Ruling 99-7, Real Estate Conveyance Tax
FACTS:
A, B and C have conducted business as equal one-third partners in a general partnership ("the Original Partnership"). The principal business of the Original Partnership is the ownership, development, operation and leasing of real and personal property. Due to the increasing value of the Original Partnership’s assets, an increasingly difficult insurance market, and the current litigious environment, the partners seek to insulate two apartment complexes owned by the Original Partnership from the other’s potential liabilities and from the potential liabilities of the other properties of the Original Partnership. Accordingly, the partners of the Original Partnership propose to divide it into three general partnerships: the Original Partnership, and two newly created partnerships ("the Newly Created Partnerships"). The Original Partnership will transfer one apartment complex to each of the Newly Created Partnerships. A, B, and C will continue to be equal partners in the Original Partnership and in each of the Newly Created Partnerships. The Original Partnership and the Newly Created Partnerships will qualify as continuing partnerships pursuant to 26 U.S.C. §708 and the regulations thereunder.
ISSUE:
Where a partnership ("the Original Partnership") owning several parcels of Connecticut realty is divided into three partnerships (the Original Partnership and two other partnerships (the Newly Created Partnerships)), and all of the partners in the Original Partnership are also the only partners in the Newly Created Partnerships, and there is no change in any of the partners’ ownership interests or in any of the partners’ share of the partnership liabilities, are the deeds transferring realty from the Original Partnership to each of the two Newly Created Partnerships subject to the real estate conveyance tax?
DISCUSSION:
The Real Estate Conveyance Tax Act, Conn. Gen. Stat. §12-494 et seq., imposes a tax on "each deed, instrument or writing, whereby any lands, tenements or other realty is granted, assigned, transferred or otherwise conveyed to, or vested in, the purchaser, or any other person by his direction, when the consideration for the interest or property conveyed equals or exceeds two thousand dollars ...."
"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... 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, quoted in Ruling No. 91-3 and Ruling No. 93-12.
A regulation that was promulgated under the federal Documentary Stamp Tax, on which the real estate conveyance tax is modeled, provided 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 ....
26 C.F.R. § 47.4383-1. Thus, under the federal Documentary Stamp Tax, a transfer of partnership realty to another partnership was not taxable if the partnership was considered to be a continuing partnership within the meaning of 26 U.S.C. §708.
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. More specifically, 26 C.F.R. § 1.708-1(b)(2)(ii) provides that
[upon the division of a partnership into two or more partnerships, any resulting partnership or partnerships shall be considered a continuation of the prior partnership if its members had an interest of more than 50 percent in the capital and profits of the prior partnership. Any other resulting partnership will not be considered a continuation of the prior partnership but will be considered a new partnership. If the members of none of the resulting partnerships owned an interest of more than 50 percent in the capital and profits of the divided partnership, the divided partnership is terminated. [Emphasis added].
Under the facts provided, the partners in the Newly Created Partnerships held a 100 percent interest in the capital and profits of the Original Partnership. Therefore, under 26 U.S.C. § 708, the Newly Created Partnerships are considered to be continuing partnerships, and, accordingly, deeds transferring realty from the Original Partnership to the Newly Created Partnerships are deeds that would not been subject to the federal documentary stamp tax.
The Department will follow 26 U.S.C. §708 and the regulations under the federal Documentary Stamp Tax to determine whether deeds transferring realty between partnerships will be subject to the real estate conveyance tax. Accordingly, where one partnership is divided into two or more partnerships, and the members of the new partnerships had an interest of more than 50 percent in the capital and profits of the prior partnership, the new partnerships are continuing partnerships, and real estate conveyance tax is not imposed on the deeds transferring realty from the original partnership to the continuing partnerships.
The deeds transferring the realty from the Original Partnership to the Newly Created Partnerships are also exempt under Conn. Gen. Stat. § 12-498(b)(17). See 1999 Conn. Pub. Acts 231, §1. This new real estate conveyance tax exemption, which applies to transfers occurring on or after October 1, 1999, provides that no real estate conveyance tax will apply to "transfers or conveyances to effectuate a mere change of identity or form of ownership or organization, where there is no change in beneficial ownership." Under the facts provided, there will be no change in beneficial ownership. The partners in the Original Partnership each owned a one-third interest in the realty held by the Original Partnership and will own a one-third interest in the realty that will be held by the Newly Created Partnerships. There is a mere change in the identity of the ownership.
RULING:
Where the partners in the two Newly Created Partnerships hold more than a 50% interest in the capital and profits of the Original Partnership, the two Newly Created Partnerships are considered to be continuing partnerships under 26 U.S.C. § 708, and no real estate conveyance tax is imposed on the deeds transferring realty from the Original Partnership to the Newly Created Partnerships.
LEGAL DIVISION
Issued December 17, 1999