When partners split one real-estate partnership into several, do the deeds moving property to the new partnerships trigger Connecticut real estate conveyance tax?

Plain-English summary

Three equal one-third partners (A, B and C) ran a real-estate general partnership that owned several Connecticut properties, including two apartment complexes. To insulate each apartment complex from the liabilities of the others (a rising-value, hard-insurance-market, litigious-environment concern), they proposed to divide the one partnership into three — the original partnership plus two newly created partnerships — and deed one apartment complex into each new partnership. Crucially, A, B and C would remain equal partners in all three partnerships, with no change in their ownership interests or shares of liabilities. They asked whether the deeds moving the real estate to the new partnerships were subject to Connecticut's real estate conveyance tax.

DRS said no tax, on two independent grounds:

• Continuing-partnership rule (federal-derived). Connecticut's Real Estate Conveyance Tax Act was modeled on the federal Documentary Stamp Tax, so DRS looks to the federal rules to interpret it. A federal regulation (26 C.F.R. § 47.4383-1) provided that no documentary stamp tax applied to a transfer of partnership realty to a continuing partnership within the meaning of 26 U.S.C. § 708. Under 26 C.F.R. § 1.708-1(b)(2)(ii), when a partnership divides, a resulting partnership is a continuation of the prior one if its members held more than 50% of the capital and profits of the prior partnership. Here the partners in each new partnership held 100% of the old partnership — so each new partnership is a continuing partnership, and the deeds are not taxed. DRS stated it will follow § 708 and the federal regulations to decide whether interpartnership realty transfers are subject to the conveyance tax.
• Mere-change-of-form exemption (statutory). The transfers are also exempt under Conn. Gen. Stat. § 12-498(b)(17) — the exemption (effective for transfers on or after October 1, 1999) for "transfers or conveyances to effectuate a mere change of identity or form of ownership or organization, where there is no change in beneficial ownership." Each partner owned a one-third beneficial interest before and after, so it was a mere change in the identity of ownership.

The two grounds reinforce each other: the reorganization moved title around among entities the same people owned, without shifting who really owns the real estate — so no conveyance tax.

What this means for you

Real-estate partnerships restructuring for liability protection

You can generally split a partnership's properties into separate partnerships — a common asset-protection move to wall off each building — without paying Connecticut conveyance tax, as long as the same owners keep more than 50% (here, all) of the capital and profits so the new partnerships "continue" the old one under IRC § 708, and beneficial ownership doesn't change. Line up the partnership-division mechanics with § 708 and document that the partners' interests carry through unchanged.

Real-estate attorneys and estate planners

Two routes to exemption exist and it's worth citing both: the § 708 continuing-partnership analysis (via the federal Documentary Stamp Tax rules DRS follows) and the statutory mere-change-of-form exemption in § 12-498(b)(17). The continuing-partnership route turns on the >50%-capital-and-profits test in 26 C.F.R. § 1.708-1(b)(2)(ii); the statutory route turns on "no change in beneficial ownership." Confirm both are satisfied at the time of the deeds.

Accountants and tax professionals

The conveyance tax attaches under § 12-494 to deeds with consideration of $2,000 or more. Because the Act is modeled on the federal Documentary Stamp Tax (former 26 U.S.C. § 4361), DRS imports § 708's continuation concept: a partnership division yields continuing partnerships where members held >50% of the prior partnership's capital and profits. Overlay the § 12-498(b)(17) mere-change-of-form exemption for post-Oct. 1, 1999 transfers. This analysis is consistent with DRS's prior guidance (Ruling No. 91-3; Ruling No. 93-12) and the Attorney General (1989 Op. Atty. Gen. 89-020).

Common questions

Q: Does splitting a real-estate partnership into several partnerships trigger Connecticut conveyance tax?
A: Not if the resulting partnerships "continue" the original under 26 U.S.C. § 708 — which they do when the same members held more than 50% of the prior partnership's capital and profits — and there's no change in beneficial ownership.

Q: Why does Connecticut look to federal partnership rules?
A: Because the Real Estate Conveyance Tax Act was modeled on the federal Documentary Stamp Tax, DRS follows § 708 and the related federal regulations to decide whether interpartnership realty transfers are taxable.

Q: Is there also a statutory exemption?
A: Yes. The transfers are exempt under Conn. Gen. Stat. § 12-498(b)(17) as a "mere change of identity or form of ownership … where there is no change in beneficial ownership" (for transfers on or after October 1, 1999).

Q: What if some partners had 50% or less in the original partnership?
A: The continuation test requires more than 50% of the prior partnership's capital and profits. A resulting partnership whose members didn't clear that threshold would not be a continuation — a different, potentially taxable, situation.

Citations and references

Connecticut statutes:

• Conn. Gen. Stat. § 12-494 (real estate conveyance tax on deeds with consideration of $2,000 or more)
• Conn. Gen. Stat. § 12-498(b)(17) (mere-change-of-form exemption), from 1999 Conn. Pub. Acts 231, § 1

Federal law and regulations:

• 26 U.S.C. § 708 (continuation of a partnership); former 26 U.S.C. § 4361 (Documentary Stamp Tax, model for the Connecticut act)
• 26 C.F.R. § 1.708-1(b)(2)(ii) (division of a partnership; >50% capital-and-profits continuation test)
• 26 C.F.R. § 47.4383-1 (no documentary stamp tax on transfer of partnership realty to a continuing partnership)

Prior guidance:

• Ruling No. 91-3; Ruling No. 93-12; 1989 Conn. Op. Atty. Gen. 89-020

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 99-7

Original ruling text

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