MEPT St. Matthews, LLC v. District of Columbia

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DISTRICT OF COLUMBIA COURT OF APPEALS

No. 22-TX-0329

MEPT ST. MATTHEWS, LLC, et al., APPELLANTS,

v.

DISTRICT OF COLUMBIA, APPELLEE.

Appeal from the Superior Court of the
District of Columbia
(2021-CVT-000674)

(Hon. John McCabe, Trial Judge)

(Argued January 31, 2023 Decided July 20, 2023)

Thomas T. Locke, with whom Renee B. Appel was on the brief, for appellants.

Arjun P. Ogale, Assistant Attorney General, with whom Karl A. Racine,
Attorney General for the District of Columbia (at the time the brief was filed),
Caroline S. Van Zile, Solicitor General, Ashwin P. Phatak, Principal Deputy
Solicitor General, Carl J. Schifferle, Deputy Solicitor General, and Richard S. Love,
Senior Assistant Attorney General, were on the brief, for appellee.

Before BLACKBURNE-RIGSBY, Chief Judge, DEAHL, Associate Judge, and
STEADMAN, Senior Judge.

BLACKBURNE-RIGSBY, Chief Judge: In this tax case regarding a commercial

real estate transaction, appellants are MEPT St. Matthews, LLC (“MEPT”) and TFG

1717 Rhode Island Avenue Property, LLC (“TFG”). MEPT sold its “right, title,
 2

interest, and obligations” in 1717 Rhode Island Avenue NW to TFG for

$58,800,000. Appellants and the District of Columbia agree that MEPT and TFG

are responsible for recordation and transfer taxes on this transaction. The dispute is

how to calculate the taxes.

Appellants contend that they are only responsible for taxes based on the

amount of consideration, or $58,800,000. The District contends that appellants are

also responsible for taxes on the assignment of a leasehold interest in the property,

the value of which is calculated separately. The difference is a sum of $1,933,934,

which appellants paid under protest. The trial court granted summary judgment to

the District, agreeing that the transaction encompassed two separate interests that

must be taxed differently, pursuant to D.C. Code §§ 42-1103 & 47-903 (recordation

and transfer tax statutes). We affirm the trial court’s conclusion that, based on the

plain language of these statutes, there were two separately taxable interests that

comprised the real estate transaction. However, we remand for the trial court to

address whether any of the $58,800,000 consideration can be attributable to the

leasehold interest.
 3

I. Factual Background

The Roman Catholic Archbishop of Washington is the owner of land at 1717

Rhode Island Avenue, NW. In 2002, the Archbishop and MEPT entered into an

agreement for the lease of the land to MEPT until December 1, 2099 (“the Ground

Lease”).1 MEPT constructed a 10-story office building (“the Improvements”) upon

the land as permitted by the Ground Lease, and MEPT was to be the owner of the

Improvements until the end of the lease.

In December 2020, MEPT agreed to sell its “right, title, interest and

obligations” in the property to TFG for $58,800,000. Appellants contacted the D.C.

Office of Tax and Revenue (“OTR”) to determine the correct amount of recordation

and transfer taxes on this transaction. Appellants contended that the total taxable

1
As we explained in District of Columbia v. Design Ctr. Owner (D.C.) LLC,
286 A.3d 1010, 1014 (D.C. 2022),

A ground lease is an agreement between a landowner and
(usually) a developer where, in exchange for rent
payments, the landowner permits the developer to build
improvements on the land and use it for a specific term of
years, often decades. At the end of the lease term, the
landowner not only regains exclusive rights to the land but
also acquires any improvements that remain.
 4

value was the consideration for the sale, or $58,800,000. Appellants expected to pay

$2,940,000 in recordation and transfer taxes.

In response, OTR told appellants that the $58,800,000 sale price would be

subject to transfer and recordation taxes as the consideration for the Improvements;

additionally, the Ground Lease would also be subject to recordation and transfer

taxes, based on 150% of the assessed 2021 value of the land. See D.C. Code

§§ 42-1103(a)(1)(B)(ii) & 47-903(a)(3). OTR’s total valuation of the transaction

was $97,478,685. By OTR’s calculation, appellants were responsible for $4,873,934

in transfer and recordation taxes.2

Appellants paid the assessed transfer and recordation taxes under protest and

then submitted a joint refund request of $1,933,934, which was denied. Appellants

filed an appeal of the assessment in the superior court. Appellants and the District

moved for summary judgment. The trial court granted summary judgment to the

District of Columbia and denied summary judgment to appellants. The trial court

agreed with the District of Columbia that “the sale of the Improvements and the

transfer of the Ground Lease are separately taxable under the plain language of D.C.

2
Appellants also paid $82,500 for non-exempt deeds of trust, which is not in
dispute.
 5

Code §§ 42-1103 and 47-903.” The trial court highlighted that “MEPT sold both

the Improvements and its interest in the Ground Lease to TFG.” Appellants noted a

timely appeal.3

II. Discussion

“Decisions of the Superior Court in civil tax cases are reviewable in the same

manner as other decisions of the court in civil cases tried without a jury.” D.C. Code

§ 47-3304(a). “This court reviews summary judgment rulings de novo. The court

is to conduct an independent review of the record in considering whether the motion

was properly granted.’” Expedia, Inc. v. District of Columbia, 120 A.3d 623, 630

(D.C. 2015) (internal quotation marks and citations omitted).

“Generally, when a deed is filed in the District of Columbia, the parties to the

deed must pay transfer and recordation taxes.” Aziken v. District of Columbia, 194

A.3d 31, 34 (D.C. 2018). “That act—submitting a deed for recordation—is what

3
Shortly before oral argument, we decided Design Center, 286 A.3d 1010,
which deals with similar questions of tax law. Consequently, we directed the parties
to file supplemental briefs addressing whether Design Center was controlling or had
any implications for the case here.
 6

triggers the assessment of the two taxes, which are typically calculated as a

percentage of the consideration paid for the transfer.” Design Ctr. Owner, 286 A.3d

at 1021. The center of this dispute is the proper interpretation and application of

D.C. Code § 42-1103, the recordation tax statute, and D.C. Code § 47-903, the

transfer tax statute, to appellants’ real estate transaction.

We “generally review[] issues of statutory construction de novo, giving

deference to the reasonable interpretation of the agency charged with implementing

the statute, which, in this case, is OTR.” Bartholomew v. D.C. Off. of Tax &

Revenue, 78 A.3d 309, 316 (D.C. 2013) (citing Wynn v. United States, 48 A.3d 181,

188 (D.C. 2012)). “In interpreting tax statutes, we apply conventional principles of

statutory construction.” 1137 19th St. Assocs., Ltd. P’ship v. District of Columbia,

769 A.2d 155, 161 (D.C. 2001) (citation omitted). “Consequently, ‘we must look

first to the language of the statute and, if it is clear and unambiguous, give effect to

its plain meaning.’” Id. (quoting District of Columbia v. Acme Reporting Co., 530

A.2d 708, 712 (D.C. 1987)). “In doing so, ‘effect must be given every word of a

statute[,] and interpretations that operate to render a word inoperative should be

avoided.’” Id. (quoting Acme Reporting Co., 530 A.2d at 713). “If we determine

that the statutory language is facially ambiguous, we may then consider ‘the

legislative history surrounding the enactment of the statute [ ] in question for
 7

assistance.’” Id. (quoting Acme Reporting Co., 530 A.2d at 713); see also Expedia,

Inc., 120 A.3d at 631 (“Interpreting tax laws is a three-step process: if the court is

confronted with ambiguity on the face of the statute, step two is to turn to the

legislative history and the other tools of reasonable statutory construction, and—if

the ambiguity persists—step three is to construe the statute strictly against the state

and in favor of the taxpayer.”).

As to the recordation tax, the relevant provisions state:

(a)(1) At the time a deed, including a lease or ground rent
for a term (with renewals) that is at least 30 years, is
submitted for recordation, it shall be taxed at the rate of
1.1% (to complete the calculation of total recordation tax
due at time of recording, see also additional tax in
subsections (a-4) and (a-5) of this section), as follows:
(A) A deed that conveys title to real property in the
District shall be taxed at a rate of 1.1% (to complete the
calculation of total recordation tax due at time of
recording, see also additional tax in subsections (a-4) and
(a-5) of this section) applied to the consideration for the
deed; provided, that if there is no consideration for a
transfer or if the consideration for the transfer is nominal,
the rate shall be applied to the fair market value of the real
property, as determined by the Mayor.
(B)(i) If there is a lease or ground rent for a term
(with renewals) that is at least 30 years, the recordation
tax shall be based upon the average annual rent over the
term of the lease, including renewals, capitalized at a rate
of 10%, plus any additional consideration payable;
provided that the amount to which the rate is applied shall
 8

not exceed the fair market value of the real property
covered by the interest transferred.
(ii) If the average annual rent of the lease or ground
rent for a term (including renewals) that is at least 30
years cannot be determined, the recordation tax will be
based on the greater of:
(I) One hundred and five percent of the
minimum average annual rent ascertainable from
the terms of the lease, capitalized at a rate of 10%,
plus any additional consideration payable; or
(II) One hundred and fifty percent of the
assessed value of the real property covered by the
interest transferred.

D.C. Code § 42-1103 (emphasis added). As to the transfer tax, the relevant

provisions state:

(a)(1) There is imposed on the transferor for each transfer
at the time the deed is submitted to the Mayor for
recordation a tax at the rate of 1.1% of the consideration
paid for the transfer; provided, that:

(A) If the interest in real property transferred is a lease or
ground rent for a term (including renewals) that is at
least 30 years, the transfer tax will be computed using
the value determined in accordance with paragraphs
(2) or (3) of this subsection; . . . .

(2) If there is a lease or ground rent for a term (including
renewals) that is at least 30 years, the transfer tax shall be
based upon the average annual rent over the term of the
lease, including renewals, capitalized at a rate of 10%, plus
any additional actual consideration payable; provided, that
the amount to which the rate is applied shall not exceed
 9

the fair market value of the real property covered by the
interest transferred.

(3) If the average annual rent of the lease or ground rent
for a term (including renewals) that is at least 30 years
cannot be determined, the transfer tax will be based on the
greater of:

(A) One hundred and five percent of the minimum
average annual rent ascertainable from the terms
of the lease, capitalized at a rate of 10%, plus any
additional consideration payable; or
(B) One hundred and fifty percent of the assessed
value of the property covered by the interest
transferred.

D.C. Code § 47-903 (emphasis added). “Deed” is construed broadly as

any document, instrument, or writing (other than a lease or
ground rent for a term (including renewals) that is less than
30 years), regardless of where made, executed, or
delivered whereby any real property in the District, or any
interest therein (including an estate for life), is conveyed,
vested, granted, bargained, sold, transferred, or assigned.

D.C. Code § 47-901(3). Therefore, “any time parties execute any instrument by

which any interest in real property is ‘conveyed, vested, granted, bargained, sold,

transferred, or assigned,’ they must record a copy of that instrument with the District

and pay the appropriate transfer and recordation taxes, unless a statutory exemption

applies.” Design Ctr. Owner, 286 A.3d at 1022.
 10

We examined these same D.C. tax statutes recently in Design Center. There,

the purchase agreement apportioned $76 million for consideration for the sale of the

land, and then apportioned $174 million to the early termination of ground leases on

the land. 286 A.3d at 1017. The ground leases had 17 years left in their term. Id.

at 1018. The taxpayers reported and paid taxes only on the consideration paid for

the land ($76 million)—not on the consideration for early termination of the ground

leases ($174 million). Id. at 1017. In that case, the taxpayers took the position that

only the consideration paid for the land itself, and not the consideration paid for the

termination of the ground leases, was taxable. Id. at 1019. On the other hand, the

District sought to tax the entire $250 million, arguing that, in reality, the buyer was

acquiring fee simple title to the land and all of its improvements. Id. at 1020. We

“largely agree[d] with the District’s view,” noting that the taxpayers’ interpretation

“d[id] not reflect reality” and “ignore[d] a massive taxable transfer of property

interests that occurred in this transaction.” Id.

Appellants argue that the District was trying to tax only the consideration in

Design Center, but here, the District is trying to go even further by creating a

“fiction” of dividing the deed into different interests, thus inflating the value of the

transaction. In response, the District argues that Design Center confirms that

transfer and recordation taxes are applied to each type of property interest in a
 11

transaction. According to the District, “the correct method to compute transfer and

recordation taxes is by examining the relevant deed, determining the distinct

property interests that the deed transfers, and computing the taxes for each transfer

under the provision that applies to the given property interest.” The District contends

that, just as the Design Center taxpayers failed to account for the reversionary

interest in the improvements, appellants here overlooked the transfer of the leasehold

interest which, pursuant to the D.C. tax statutes, is not taxed based on consideration.

We agree with the District’s interpretation. Though the real estate transaction

in Design Center is factually distinguishable, the general proposition that each

separate interest transferred is taxable, regardless of how a real estate deal is

structured or how the transfer is effected, applies here. 4 As we explained, “the

District’s transfer and recordation tax statutes apply broadly to any instrument used

to convey ‘any real property in the District, or any interest therein.’” Design Ctr.

Owner, 286 A.3d at 1023 (quoting D.C. Code § 47-901(3)). Overall, we concluded

that, whatever the structure of transaction and the mechanism of the transfer, the

4
Indeed, the facts were more complicated in Design Center, as the ground
leases there were for only 17 years. We explained that “a typical ground lease, or
the termination or assignment thereof, is not taxable so long as less than 30 years
remain on the term.” Design Ctr. Owner LLC, 286 A.3d at 1019 (emphasis added).
Here, it is undisputed that the Ground Lease has over 70 years left in its term.
 12

reality was that it contained separate interests that were each subject to taxation. Id.

at 1020-21.

Based on the statutes, the transfer and recordation taxes must be applied to the

individual interests contained within each deed. The transfer tax provision states

that the tax is based on “consideration paid for the transfer; provided, that . . . [i]f

the interest in real property transferred is a lease or ground rent . . . that is at least

30 years,” additional computation is needed. D.C. Code § 47-903(a)(1)(A)

(emphasis added). Similarly, the recordation tax provision states that “[a]t the time

a deed, including a lease or ground rent for a term . . . that is at least 30 years, is

submitted for recordation, it shall be taxed . . . as follows . . . .” D.C.

Code § 42-1103(a)(1) (emphasis added). Both statutes then go on to state that the

tax must be based on either the average annual rent or, if that amount “cannot be

determined,” the greater of either “[o]ne hundred and five percent of the minimum

average annual rent ascertainable from the terms of the lease, capitalized at a rate of

10%, plus any additional consideration payable” or “[o]ne hundred and fifty percent

of the assessed value of the real property covered by the interest transferred.” D.C.

Code § 42-1103(a)(1)(B)(ii); see also D.C. Code § 47-903(a)(3).
 13

We find no support for appellants’ interpretation that these provisions are

meant to tax only the creation, and not the assignment, of ground leases. The statutes

do not distinguish between “assignment” and “creation.”5 Additionally, the transfer

statute states that “each transfer” is taxable, D.C. Code § 47-903(a)(1), and a

“transfer” includes an “assigned” interest, D.C. Code § 47-901(9). Similarly, the

recordation statute states that a “deed” shall be taxed upon being submitted for

recordation, D.C. Code § 42-1103(a)(1), and a “deed” can be “any document,

instrument, or writing” pursuant to which an “interest . . . is . . . assigned,” D.C.

Code § 42-1101(3)(A)(i).

Based on the plain language of the statute and the reasoning of Design Center,

it is of no matter that MEPT transferred the entirety of its interests, including a

leasehold interest, via one deed. The reality is that there were two separate interests

being transferred: (1) title to the Improvements and (2) leasehold interest in the land

5
It is true, as appellants point out, that other states tax the assignment of
leasehold interests differently. In Virginia, assignments of leasehold interest are
generally not taxable. See 23 Va. Admin. Code 10-320-80 (“An assignment of a
lease on which the recordation tax has been previously paid is generally not subject
to tax under the provisions of § 58.1-807 of the Code of Virginia if there is no
increase in the amount of the principal obligation.”). In New York, an assignment
of a leasehold interest is generally taxed based on the consideration for the
assignment—not on rent. See N.Y. Comp. Codes R. & Regs. Tit. 20 § 575.7(d). But
the relevant provisions actually include language to that effect, unlike the D.C. tax
statutes.
 14

(or the Ground Lease). Pursuant to the statutory text, OTR first taxed the

$58,800,000 as consideration for the Improvements. See D.C. Code § 47-903(a);

D.C. Code § 42-1103(a)(1)(A). OTR next determined that, given the transfer of the

Ground Lease of over 70 years (well over 30 years), it must tax that interest

separately. See D.C. Code § 42-1103(a)(1)(B)(i); D.C. Code § 47-903(a)(1)(A).

OTR concluded that there was no ascertainable average rent. Therefore, OTR

calculated the transfer and recordation taxes based on “150% of the assessed [2021]

value of the Land.” See D.C. Code § 42-1103(a)(1)(B)(ii); D.C. Code

§ 47-903(a)(3)(B).

If the “plain meaning of statutory language is clear and unambiguous and will

not produce an absurd result, we will look no further.” Hargrove v. District of

Columbia, 5 A.3d 632, 634 (D.C. 2010) (quotation marks and citation omitted).

OTR’s application of the transfer and recordation tax statutes comports with the

plain language of the statute and the reality of the transaction. To interpret otherwise

would be to read out the ground lease provision in each statute.6

6
Additionally, the District also persuasively frames the policy behind these
provisions, as a “ground lease typically transfers for a de minimis upfront value, if
any, because changing who owes the future lease payments is the consideration for
the transfer . . . . To accurately capture the taxable value associated with a ground
 15

This leaves the question of whether any of the $58,800,000 reflected the value

of the Ground Lease such that appellants may have been overtaxed. See D.C. Code

§ 47-903(a)(1) (transfer taxed “at the rate of 1.1% of the consideration paid for the

transfer”); D.C. Code § 42-1103(a)(1)(A) (recordation taxed at a rate of 1.1%

“applied to consideration for the deed”).

Appellants maintain that part of the $58,800,000 was for the transfer of the

Ground Lease. 7 The District contends that the $58,800,000 did not account for any

value of the Ground Lease and, in support, cite to an appraisal of $59,100,000, which

the District contends reflects the value of only the Improvements.

The appraisal refers to the “subject” as the “ten-story office building in very

good condition,” but it also refers to the Ground Lease repeatedly. The purchase

agreement refers to both the Ground Lease and the Improvements. The trial court

lease transfer, District law looks to the rent due under the lease (plus any other
consideration paid) or a reasonable proxy thereof.”
7
In appellants’ joint Claim for Refund, they similarly argued that the
$58,800,000 encompassed “all interests, . . . including but not limited to MEPT’s
interests in a long-term ground lease and building improvements.”
 16

explained that “the total transaction was worth far more than the $58,800,000 paid

by TFG to MEPT . . . [as] not only was MEPT receiving the $58.8 million dollars,

it was being released from any further liability under the Ground Lease.”

Additionally, the trial court noted that TFG’s statements before the D.C. Real

Property Tax Commission support the proposition that “the Improvements have a

value separate and apart from the Land.” However, the trial court was merely

recognizing that the value of a leasehold interest is often not captured in

consideration. It made no factual findings on this issue.8

The trial court did not address whether any of the consideration here was paid

for the Ground Lease. The trial court may conclude that it can resolve this question

on the current record or it may need to reopen discovery to resolve the issue. E.g.,

Design Ctr. Owner, 286 A.3d at 1024 n.10. Therefore, while we affirm the trial

court’s conclusion that there were two separately taxable interests here, we remand

the case for the trial court to address this narrow factual question of whether any of

the $58,800,000 was for the transfer of the Ground Lease.

8
Nor did the trial court rely on “release of liability” or appellants’ past
statements in granting summary judgment to the District. Therefore, we do not
address appellants’ arguments regarding judicial estoppel or “release of liability.”
 17

III. Conclusion

In sum, we affirm the trial court’s grant of summary judgment to the District

of Columbia. Based on the plain language of the D.C. tax statutes, the sale of the

Improvements and the transfer of the Ground Lease were separately taxable. See

D.C. Code §§ 42-1103(a)(1)(B) & 47-903(a)(3). However, we remand the case for

the trial court to address the narrow factual question of whether any of the

consideration was attributable to the Ground Lease.

So ordered.