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Ruling 94-14, Real Estate Conveyance Tax / Controlling Interest Transfer Tax

FACTS:

A company ("the Company") and its wholly-owned subsidiary ("the Subsidiary") are the only two partners of a partnership which owns Connecticut real estate with a present true and actual value equaling or exceeding $2000. The Subsidiary has a controlling interest, as defined in Conn. Gen. Stat. §12-638a(2), in the partnership. The Company transfers to the Subsidiary its interest in the partnership, leaving the Subsidiary as the only partner in the partnership.

ISSUES:

Whether the real estate Conveyance tax applies to a partner's transfer of its interest in a partnership that owns Connecticut real estate, where the partnership is not considered to be a continuing partnership within the meaning of 26 U.S.C. § 708.

Whether the controlling interest transfer tax applies to a partner's transfer of its partnership interest, where the transferee already has a controlling interest in the partnership.

DISCUSSION:

The Real Estate Conveyance Tax Act, Conn. Gen. Stat. §12-494 et seq., imposes a tax on "each deed, instrument or writing, whereby any lands, tenements or other realty is granted, assigned, transferred or otherwise conveyed to, or vested in, the purchaser, or any other person by his direction, when the consideration for the interest or property conveyed equals or exceeds two thousand dollars ..."

"The Real Estate Conveyance Tax Act, 1967 Conn. Pub. Acts 693, was modeled on the federal Documentary Stamp Tax provisions of the Internal Revenue Code, 26 U.S.C. § 4361... Therefore, the regulations promulgated under the federal act should be regarded as helpful in interpreting the Connecticut law." 1989 Conn. Op. Atty. Gen. 89-020, quoted in Ruling No. 91-3 and Ruling No. 93-12.

26 C.F.R. § 47.4383-1 provides that "[no [federal documentary stamp] tax shall be imposed under section ... 4361 by reason of any transfer of an interest in a partnership holding ... realty if such partnership (or another partnership) is considered to be a continuing partnership within the meaning of section 708 and if such ... realty [continues] to be held, regardless of the name in which held, by the continuing partnership (or the continuing partnerships if more than one)..." (Emphasis added)

Section 708(a) of the Internal Revenue Code provides that "... an existing partnership shall be considered as continuing if it is not terminated." Additionally, 26 C.F.R. § 1.708-1(b)(1)(i) provides that "[a] partnership shall terminate when the operations of the partnership are discontinued and no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. For example, ... A and B, each of whom is a 20-percent partner in partnership ABC, sell their interests to C, who is a 60-percent partner. Since the business is no longer carried on by any of its partners in a partnership, the ABC partnership is terminated ... [emphasis added]."

By contributing its interest in the partnership to the Subsidiary, the only other partner, the Company caused the partnership to terminate for purposes of 26 U.S.C. § 708.

26 C.F.R. § 47.4383-1 indicates that the federal Documentary Stamp Tax would have been imposed on the Company's transfer of its interest in the partnership to the Subsidiary. Although the Real Estate Conveyance Tax was modeled on the federal Documentary Stamp Tax, the Real Estate Conveyance Tax does not apply to the Company's transfer because, under the facts provided, the Company did not by "deed, instrument or writing" transfer its interest in real estate to the Subsidiary. Instead, under the facts provided, the Connecticut real property owned by Realty Partnership became the real property of the Subsidiary by operation of law. Accordingly, the Real Estate Conveyance Tax does not apply to the Company's contribution of its interest in the partnership to the Subsidiary.

The next issue is whether the Controlling Interest Transfer Tax applies to the Company's contribution of its interest in the partnership to the Subsidiary.

The Controlling Interest Transfer Tax, Conn. Gen. Stat. §12-638a et seq., imposes a tax "on the sale or transfer of a controlling interest in any entity which possesses an interest in real property in this state when the present true and actual value of the interest in real property equals or exceeds two thousand dollars ... " The General Assembly intended that the controlling interest transfer tax provisions be operable only where [real estate] conveyances were not made. See Ruling No. 91-2. "Controlling interest" is defined in Conn. Gen. Stat. §12-638a(2)(B) as meaning " in the case of a partnership ... more than fifty per cent of the capital, profits or beneficial interest in such partnership ..."

In this case the, the Subsidiary owned the controlling interest in the partnership and the Company owned a minority interest. The minority interest, rather than the controlling interest, in the partnership was conveyed. Therefore, the controlling interest transfer tax does not apply to the transfer at issue. This conclusion assumes that the Company was not a member of a group of transferors acting in concert to transfer a controlling interest in the partnership and that the Company's transfer was not one of a series of transfers that, had they occurred at the same time, would have constituted a transfer of a controlling interest. See LSN-89 (rev. 7/90).

RULING:

Under the facts provided, the Company did not by "deed, instrument or writing" transfer its interest in Realty Partnership (and its real estate) to the Subsidiary. Instead, under the facts provided, the Connecticut real property owned by the partnership became the real property of the Subsidiary by operation of law. Accordingly, the Real Estate Conveyance Tax does not apply to the Company's contribution of its interest in the partnership to the Subsidiary.

In addition, because a minority interest, rather than a controlling interest, was transferred by the Company to the Subsidiary, the controlling interest transfer tax does not apply to the transfer at issue.

LEGAL DIVISION

July 22, 1994