Tax Type
Recordation Tax
Description
Deeds conveying real estate; Conveyances between nonstock, nonprofit corporations
Topic
Exemptions
Date Issued
06-21-1995
June 21, 1995
Re: Request for Ruling; Recordation Tax
Dear***********
This is in response to your request for a ruling as to whether a deed conveying property from the *********("the Old Corporation") to the **********("the New Corporation") is exempt from recordation tax.
FACTS
The Old Corporation was incorporated in another state and was dissolved several years ago for failure to file required reports. The directors of the Old Corporation did not become aware of the dissolution until recently, long after the Old Corporation could be reinstated under the laws of the other state. The directors of the Old Corporation caused the incorporation of the New Corporation solely for the purpose of continuing the business of the Old Corporation. A deed has been prepared and delivered conveying real estate from the Old Corporation to the New Corporation. Although the conveyance has been made by delivery of the deed, the deed has not been recorded pending resolution of whether it would be exempt from recordation tax under Code of Virginia §58.1-811 A.6., which provides:
A. The taxes imposed by §58.1-801 shall not apply to any deed conveying real estate:
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6. To a corporation upon its organization by persons in control of the corporation in a transaction which qualifies for nonrecognition of gain or loss pursuant to §351 of the Internal Revenue Code as it exists at the time of the conveyance ....
A question has arisen as to the qualification for the exemption because both corporations are nonstock, nonprofit organizations.
RULING
The exemption will not apply in every case in which IRC §351 applies because the exemption is limited to conveyances "upon organization" while IRC §351 is not. Both the exemption and IRC §351 require "control" to exist, and the Attorney General has interpreted the exemption's control test to be the same as the IRC §351 control test (i.e., 80% of the voting power and 80% ownership of all other classes of stock). 1978-1978 Att'y Gen. Ann. Rep. 439.
It is clear from the facts provided that the transfer occurred sufficiently close to the organization of the New Corporation to satisfy the first test. The directors of the Old Corporation who conveyed the property and the directors of the New Corporation are identical, so it is clear that 100% control was maintained even though no stock ownership is involved.
The transaction would clearly qualify for nonrecognition of gain or loss under IRC §351 if the New Corporation had issued stock in exchange for the property conveyed by the deed. The provisions of IRC §351 incorporate a test for control in IRC §368(c). Both sections refer to stock: §351 requires that property be transferred solely in exchange for stock, and §368(c) defines control in terms of the ownership of stock. No stock was exchanged in this transaction, and no stock exists with or without voting power.
Exemptions are generally strictly construed against the exemption, but the portion of this exemption which incorporates IRC §351 can be construed no more strictly than IRC §351 has been construed. Federal courts have applied IRC §351 in cases where no stock was issued. For example, a corporation was held to have satisfied the "solely in exchange for stock or securities" requirement when a sole shareholder conveyed property to the corporation without the corporation issuing any stock, because issuance of stock would have been a meaningless gesture. Lessinger v. Comm.. 89-1 USTC ¶ 1T 9254, 63 AFTR 2d. 89-1055 (1989 CA2).
In this case, it appears that the New Corporation was exempt from federal income tax under another provision (e.g., IRC §501) and there would have been no reason to determine whether or not IRC §351 applied to the transaction. It may also be noted that the description of the transaction suggests that it may also have qualified for nonrecognition of gain or loss as an "F" reorganization under IRC §368(a)(1)(F) and, if so, would qualify for a recordation tax exemption under Code of Virginia §58.1 -811 A.8.
Accordingly, based on all of the facts and circumstances, the deed conveying property from the Old Corporation to the New Corporation will be exempt from Virginia recordation tax when recorded. If you have any questions about this ruling you may contact*************at the Office of Tax Policy, P.O. Box 1880, Richmond, Virginia 23282-1880,
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- Sincerely,
Danny M. Payne
Tax Commissioner
- Sincerely,
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Rulings of the Tax Commissioner