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

Thu Apr 2 11:35:12 PDT 2015

Rob, I had an instance a few years ago where the title company for some
reason did not list the percentages right in the transfer to the LLC. DOR
allowed a revision in the title to reflect the right percentages and then
allowed the transfer as mere like kind exchange.  I think what was missed
here was something on title to show the 50/50 ownership.  I would ask DOR
what they want to see on title to establish the 50/50 ownership prior to
transfer to the LLC.

On Thu, Apr 2, 2015 at 9:58 AM, Jeanne Dawes <jjdawes at goregrewe.com> wrote:

>  Rob, I should have been more clear.  If the transfer already occurred
> from Grantor to LLC, and at the time of transfer the LLC already had two
> members, trying to call it a gift now, may be problematic.  But, if you are
> able rescind the transaction between the Grantor and LLC, and then do a
> gift from Grantor to significant other, and then have the two of them
> convey to LLC, that should work.    Possibly instead of rescinding, you can
> do a re-record to correct Grantee. And then go from there.  Just some
> ideas.  I’m not sure how DOR will respond, but it’s worth a shot.
>
>
>
> *Jeanne*
>
>
>
> *Jeanne J.* *Dawes*
>
> Attorney at Law
>
> Gore & Grewe, P.S.
>
> 103 E. Indiana Avenue, Suite A
>
> Spokane, WA 99207-2317
>
> Voice:  509-326-7500
>
> Fax:      509-326-7503
>
> jjdawes at goregrewe.com
>
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>
> *From:* wsbarp-bounces at lists.wsbarppt.com [mailto:
> wsbarp-bounces at lists.wsbarppt.com] *On Behalf Of *Rob Rowley
> *Sent:* Thursday, April 02, 2015 9:41 AM
> *To:* WSBA RPPT
> *Subject:* [WSBARP] Mere Change In Identity (WAC 458-61A-211) & A
> Committed Intimate Relationship - DOR Audit Letter
>
>
>
> 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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-- 
Mary K. Henderson
Henderson Law Office PLLC
1123 Maple Ave SW, Suite 225
Renton, WA 98057
206-650-2472
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