[WSBARP] Mere Change In Identity (WAC 458-61A-211) & A Committed Intimate Relationship - DOR Audit Letter

Thu Apr 2 09:40:41 PDT 2015

Has anyone had any experience in responding to a DOR audit letter where DOR
is challenging a transfer of residential rental properties from an
individual into a Washington State LLC where the grantor is still in a 15+
year, committed intimate relationship with his spouse (but held title
solely in his name and properties were acquired during C-I-R) and the new
LLC has equally split ownership (50/50 member interests) between the two
C-I-R individuals.

DOR is taking the position that because they were not married or in a
registered domestic partnership that it is not exempt, and as such wants
lots and lots of money.

Thoughts?

*Robert R. Rowley* | Attorney at Law

505 W. Riverside Ave, Suite 500

Spokane, WA  99201

Telephone: (509) 252-5074

Mobile: (509) 994-1143

Facsimile: (509) 928-3084

Email: rob at rowleylegal.com

Web Site: www.rowleylegal.com

Practice concentrated on business, real estate and general legal matters in
Washington and Idaho.

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WAC 458-61A-211

Agency filings affecting this section
<http://app.leg.wa.gov/WAC/registerfiling.aspx?cite=458-61A-211>
Mere change in identity or form—Family corporations and partnerships.

(1) *Introduction.* A transfer of real property is exempt from the real
estate excise tax if it consists of a mere change in identity or form of
ownership of an entity. This exemption is not limited to transfers
involving corporations and partnerships, and includes transfers of trusts,
estates, associations, limited liability companies and other entities. If
the transfer of real property results in the grantor(s) having a different
proportional interest in the property after the transfer, real estate
excise tax applies.

(2) *Qualified transactions.* A mere change in form or identity where no
change in beneficial ownership has occurred includes, but is not limited to:

(a) The transfer by an individual or tenants in common of an interest in
real property to a corporation, partnership, or other entity if the entity
receiving the ownership interest receives it in the same pro rata shares as
the individual or tenants in common held prior to the transfer. (See also
WAC 458-61A-212 <http://app.leg.wa.gov/WAC/default.aspx?cite=458-61A-212>,
Transfers where gain is not recognized under the Internal Revenue Code.)

(b) The transfer by a corporation, partnership, or other entity of its
interest in real property to its shareholders or partners, who will hold
the real property either as individuals or as tenants in common in the same
pro rata share as they owned the corporation, partnership, or other entity.
To the extent that a distribution of real property is disproportionate to
the interest the grantee partner has in the partnership, it will be subject
to real estate excise tax.

(c) The transfer by an entity of its interest in real property to its
wholly owned subsidiary, the transfer of real property from a wholly owned
subsidiary to its parent, or the transfer of real property from one wholly
owned subsidiary to another.

(d) The transfer by a corporation, partnership or other entity of its
interest in real property to another corporation, partnership, or other
entity if the grantee owner(s) receives it in the same pro rata shares as
the grantor owner(s) held prior to the transfer.

(e) Corporate mergers and consolidations that are accomplished by transfers
of stock or membership, and mergers between corporations and limited
partnerships as provided in chapters 25.10
<http://app.leg.wa.gov/RCW/default.aspx?cite=25.10> and 24.03
<http://app.leg.wa.gov/RCW/default.aspx?cite=24.03> RCW.

(f) A transfer of real property to a newly formed, beneficiary corporation
from an incorporator to the newly formed corporation, provided:

(i) The proper real estate excise tax was paid on the original transfer to
the incorporator; and

(ii) It was documented on or before the original transfer that the
incorporator received title to the property on behalf of that corporation
during its formation process.

This tax exemption does not apply to a transaction in which a property
owner acquires title in his or her own name and later transfers title to
the corporation upon its formation.

(g) A transfer into any revocable trust.

(h) A conveyance from a trustee of a revocable trust to the original
grantor or to a beneficiary if no valuable consideration passes, or if the
transaction is otherwise exempt under this chapter (for example, a gift or
inheritance). A sale of real property by the trustee to a third party, or
to a beneficiary for valuable consideration, is subject to the real estate
excise tax.

(3) *Examples.* The following examples, while not exhaustive, illustrate
some of the circumstances in which a grant of an interest in real property
may or may not qualify for this exemption. These examples should be used
only as a general guide. The taxability of each transaction must be
determined after a review of all the facts and circumstances.

(a) Andy owns a 100% interest in real property. He transfers his property
to his solely owned corporation. The transfer is exempt from real estate
excise tax because there has been no change in the beneficial ownership
interest in the property.

(b) Elizabeth owns a 100% interest in real property, and is the sole owner
of Zippy Corporation. She transfers her property to Zippy. The corporation
pays $5,000 to Elizabeth and agrees to make payments on the underlying debt
on the property. Despite the fact that there was consideration involved in
the transfer, it is still exempt from tax because there was no change in
beneficial ownership.

(c) Jim, Kathie, and Tim own real property as joint tenants. They transfer
their property to their LLC in the same pro rata ownership. The transfer is
exempt from real estate excise tax because there has been no change in
beneficial ownership.

(d) Pat, Liz, and Erin own Stage Corporation. They also own Song & Dance
Partnership, in the same pro rata ownership percentages as their interests
in the corporation. Stage Corporation transfers real property to Song &
Dance Partnership. The transfer is exempt from real estate excise tax,
because there has been no change in beneficial interest.

(e) Morgan owns real property. Brea owns Sparkle Corporation. Morgan
transfers real property to Sparkle in exchange for an interest in the
corporation. The transfer is subject to real estate excise tax because
there has been a change in the beneficial interest in the real property.
The tax applies to the extent that the transfer of real property results in
the grantor having a different proportional interest in the property after
it is transferred. (Note, however, that Morgan and Brea may be able to
structure their transaction in a manner that would qualify for exemption
under WAC 458-61A-212
<http://app.leg.wa.gov/WAC/default.aspx?cite=458-61A-212>.)

(f) Dan owns property as sole owner. Jill owns property as sole owner. Dan
and Jill each transfer their property to Rhyming LLC, which they form
together. The transfers are taxable because there has been a change in the
beneficial ownership interest in the real property. To the extent that the
transfer of real property results in the grantor having a different
proportional interest in the property after the transfer, it is taxable.
(Note, however, that Dan and Jill may qualify for an exemption under WAC
458-61A-212 <http://app.leg.wa.gov/WAC/default.aspx?cite=458-61A-212>.)

(g) Fred and Steve are equal partners in Jazzy Partnership. They decide to
transfer real property from the partnership to themselves as individuals.
Based on its true and fair value, the partnership transfers 60% of the real
property to Fred and 40% to Steve. This distribution is not in proportion
to their ownership interest in Jazzy Partnership, and the transfer is not
exempt because there has been a change in the beneficial ownership
interest. To the extent that the transfer of property results in the
grantor having a different proportional interest in the property after the
transfer, it is taxable. (Note, however, that Fred and Steve may qualify
for an exemption under WAC 458-61A-212
<http://app.leg.wa.gov/WAC/default.aspx?cite=458-61A-212>.)

(4) *Disparate treatment of ownership interests.*

(a) Where the ownership of real property is different for financial
accounting purposes than for federal tax purposes, the beneficial ownership
interest in the real property is deemed the entity which is the owner for
financial accounting purposes. Any transfer from the entity that is the
owner for federal tax purposes to the owner for financial accounting
purposes, or vice versa, is subject to the real estate excise tax.

(b) For example, Giant Company wants to expand its business. It identifies
some real property, but is unable to finance the purchase through a normal
loan. It contracts with Mega Loans Inc. to enter into a "synthetic lease"
for the purchase of the real property. Under the terms of the synthetic
lease, Mega Loans will take title to the real property, and Giant Company
will lease it from Mega Loans. Real estate excise tax is paid on the
purchase of the real property by Mega Loans. The terms of the lease also
provide that Giant Company will be the owner for federal tax purposes and
Mega Loans will be the owner for financial accounting purposes. Per the
lease agreement, after a specified time Mega Loans will transfer title to
the real property to Giant Company. The transfer of title from Mega Loans
to Giant Company is subject to real estate excise tax.

(5) *Family corporations, partnerships, or other entities.* This exemption
applies to transfers to an entity that is wholly owned by the transferor
and/or the transferor's spouse, state registered domestic partner,
children, or state registered domestic partner's children regardless of
whether the transfer results in a change in the beneficial ownership
interest. However, real estate excise taxes will become due and payable on
the original transfer as otherwise provided by law if:

(a) The partnership or corporation thereafter voluntarily transfers the
property; or

(b) The transferor, spouse, state registered domestic partner, children, or
state registered domestic partner's children voluntarily transfer stock in
the corporation, or interest in the partnership capital to other than:

(i) The transferor and/or the transferor's spouse, state registered
domestic partner, children, or state registered domestic partner's children;

(ii) A trust having the transferor and/or the transferor's spouse, state
registered domestic partner, children, or state registered domestic
partner's children as the only beneficiaries at the time of transfer to the
trust; or

(iii) A corporation or partnership wholly owned by the original transferor
and/or the transferor's spouse, state registered domestic partner,
children, or state registered domestic partner's children within three
years of the original transfer to which this exemption applies, and the tax
on the subsequent transfer is not paid within sixty days of becoming due.

For example, parents own real property as individuals. They create an LLC
that is owned by themselves and their three children. The parents transfer
the real property to the LLC. Despite the fact that there was a change in
beneficial ownership interest, it is still exempt from tax, because the LLC
is owned by the grantor and/or the grantor's spouse, state registered
domestic partner, children, or state registered domestic partner's children.

(6) *Transfers when there is not a change in identity or form of ownership
of an entity.* This exemption applies to transfers of real property when
the grantor and grantee are the same.

For example, John and Megan own real property as tenants in common. They
decide that they prefer to hold the property as joint tenants with rights
of survivorship. John and Megan, as tenants in common, convey the property
to John and Megan as joint tenants with rights of survivorship. The
transfer is exempt from real estate excise tax.

[Statutory Authority: 2009 c 521. WSR 10-07-133, § 458-61A-211, filed
3/23/10, effective 4/23/10. Statutory Authority: RCW 82.32.300
<http://app.leg.wa.gov/RCW/default.aspx?cite=82.32.300>, 82.04.150, and
82.01.060(2). WSR 06-20-036, § 458-61A-211, filed 9/25/06, effective
10/26/06. Statutory Authority: RCW82.32.300
<http://app.leg.wa.gov/RCW/default.aspx?cite=82.32.300>, 82.01.060(2), and
82.45.150. WSR 05-23-093, § 458-61A-211, filed 11/16/05, effective
12/17/05.]
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