Controlling Interest Transfer Taxes
This Ruling has been cited in Ruling 99-6
Can the merger of a corporation that owns Connecticut real property into another corporation be a transfer subject to the controlling interest transfer taxes?
Shareholders owning more than 50% of the total combined voting power of all classes of stock of a corporation [hereinafter, "the disappearing corporation"] have agreed to merge the disappearing corporation with a wholly-owned subsidiary [hereinafter, "the surviving corporation"] that will be newly formed by a corporation [hereinafter, "the parent corporation"] that is also a party to the merger agreement.
Pursuant to the merger, all of the shares of the disappearing corporation will be cancelled, the disappearing corporation will cease to exist, and the shareholders of the disappearing corporation will receive shares in the parent corporation, promissory notes of the parent corporation and cash.
The disappearing corporation is the owner of Connecticut real property with a present true and actual value not less than $2,000.
The shareholders of the disappearing corporation will, in transferring their controlling interest therein to the surviving corporation and in receiving consideration therefore, act in concert.
The transfer of the controlling interest in the disappearing corporation will occur on or after July 1, 1989.
The surviving corporation will be organized under the laws of the State of Delaware, and the disappearing corporation is organized under the laws of the State of Connecticut.
It has been argued that Ruling No. 89-231 is on point and that, under that ruling, a merger of a corporation that owns Connecticut real property into another corporation cannot be a transfer subject to the controlling interest transfer taxes. Ruling No. 89-231, a ruling that, like the instant ruling, involves a merger, but otherwise is factually dissimilar, relies heavily on the only remarks made in either the House or the Senate concerning the controlling interest transfer taxes.
"[It has become evident over time that it is possible to evade [sic], if you will, the current real estate conveyance tax by simply taking controlling interest in a corporation which has control over real estate, and thus ... be able not to pay a real estate conveyance tax, because there is no actual transfer of title within the corporation when the controlling interest in the corporation is purchased by another set of individuals."
32 H.R. Proc., Pt. 28, 1989 Sess., p. 9821.
Ruling No. 89-231, in summarizing the remarks that were made on the floor of the House of Representatives by the House Co-Chairman of the Finance, Revenue and Bonding Committee, stated that "[the General Assembly intended that the controlling interest transfer tax provisions be operable only where conveyances were not made."
Having so summarized the legislative intent, the ruling ignored the fact that, in a merger or consolidation, a deed is superfluous. The Connecticut real property that X Corporation owned became, by operation of law, the real property of Y Corporation. "[All property, real, personal and mixed, ... belonging to ... each of the corporations so merged or consolidated, shall be taken and transferred to and vested in such single corporation without further act or deed; and the title to any real estate, or any interest therein, vested in any of such corporations shall not revert or be in any way impaired by reason of such merger or consolidation." Conn. Gen. Stat. §33-369(c).
In a merger of domestic and foreign corporations, "[if the surviving ... corporation is a foreign corporation, the effect of the merger ... shall be the same as in the case of the merger ... of domestic corporations except insofar as the laws governing such foreign corporation shall otherwise provide ...." Conn. Gen. Stat. §33-371(d). In the instant ruling, the surviving corporation is organized under the laws of the State of Delaware, and, under that law, "all property, real, personal and mixed, and all debts due to any [disappearing corporation] on whatever account ... shall be vested in the corporation surviving ... such merger ...." Del. Code Ann. tit. 8, §259(a).
Hence, where the transfer was by operation of law and a deed was superfluous, there was no basis for concluding that the controlling interest transfer tax provisions could not be operable.
Furthermore, while certain deeds that are exempt from real estate conveyance taxes under Conn. Gen. Stat. §12-498(a) have a corresponding exemption from controlling interest transfer taxes under 1989 Conn. Pub. Acts 251, 39(b), as amended by 1990 Conn. Pub. Acts 315, §3, there is no exemption from controlling interest transfer taxes with respect to a sale or transfer of a controlling interest pursuant to a merger of corporations.
Ruling No. 89-231 also ignored the provisions of N.Y. Tax Reg. §590.54, even though the Connecticut controlling interest transfer taxes are based on the New York real property transfer gains tax. That regulation provides that the merger of a corporation into another corporation may result in a transfer within the scope of the tax.
It should be noted that, where there is a transfer of a controlling interest pursuant to a merger, the transfer will not be subject to the controlling interest transfer taxes where a parent corporation is the surviving corporation in a merger with its wholly-owned subsidiary. In such a situation, unlike the situation involved in Ruling No. 89-231, the transferor and the transferee are the same person.
The merger of a corporation that owns Connecticut real property into another corporation can be a transfer subject to the controlling interest transfer taxes. Ruling No. 89-231 is revoked, and does not apply to transfers of controlling interests occurring on or after the date of this ruling.
January 22, 1991