Is assigning the unexpired term of a nonrenewable 99-year ground lease subject to Connecticut's real estate conveyance tax?

Plain-English summary

A tenant held a nonrenewable 99-year ground lease of land in Connecticut and, as the lease required, built a building on it — a building the tenant would own during the lease term but which would revert, without payment, to the landlord when the lease ended. The tenant financed the building with a mortgage. After the note matured (with the balance exceeding the property's value) the tenant defaulted, and after months of delinquency the lenders released the tenant from the debt in exchange for the tenant assigning all its interest in the leased premises (the unexpired lease plus the building) to an assignee — a subsidiary of one of the lenders. The question: is that assignment a conveyance subject to Connecticut's State and municipal real estate conveyance taxes under Conn. Gen. Stat. § 12-494?

No. Connecticut's conveyance tax reaches conveyances of "realty." Under Conn. Agencies Regs. § 12-494-1(b)(2), a lease (or other ownership interest) counts as "realty" only if it "endure[s] for a fixed period of 99 years or more, or … may so endure because of extension or renewal options." And Conn. Agencies Regs. § 12-494-2(c)(5) says a lease other than one meeting that 99-year test is not a conveyance.

DRS had already decided essentially the same question in Ruling 90-74 (which involved a 50-year lease), and treated that ruling as controlling here. Applying it: the interest being assigned — the unexpired remainder of a nonrenewable 99-year lease — does not endure for a fixed period of 99 years or more, and cannot be extended or renewed to reach that mark. The transfer of the improvements does move ownership interests in realty, but those interests likewise don't endure 99 years or more. So neither piece is a conveyance of taxable "realty," and no conveyance tax applies.

DRS also explained why it follows its own regulation over an old federal rule of thumb. Connecticut's Real Estate Conveyance Tax Act was modeled on the repealed federal Documentary Stamp Tax (26 U.S.C. § 4361), and an old federal memorandum (G.C.M. 23295) suggested a 99-year lease was itself taxable. But no federal regulation adopted that approach, and the Connecticut regulations reject it — Connecticut uses the "99 years or more" fixed-period test instead. The Connecticut regulation, approved by the legislative regulation-review committee, gets great deference (citing Phelps Dodge, Texaco, and Fusco-Amatruda).

What this means for you

Ground-lease tenants, landlords, and their lenders

Whether transferring a lease interest triggers Connecticut conveyance tax turns on the 99-years-or-more test. A lease (or the assignment of what's left of one) that cannot endure for 99 years or more — because it's nonrenewable and its remaining term is shorter — is generally not a taxable conveyance.

The remaining term and renewal options are what count

Look at whether the interest being transferred endures, or can be extended/renewed to endure, for 99 years or more. A nonrenewable lease whose unexpired term is under 99 years falls outside "realty," and so does a transfer of improvements that won't endure that long.

Deeds/assignments in lieu of foreclosure

Even in a workout — a tenant assigning a defaulted ground lease and its building to the lender in exchange for debt release — the conveyance-tax question is the same 99-year "realty" test, applied to the interest actually transferred.

This is the conveyance tax, not the sales tax

Connecticut's real estate conveyance tax has both a state and a municipal component (unlike the sales tax, which is state-only). This ruling addresses that conveyance tax; confirm the current statute and regulation, which have changed over time.

Common questions

Q: Is assigning a 99-year ground lease subject to Connecticut conveyance tax?
A: Not on these facts. DRS held the assignment of the unexpired term of a nonrenewable 99-year ground lease isn't a conveyance of "realty," because the interest doesn't endure (and can't be renewed to endure) for 99 years or more.

Q: What is the test for a lease being taxable "realty"?
A: Under Conn. Agencies Regs. § 12-494-1(b)(2), the lease or interest must endure for a fixed period of 99 years or more, or be able to so endure through extension or renewal options.

Q: The tenant also transferred a building — isn't that realty?
A: The improvements are realty interests, but they didn't endure for 99 years or more either (they revert to the landlord at lease end), so their transfer wasn't a taxable conveyance under the regulation.

Q: Doesn't an old federal rule treat a 99-year lease as taxable?
A: An old federal memorandum suggested that, but no federal regulation adopted it and Connecticut's regulations reject it. DRS follows Connecticut's "99 years or more" fixed-period test, which is entitled to deference.

Citations and references

Statutes, regulations, and authorities:

• Conn. Gen. Stat. § 12-494 (State and municipal real estate conveyance taxes); § 12-504
• Conn. Agencies Regs. § 12-494-1(b), (b)(2) ("realty"; long-term leases); § 12-494-2(c)(5) (leases that are not conveyances)
• 26 U.S.C. § 4361 (federal documentary stamp tax); G.C.M. 23295, 1942-2 Cum. Bull. 271; 1989 Conn. Op. Atty. Gen. 89-020
• Phelps Dodge Copper Products Co. v. Groppo, 204 Conn. 122, 527 A.2d 672 (1987); Texaco Refining & Marketing Co. v. Commissioner of Revenue Services, 202 Conn. 583, 522 A.2d 771 (1987); Fusco-Amatruda Co. v. Tax Commissioner, 168 Conn. 597 (1975)

Related guidance (described in prose, not linked):

• Ruling Nos. 90-74 (controlling; 50-year lease) and 91-3 (quotes the Attorney General opinion)
• Ruling 99-7 (cites this Ruling)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 93-12

Original ruling text

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