82-25 | Virginia Tax

Tax Type

Recordation Tax

Description

Continental Telephone Company of Virginia v. The Commonwealth of Virginia

Topic

Court Case

Date Issued

03-19-1982

March 19, 1982

Re: Case No. 8933
Continental Telephone Company of Virginia
v.
The Commonwealth of Virginia

Gentlemen:

This is a recordation tax refund suit brought by Continental Telephone Company of Virginia (Continental of Virginia) pursuant to Virginia Code § 58-1130.

The facts are not in dispute and have been agreed to by counsel in a Stipulation of Facts, (Stipulation), filed with the Court. The pertinent facts will be summarized as they appear in the Stipulation and as they are stated in the respective briefs of counsel.

Continental of Virginia is a Virginia public service company which is a wholly-owned subsidiary of Continental Telephone Corporation, a Delaware Corporation. Continental of Virginia is in the business of providing telephone service in various areas of Virginia and northeastern North Carolina.

Prior to May 30, 1975, Continental Telephone Corporation also owned three other telephone companies: Tidewater Company (Tidewater), Commonwealth Telephone Company of Virginia (Commonwealth Telephone), and First Colony Telephone Company (First Colony). On May 30, 1975, Tidewater, Commonwealth Telephone and First Colony merged into Continental of Virginia.

Before the merger, each of the telephone companies had various long-term outstanding debts. Some of that debt had been recorded and taxed and some of it had not. Counsel for the applicant herein has set forth on page 5 and 6 of its opening brief a table that summarizes the debt of all of the companies and whether it had been recorded and taxed or not.

The issue here involves only two debts shown in that table at page 5, which were the Virginia Bonds issued by Continental of Virginia and the Tidewater Bonds issued by Tidewater. According to the Stipulation and the table, the pertinent information as to those debts, prior to the merger is as follows:

Continental of Virginia - It had issued 24 series of first mortgage bonds (the Virginia bonds), under a recorded bond indenture dated July 14, 1947, as supplemental and amended by a number of recorded supplemental indentures. State recordation taxes based on the full amounts of those bonds had been paid by Continental of Virginia. As of the date of the merger on the principal amount of the outstanding Virginia Bonds was $30.701.750.

Tidewater - It had issued 14 series of first mortgage bonds (the Tidewater Bonds), secured by a recorded bond indenture, as supplemental by various recorded supplemental indentures. Recordation taxes based on the full amount of the bonds secured by these instruments were paid by Tidewater. As of the date of the merger, the aggregate principal amount of the outstanding Tidewater Bonds was $16,586.00. Tidewater also had outstanding at the time of the merger $272,000.00 of its convertible subordinated debentures (the Tidewater Debentures), which had not been previously recorded or subject to recordation taxation.

Because each of the debt instruments of the affiliated companies, before merger, contained a standard clause providing for automatic default in the event of a merger, on May 1, 1975, the holders of the bonds entered into a Bond Exchange Agreement with the affiliated companies in which the secured parties consented to the merger and waived any resulting default and agreed to post-merger consolidation of the outstanding indebtedness of the affiliated companies.

The debt consolidation provision of the Bond Exchange Agreement required Continental of Virginia to assume the outstanding indebtedness of the affiliated companies and to issue replacement instruments evidencing that obligation. The Bond Exchange Agreement further specified that the replacement instruments contain terms identical to those in the original instruments and be secured by substantially all of the property.

The legal effect of the merger under Virginia Code § 13.1-75; under the terms of the Bond Exchange Agreement; and Stipulation entered into herein, was to substitute Continental of Virginia as obligator on the Tidewater Bonds, Tidewater Debentures and the indebtedness of the other companies. It continued to be obligated on its own Virginia Bonds.

Counsel for Continental Telephone Company has included in its opening Brief two charts which summarizes the debt which Continental of Virginia was obligated to pay after the merger which are included herein as to the Virginia Bonds and the Tidewater Bonds:

Form of Pre-Merger Tax Tax Due According to
Indebtedness Assessed Continental of Virginia

Virginia Bonds $30,701.750 None

Tidewater Bonds $16,586.000 None

(Opening Brief of Continental Telephone Company of Virginia, p. 5).

Subsequent to the merger and pursuant to the Bond of Exchange Agreement, continental of Virginia issued replacement first mortgage bonds in its name, (the replacement bonds), for the Virginia Bonds and for other indebtedness, which is not at issue here.

The terms of the replacement bonds were identical to the terms of the pre-merger indebtedness they replaced. They were identical in principal amount, interest rate, maturity, optional redemption and sinking fund redemptions.

Following the merger, and immediately prior to the issuance of the replacement bonds, Continental of Virginia, recorded the Indenture of mortgage and Deed of Trust (the New Indenture) required by the Bond Exchange Agreement.

The New Indenture conveyed to the New Indenture Trustee substantially all of the property of Continental of Virginia to secure the replacement bonds which were issued in the place of the pre-merger indebtedness of the affiliated companies. Prior to the merger, the property of each individual affiliated companies' debt was secured by only its separate property as collateral. Following the merger, however, Continental of Virginia (the merged company) conveyed substantially all of its property to secure the Replacement Bonds through the New Indenture. The effect of the New Indenture was to increase the collateral on particular portions of the debt, since the terms of the replacement bonds were identical to the corresponding pre-merger debt instruments.

For example, as pointed out by the Applicant on brief, before the merger, only the property of Tidewater served as collateral for the Tidewater bonds. However, the effect of the New Indenture was to convey substantially all of the property of the four merged companies as collateral for the consolidated debt which included the Tidewater Bonds.

When Continental of Virginia recorded the New Indenture, it was required to pay a recordation tax of $109,314 based on the portion (99.813%) of the value of the Virginia Bonds, Tidewater Bonds and Commonwealth Telephone notes secured by Virginia real estate. The full amount of the tax was paid under protest.

It is the position of Continental of Virginia, inter alia, that the recordation tax should have been assessed only on 99. 813% of the value of the Commonwealth Telephone notes, which had not been recorded or taxed prior to the merger and that no tax should have been assessed on the Virginia Bonds and the Tidewater Bonds. The tax on that value, Continental of Virginia, argues would have been $38,515. Continental of Virginia seeks a refund of $70,799.00.

The Department of Taxation, however, takes the position, inter alia, that the Virginia Bonds and the Tidewater Bonds are subject to recordation tax even though each had been previously recorded and subject to a recordation tax.

Since the Virginia Bonds and the Tidewater Bonds had been previously recorded and taxed before the merger, the question presented is whether the recordation of the New Indenture securing their identical replacements is taxable.

The specific question presented here, in the order presented, in the Briefs are as follows:

- Is the New Indenture exempt from recordation as a deed of confirmation under Code § 58-61?
  
  Is the New Indenture exempt for recordation taxation as a supplemental deed of trust under Code § 53-60?

These questions will be discussed in the order presented.

Whether or not the New Indenture is exempt from recordation taxation because it is a deed of confirmation depends upon the interpretation to be given Code § 58-61.

Code § 58-61 as it existed at the time of the merger on May 30, 1975, provided that deeds of confirmation were exempt from recordation taxation in the following terms:

- § 58-61. What other deeds not taxable.
  
  No additional recordation tax shall be required for admitting to record any deed of confirmation or deed of correction, when the tax has been paid at the time of the recordation of the original deed...; provided, that if the tax already paid is less than a proper tax based upon the full amount of consideration or actual value of the property involved in the transaction, an additional tax shall be paid based on the difference between the full amount of such consideration or actual value and the amount on which the tax has been paid...

Code § 58-61 does not define the term "deed of confirmation", nor its requisites nor have any Virginia decisions directly on point been found. Therefore, the intent of the General Assembly in its use of the term in Code § 58-61 must be determined and in doing so, it must be interpreted so as to carry out and further the purpose of the General Assembly. Under familiar principals, the terms must be interpreted according to its ordinary and familiar meaning, within the context of the statute.

A deed of confirmation is a conveyance which may be utilized in order to accomplish many purposes. For instances, it may be utilized in order to remove doubts as to the effectiveness or operativeness of a prior deed, (See: Hall v. Wright, 138 Ky. 71, 127 S.W. 516); it may be used to ratify a prior deed executed by an agent or a deed executed by one under a disability; or it may be used to correct a mistake in a prior deed.

As between the parties, a confirming deed relates back to the date of the original instrument, Hall v. Wright, supra; Kernan Livestock Farm. Inc. v. State Highway Comm., 224 Or. 87, 355 P2d 719; Fenn v. Boxwell (Tex. Civ. App) 312 S.W.2d 536.

Further, in at least one treatise a"deed of correction" is sometimes called a"deed of confirmation'. In Unger, Real Estate, Principles and Practices, 4th Ed., p. 135, it is stated:

- CORRECTION DEED
  
  A correction deed, sometimes called a deed of confirmation, is used to correct an error in a deed. For example, if A conveys to B, and there is an error in description, A upon request will correct the error. This is usually done by means of a quitclaim deed containing a statement explaining the purpose of the instrument.

In each of the above instances of the usages of a deed of confirmation, its use was necessary to cure some defect or irregularity in the original deed or to give some legality to the original deed and the original and confirming deeds where thereafter related back to the original and they were both read together as a complete conveyance.

In the instant case, no defect, irregularity or lack of effectiveness or operativeness existed in the original deeds. The original deeds at the time of recordation were complete and effective on their own and needed nothing further to be done in order to complete them as effective instruments for their intended purpose.

The New Indenture likewise exists independently of the prior indentures and it is complete in and of itself and ratifies nothing.

Code § 58-61 is a tax exemption statute and must be strictly construed against the taxpayer, with all doubts resolved against the exemption Commonwealth v. Community Motor Bus, 214 Va. 155, 157, 198 S.E.2d 619, 620-621 (1973); Commonwealth v. Manzer, 207 Va. 996, 1000, 154 S.F..2d 185, 189 (1967). Strictly construing the term "deed of confirmation" as contained in Code § 58-61, I adopt the construction that a deed of confirmation is one which affirms, corrects, ratifies or adds effectiveness or legality to an earlier deed, which is essential to make the earlier deed effective. In the context of Code § 58-61, the term does not apply where a prior deed or indenture conveyed a valid estate and effectuated the intent of the grantor and grantee at the time of the first conveyance. The New Indenture here represents the recordation of a completely new and independent conveyance and therefore is taxable. While it is true that Continental of Virginia assumed by operation of law and by agreement all of the debts of the merged corporations, the recordation of the New Indenture was not necessary or required in order to give effectiveness or operativeness to the original deeds. Recordation here was a privilege that Continental of Virginia availed itself of and such exercise is taxable.

The New Indenture is not therefore a deed of confirmation within the context of Code § 58-61, which is exempt from recordation taxation.

Whether the New Indenture is a supplemental deed of trust within the meaning of Code § 50-60 depends upon the interpretation to be given that term within the context of that Section.

Code § 58-60 provides in pertinent part as follows:

- § 58-60. When supplemental deeds of trust, etc., not taxable. - §§ 58-55, 58-58 and 58-59 are not to be construed as requiring the payment of any tax for the admitting to record of any deed of trust, mortgage, contract, agreement or other writing supplemental to any deed of trust, mortgage, contract, agreement or other writing theretofore admitted to record and upon which the tax herein imposed has been paid, hereinafter called the original instrument, when the sole purpose and effect of the supplemental deed of trust, mortgage, contract, agreement or other writing is to convey set over or pledge property, real or personal, in addition to or in substitution in whole or in part, of the property conveyed. set over or pledged in the original instrument, to secure or to better secure the payment of the amount contracted for in the original instrument, but in such case there shall be no tax for the admitting to record of such supplemental deed of trust, mortgage, contract, agreement or other writing. (Emphasis added).

In order to be exempted from recordation taxation, pursuant to Code § 58-60, an instrument must satisfy four requirements:

(1) the second instrument must be supplemental to the original instrument;

(2) the original instrument securing the same debt must have been previously recorded;

(3) the recordation tax on that instrument must have been assessed and paid; and

(4) the subsequent deed of trust's sole purpose and effect must be to convey additional property to secure or better secure the debt secured by the original instrument.

"Supplemental" has been defined as that which is added to a thing to complete it. Black's Law Dictionary 1608; (4th Ed. 195) or that which relates to or serves in aid of an original paper to supply some defect or reflect after-acquired facts. Webster's Third Mew International Dictionary at 2297 (1966). In the instant case, the New Indenture is an entirely new deed of trust and there is nothing to supplement as the old deeds of trust were cancelled.

In the instant case, the New Indenture does not meet the first requirement above because it does not supplement the originally recorded instruments. As urged by counsel for the defendant, in his Brief, the original debt of the merged corporations were simply cancelled and replaced by the new indebtedness of Continental of Virginia. All of the old notes and bonds were cancelled, the prior indentures superseded and new independent obligations were issued secured by the New Indentures in the name of Continental of Virginia.

Further, the New Indenture was not executed pursuant to some provision or covenant contained in the original instrument.

The New Indenture does not meet requirement 4 above, because its sole purpose and effect is not to convey additional property to secure or better secure the debt secured by the original instrument. As indicated above, the originally recorded debt instruments executed separately by the companies before merger were secured by the separate property of the merged companies. After the merger, and the emergence of Continental of Virginia as the merged company, Continental of Virginia's property and that of the merged companies stood instead as security for the merged indebtedness. In one sense, as urged by Continental of Virginia, the pre-merger debt of each company is now better secured by additional property. The test, however, under requirement four is not merely that additional property be conveyed to secure the debt but further it is required that the debt that is being additionally secured by additional property be the same debt that was secured by the original instrument.

In the instant case, as noted above, the original debt was the debt of the separate companies. While it is true that Continental of Virginia by operation of law and by agreement stepped into the shoes of the merged companies and became responsible for the pre-merger debts of the merged companies, Continental of Virginia, chose to cancel the original debt and to substitute its own debt as evidenced by the deed of trust and the New Indenture. The original debt was cancelled upon merger and it was replaced by the new debt of Continental of Virginia.

Both counsel have adequately analyzed the three relevant Virginia decisions dealing with instruments supplement to an originally previously recorded and taxed instrument. Saville v. Va. Ry & P. Co., 114 Va. 444, 76 S. E. 954 (1913); Interstate Railroad Co. v. Roberts, 127 Va. 688, 105 S.E. 463 (1920); and White v. Schwartz, 196 Va. 316, 83 S.E.2d 376 (1954). Each of these decisions are distinguishable on its facts and are not therefore dispositive of the issues presented here.

These decisions, however, are instructive here as to the factors that the Supreme Court of Virginia has looked to determine whether an instrument is supplemental to a previously recorded instrument within the context of Code § 58-60.

In Saville v. Va. Ry. & P. Co., supra, the Virginia Railway and Power Company (the railway company), in order to secure an issue of certain first and refunding mortgage bonds, then and thereafter to be issued, executed and delivered to The Equitable Trust Company of New York, as trustee, a deed of trust or trust indenture wherein it conveyed all of its property then owned or thereafter acquired (subject to certain exceptions), in trust to secure the payment of the bonds. This deed of trust was recorded and tax was paid, as prescribed by Section 13 of the Virginia statute, commonly known as the tax bill, and recordation fees were also paid.

By the terms of this deed, the trustee was granted and conveyed not only the property owned or enjoyed on the date of delivery of the indenture but by Section 12 of the granting clause of the deed of trust, it was provided that all of the property that might hereafter be constructed by the railway company subject to certain exceptions would also be covered under the deed of trust.

The trust also provided that the railway company agreed that whenever the trustee required it, it would convey to the trustee any after acquired property, with certain exceptions to further secure the bonds.

Subsequent to the execution and recordation of the original deed of trust the railway company purchased and acquired additional property. Desiring to issue and dispose of certain of the bonds reserved under the trust indenture, and at the request of the trustee, the railway company executed and delivered to The Equitable Trust Company of New York, trustee, a supplemental deed or trust indenture; by which it granted to the trustee; subject to the terms and provisions of the original deed of trust, the property acquired since the original mortgage was recorded.

The Clerk of the Court refused to record the supplemental deed of trust indenture unless an additional tax was paid. No bonds were authorized to be issued or secured by the supplemental deed of trust indenture other than, or in addition to, the bonds secured by the original indenture.

The Court held in Saville, however, that each of the two instruments were complete in themselves and the second mortgage was not to be treated as being merely supplemental to the first.

In White v. Schwartz, 196 Va 316 (1954), the Supreme Court of Virginia was called upon to determine whether deeds of trust were supplemental" deeds in the context of Code §50-60 and while the facts are not identical to those in the instant case, the Court's analysis is instructive as to the kind of factors which the Court views as-determinative of whether a deed of trust is supplemental or not within Code § 50-60. In Schwartz, supra, the Court reasoned that three deeds of trust were supplemental to each of the corresponding building loan agreements which had been previously recorded where the evidence established that; each instrument referred to the other; each agreement was made a Part of the corresponding deed of trust; each of the deeds of trust were executed on the same day and by the same party who had executed the corresponding deed of trust; the same property was described in each corresponding instrument; and the purpose of each of the deeds of trust was to secure the payment of the same loan described in the corresponding agreement and to give added security for the performance of the corresponding agreement.

In the instant case, none of these similarities are present, thus compelling a different result from that reached by the Supreme Court in Schwartz, supra.

In International Railroad Co. v. Roberts, 127 Va. 688, 105 S.E. 463 (1920), the International Railroad Co. (International) presented to the clerk of the Circuit Court of Wise County for recordation two papers under one cover.

The first paper appeared on its face to be a lease from the Fidelity Trust Company, trustee, to Interstate of certain coal cars at a total price of $1,000,000, to be payable partly in cash and the residue to be paid in subsequent annual installments. All payments were termed rentals, but the lease provided for a formal transfer of title upon full-payment and was executed by both parties.

The second instrument which was attached to the lease expressly referred to it as a contemporaneous instrument to the lease and "was an agreement between the same parties which recited that Brown Brothers and Company, Philadelphia bankers, had secured subscriptions to the amount of $900,000.00 to be supplied towards the payment of the purchase of the railroad equipment and rolling stock particularly described in said indenture of lease and obligated the trust company, when the amount of money necessary to pay for the cars had been deposited with it, to issue and deliver to Brown Brothers and Company 900 interest-bearing certificates for $1,000 each, and to collect and apply to the payment of such certificates the so-called rentals stipulated for in the former paper, and, in case of default in payment thereof by the railroad company, to take possession of and sell the cars and apply the proceeds to the payment of the certificate This instrument, like its companion, was signed, sealed and acknowledged by both parties." (Id. at 690-1).

The Supreme Court held that the two papers were to be read together and when done so it was apparent that "the two papers in question were in furtherance of one and the same transaction, and were essentially inter-dependent; that while the first paper might have appeared on its face to be complete in itself, the second showed that it was not; that both were essential to effectuate the transaction, and that neither party would have executed and delivered either paper without execution and delivery of the other."(Id. at 690)

The issue in Interstate did not involve the construction of Code § 58-60, but involved the question of whether having taxed the first instrument as a contract relating to rolling stock of a railroad under the provisions of Section 13 of the tax bill, Code 1919, page 3087, could the second instrument be taxed on the ground, first that it was signed, sealed and delivered, and hence taxable as a deed under Section 13 of the tax bill; and, second, because it was a deed of trust or mortgage and taxable as such under that Section. However, the Supreme Court's view of the two instruments is helpful to our analysis in the instant case.

The Supreme Court of Virginia, in Interstate, rejected the argument that the second paper was taxable as a deed under Section 13 because that Section only imposed a recording tax on deeds conveying property and the instrument did not purport to convey anything.

The Court further rejected the argument that the second instrument was a deed of trust, or mortgage, because the instrument by itself did not create a lien on property to secure a debt, and constituted a security for the certificates therein named only by virtue of its relationship and connection with the first instrument, and that when so read with the first instrument the second instrument did secure the debt and might be regarded as a mortgage.

The Court concluded, however, that the two instruments were essentially one, and that in the "more natural view" the instruments constituted one contract or agreement relating to the sale of rolling stock of equipment.

The Court in Interstate distinguished its earlier holding in Saville, supra, on the basis that in Saville the supplemental mortgage had not been contemporaneous with nor an essential part of the original mortgage stating as follows:

- The case of Saville v. Virginia Railway & Power Co., 114 Va. 444, 76 S.E. 954, relied upon by the Commonwealth, is not in conflict with the views herein expressed. In that case, as expressly shown by Judge Keith in the course of the opinion, the supplemental mortgage upon which the additional tax was required was not contemporaneous with nor an essential part of the original mortgage.
  
  Interstate Railroad Co. v. Roberts, supra, at 692-3)

The Supreme Court of Virginia looked at the two instruments; read them together and found that they were one; and were inter-dependent to give vitality to the intention and purpose of their makers. None of these factors, however, are present in the instant case.

Lastly, Code § 58-60 is also an exemption provision and as such must be strictly construed against Continental of Virginia.

Thus, the New Indenture is not a supplemental deed of trust within the context of Code § 58-60.

Continental of Virginia's contention that the purpose of the exemptions for deeds of confirmation and supplemental deeds is to avoid double taxation of the tape presented in this case, were taken. The levying of a recordation tax on both the original deeds and indentures and the New Indenture under the circumstances of this case, does not result in double taxation forbidden under the Constitution. The Supreme Court has previously held that in a constitutional sense "...the recording tax is not a property, but a tax on a privilege". White v. Schwartz, 196 Va. 316, 321; See also: Pocahontas Collieries Co. v. Commonwealth, 113 Va. 108, 112, 73 S.E. 446, 448. Langston v. City of Danville, 189 Va. 603, 609, 54 S.E.(2d) 101, 105. Thus, any Constitutional prohibitions against double taxation are not applicable to the recordation tax, which one only has to pay when one avails himself of the benefits and advantages of utilizing Virginia recordation facilities and laws. No constitutional protections against double taxation accompany the exercise of a privilege.

However, Code §§ 58 and 61 do prohibit a second tax when one tax has already been paid. Code 58-61 exempts from "additional tax" deeds of confirmation "...when the tax has been paid on the recordation of the first deed..."

Code Section § 58-60 provides that supplemental deeds "...upon which the tax herein imposed has been paid" are exempt from further taxation upon recordation.

Further, the Supreme Court of Virginia noted in White v. Schwartz, supra, that the prohibition of double taxation was declared by statute, Code § 58-60, where the Court stated in pertinent part as follows:

- The Commonwealth collected its tax on the only consideration involved in the recording of these instruments when it taxed the recording of the agreement. Having done that, its purpose not to collect the second time on the same consideration for recording the deed of trust was declared by statute, § 58-60, which provided, as applied to the instruments here involved, that there should be no tax on recording the deed of trust, supplemental to the agreement, because its sole purpose and effect was to convey the property according to the agreement in order to secure the payment of the amount contracted for in the agreement.
  
  Id. at 321

More importantly, however, no prohibited double taxation under Code § 58-61 or Code § 58-60 occurred here under the facts and circumstances of the instant case. Under these Code Sections double taxation could only occur where the same act of recordation is subjected to two recordation taxes. In the instant case, for the reasons stated above, the recordation of the New Indenture did not confirm or supplement the first recorded instruments and therefore no statutorily prohibited double taxation took place.

Lastly, as a matter of practicality, if Continental Telephone Company's position were to prevail here upon the facts presented here, it would mean that Circuit Court personnel throughout the Commonwealth of Virginia would he called upon to examine instruments presented for recordation, like those presented in the instant case, which were executed by different parties, at different times; which secured or stated different debt amounts to be secured by different parties and property; which did not refer to or acknowledge the existence of each other; which were not contemporaneous and inter-dependent; where each instrument is itself complete and capable of effectuating the purpose intended; to determine whether such instruments were in confirmation and/or supplemental to a previously recorded instrument. Such a burden would be especially onerous in a situation, like the present, where part of the proponents basis for asserting that the instrument is confirmatory is based upon the operation of law. Such an onerous burden and situation cannot be attributed to the General Assembly when it enacted the two Sections under discussion here.

For the foregoing reasons, Continental of Virginia's application for correction of the assessment made by the Department of Taxation, Commonwealth of Virginia is denied.

Counsel for the defendant is requested to present a proper sketch for an order, embodying the above decision.

Very truly yours,

James Edward Sheffield

Rulings of the Tax Commissioner