Ruling 93-12, Real Estate Conveyance Taxes
This Ruling is cited in Ruling 99-7
FACTS:
Under a nonrenewable ground lease (hereinafter referred to as "the Ground Lease") with a term of 99 years, a landlord (hereinafter referred to as "the Landlord") leased premises (hereinafter referred to as "the Leased Premises") located in Connecticut to a general partnership (hereinafter referred to as "the Tenant"). No improvements were constructed on the Leased Premises at the commencement of the term of the Ground Lease, but the Tenant was obligated under the Ground Lease to construct a building on the Leased Premises. The building was to be owned by the Tenant during the term of the Ground Lease and to revert, without consideration, to the Landlord upon expiration of such term. Two financial institutions made a mortgage loan to the Tenant, and the Tenant executed a note in favor of, and gave a mortgage on the Leased Premises and the improvements to be constructed thereon to, the financial institutions.
The note matured after seven years, at a time when the principal balance of the mortgage exceeded the fair market value of the Leased Premises. After that date, the Tenant made no further payments. After mortgage payments had been delinquent for not less than six months, the financial institutions released the Tenant from liability on the mortgage and note in exchange for the assignment by the Tenant of all of its rights, title and interest in the Leased Premises to an assignee. The assignee was a wholly owned subsidiary of one of the financial institutions.
ISSUE:
Whether the assignment by a tenant of the unexpired portion of a nonrenewable 99-year ground lease and the transfer by the tenant of the improvements constructed thereon by it, which improvements are to revert, without consideration, to the landlord upon the expiration of the ground lease, is a conveyance that is subject to State and municipal real estate conveyance taxes under Conn. Gen. Stat. § 12-494.
DISCUSSION:
This issue was addressed in Ruling No. 90-74, except a 50-year, rather than a 99-year, ground lease was involved. The Ruling stated in pertinent part:
Conn. Agencies Regs. § 12-494-1(b)(2) defines "realty" as including, but not being limited to, "long-term leases or other ownership interests which endure for a fixed period of 99 years or more, or which may so endure because of extension or renewal options."
Conn. Agencies Regs. § 12-494-2(c)(5) gives as an example of a transaction which is not a conveyance and, accordingly, not subject to the State and municipal real estate conveyance taxes "a lease other than a lease described in § 12-494-1(b)(2)."
The Ground Lease neither endures for a fixed period of 99 years or more nor may so endure because of extension or renewal options. A fortiori, the assignment of the unexpired term of the Ground Lease will not be a lease described in § 12-494-1(b)(2).
The transfer of improvements that were constructed on the Leased Premises will transfer ownership interests in realty, but those interests neither endure for a fixed period of 99 years or more nor may so endure because of extension or renewal options. Accordingly, the transfer of those interests will not be a conveyance of "realty", as defined in Conn. Agencies Regs. § 12-494-1(b).
Ruling No. 90-74, at 1-2.
This Ruling is controlling and is followed here. As 1989 Conn. Op. Atty. Gen. 89-020, which is quoted in Ruling No. 91-3, indicates:
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. 89-020, at 112-114. [Emphasis furnished]
G.C.M. 23295, 1942-2 Cum. Bull. 271 implies that a lease of real estate for 99 years is not subject to the documentary stamp tax.
Thus, for example, a lease of real estate for 999 years, or a lease for 99 years renewable forever or for several succeeding terms is taxable. On the other hand, a lease for five years is not taxable even if the right is granted to renew it for several successive terms.
G.C.M. 23295, 1942-2 Cum. Bull. 271, 275.
However, there are no federal regulations that expressly adopt this approach, and the Connecticut regulations reject this approach.
Even if there were federal regulations expressly adopting the approach of G.C.M. 23295, 1942-2 Cum. Bull. 271 and conflicting with the Connecticut regulations, the Connecticut Supreme Court has stated that "the commissioner's regulatory interpretation of the statute, which he is charged with administering, is entitled to great deference and weight. [Citation omitted]" Phelps Dodge Copper Products Co. v. Groppo, 204 Conn. 122, 128-129, 527 A.2d 672 (1987).
The fact that the commissioner's regulation has been approved by the standing legislative regulation review committee, although not dispositive of the issue ... is an important consideration in our determination of whether the commissioner's regulation comports with the legislative intent ... Texaco Refining & Marketing Co. v. Commissioner of Revenue Services, 202 Conn. 583, 599-600, 522 A.2d 771 (1987); Connecticut Hospital Assn. v. Commission on Hospitals & Health Care, 200 Conn. 133, 144, 509 A.2d 1050 (1986). The committee's "ratification" of the regulation shows support for the proposition that the commissioner's regulatory interpretation of the statute "is part of the general statutory scheme" that the legislature has provided for the imposition of the ... tax.
Id., at 129-130.
The Court also cited Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597, 605 (1975). Fusco-Amatruda involved the validity of Conn. Agencies Regs. § 12-416-18, the promulgation of which long preceded the creation by 1971 Conn. Pub. Acts 854, 5 of a standing legislative committee whose duty it is to approve or disapprove proposed regulations. The Court upheld the regulation, even though its provisions concerning the taxability of sales made to contractors constructing buildings for certain governmental or exempt organizations were unauthorized by the legislature at the time of its promulgation. "[T]he principle is well established that administrative acts, rules, and regulations unauthorized by the legislature at the time of promulgation may, for the most part, become valid and binding by ratification." Id., at 605. The Court concluded that the regulation was impliedly ratified upon the General Assembly's refusal to disapprove it, and that, accordingly, "the regulation thereafter acquired the force of law, and the exemption conferred thereunder became as effective as if the legislature itself had originally enacted it." Id., at 608. It stands to reason that, if an unauthorized regulation can be impliedly ratified upon the failure of the General Assembly to act, such a regulation can be impliedly ratified upon the affirmative act of the regulation review committee to approve it.
RULING:
The assignment by a tenant of the unexpired portion of a nonrenewable 99-year ground lease and the transfer by the tenant of the improvements constructed thereon by the tenant, which improvements are to revert, without consideration, to the landlord upon the expiration of the ground lease, is not a conveyance that is subject to State and municipal real estate conveyance taxes under Conn. Gen. Stat. § 12-494.
LEGAL DIVISION
May 27, 1993