Was real estate excise tax due when a Washington general partnership distributed land to partners on dissolution?

Plain-English summary

The Washington Attorney General modified an earlier opinion in 1963 and concluded that distributing partnership real estate to general partners on dissolution was generally outside the real estate excise tax when the partners received only what their statutory rights already entitled them to receive. In that situation, the AG found no valuable consideration for the transfer under RCW 28.45.010.

The answer depended on the partnership agreement and the actual transfer. An agreement could change the partners’ default rights. If a later arrangement gave a partner land beyond those rights, valuable consideration could be present. The opinion also described a partner paying more toward partnership liabilities than legally required to obtain land that otherwise would go to creditors; in that circumstance, the transfer could be taxable. It said each partnership agreement needed examination.

Currency note

This opinion was issued in 1963. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: Did every dissolution distribution of partnership land trigger the tax?
A: No. The AG said a transfer that merely fulfilled statutory rights involved no valuable consideration for this tax.

Q: Could the partnership agreement change the tax answer?
A: Yes. Because an agreement could alter each partner’s share, the AG said it had to be examined in each case.

Q: Could paying partnership creditors create consideration?
A: The opinion said tax could arise if a partner contributed more than legally obligated to obtain land that otherwise would have satisfied creditors.

Background and statutory framework

The AG applied the reasoning of Deer Park Pine Industry v. Stevens County, a corporate dissolution tax case, to general partnerships governed by the Uniform Partnership Act then in chapter 25.04 RCW. It discussed default sharing rights in RCW 25.04.180, RCW 25.04.380, and RCW 25.04.400, and valuable consideration under RCW 28.45.010. It modified AGO 51-53-298, which had treated the transfer as taxable.

Citations and references

The opinion discusses RCW 28.45.010, RCW 25.04.180, RCW 25.04.380, RCW 25.04.400, Deer Park Pine Industry v. Stevens County, and AGO 51-53-298.

Source

• Landing page: https://www.atg.wa.gov/ago-opinions/taxation-real-estate-sales-tax-dissolution-general-partnership-rights-fixed-statute-and

Original opinion text

Attorney General John J. O'Connell

TAXATION ‑- REAL ESTATE SALES TAX ‑- DISSOLUTION OF GENERAL PARTNERSHIP ‑- RIGHTS FIXED BY STATUTE AND NOT AGREEMENT ‑- TRANSFER OF REALTY TO PARTIES.

Where the rights of partners of a general partnership are only those fixed by statute rather than by agreement, the transfer of realty to the partners upon dissolution of the partnership is not subject to the real estate sales tax except in limited cases.

April 17, 1963

Honorable Sid Buckley
Prosecuting Attorney
Stevens County
Colville, Washington

Cite as: AGO 63-64 No. 18

Dear Sir:

You have requested that we reconsider a previous opinion of this office dated April 22, 1952, No. 51-53-298 [[to Department of Fisheries on May 6, 1952]], in the light ofDeer Park Pine Industry v. Stevens County, 46 Wn. (2d) 852, 286 P. (2d) 98 (1955). We held in that opinion that the real estate excise tax applies to the transfer of partnership real property to partners on the dissolution of a general partnership.

We conclude that our prior opinion should be modified as hereinafter set forth.

ANALYSIS

It was held in theDeer Park case that no tax was due on the transfer of corporate real estate to stockholders upon the voluntary dissolution of a solvent corporation except in a case where the stockholders had agreed to assume the liabilities of the liquidating corporation. In such event, the tax is to be measured by the amount of liabilities assumed. See, also, TheDoric Co. v. King County, 57 Wn. (2d) 640, 358 P. (2d) 972 (1961).

The court reasoned that, because the ownership of corporate stock carries with it the inherent right to participate in the control of the corporation while it is operating as such, and the inherent right to share in the assets, after creditors, when the corporation is dissolved, [[Orig. Op. Page 2]] a transfer of realty, as above described, was without valuable consideration, the change in title being but the fruition of a right which the stockholder acquired when he bought his stock.

However, creditors have a paramount right to the corporate assets, to if the stockholders agree to pay the corporate debts in order to have the realty distributed to them in kind, they are in effect purchasing such realty from the creditors, and valuable consideration is present.

For purposes of the question we are considering, there would appear to be some similarities between the rights of general partners and the rights of corporate stockholders. Washington has adopted the Uniform Partnership Act, chapter 25.04 RCW, to govern general partnerships. Under this act the partners have:

1. Equal rights in the management and conduct of the partnership business and the right to share in the partnership assets (after creditors) upon dissolution. RCW 25.04.180 (5); RCW 25.04.380 and 25.04.400.

2. The right to dissolve the partnership for reasons contained in RCW 25.04.310 and 25.04.320.

3. The right to wind up the partnership affairs if not done by the court (RCW 25.04.370).

All of the foregoing rights are subject to change by the partnership agreement. The right of partnership creditors to the partnership assets is, of course, unaffected by any agreement between the partners.

We believe that the reasoning of the Deer Park case, supra, applies to the dissolution of a general partnership subject to the limitations hereinafter noted. In the absence of any agreement to the contrary, the transfer of partnership real estate to the partners upon dissolution of the firm is but the realization of a right which the partners had at the time the partnership was formed. There is no valuable consideration for such a transfer within the intent of RCW 28.45.010.

However, as we have said, the statutory right of partners to share in the assets upon dissolution can be changed by the partnership agreement (RCW 25.04.380 ‑ 25.04.400) so that there could be valuable consideration in the transfer of the assets. For example, a partnership agreement provides that upon dissolution, certain real estate shall all go to a partner A and not to partner B. Upon winding up the firm and by further agreement B receives an interest in the property. Valuable consideration making the transfer to B subject to tax could well be found. On the other hand, if it all was transferred to A in accordance with the agreement, A would be only receiving what he had a right to receive in the first place.

We would conclude that if the rights of the partners are those as fixed by statute, unaffected by the partnership agreement, there would be no tax upon a transfer of the type we are considering. The partnership agreement would have to be examined in each case.

While general partners, unlike stockholders, are by law made personally responsible for the payment of partnership liabilities RCW 25.04.180(1), a situation could arise whereby a partner might contribute more toward payment of liabilities that he was legally bound to do so that he might receive partnership realty in kind, and which otherwise would go to creditors to satisfy partnership liabilities. In such a case he would in effect be purchasing the property from the creditors, and the tax would be due on the transfer of title.

AGO 51-53-298 should be modified in accordance with the views herein expressed.

Very truly yours,

JOHN J. O'CONNELL
Attorney General

HENRY W. WAGER
Assistant Attorney General