Did selling partnership interests totaling 50% of profits trigger controlling-interest transfer tax when the buyers were unrelated and not acting in concert?

Plain-English summary

A limited partnership owned Connecticut real property worth at least $2,000 and planned to sell limited-partnership interests. If every offered interest sold, the new limited partners collectively would receive 50% of the partnership's profits.

The ruling assumed the interests would not go to one buyer and would not go to buyers acting in concert. It also assumed there would be no relationship allowing one buyer to influence another and no unified negotiation or purchase shown by closely timed transfers, few buyers, common contract terms, or agreements binding buyers to a shared course of action.

DRS said the historical controlling-interest transfer tax required six elements. Five were present: a transfer of at least a 50% partnership interest, consideration, ownership of Connecticut real property, property value of at least $2,000, and a transfer on or after July 1, 1989.

The sixth element was absent on the assumed facts: the controlling interest was not transferred to one transferee or to a group acting in concert. The proposed sales therefore were not taxable under the cited 1989 act.

That conclusion was expressly fact-dependent. DRS warned that whether buyers acted in concert was a question of fact and that the general partner could not rely on the ruling if events did not match the assumptions.

What this means for you

For the historical tax, splitting a 50% interest among multiple buyers did not automatically avoid tax. The decisive question was whether those buyers were effectively one coordinated group. Relationships, negotiation unity, transaction timing, contract terms, and buyer agreements could change the answer.

Common questions

Was 50% treated as a controlling partnership interest? Yes. The ruling defined it as 50% or more of capital, profits, or beneficial interest.

Did multiple buyers automatically prevent tax? No. Buyers acting in concert could still satisfy the transferee element.

What facts suggested concerted action? Relationships involving influence or control, closely related timing, few buyers, mutual contract terms, or agreements binding buyers to a common course.

Could the requester rely on the ruling if the facts changed? No. DRS expressly conditioned reliance on its factual assumptions.

Citations and references

• 1989 Conn. Pub. Acts 251, §§ 38-53, especially § 39.
• Special Notice Concerning Controlling Interest Transfer Taxes (Form LSN-89), as described in the ruling.

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 90-40

Original ruling text

Ruling 90-40, Controlling Interest / Transfer Tax

Ruling 90-40

Controlling Interest / Transfer Tax

ISSUE PRESENTED

Whether a transfer is a transfer subject to the tax imposed by 1989 Conn. Pub. Acts 251, §39 where the controlling interest transferred is not transferred to one transferee (or a group of transferees acting in concert).

RULING ISSUED

A transfer is not a transfer subject to the tax imposed by 1989 Conn. Pub. Acts 251, §39 where the controlling interest transferred is not transferred to one transferee (or a group of transferees acting in concert).

FACTS FOUND

A request for the issuance of a letter ruling was made by the general partner of a limited partnership that owns an interest in Connecticut real property.

The present true and actual value of such interest in real property is $2000 or more.

Such interest in real property is not open space land, farm land or forest land, as those terms are defined in the Special Notice Concerning Controlling Interest Transfer Taxes (Form LSN-89).

The general partner is the sole partner of the limited partnership, and the general partner intends to offer for sale limited partnership interests in the limited partnership. If all such interests are sold, the limited partners will be entitled to 50% of the profits of the limited partnership.

The limited partnership interests will be sold on or after July 1, 1989.

The limited partnership anticipates, and it is assumed for purposes of this letter ruling that the facts will develop as anticipated, that the limited partnership interests will not be sold to one transferee.

The limited partnership anticipates, and it is assumed for purposes of this letter ruling that the facts will develop as anticipated, that the limited partnership interests will not be sold to a group of transferees acting in concert; i.e., the transferees will not be so related that one influences or controls the actions of another (such as parent and subsidiary corporations, parents and children, husbands and wives, etc.).

The limited partnership anticipates, and it is assumed for purposes of this letter ruling that the facts will develop as anticipated, that there will not be a unity with which the transferees have negotiated and will consummate their purchase of the limited partnership interests (such as purchases that are closely related in time; transferees that are few in number; purchase contracts that contain mutual terms; and agreements among transferees binding them to a course of action with respect to the transfers).

CONCLUSIONS OF LAW

While the Commissioner of Revenue Services has not promulgated regulations pertaining to the controlling interest transfer taxes enacted by 1989 Conn. Pub. Acts 251, §§38 through 53, inclusive, he has caused to be issued a Special Notice Concerning Controlling Interest Transfer Taxes (Form LSN-89). This Special Notice indicates that there are six elements --all of which must be present--of a transfer subject to the tax imposed by 1989 Conn. Pub. Acts 251, §39. Those elements are:

A transferor must transfer a controlling interest in an entity. A controlling interest in a partnership is 50% or more of the capital, profits or beneficial interest in the partnership.

The transfer must be for consideration.

The entity in which a controlling interest is being transferred must own an interest in Connecticut real property.

Such interest in real property must have a present true and actual value not less than $2000.

The transfer of a controlling interest must occur on or after July 1, 1989, and a transfer or transfers of an interest in the entity before such date will be disregarded in determining whether a transfer of a controlling interest has occurred on or after such date.

While the five preceding elements are all present here, the sixth element is not, or is assumed for purposes of this letter ruling not to be, present. The controlling interest in an entity must be transferred to a transferee or to a group of transferees acting in concert. Where transferees are so related that one influences or controls the actions of another (such as parent and subsidiary corporations, parents and children, husbands and wives, etc.), the transferees will be presumed to be acting in concert. Where there is a unity with which transferees have negotiated and will consummate their purchase of ownership interests (such as transfers that are closely related in time; transferees that are few in number; purchase contracts that contain mutual terms; and agreements among transferees binding them to a course of action with respect to the transfers, etc.), the transferees will be presumed to be acting in concert.

Whether or not a controlling interest in an entity is transferred to one transferee (or a group of transferees acting in concert) is a question of fact. For purposes of issuing this letter ruling, factual assumptions have been made. This letter ruling is premised on those assumptions, and, to the extent that the facts do not develop as anticipated, this letter ruling cannot be relied upon by the general partner.

To the extent that, because the facts develop as anticipated, this letter can be relied upon, it is premised solely on the absence of one of the six elements of a transfer subject to the tax imposed by 1989 Conn. Pub. Acts 251, §39.

LEGAL DIVISION

April 12, 1990