Was a post-confirmation deed transfer required by a Chapter 11 plan subject to Virginia state and local grantor's tax?

Subject

Chapter 11 plan transfer was exempt from grantor's tax

Plain-English summary

The deed transfer required by the confirmed Chapter 11 plan was exempt from Virginia's state and local grantor's tax. Federal bankruptcy law barred a stamp or similar tax on the post-confirmation transfer.

The taxpayer was indirectly owned by an affiliate of the debtor in possession. The confirmed plan required transfers of the debtor's and affiliates' assets, and this deed was recorded after confirmation. That brought it within 11 U.S.C. § 1146(a) as applied by the ruling.

Although the deed did not state a Virginia statutory exemption section, the county clerk's state-law authority to demand such a citation could not override the federal exemption. The Department ordered the state portion refunded and sent the ruling to the county so it could refund the local portion.

What this means for you

• The transfer must occur pursuant to and after confirmation of the Chapter 11 plan under the rule applied here.
• Federal bankruptcy law can override state recording requirements for the exempt transfer.
• State and local grantor-tax portions may be refunded by different authorities.

Citations and references

• Va. Code §§ 58.1-802 and 17.1-223 A; 11 U.S.C. §§ 1129 and 1146(a).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-13

Original ruling text

January 12, 2015

Re: § 58.1-1821 Application: Recordation Tax

Dear *:

This will reply to your letter in which you request a refund of the state and local grantor tax paid by * (the "Taxpayer") for recording a deed in the *** (the "County").

FACTS

The Taxpayer was 100% indirectly owned by * (LP). LP was a controlled subsidiary of *** (Corporation A). Corporation A was a debtor in possession under a Chapter 11 bankruptcy plan (the "Plan") confirmed under 11 U.S.C. § 1129 by a United States bankruptcy court. Pursuant to the Plan, the Taxpayer transferred real property by special warranty deed to a grantee and paid the state and local grantor's tax. The Taxpayer requests a refund of the grantor's tax it paid, contending it was exempt from the Virginia Recordation Tax under federal bankruptcy law.

DETERMINATION

Virginia Code § 58.1-802 imposes a 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, on the greater of actual value of the property conveyed or the consideration of the sale. Half of the amount of the grantor's tax collected goes to Virginia, and the other half goes to the locality in which the property transferred is located. See Va. Code § 58.1-802 B.

If a debtor in bankruptcy sells real property pursuant to a plan of reorganization confirmed under 11 U.S.C. § 1129, the transfer will not be subject to state or local recordation taxes provided the transaction occurs after the plan's confirmation. See Public Document (P.D.) 92-174 (9/10/1992). Under 11 U.S.C. § 1146 (a) (2005), transfers of property pursuant to a plan confirmed under 11 U.S.C. § 1129 may not be taxed under any law imposing a stamp or similar tax, which includes a recordation tax.

The Plan requires Corporation A to transfer its assets and the assets of its affiliates. The transfer occurred after the Plan was confirmed. As such, the Taxpayer's sale of the subject property pursuant to the Plan was not subject to Virginia state or local income tax.

The subject deed did not provide the statutory section exempting the transaction from recordation tax. Virginia Code § 17.1-223 A grants county clerks the authority to reject any writing for filing or recordation unless the Virginia Code section under which an exemption from recordation taxes is claimed is clearly stated on the face of the writing. However, this authority cannot be used to ignore any federal law that established an exemption from recordation taxes. See P.D. 13-58 (5/1/2013).

Based on the forgoing, the deed recorded by the Taxpayer was not subject to the grantor's tax. The Department will refund the appropriate amount of the grantor's tax. The Department will send a copy of this letter to the Clerk of the County and a refund of the local portion of the grantor's tax will be issued by the County.

The Code of Virginia sections and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department's website. If you have and questions, please contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-5699245252.B