Was South Carolina documentary tax due when a grantor trust transferred real estate to partnerships owned in the same percentages by the trust's eight grantors and beneficiaries?

Plain-English summary

South Carolina Private Letter Ruling 89-20 concluded that a grantor trust's transfer of real estate to two partnerships was not subject to documentary tax because the ownership percentages did not change.

The same eight people were the trust's sole grantors and beneficiaries and the partnerships' only partners. Each person owned 12.5% of the trust property before the transfer and 12.5% of each partnership afterward.

The ruling made that identity of ownership essential: the transfer was exempt if and only if each partner's percentage interest in the partnership was the same as that person's percentage interest in the real estate held by the trust before the conveyance.

The ownership structure

Eight people initially owned the properties as equal tenants in common. In 1980 they transferred their undivided interests to a grantor trust to simplify administration, because decisions about the property otherwise required approval and signatures from all co-tenants.

Each grantor and beneficiary held a 12.5% interest in the trust property. In 1989 the same eight people formed two partnerships, and each person also owned 12.5% of each partnership. They then directed the trust to convey the property to those partnerships.

No outsider entered the ownership group, and no owner's percentage changed.

The general rule for partnership contributions

Section 12-21-380 imposed documentary tax on an instrument conveying "realty sold." The ruling noted the Tax Commission's longstanding position that contributing real property to a partnership generally was a taxable conveyance.

The cited federal guidance explained the reason: when one partner contributes real estate to a partnership with other owners, the contributor effectively transfers undivided interests to the other partners and receives interests in their contributed property or cash.

The ruling therefore did not create a general exemption for partnership contributions. It distinguished this transfer because the real estate was not shifted to anyone who was not already a grantor and beneficial owner in the same percentage.

Why this transfer was not taxed

The Commission summarized the limiting rule this way: a partnership contribution is taxable when it transfers an undivided interest in the realty to partnership members other than the transferor.

Here, every grantor and beneficiary became a partner, and each person's 12.5% share stayed the same. The Commission therefore concluded that the particular transfer was not taxable under section 12-21-380.

What this means for you

Property owners reorganizing into a partnership

PLR 89-20 turned on exact continuity of ownership. The favorable result depended on the same people owning the same percentages before and after the deed.

Trustees and grantor-trust beneficiaries

The trust form did not by itself prevent tax. What mattered was that all grantors and beneficiaries were the only partners and that no beneficial percentage shifted.

Partnerships receiving contributed real estate

The ruling reaffirmed that a contribution of realty to a partnership generally could be treated as a taxable conveyance. Its exception was limited to unchanged ownership on the stated facts.

Title and tax professionals

The deed's tax treatment required comparing the beneficial ownership immediately before the conveyance with the partnership ownership immediately afterward. A new partner or a changed percentage would fall outside the ruling's express condition.

Readers applying the ruling today

PLR 89-20 applied the documentary-tax statute and authorities cited in 1989. Current deed-tax statutes, rates, exemptions, entity rules, and administrative guidance must be checked under current law.

Common questions

Q: Are contributions of real estate to a partnership always exempt?

A: No. The ruling said that a contribution of realty to a partnership generally is subject to documentary tax.

Q: Why was this particular transfer not taxed?

A: The same eight people owned the property before and after the conveyance, and each person's ownership percentage remained 12.5%.

Q: Did the grantor-trust structure alone create the exception?

A: No. The Commission required all grantors and beneficiaries to be partners and required each partner's percentage interest to match the person's prior percentage in the trust property.

Q: What if one partner received a larger percentage after the transfer?

A: That would fail the ruling's express identical-percentage condition. PLR 89-20 did not decide the tax consequences of that different transaction.

Q: What if the partnership included a new owner?

A: That would also fall outside the ruling's facts and its requirement that all partners be the grantors and beneficiaries who owned the realty before the transfer.

Q: Can another taxpayer rely on PLR 89-20?

A: No. The ruling states that it applied only to the requesting taxpayer's specific facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 12-21-380 (Supp. 1987) — documentary tax on deeds and other instruments conveying realty sold
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — private-letter-ruling authority
• Internal Revenue Regulation 47.4361-2(a)(12) — partnership-contribution conveyance rule cited in the ruling
• M.T. 4, 1942-2 C.B. 275 — federal analysis limiting tax to interests transferred to partnership members other than the transferor
• 1979 Op. S.C. Att'y Gen. No. 2876, at 12 — Tax Commission position cited in the ruling

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR89-20.pdf

Original ruling text

SC PRIVATE LETTER RULING #89-20

TO:

XYZ

SUBJECT:

Realty, Held in Trust, Transferred to a Partnership
(Documentary Tax)

REFERENCE:

S.C. Code Ann. Section 12-21-380 (Supp. 1987)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
Does the contribution, by a grantor trust, of realty owned by the trust, to a partnership in which
the grantors/beneficiaries are the only partners, constitute "realty sold", thereby subject to the
documentary tax, pursuant to Code Section 12-21-380?
Facts:
On September 4, 1980 eight persons, who were equal tenants in common of certain properties,
transferred their undivided interest in such properties into a trust. The purpose of the trust was to
simplify the daily administration of the properties since any action concerning the use of the
properties required the approval and signatures of all co-tenants. The trustee under this
agreement was ABC. The trust was a grantor trust. Each grantor/beneficiary under the trust held
a 12.5% interest in the trust's properties.
On December 15, 1981 the Trust Agreement was amended substituting XYZ, one of the
beneficiaries of the trust, as trustee.
On September 1, 1989 these same eight persons, the sole beneficiaries of the grantor trust,
formed two partnerships. Each person owns a 12.5% interest in each partnership, the same
interest held by each partner, as beneficiaries, in the realty held in the grantor trust.

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As beneficiaries of the trust, these eight persons have now directed the transfer of the property
from the trust to the partnerships. After the conveyance, each partner will continue to own a
12.5% interest in each partnership, which is the same percentage ownership held by each partner,
prior to the transfer, as a beneficiary of the trust.
Discussion:
The issue is the taxability of the transfer, to a partnership, of realty jointly owned by all partners.
Code Section 12-21-380 reads, in part:
A deed, instrument, or writing whereby any lands, tenements, or other realty sold
is granted, assigned, transferred, or otherwise conveyed to, or vested in, the
purchaser or any value of the interest of property conveyed exclusive of the value
of any lien or encumbrance remaining thereon at the time of sale exceeds one
hundred dollars and does not exceed five hundred dollars must be taxed one dollar
and ten cents and for each additional five hundred dollars, or fractional part
thereof, one dollar and ten cents. (emphasis added)
The above cited code section is similar to a now repealed federal documentary tax statute.
Internal Revenue Regulation 47.4361-2 (a)(12) stated that "[a] conveyance of realty by a partner
to a partnership as a contribution of partnership assets" is a conveyance subject to the tax.
In addition, it has been the long-standing position of the Tax Commission that "[a] conveyance
of property to a partnership in the partnership name as a contribution of partnership assets is a
conveyance subject to the documentary tax" 1979 Ops. Atty. Gen., No. 2876, p. 12.
However, in M.T. 4, (I.R.S. Manual Transmittal) 1942-2 CB 275, it was held:
Section 3482 of the Internal Revenue Code, as amended by
section 1 of the Revenue Act of 1939, sections 209 and 210 of the Revenue Act of
1940, and sections 505 and 521(a)24 of the Revenue Act of 1941, imposes a
stamp tax on any "Deed, instrument, or writing * * * whereby any lands,
tenements, or other realty sold shall be granted, assigned, transferred, or otherwise
conveyed to, or vested in, the purchaser or purchasers * * *." Section 113.81(b)
of Regulations 71 (1941) provides that the "term 'sold' imports transfer of title for
a valuable consideration which may involve money or anything of value."
A partnership is not a legal entity separate and distinct from its component
members. Partnership property is the common property of the partners, whose
interest therein is that of co-owners, being similar in many respects to that of
tenants in common. Accordingly, since partners are treated as co-owners of all
the partnership assets, when a partner contributes real estate to the partnership
assets he receives a consideration in exchange. For example, where partners A
and B contribute real estate to the partnership, has in effect sold an undivided
interest in his land for an undivided interest in B's property. An exchange of real
estate constitutes a taxable conveyance of both pieces of real estate. (Section

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113.83(a) of Regulations 71 (1941).) Likewise, where A contributes real estate
and B contributes an amount of cash or property to the partnership, A has in effect
sold an undivided interest in his real estate for an undivided interest in the cash or
property contributed by B.
In view of the foregoing, it is held that a conveyance of realty to a partnership by
a partner as a contribution to partnership assets constitutes a conveyance of realty
sold subject to stamp tax under section 3482 of the Internal Revenue Code, as
amended, to the extent that the conveyance is a transfer of an undivided interest in
the realty to members of the partnership other than the transferor. (emphasis
added)
In summary, a conveyance of realty by a partner to a partnership, as a contribution of partnership
assets, is subject to the tax; however, M.T.4, 1942-27 CB 275 qualifies such a statement. The
conveyance must be a transfer to partners who are not the grantors or transferors of the realty, in
order for the transaction to be subject to the tax.
Conclusion:
A conveyance of realty by a partner to a partnership, as a contribution of partnership assets, is
subject to the documentary tax, pursuant to Code Section 12-21-380.
However, where realty, which is owned by a grantor trust, is conveyed by the
grantors/beneficiaries of the trust to a partnership in which all of the grantors/beneficiaries are
partners, the conveyance is not subject to the documentary tax, if and only if, as here, each
partner's percentage interest in the realty held in trust (prior to the conveyance) is the same as his
percentage interest in the partnership. Accordingly, the transfer in question is not subject to
taxation under Section 12-21-380.

SOUTH CAROLINA TAX COMMISSION
s/S. Hunter Howard, Jr.
S. Hunter Howard, Jr., Chairman
s/A. Crawford Clarkson, Jr.
A. Crawford Clarkson, Jr., Commissioner
s/T. R. McConnell
T. R. McConnell, Commissioner

Columbia, South Carolina
December 12,
, 1989

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