Connecticut State Department of Revenue Services

Ruling 91-24

Real Estate Conveyance Taxes

FACTS:

  1. Under a quitclaim release that was delivered on April 5, 1983, three individuals [hereinafter, "X, Y and Z"], as tenants in common, each received an undivided one-third interest in real property [hereinafter, "Parcel A"] located in a Connecticut town. The quitclaim release was recorded on June 9, 1983.
  2. X, Y and Z filed a Certificate of Adoption of Trade Name with the town clerk of the same Connecticut town on June 3, 1983.
  3. Under a quitclaim release that was delivered on June 15, 1983, X, Y and Z, as tenants in common, doing business as XYZ Associates (the trade name indicated in the Certificate of Adoption of Trade Name), each received an undivided one-third interest in real property [hereinafter, "Parcel B"] located in the same Connecticut town. The quitclaim release was recorded on June 22, 1983.
  4. XYZ Associates has filed a Form 1065 (U.S. Partnership Return of Income) with the Internal Revenue Service since calendar year 1980. The 1980 Form 1065 indicates that XYZ Associates started business on January 1, 1980 and that its principal service is the rental of real estate.
  5. From calendar year 1980 to the present, the Schedules K-1 for XYZ Associates's Form 1065 have indicated that X, Y and Z each hold a one-third partnership interest.
  6. X, Y and Z executed a Partnership Agreement on April 16, 1990, providing that the term of the Partnership would begin on that same date. The Partnership Agreement recited that "[the Partners have been involved in various joint ventures in the past as tenants-in-common" and "[the Partners desire to establish a partnership so as to provide for the continuation in management and ownership of the Partnership and the Property and to provide for a mechanism for selling property during life as well as for death, disability or incompetency." Partnership property was to include Parcels A and B.
  7. With respect to both Parcels A and B, X, Y and Z wish to deliver for recordation on the Land Records a quitclaim release from X, Y and Z, as tenants-in-common, to XYZ Associates.

ISSUE:

Whether a quitclaim release to a partnership from its three partners is a contribution of partnership assets subject to the real estate conveyance taxes, where the original acquisition of such property by those three as tenants-in-common preceded the execution of a partnership agreement characterizing prior dealings among the three as joint ventures involving the co-ownership of property and expressing the desire of the three to establish a partnership.

DISCUSSION:

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) (quoted in Ruling No. 91-3).

One such pertinent regulation promulgated under the federal act was 26 C.F.R. §47.4361-2(a)(12). It provided 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.

If a partnership did not exist until the Partnership Agreement was executed on April 16, 1990, then a deed, instrument or writing conveying Parcels A and B to the partnership on or after April 16, 1990 would be "a contribution of partnership assets"; 26 C.F.R. §47.4361-2(a)(12). However, if a partnership did exist from the date indicated by XYZ Associates on its 1980 Form 1065, then a deed, instrument or writing conveying Parcels A and B to the partnership on or after April 16, 1990 might not be a contribution of partnership assets. Conn. Agencies Regs. §12-494-2(d)(2).

Under the Uniform Partnership Act; Conn. Gen. Stat. §34-39 et seq.; title to real property may be in the partnership name or title may be in the name of one or more of the partners. Conn. Gen. Stat. §34-48. Hence, the fact that the title to Parcels A and B is not in the name of the partnership does not mean that Parcels A and B are not partnership property. The question is whether, prior to April 16, 1990, X, Y and Z had formed a partnership.

While the filing of a Certificate of Adoption of Trade Name by XYZ Associates could be evidence that, under the assumed name of XYZ Associates, X, Y and Z were conducting or transacting business, the filing could just as plausibly be evidence that X, Y and Z wished to avoid any possibility of criminal prosecution for violating Conn. Gen. Stat. §35-1. "The remedial purpose of the statute manifestly was that the public should have ready means of information as to the personal or financial responsibility behind the assumed name. Its aim was the protection of those who might deal with or give credit to the fictitious entity." Sagal v. Fylar, 89 Conn. 293, 297-298, 93 A. 1027 (1915). Like partners, co-tenants deal with or are given credit by merchants, tradesmen and lenders. Conn. Gen. Stat. §35-1 protects those merchants, tradesmen and lenders in their dealings with persons, whether partners or co-tenants, using an assumed name.

The filing of Forms 1065 by XYZ Associates is evidence that a partnership may have existed for federal income tax purposes since January 1, 1980. Those filings are not evidence that a partnership existed before April 16, 1990 for State law purposes. "The term 'partnership' is broader in scope than the common law meaning of partnership, and may include groups not commonly called partnerships." 26 C.F.R. §§1.761-1(a) and 301.7701-3(a). "Whether a partnership existed for federal tax purposes is to be determined by federal law, although local law is relevant to such an analysis. Haley v. Commissioner, 203 F.2d 815 (5th Cir. 1953)." Buckley v. United States, 76-1 U.S.T.C. 9473 (W.D. Tex. 1976). While local law may be relevant, it is not controlling.

Whether a joint enterprise is a partnership at common law or under state partnership statutes is not determinative of its status for income tax purposes. Therefore, an enterprise may be classified as a partnership for [federal income] tax purposes even though it is not, or could not be, a partnership under a state partnership statute.

McKee, Nelson & Whitmore, Federal Taxation of Partnerships and Partners 3.01 [1] (2d ed. 1990) [hereinafter, "McKee"].

In Nichols v. Commissioner, 32 T.C. 1032 (1959), acq., 1960-2 C.B. 6, the Tax Court held that a partnership existed for federal income tax purposes between a physician and his non-physician wife, even though such a partnership would be illegal under State law. In Rev. Rul 77-332, 1977-2 C.B. 484, the Internal Revenue Service ruled that accountants who were not certified public accountants were considered to be partners for federal income tax purposes, even though those accountants could not be partners under State law.

Conversely, the fact that a joint enterprise is a partnership under state law is not dispositive of its classification for federal income tax purposes.

McKee at 3.01[1].

In rejecting an argument that Congress could not subject an entity that was a partnership under State law to a corporate income tax, the Supreme Court observed, in upholding the application of the tax to the entity:

It is true that Congress cannot convert into a corporation an organization which by the law of its State is deemed to be a partnership. But nothing in the Constitution precludes Congress from taxing as a corporation an association which, although unincorporated, transacts its business as if it were incorporated. The power of Congress so to tax associations is not affected by the fact that, under the law of a particular State, the association cannot hold title to property, or that its shareholders are individually liable for the association's debts, or that is not recognized as a legal entity. Neither the conception of unincorporated associations prevailing under the local law, nor the relation under that law of the association to its shareholders, nor their relation to each other and to outsiders, is of legal significance as bearing upon the power of Congress to determine how and at what rate the income of the joint enterprise shall be taxed.

Burk-Waggoner Oil Ass'n v. Hopkins, 269 U.S. 110, 114 (1925).

In determining whether a deed, instrument or writing conveys realty as a contribution of partnership assets, Connecticut partnership law will determine whether or when a partnership exists.

"A partnership is an association of two or more persons to carry on as co-owners a business for profit." Conn. Gen. Stat. §34-44(1). "Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property." Conn. Gen. Stat. §34-45(2). "Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership ...." Conn. Gen. Stat. §34-47(1). "To find a true partnership, a mutual agency relationship is essential. " Travis v. St. John, 176 Conn. 69, 72-73, 404 A.2d 885 (1978) (citations omitted).

The Partnership Agreement characterized the prior activities of X, Y and Z as joint ventures involving the co-ownership of Parcels A and B. "The distinction between a partnership and a joint venture is often slight, the former commonly entered into to carry on a general business, while the latter is generally limited to a single transaction." Travis v. St. John, 176 Conn. 69, 72, 404 A.2d 885 (1978) (citations omitted).

X, Y and Z, in executing the Partnership Agreement, expressed their "desire to establish a partnership so as to provide for the continuation in management and ownership of the Partnership and the Property...."

To determine the nature of an association the court looks to the intent of the parties. In the present case, the association was established for the sole purpose of investing in a single parcel of real estate. The record does not indicate any intention by the parties to carry on a trade, occupation or business, or to create an agency relationship among themselves. The only indicium of a partnership in this case was the agreement to share profits or losses. We conclude that the agreement entered into by the parties did not constitute a partnership within the ambit of the Uniform Partnership Act.

Travis v. St. John, supra, at 73.

The terms of the Partnership Agreement are conclusive evidence that a partnership did not exist for Connecticut partnership law purposes until the execution of the Partnership Agreement.

"Although parties might prefer to have the court decide the plain effect of their contract contrary to the agreement, it is not within its power to make a new and different agreement; contracts voluntarily and fairly made should be held valid and enforced in the courts." Robert Lawrence Associates, Inc. v. Del Vecchio, 178 Conn. 1, 22, 420 A.2d 1142 (1979).

Fidelity Trust Co. v. BVD Associates, 196 Conn. 270, 282, 492 A.2d 180 (1985).

RULING:

A quitclaim release to a partnership from its three partners is a contribution of partnership assets subject to the real estate conveyance taxes, where the original acquisition of such property by those three as tenants-in-common preceded the execution of a partnership agreement characterizing prior dealings among the three as joint ventures involving the co-ownership of property and expressing the desire of the three to establish a partnership.

LEGAL DIVISION

August 29, 1991