Was real property contributed by a corporation for a 42% LLC interest exempt from Virginia recordation tax?

Plain-English summary

Virginia denied all three claimed recordation-tax exemptions for the property contribution to the new LLC. Two corporations combined their U.S. operations into an LLC, and Corporation B transferred county real estate for a 42% membership interest.

The merger or reorganization exemption did not apply because both corporations continued to exist, the transferee was an LLC issuing membership interests rather than a corporation issuing voting stock, and the transaction was not a mere corporate-form change.

The parent-subsidiary exemption also failed. Although the contribution qualified for federal nonrecognition under IRC § 721, the deed ran from a corporation to an LLC rather than between parent and subsidiary corporations. The 50%-ownership exemption failed because the only deed grantor, Corporation B, received 42% of the LLC.

Virginia denied the exemption refund. A separate issue remained: the clerk had been asked to review whether the assessed value and amount of property used for the original tax were correct. A valuation or conveyance error could still support state and local refunds.

What this means for you

• Federal nonrecognition does not by itself create a Virginia recordation-tax exemption.
• Entity type and continued legal existence matter.
• The ownership test looked to the deed's grantor, not the combining parties collectively.
• Separate valuation errors can remain open even when an exemption fails.

Citations and references

• Va. Code §§ 13.1-721(A), 58.1-800, 58.1-801, 58.1-802, 58.1-811, and 58.1-814.
• IRC §§ 368(a)(1)(C), 368(a)(1)(F), and 721.
• Virginia Public Document 10-266 (December 15, 2010).
• Commonwealth v. Community Motor Bus Co., Inc., 214 Va. 155, 198 S.E.2d 619 (1973).

Subject

Clerk to review the actual valuation of the property transferred.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 11-186

Original ruling text

November 16, 2011

Re: § 58.1-1824 Application: Recordation Tax

Dear *:

This will reply to your letter in which you seek reconsideration of the Department's determination letter, issued as Public Document (P.D.) 10-266 (12/15/2010) to * (the "Taxpayer") addressing a request for a refund of recordation taxes paid.

FACTS

In June 2008, * (Corporation A) and (Corporation B) merged their United States operations into a limited liability company (LLC) 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 in exchange for membership shares in the LLC and recordation taxes were paid.

In P.D. 10-266, the Department denied the Taxpayers request for a refund because the Taxpayer provided insufficient documentation that the transfer of the real property in the County qualifies for any exemption granted by Va. Code § 58.1-811. The Taxpayer has provided additional documentation and requests a redetermination that the transfer of its property located in the County was exempt from recordation tax.

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 one-third of the amount of state recordation tax.

Virginia Code § 58.1-811 provides exemptions from the recordation tax for certain transfers of real estate. Virginia Code § 58.1-811 C 1 extends these exemptions to the grantor's tax imposed by Va. Code § 58.1-802. The Department has examined the additional documentation provided by the Taxpayer to determine if the transaction was eligible for one of three exemptions in Virginia in Va. Code § 58.1-811 A.

Virginia Code § 58.1-811 A 8 provides an exemption from recordation tax on a deed conveying real estate to a surviving or new corporation, partnership, limited partnership, business trust or limited liability company in a merger or consolidation, or in a reorganization as defined in Internal Revenue Code (IRC) § 368(a)(1)(C) and (F). Virginia Code § 13.1-721 A provides that a merger requires that the existence of the entity or entities being merged into the surviving entity ceases existence. In a consolidation, a new entity is formed and the corporations entering into the consolidation cease to exist. As such, a merger or consolidation require that at least one of the corporations entering into the merger, consolidation or reorganization cease to exist after the merger, consolidation or reorganization occurs. In this case, both Corporation A and Corporation B continued to exist after the creation of the Taxpayer.

Under IRC § 368(a)(1)(C), a reorganization is the acquisition by one corporation, in exchange solely for all or a part of its voting stock for substantially all of the properties of another corporation. In this case, the Taxpayer was not a corporation, it was a limited liability company that issued membership shares in the LLC, not voting stock to Corporation B. Under IRC § 368(a)(1)(F), a reorganization is a mere change in identity, form, or place of organization of one corporation. This type of reorganization clearly does not apply to the Taxpayer's transaction. As such, the exemption under Va. Code § 58.1-811 A 8 is not applicable.

Virginia Code § 58.1-811 A 9 provides an exemption from recordation tax on a deed conveying real estate 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 IRC. The Taxpayer contends that this transaction qualifies for the nonrecognition of gain or loss under IRC § 721. Under IRC § 721(a), no gain or loss is recognized to a partner when property is contributed to the partnership in exchange for an interest in the partnership.

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). In the Taxpayer's case, the property was conveyed from a corporation to a limited liability company. Based on the principle of strict construction of tax exemptions, the transaction at issue does not meet the criteria established in Va. Code § 58.1-811 A 9, and the exemption does not apply.

Virginia Code § 58.1-811 A 10 provides an exemption from recordation tax on a deed conveying real estate to a partnership or LLC when the grantors are entitled to receive at least 50% of the profits and surplus of such partnership or LLC. In this case, the only grantor of the property on the deed transferring the real property was Corporation B. Corporation B only retained a 42% interest in the Taxpayer. Thus, the exemption under Va. Code § 58.1-811 A 10 does not apply.

Accordingly, the Taxpayer's request for a refund of recordation taxes paid for the transfer of the property located in the County is denied. However, in P.D. 10-266 it was acknowledged that the transfer of property was taxed at the assessed value that was greater than the consideration and that only half of the property, may have been transferred. P.D. 10-266 requested that the Clerk review the actual valuation of the property transferred and the Taxpayer's contention that tax was imposed on the conveyance of more property than ways actually transferred. If the Clerk determines that an incorrect amount of tax was paid, the Department would refund the appropriate amount of state recordation tax and the County would issue a refund for the proper amount of the local recordation tax.

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,

Craig M. Burns

Tax Commissioner

AR/1-4659259873.B