Did a real-property transfer into a combined business entity qualify for Virginia's merger, parent-subsidiary, or partnership recordation-tax exemptions?

Subject

Taxpayer contends that the transfer of property was exempt from recordation tax.

Plain-English summary

The taxpayer did not prove that the deed qualified for any of the three claimed recordation-tax exemptions. Exemptions are strictly construed, and the documents supplied did not substantiate the merger, parent-subsidiary, or qualifying partnership/LLC requirements in Va. Code § 58.1-811.

The Department left a separate valuation issue open. It asked the circuit court clerk to review whether the assessed value overstated fair market value and whether the deed had been taxed as transferring more than the actual interest conveyed. If the clerk found an error, the Department would refund the appropriate state tax and the county would handle the local refund.

What this means for you

• A business reorganization does not establish an exemption without documents showing every statutory condition.
• Assessed value has a strong presumption of accuracy but is not the only evidence a clerk may consider.
• Clear and cogent evidence may support a different fair market value on the recording date.
• The clerk, not the Department, was best positioned to determine the property's value and transferred interest.

Common questions

Did the Department finally deny every possible refund?

No. It rejected the unsupported exemption claim but requested review of the value and amount of property taxed.

Who would issue a refund after that review?

The Department would refund state recordation tax; the county would issue any local-tax refund.

Citations and references

• Va. Code §§ 58.1-800 et seq., 58.1-801, 58.1-802, 58.1-814, and 58.1-811(A)(8)-(10), (C)(1).
• Commonwealth v. Community Motor Bus Co., 214 Va. 155, 198 S.E.2d 619 (1973).
• Shoosmith Bros. v. County of Chesterfield, 268 Va. 241, 601 S.E.2d 641 (2004).
• Tidewater Psychiatric Institute v. Virginia Beach, 256 Va. 136, 501 S.E.2d 761 (1998).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-266

Original ruling text

December 15, 2010

Re: § 58.1-1824 Application: Recordation Tax

Dear *:

This will reply to your letter in which you request a refund of state and local recordation taxes paid by * (the "Taxpayer") for recording a deed. I apologize for the delay in responding to your letter.

FACTS

In June 2008, * ("Corporation A") and *** ("Corporation B") merged their United States operations into a combined entity that commenced operating as the Taxpayer. Corporation A and Corporation B maintained a 58% and 42% interest in the Taxpayer, respectively.

As part of this merger, real property located in * (the "County") was transferred from Corporation B to the Taxpayer and recordation taxes were paid. The Taxpayer has requested the refund of the recordation taxes paid, contending that the transfer of the property was exempt from recordation tax under either Va. Code §§ 58.1-811 A 8, 58.1-811 A 9, or 58.1-811 A 10.

DETERMINATION

Virginia Code § 58.1-800 et seq ., imposes the state tax on the recordation of documents relating to real estate transactions. A recordation tax is imposed on any instrument admitted to record unless otherwise exempt by statute. Virginia Code § 58.1-801 imposes a state recordation tax of 25¢ on every $100 or fraction thereof of the consideration of the deed or the actual value of the property conveyed, whichever is greater. Virginia Code § 58.1-802 imposes an additional grantor's tax of 50¢ on every $500 or fraction thereof, exclusive of any lien or encumbrance remaining thereon at the time of the sale, of the consideration of the sale. Virginia Code § 58.1-814 permits any city or county to impose a recordation tax equal to 1/3 of the amount of state recordation tax.

Virginia Code § 58.1-811 provides exemptions from the recordation tax for certain transfers of real estate. Specifically, Va. Code §§ 58.1-811 provides exemptions from the transfer tax imposed by Va. Code § 58.1-801 for any deed conveying real estate or lease of real estate:

8. To the surviving or new corporation, partnership, limited partnership, business trust, or limited liability company upon a merger or consolidation to which two or more such entities are parties, or in a reorganization within the meaning of § 368(a)(1)(C) and (F) of the Internal Revenue Code as amended;

9. To a subsidiary corporation from its parent corporation, or from a subsidiary corporation to a parent corporation, if the transaction qualifies for nonrecognition of gain or loss under the Internal Revenue Code as amended;

10. To a partnership or limited liability company, when the grantors are entitled to receive not less than 50 percent of the profits and surplus of such partnership or limited liability company; provided that the transfer to a limited liability company is not a precursor to a transfer of control of the assets of the company to avoid recordation taxes.

Virginia Code § 58.1-811 C; 1 extends these exemptions to the grantor's tax imposed by Va. Code § 58.1-802.

Statutes granting tax exemptions are construed strictly against the taxpayer. Commonwealth v. Community Motor Bus Co., Inc. , 214 Va. 155, 198 S.E.2d 619 (1973). Accordingly, the burden of proving that the assessment is incorrect lies with the Taxpayer. In the instant case, the Department requested documents to support the Taxpayer's claims concerning the recordation tax exemptions. While the Taxpayer has provided some of the documents, the Department is unable substantiate the Taxpayer's claims based on the information provided. As such, the Taxpayer has not met its burden of demonstrating that the transfer of the real property in the County qualifies for any exemption granted by Va. Code § 58.1-811.

Even if the Taxpayer's transaction does not meet any of the exemptions, it has indicated that the transfer of property was taxed at the assessed value which was greater than the consideration. Furthermore, the Taxpayer states that only half of the property was actually transferred. Virginia Code § 58.1-802 provides for a grantor's tax to be imposed on each deed, instrument, or writing by which lands, tenements or other realty sold is granted, assigned, transferred, or otherwise conveyed to, or vested in the purchaser. "The rate of the tax, when the consideration or value of the interest, whichever is greater, exceeds $100, shall be 50 cents or each $500 or fraction thereof . . . ." [Emphasis added.]

The assessed value is accorded a very strong presumption of accuracy in determining fair market value. See Shoosmith Bros., Inc. v. County of Chesterfield , 268 Va. 241, 601 S.E.2d 641 (2004) and Tidewater Psychiatric Institute, Inc. v. Virginia Beach , 256 Va. 136, 501 S.E.2d 761 (1998).

The Clerk of the Circuit Court, however, is not required to use the assessed value to the exclusion of other reliable information as to the current fair market value. If it can be shown by clear and cogent evidence why the assessed value does not reflect fair market value as of the date of the transaction, the Clerk has the authority to rely on such evidence to determine the proper amount of the recordation tax. See Public Document (P.D.) 00-97 (5/26/2000) and P.D. 06-77 (8/23/2006).

Placing a value on real estate is entirely a factual determination that is best made by one who is thoroughly familiar with the property itself and local market conditions. This responsibility lies with the Clerk when the value must be determined for recordation tax purposes. See P.D. 91-146 (8/2/1991).

The Department will, however, send a copy of this letter to the Clerk and request a review of the determination of the actual value of the property. It is also requested that the Clerk review the Taxpayer's contention that tax was imposed on the conveyance of more property than was actually transferred. If the Clerk determines that an incorrect amount of tax was paid, the Department will refund the appropriate amount of state recordation tax. A refund of the local recordation tax would The issued by the County.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Linda D. Foster

Deputy Tax Commissioner

AR/1-41008535901.B