampshire, One Charles Doe Drive, Concord, New Hampshire 03301, of any Readers are requested to notify the Reporter, Supreme Court of New well as formal revision before publication in the New Hampshire Reports. NOTICE: This opinion is subject to motions for rehearing under Rule 22 as by “transferable shares.” See p. 2 for the taxes because their beneficial interests in Lyme were represented audit division determined that the individual petitioners were responsible Lyme itself had paid the interest and dividends taxes for these years, the taxes and interest due for the tax years 2002, 2003 and 2004. Although the petitioners and issued notices of assessments to the petitioners for In 2005, the DRA’s audit division reviewed Lyme’s distributions to

the offer and (3) the Partnership has not done so. (2) the Limited Partner has given the Partnership 60 days to match Limited Partner’s family or (1) pursuant to a bona fide written offer,

(c) Such assignment is to another Partner or a member of the

The petitioners appealed the DRA’s decision to the superior court. See

this Agreement in the place and stead of the Limited Partner. satisfactory to the General Partner, to be bound by the terms of (b) The purchaser or assignee shall consent in writing, in form

ambiguities, that the regulations could be reasonably interpreted in a manner “transferable shares” under RSA 77:3 and :4, III contained a number of court ruled that the relevant DRA regulations relating to the meaning of 11. Assignment of Partnership Units motion and denied DRA’s motion, thereby reversing the decision of DRA. The cross-motions for summary judgment, the trial court granted the petitioners’ RSA 21-J:28-b, IV (superior court “shall hear the appeal de novo”). Ruling on regulations.

(Supp. 2010). upheld the audit division’s assessments. See generally RSA 21-J:28-b redetermination by DRA and, after a hearing, a DRA hearings officer

partnership agreement, in effect during the relevant times, provided in part: develops, and manages commercial real estate and timberland. Lyme’s the summary judgment record. Lyme is a limited partnership that owns, The following undisputed facts are drawn from the trial court’s order and or assignment is in compliance with applicable securities laws and opinion of counsel satisfactory to the General Partner that the sale (a) The Limited Partner shall furnish the Partnership with an

conditions: or assign his Partnership Units but only on the following terms and

(200 p. 3 3) (amended 2009, 2010). We reverse and remand. chapter 77. See RSA 77:3 (2003) (amended 2004, 2009, 2010); RSA 77:4, III 3

regulations apply, and this opinion refers to that law as it existed at the times relevant to this litigation. changes to DRA rules have also taken effect. The parties agree about which version of the statutes and is “prima An administrative regulation adopted by an agency pursuant to a statute As noted by the trial court, various parts of RSA chapter 77 have been amended at different times, and 1 taxpayer. See Cagan’s, Inc., 126 N.H. at 248-49; see also Pheasant Lane Realty is ambiguous, we construe it against the government and in favor of the 78 p. 3 3 (citation, brackets and quotation omitted). If a taxing statute or regulation purpose which the regulation is intended to serve.” Vector Mktg., 156 N.H. at determine if it is consistent with the language of the regulation and with the is not total, because we still must examine the agency’s interpretation to Vector Mktg. Corp. v. N.H. Dep’t of Revenue Admin. accord deference to an agency’s interpretation of its regulations, “our deference regulations; we apply the same principles of construction in interpreting both. 1 Cagan’s Inc. v. Dep’t of Rev. Admin., 126 N.H. 239, 248 (1985). And while we

facie evidence of the proper interpretation of the . . . statute.”

Place Real Estate Inv. Trust, 159 N.H. 5 p. 3 39, 542 (2009). add words which the lawmakers did not see fit to include. Appeal of Garrison 488 (2007). Courts can neither ignore the plain language of the legislation nor Residents Defending Their Homes v. Lone Pine Hunter’s Club, 155 N.H. 486, the overall legislative purpose and to avoid an absurd or unjust result. See Vector Mktg., 156 N.H. at 783 (interpreting regulations). We seek to effectuate in isolation. Appeal of Union Tel. Co., 160 N.H. at 317 (interpreting statutes); Resolution of this appeal requires us to construe statutes and regulation in the context of the overall statutory or regulatory scheme and not 140, 142 (1998). Additionally, we interpret disputed language of a statute or 21:1, :2 (2000); see Pheasant Lane Realty Trust v. City of Nashua, 143 N.H. unless from the statute it appears that a different meaning was intended. RSA construed according to “the common and approved usage of the language” (2010); Vector Mktg., 156 N.H. at 783. Words and phrases in a statute are meanings to words used. See Appeal of Union Tel. Co., 160 N.H. 309, 317 language used, and, where possible, we ascribe the plain and ordinary light most favorable to the non-moving party. See When construing statutes and administrative regulations, we first examine the affidavits and other evidence, and all inferences properly drawn from them, in the In reviewing the trial court’s summary judgment rulings, we consider the, 156 N.H. 781, 783 (2008).

court’s application of the law to the facts de novo. Id. of summary judgment. N. Sec. Ins. Co., 161 N.H. at __. We review the trial moving party is entitled to judgment as a matter of law, we will affirm the grant review of that evidence discloses no genuine issue of material fact, and if the 161 N.H. __, __ (decided March p. 3 31, 2011); see also RSA 491:8-a (2010). If our

favor of the petitioners as the taxpayers. This appeal followed. that favored the petitioners, and that the ambiguities had to be resolved in p. 4 (b) Partnerships, . . . the beneficial interest in which is not

income from all sources exceeds $2,400 during that taxable period.

any part of the taxable year whose gross interest and dividend (a) Individuals who are inhabitants or residents of this state for

provided, in relevant part: “‘Beneficial interest in which is not years at issue, the following DRA regulations were in effect. Rule 901.02 dividends during the tax year prior to the assessment date by: I. Taxable income is that income received from interest and The term “transferable” is not defined by statute. However, during the

dividends when the beneficial interest in the partnership is not subject to taxation under RSA chapter 77 for income received from interest and Therefore, pursuant to the statutory scheme, a partnership entity is

(Emphasis added.); see

dissolution of the organization.” N.H. Admin. Rules, Rev 901.02 (amended are not transferable without obtaining prior member approval or causing a organization . . . [w]here the shares, equity interests and all ownership rights transferable shares,’ as used in RSA 77:3, I(b), means an interest in an

taxable year . . . . received from interest and dividends. It provides in part: to taxation on such income. transferable shares.” RSA 77:3 specifies who is subject to taxation for income represented by transferable shares, the individual limited partners are subject in partnerships . . . the beneficial interest in which is represented by transferable shares. But if the beneficial interest in the partnership is Under RSA 77:4, III, taxable income includes “[d]ividends . . . on shares represented by

77:14-a to :14-d (Supp. 2010).

dividend income from all sources exceeds $2,400 during the represented by transferable shares, whose gross interest and

appeal. framework in mind, we turn to the statutes and regulations relevant to this 156 N.H. 732, 735 (2008) (interpreting administrative rule). With this of Gamas, 158 N.H. 646, 648 (2009) (interpreting statute); Appeal of Murdock, interpretation of both statutes and administrative rules is de novo, see Appeal as a whole, Appeal of Union Tel. Co., 160 N.H. at 317, and our review of the the intent of the legislature as expressed in the words of a statute considered by implication.” (citations and quotation omitted)). We are the final arbiter of right to tax must be found within the letter of the law and is not to be extended Trust, 143 N.H. at 143 (“Because the power to tax arises solely by statute, the least one p. 5 limited partner must be able to dispose of the shares, without approval, by at that “by any means” could mean that for the shares to be “transferable,” the “approval” were subject to multiple reasonable interpretations. It determined 901.17 was ambiguous in that the phrase “by any means” and the term Second, the court ruled that the definition of “transferable” under Rule

reasonably refer to whether the limited partnership can block the transfer the whether ‘approval’ is required.” It concluded that because “[a]pproval could “whether the partnership agreement or the practice of the partnership guides under the rules approval from right of first refusal” as well as to determine 5 was not defined by the regulations, “making it difficult to plainly distinguish Regarding the term “approval,” the trial court remarked that the term changes from former Rule 901.17. Rule 901.18. Currently, former Rule 901.17 again has been designated as 901.18 which includes some For the two prior tax years, 2002 and 2003, the operative rule was exactly the same but was designated as Agreement.” Former Rule 901.17 became effective on August 10, 2004 and was the operative rule for the 2004 tax year. to the restrictions and conditions set forth in paragraph 11 of the Partnership 2 at issue in this case are not ‘freely transferable’ because transfers are subject choosing without first obtaining approval. Under this interpretation, the units to dispose [o]f his or her rights and interests by any means of his or her transferable’ is that the p. 5 limited partner must be able, without any restriction, ambiguity in the regulations. It concluded, “[A] reasonable meaning of ‘freely 901.02, and the phrase “freely transferable” under Rule 901.03, created ambiguities. First, it determined that use of the term “transferable” under Rule

Timber can, in effect, veto a limited partner’s choice of transferee.” partnership may instead choose to exercise its option to buy the units. Lyme dispose of his or her interest by any means of his or her choosing because the petitioners: “Under the Partnership Agreement, a limited partner cannot chosen by the limited partner. It concluded that the latter meaning favored the

single means or by all possible means of disposal that might be

The superior court found that these regulations contained several

itself.” Id. 901.18 (amended 2010) (emphasis added). 2 the disposition by another member, and without dissolution of the organization any means, all rights incidental to his interest without a required approval of ability of a shareholder or interest holder in an organization to dispose of, by defined “transferable,” as used in RSA 77:3, I(b) and RSA 77:4, III, to mean “the Id. 901.03 (amended 2010) (emphasis added). Finally, former Rule 901.17 of securing prior member approval or causing dissolution of the organization.” interests and all ownership rights are freely transferable without the necessity III, means an interest in an organization . . . [w]here the shares, equity interest in which is represented by transferable shares,’ as used in RSA 77:4, 2010) (emphasis added). Rule 901.03 provided, in relevant part: “‘Beneficial p. 6 6

constraints) for the interest and dividends income to be taxable to the the lower standard of “transferable” (without complete freedom from this case because that rule covers only entities other interests in entities covered by Rule 901.02, including Lyme, need only meet Initially, we note that by its plain terms Rule 901.03 does not apply to distributions to be taxable to the individual interest-holders, beneficial associations must be “freely transferable” for interest and dividend beneficial interests in certain trusts and homeowners and condominium construction of Rules 901.02 and 901.17 advocated by DRA. Thus, while entities covered by each rule, and this dichotomy weighs in favor of the degree of transferability required between the beneficial interests in those “transferable” versus “freely transferable,” is to suggest some difference in the as DRA points out, the only logical reason for the use of different terms, i.e. transferring it, so long as prior, different term in Rule 901.03 renders the applicable rules ambiguous. Indeed, 901.17, “an interest is still transferable even if there is some constraint on 901.03 had no application to such interests, we fail to see how the use of a Lyme’s partnership agreement. It contends that under Rules 901.02 and governing whether the Lyme partnership interests are transferable, and Rule interpretations of its own rules, and failed to consider germane portions of transferable.” Because Rules 901.02 and 901.17 are the operative rules chapter 77 as well as pertinent federal law, afforded no deference to DRA’s 901.02 uses the term “transferable” whereas Rule 901.03 uses the term “freely misapplied the regulations, failed to consider the legislative history of RSA its finding of ambiguity in the regulations at least in part on the fact that Rule On appeal, DRA argues that the trial court misinterpreted and impression that both Rules 901.02 and 901.03 applied to Lyme, and it based and Rule 901.02. However, the trial court appears to have been under the guidance as to the intended meaning of transferable shares under Rule 901.17 rule applies to a limited partnership such as Lyme, but rely upon it for N.H. Admin. Rules, Rev 901.03(a). Indeed, the parties do not contend that this various types of trusts and homeowners or condominium associations. See

making the units non-transferable.” Partnership Agreement [on the transfer of units] do not rise to the level of for, the anticipated transfer of units, and “the asserted conditions in the requires a limited partner only to provide prior notice of, not to gain approval of first refusal clause under paragraph 11(c) in the partnership agreement (and as long as the organization will not dissolve).” According to DRA, the right

ambiguities must be construed in the petitioners[’] favor.” understanding of its own regulations, “the rules are ambiguous,” and “[t]he requirement.” The trial court determined that even considering DRA’s paragraph 11 of the Partnership Agreement establishes an approval limited partner desires to make (by, for example, buying the shares)[,] . . . favorably”; and “approval” ordinarily includes “the act of approving.” Webster’s p. 7 commendable or acceptable,” to “have or express a favorable opinion,” to “judge

The common meaning of “approve” includes “to judge and find

This was error. some degree of control over who would become a member of the partnership. 7 “approval” because, by exercising the right, Lyme had the ability to exercise The trial court reasoned that the right of first refusal constituted a form of other than another limited partner or a member of the limited partner’s family. limited partner desires to sell his or her partnership interest(s) to someone the partnership agreement do the words “approve,” “approval,” or any similar Third New International Dictionary to the partnership by paragraph 11(c) of the partnership agreement when a, supra at 106. Nowhere in paragraph 11 of it reasonably could be construed to encompass the right of first refusal granted The trial court found that the term “approval” was ambiguous, and that

can be construed to afford coverage); cf interpretation of insurance policy language must favor insured before policy

neither possible construction supports challenging party’s position). N.H. 539, 547 (2006) (ambiguity in regulation need not be resolved where

156, 159 (2001) (even where language is ambiguous, one reasonable at least one an “approval.” See an interest-holder has to be able to dispose of his shares without approval by EnergyNorth Natural Gas v. Continental Ins. Co., 146 N.H. the right of first refusal in the partnership agreement is not the equivalent of court correctly observed, this phrase could be interpreted to mean either that Lyme requires the “approval” of another member of the partnership because court that the phrase “by any means” in this rule is ambiguous. As the trial that there are no circumstances under which the disposal of an interest in “transferable,” is ambiguous in two respects. First, we agree with the trial Whichever construction is placed on the phrase “by any means,” we conclude We next address the trial court’s finding that Rule 901.17, which defines taxpayer, leads to the conclusion that the Lyme interests are not transferable. court that this ambiguity, which all concede must be construed in favor of the indiscriminately of whatever quantity”). However, we disagree with the trial (unabridged ed. 2002) (meaning of “any” includes “one, some, or all deemed “transferable.” See Webster’s Third New International Dictionary 97

single means or by all possible means in order for the interest to be

regulations ambiguous in a manner that favors the petitioners. court that the different terminology in Rules 901.02 and 901.03 renders the superfluous or redundant words.”). Simply put, we disagree with the trial presume that the legislature [or administrative agency] did not enact statute [or regulation], we must give effect to all words in a statute and Dist. v. Town of Seabrook, 14 p. 8 8 N.H. 519, 525-26 (2002) (“When construing a individual interest-holders rather than the entity. Cf. Winnacunnet Coop. Sch. 8

assigns a right of first refusal of unlimited duration to repurchase the subject property from the grantee the rule against perpetuities would invalidate a deed provision which gave the grantor and his heirs or In North Bay Council, Inc. v. Grinnell, 123 N.H. 321, 324 (19 p. 8 83), we stated that a “stric t application” of 3 apply to right of first refusal). But see Ferrero Constr. Co., Inc. v. Dennis 3 Property (Servitudes) § 3.3, at 425 (2000) (rule against perpetuities ought not marketability or discourage improvement of the land); Restatement (Third) of Florida’s rule against perpetuities because it did not undermine the either accept offer or sell to third party at a higher price, did not violate event defendant desired to sell real property, but which allowed defendant to App. 2010) (agreement under which plaintiff had right to make first offer in the Enterprises, Inc. v. Zion Jacksonville, Ltd., 52 So. 3d 55, 58-59 (Fla. Dist. Ct. unlawful restraint on alienation of real property); Smurfit-Stone Container merely the right “to meet the offer of an open market purchaser” is not an Property § 413 (1944) that right of first refusal which gives holder thereof transferability of interests.” Larson Shiver v. Benton, 304 S.E.2d 903, 905 (Ga. 1983) (quoting Restatement of purchase certain valuable paintings on same terms offered by third party); agreement under which art collector gave dealer right of first refusal to rule against restraints on alienation of property did not invalidate commercial 35 (N.Y. 1992) (New York statutory rule against perpetuities and common law alienation of property”); Wildenstein & Co., Inc. v. Wallis, 595 N.E.2d 828, 834bona fide offer made by third party “works a de minimis restraint on the 882, 890 (Mass. 2007) (right of first refusal giving holder right to match any important consideration in determining the tax status of collective entities. See impediment to the transfer of property. See Bortolotti v. Hayden, 866 N.E.2d match a third party’s offer to purchase does not constitute a significant Ready transferability of ownership interests has long been regarded as an the weight of modern authority, which holds that a right of first refusal to

partnerships] therefore possessed the corporate characteristic of free shares than that typically associated with partnership interests. The [limited “[t]he right of assignment more closely resemble[d] that attending corporate of a limited partner’s interests in the partnerships there at issue, held that refusal at fair market value constituted a modicum of restriction on alienability example, the United States Tax Court, while recognizing that even a right of generally Morrissey v. Commissioner., 296 U.S. 344, 359 (1935). In Larson, for

See Larson v. Commissioner, 66 T.C. 159, 1 p. 8 82-83 (1976). represent a significant restraint on the ability to alienate partnership interests. of an “approval” as contemplated by the DRA regulations because it does not shares to a person the partnership finds undesirable, this is not the equivalent may in some circumstances allow Lyme to block a transfer of partnership transferee has offered. While the ability to exercise this right of first refusal non-partner, to purchase the partnership interest on the same terms as that case of a proposed transfer to a non-family member of the transferor and to a terms appear. Instead, paragraph 11(c) merely gives Lyme the option, in the enforcement action at an earlier time. See p. 9 offer of a third party purchaser. For the reasons already stated, such ipse a transfer is subject to the right of first refusal, to match the bona fide written the partnership agreement gives Woodland no choice but to approve, or, where of granting “approval” to each and every transfer, the important point is that argument is that while Woodland may indeed have gone through the formality partner], acting for Lyme and the Limited Partners.” The short answer to this to the approval of Woodland [Management Associates, Inc., the general that, during its thirty-years existence, “every transfer of Units has been subject The petitioners seek to avoid application of the above analysis by arguing

the partnership was proper, and it is well established that no estoppel arises limited partnership’s treatment of interest and dividends income as taxable to impediment to the alienability of property. took any affirmative steps that might be viewed as a representation that a whether such a right, as properly limited in accordance with our precedents, would constitute a significant than from a partnership as an entity. But Lyme does not claim that DRA ever negligently failing to exercise his right upon the first sale of the property, we had no occasion to consider to collect interest and dividends taxes from individual limited partners rather importantly, because in that case the holder of the right of first refusal had been guilty of laches in been in effect since 1988, prior to the audit in this case DRA had never sought been more concerned with carrying out the intent of the testator or grantor in any given case.” Id. More Finally, the petitioners complain that although the DRA regulations have that case that the rule had never been “remorseless ly applied” in this state, but that, “[i]nstead, we have and its successors by matching the highest bona fide offer made by a third party. However, we noted in

whatever price the market will bear. Town of Windham v. Alfond, 129 itself, the interest holder is able to readily liquidate his or her holdings for interest: whether the purchaser of his or her interest is an outsider or Lyme significantly affect the marketability or value of a limited partner’s economic consideration offered by the outsider, the right of first refusal does not outsider, Lyme must be prepared to pay the disposing interest-holder the same opposed to collective economic value. Because, in order to block transfer to an organization itself) on the extent to which their interests represent individual as taxation of individual holders of a beneficial interest (rather than the entity or under RSA 77:3 and :4, III, and the implementing regulations, is to hinge The clear purpose of the regulatory scheme established by the legislature non-transferable within the meaning of Rules 901.02 and 901.17. “approvals” do not satisfy the requirements necessary to make the Lyme units

from making offers, which in turn could depress the value). rule against perpetuities because it had potential to discourage third parties refusal which grants holder option to meet offer made by third party violated Rourke Corp., 536 A.2d 1137, 1144 (Md. 1988) (reasoning that right of first p. 10 10

Reversed and remanded

DALIANIS, C.J.