Ruling 99-6, Controlling Interest Transfer Taxes

FACTS:

P, a parent corporation of a controlled group, owns all of the shares of S1, a first-tier subsidiary corporation. S1 owns all of the shares of S2, a second-tier subsidiary corporation that owns Connecticut real property, the present true and actual value of which is not less than $2,000. S1 will merge into S2, with S2 being the surviving corporation. Pursuant to the merger, P’s shares in S1 will be cancelled and P will receive shares in S2. After the merger, P will directly own all the shares of S2.

ISSUE:

Within a controlled group, will the merger of a first-tier subsidiary into its own subsidiary, which owns Connecticut real property, be a sale or transfer subject to the controlling interest transfer tax where the parent corporation that indirectly controlled the corporation holding the real estate before the merger directly controls the corporation holding the real estate after the merger?

DISCUSSION:

Conn. Gen. Stat. §12-638b 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 ...." "Controlling interest" is defined in Conn. Gen. Stat. §12-638a(2)(A) as meaning "in the case of a corporation, more than fifty per cent of the total combined voting power of all classes of stock of such corporation ..."

The elements of a taxable transfer, all six of which must be present, are set out in LSN-89, Revised Special Notice Concerning Controlling Interest Transfer Taxes (Rev. 7/90):

1. A transferor (or a group of transferors acting in concert) must transfer a controlling interest in an entity.
2. The controlling interest must be transferred to a transferee (or a group of transferees acting in concert).
3. The transfer must be for consideration.
4. The entity must own Connecticut real property.
5. The present true and actual value of the Connecticut real property must not be less than $2,000.
6. The transfer of a controlling interest must occur on or after July 1, 1989.

The Department has ruled that a merger involving a wholly-owned subsidiary and its parent corporation, where the parent corporation is the surviving corporation, is not subject to the controlling interest transfer tax, because the transferor and the transferee are the same. Ruling No. 91-2.

The Department more recently ruled that "[the merger of a first-tier wholly-owned subsidiary of a parent corporation into another first-tier wholly-owned subsidiary of the same parent corporation is not a sale or transfer subject to the controlling interest transfer tax." Ruling No. 98-3. "Such a merger does not constitute a taxable sale or transfer of a controlling interest, because the first two of six elements of a taxable sale or transfer that are set out in LSN-89 are not present, and, in order for a taxable sale or transfer to occur, all six of the elements must be present." Id.

The two rulings discussed above instruct us that a transfer of ultimate control is necessary for the tax to apply. Here, because there is a merger within a controlled group of wholly-owned subsidiaries, ultimate control has not changed. Initially, P’s control of the Connecticut real property was indirect, through its ownership of S1, whereas after the merger P’s control of the property is direct, through its 100% ownership of S2. Thus, while S2 will be directly controlled by P after the merger, S2 was indirectly controlled by P prior to the merger. However, since this is a merger within a controlled corporate group of wholly-owned subsidiaries, the merger of S1 into S2 does not result in a transfer of the ultimate control of the Connecticut real property that is owned by S2. As a result, the merger is not deemed to be a transfer of a controlling interest.

RULING:

Within a controlled corporate group, the merger of a first-tier subsidiary of a parent corporation into its own subsidiary, which owns Connecticut real property, is not a transfer subject to the controlling interest transfer taxes where the same interest that indirectly controls the corporation holding the real estate before the merger, directly controls the corporation holding the real estate after the merger.

LEGAL DIVISION

Issued November 1, 1999