[WSBARP] Controlling Interest Transfer

[Kaitlyn Jackson]

Thank you, Professor, Bickel!

On Wed, Jun 17, 2020 at 4:36 PM Jennifer Johnson <jmhanigan at cni.net> wrote:

> Wow, indeed!!  Dwight, thank you so much for spending your time on this.
> This is a huge help.
>
>
>
> Jennifer
>
>
>
> *Jennifer M. Johnson*
>
> Attorney
>
> Hanigan Law Office, PS
>
> PO Box 39 - 68 Main Street
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> Cathlamet, WA 98612
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> *From: *<wsbarp-bounces at lists.wsbarppt.com> on behalf of "Gregory L.
> Ursich" <gursich at insleebest.com>
> *Reply-To: *WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com>
> *Date: *Wednesday, June 17, 2020 at 2:41 PM
> *To: *WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com>
> *Subject: *Re: [WSBARP] Controlling Interest Transfer
>
>
>
> Dwight: WOW!
>
>
>
> [image: cid:image003.jpg at 01D644B5.44C04930]
>
> *Gregory L. Ursich *
>
> Shareholder
>
> Skyline Tower, Suite 1500 | 10900 NE 4th Street | Bellevue, WA 98004
>
> P: 425.450.4258 | F: 425.635.7720
>
> *vCard <http://www.insleebest.com/uploads/vcards/gursich.vcf>* | *website
> <http://www.insleebest.com/>* | *gursich at insleebest.com
> <gursich at insleebest.com>*
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>
> *From:* wsbarp-bounces at lists.wsbarppt.com [mailto:
> wsbarp-bounces at lists.wsbarppt.com] *On Behalf Of *Dwight Bickel
> *Sent:* Wednesday, June 17, 2020 2:15 PM
> *To:* WSBA Real Property Listserv <wsbarp at lists.wsbarppt.com>; Jennifer
> Johnson <jmhanigan at cni.net>
> *Subject:* Re: [WSBARP] Controlling Interest Transfer
>
>
>
> Jennifer Johnson posted a complicated question. The answer is more
> complicated due to new statutes and regulations.  The answer is further
> difficult because the position of the DOR about reporting exempt
> transactions is less clear with controlling interest transfers without a
> recorded document that prompts the affidavit claiming exemption.
>
>
>
> I believe that the described series of transfers result in obligations to
> report the transfers to the DOR, but the determinations about taxability
> vary between the separated transfers in the example, where most are exempt
> but one is taxable under the real estate sales tax statutes and
> regulations.
>
>
>
> The starting point is that 50% of the controlling interest has transferred
> to one person within 36 months [Review 2020 versions of RCW 82.45.010(2)(a)
> and 82.45.033(1)(b) and examples within WAC 458-61A-101(2)(ii).] However,
> some transfers were not necessarily "sales" that require payment of the
> tax. The DOR now claims affidavits are needed for transfers that are
> exempt, such as transfers by operation of law, like inheritance and court
> orders.
>
>
>
> It is important to separately analyze and report each of the five
> transfers. The first transfer already occurred in December 2018, when the
> 25% interest of D transferred by operation of law when D1, D2, D3 and D4
> inherited 6.25% each. The first transfer is inheritance from D which is not
> a taxable sale [(3)(a) and 458-61A-202]. I presume the title is held by the
> LLC and no deeds are recorded.
>
>
>
> The DOR believes that an Excise Tax Affidavit is required for transfers by
> operation of law to tell the DOR about the transfer of ownership, even when
> exempt, and even if there is no recording. See RCW 82.45.197 and WAC
> 458-61A-101; WAC 458-61A-303(2) applies if there was court order or deed of
> distribution recorded]. There is a fee of course. However, that was not a
> controlling interest transfer by definition. No deed is required to be
> recorded and no affidavit is required under the controlling interest
> statute at that time. If an affidavit was otherwise required, like
> recording a distribution deed, that statute states the documents needed to
> claim the exemption from real estate sales tax. D1 is the logical person
> to complete the affidavit related to the inheritance from D.
>
>
>
> The next three proposed transfers are proposed gifts from D2, D3 and D4 to
> D1. The combined transfers of 18.75% are not sales of a controlling
> interest [(3)(b)]. They are probably exempt as gifts and also exempt as
> partition among tenants in common [(3)(e)]. The affidavit requirements will
> be different if a recording is intended.
>
>
>
> Gift transfers are not necessarily exempt though, based on the DOR relief
> from debt rules [458-61A-103]. However, in this example, no consideration
> is attributed due to assumption of debt by D4 because D1, D2 and D3 could
> have no personal liability for D's debt. D1 may or might not choose to pay
> any debt encumbering the property.
>
>
>
> The last proposed transfer appears to be a taxable sale from A to D1 based
> upon the consideration. Unfortunately, this last fifth transfer is within
> 36 months, so the series of transfers trigger reporting duties, because now
> D1 owns 50%, which sufficient for a controlling interest. If A and D had
> transferred separately to D1 within 36 months, the transactions would
> require reporting to DOR. Again, different exemptions could have applied to
> A and D.
>
>
>
> The combination of multiple parties as sellers, for different
> consideration, creates taxable and exempt transactions. The effect of
> assumption of debt further complicates the amount subject to the tax. The
> fifth transfer is a taxable sale of 25% and should be valued as a portion
> of the value of the property, or the actual price if DOR accepts that is
> reasonable.
>
>
>
> However, if you accept that these are unrelated from the first
> inheritance, then the four proposed transfers of the interests of D2, D3,
> D4 and A to D1 are probably not a defined controlling interest transfer. These
> four together transfer 43.75% of control of the LLC.  I believe the
> transfers from A are not aggregated with the transfers from A to D1. The
> second, third and fourth transfers are not necessarily acting in concert
> with the fifth sale. The change to three years occurred after the first
> transfer, but I expect the DOR will conclude the present law applies.
>
>
>
> "Acting in concert" occurs:
>
> (i) When one or more persons have a relationship with each other such that
> one person influences or controls the actions of another through common
> ownership. For example, if a parent corporation and a wholly owned
> subsidiary each purchase a 25% interest in an entity, the two corporations
> have acted in concert and acquired a controlling (i.e., at least 50%)
> interest in the entity.
>
>
>
> The grantors for each transfer will separately complete excise tax
> affidavits to be sent to the Olympia DOR [RCW 82.45.090(2) and WAC
> 458-61A-101(8)(a).] I would send them together to get one employee to
> discuss the combination of taxable and exempt transactions together. Also,
> that opinion of non-taxability will be binding. However, by asking, you can
> be sure a determination of taxability will be enforced.
>
>
>
> This is the excise tax affidavit for controlling interest transfers and
> the address of DOR at Olympia where it is mailed:
>
>
> https://dor.wa.gov/sites/default/files/legacy/Docs/forms/RealEstExcsTx/84-0001b-2020.pdf
>
>
>
> I recommend contact with the DOR at Olympia, finding a person to review
> the facts and worth with you resolving the questions. The title and escrow
> people are not reliable on their knowledge of controlling interest
> transfers and mixing taxability with determination of the amount of tax.
> The employee at the County Recorder is not sufficiently reliable. The
> different counties are notoriously inconsistent and often incorrect. I
> would seek a binding opinion that no tax is due under these facts. However,
> a reasonable attorney might conclude no reporting is required for the four
> proposed transactions because they are not the sale of a controlling
> interest. Only 43.75% of the interest of the corporate owner has
> transferred separately by the proposed four transactions where A, D1, D2
> and D3 transfer to D1. The obligors of the tax are grantors, but grantee
> D1 is also liable if choosing not to report and the lien is upon the real
> property.
>
>
>
> Dwight A. Bickel
>
> Washington Title Professional
>
> dwightbickel at hotmail.com
>
> www.linkedin.com/in/dwightbickel
>
> http:/www.titleadvisor.com
>
> 206-484-1976
>
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-- 
Thank you,

Kaitlyn R. Jackson | Attorney| DIMENSION LAW GROUP PLLC
130 Andover Park East, Suite 300 | Tukwila, WA 98188
t: *206.973.3500 *| f: *206.577.5090*| e: *kaitlyn at dimensionlaw.com*|
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