Real Estate Conveyance Taxes
Where a general partnership owning real property will be converted to a limited partnership, and the limited partnership will be considered to be a continuing partnership within the meaning of 26 U.S.C. §708, will any deed that is recorded to reflect the proper ownership of the real property (with the general partnership as the grantor and the limited partnership as the grantee) be subject to real estate conveyance taxes?
Real property located in Connecticut is owned by a general partnership [hereinafter, "the General Partnership"].
The partners of the General Partnership are nine natural persons and one corporation.
In order to provide limited liability for the individual partners, and in order to provide for exclusive management by the corporate partner, the partners will amend the Partnership Agreement to convert the general partnership into a limited partnership [hereinafter, "the Limited Partnership"] under the Connecticut Uniform Limited Partnership Act.
After the General Partnership is converted into the Limited Partnership, the business of the General Partnership will continue to be carried on by the Limited Partnership, with the corporate partner as the sole general partner and all partners who are natural persons as limited partners.
Each partner's percentage interest in the profits, losses and capital of the Limited Partnership will be the same as that partner's percentage interest in the profits, losses and capital of the General Partnership.
All property, real or personal, owned by the General Partnership will be owned by the Limited Partnership. So that the Land Records will reflect the proper ownership of the real property located in Connecticut, a deed will be recorded showing the General Partnership as the grantor and the Limited Partnership as the grantee.
"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... The Connecticut act, as originally passed, incorporated much of the wording of the repealed federal statute... It was the intention of the General Assembly for the municipalities in the state to tax real estate transactions upon the effective date of the repeal of the federal act... If the federal act is ever reinstated, the Connecticut act automatically ceases to have effect if the federal tax is the same or higher than the state conveyance tax. If the federal tax is imposed at a lower rate, then the Connecticut act would remain in effect, but the amount of the tax would be reduced by the amount of the federal tax. Conn. Gen. Stat. §12-504... In light of the above, it is obvious that the General Assembly intended to substitute the Connecticut act for the repealed federal act. Therefore, the regulations promulgated under the federal act should be regarded as helpful in interpreting the Connecticut law." 1989 Conn. Op. Atty. Gen. (8-15-89).
The pertinent regulations promulgated under the federal act were 26 C.F.R. §§47.4361-2(a)(12) and 47.4383-1. The first regulation provides in part:
(a) The following are examples of conveyances subject to the tax:
(12) A conveyance of realty by a partner to the partnership as a contribution of partnership assets. See section 4383 and §47.4383-1 for application of the tax in case of a termination of a partnership owning realty.
The second regulation provides in part:
No 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 continuing partnerships if more than one). For rules relating to continuations of partnerships, see section 708 and the regulations thereunder ...."
Under 26 U.S.C. §708 a partnership is considered to be continuing if it is not terminated. A partnership is terminated if (1) 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 or (2) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits. Under 26 C.F.R. §1.708-1(b)(1)(ii), a contribution of property to a partnership does not constitute a sale or exchange for purposes of 26 U.S.C. §708.
In Rev. Rul. 84-52, 1984-1 C.B. 157, it was held that, where partners amended the partnership agreement to convert a general partnership into a limited partnership under a statute corresponding in all material respects to the Uniform Limited Partnership Act and where each partner's percentage interest in the partnership's profits, losses and capital remained the same upon conversion, the partnership was considered to be continuing as long as the business of the general partnership continued to be carried on after the conversion by the limited partnership.
A conveyance by a partner to a partnership as a contribution of partnership assets and a conveyance of partnership realty to a partner, in consideration for the partner's withdrawal or where there is a termination of the partnership, "are subject to the Real Estate Conveyance Tax to the extent provided in the regulations promulgated under the federal Documentary Stamp Tax Act." 1989 Conn. Op. Atty. Gen. (8-15-89). Those regulations expressly proscribed the imposition of the tax under 26 U.S.C. §4361 where, as in the instant matter, there are transfers of interests in a partnership holding realty for interests in the same or another partnership that is considered to be a continuing partnership within the meaning of 26 U.S.C. §708 and the realty continues to be held, regardless of the name in which held, by the continuing partnership.
Where a general partnership owning real property will be converted to a limited partnership, and the limited partnership will be considered to be a continuing partnership within the meaning of 26 U.S.C. §708, any deed that is recorded to reflect the proper ownership of the real property (with the general partnership as the grantor and the limited partnership as the grantee) will not be subject to real estate conveyance taxes.
January 25, 1991