When one partner transfers its minority partnership interest to the only other partner — ending the partnership that owns Connecticut real estate — does the conveyance tax or the controlling interest transfer tax apply?

Plain-English summary

A parent company and its wholly-owned subsidiary were the only two partners in a partnership that owned Connecticut real estate worth at least $2,000. The subsidiary already held the controlling (over 50%) partnership interest; the parent held a minority interest. The parent then transferred its minority interest to the subsidiary, leaving the subsidiary as the sole remaining partner. That ended the partnership — and under federal law (IRC § 708) the partnership terminated, so the real estate passed to the subsidiary by operation of law. DRS was asked whether two different Connecticut taxes applied.

Real Estate Conveyance Tax (§ 12-494 et seq.) → no. This tax hits a "deed, instrument or writing" that conveys realty for $2,000 or more. Connecticut modeled the tax on the federal documentary stamp tax (26 U.S.C. § 4361), so DRS treated the federal regulations as helpful guidance. Under those, transferring a partnership interest that terminates the partnership (26 C.F.R. § 47.4383-1; § 1.708-1(b)(1)(i)) would have triggered the federal stamp tax. But Connecticut's tax requires an actual deed, instrument, or writing conveying the real estate — and here there was none. The parent didn't deed the property to the subsidiary; the real estate became the subsidiary's by operation of law when the partnership terminated. No deed, no conveyance tax.

Controlling Interest Transfer Tax (§ 12-638a et seq.) → no. This tax is the backstop for real-estate transfers accomplished by moving entity interests instead of deeding the property. It applies to the transfer of a "controlling interest" — for a partnership, more than 50% of capital, profits, or beneficial interest (§ 12-638a(2)(B)). But here the subsidiary already owned the controlling interest; the parent transferred only its minority interest. Since no controlling interest changed hands, the tax doesn't apply. DRS added an important caveat: this assumes the parent wasn't part of a group acting in concert, or a series of transfers that, taken together, would move a controlling interest (see LSN-89).

Net result: a transfer that would have been federally taxable slipped between Connecticut's two real-estate transfer taxes — no deed for the conveyance tax, and only a minority interest for the controlling interest transfer tax.

What this means for you

Structuring partnership/LLC wind-ups that hold real estate

If a realty-owning partnership terminates because one partner's interest moves to the only other partner — so the property vests by operation of law with no deed — Connecticut's conveyance tax may not reach it (no instrument of conveyance), and the controlling interest transfer tax may not either (if only a minority interest moved). But the outcome is structure-specific; small changes can flip it.

The conveyance tax needs an actual instrument

Connecticut's real estate conveyance tax is triggered by a deed, instrument, or writing conveying realty. A transfer that vests title by operation of law (like a partnership termination) isn't that — even where the analogous federal documentary stamp tax would have applied. Don't assume federal treatment carries over.

The controlling interest transfer tax turns on crossing 50%

The controlling interest transfer tax reaches transfers of more than 50% of an entity. Moving a minority interest — especially to someone who already has control — generally isn't a taxable controlling-interest transfer. But watch the anti-abuse rule.

Beware "acting in concert" and staged transfers

DRS expressly conditioned its answer on the parent not being part of a coordinated group or a series of transfers that together shift a controlling interest (LSN-89). Splitting one controlling-interest transfer into steps to dodge the tax can be collapsed and taxed. Plan accordingly and document independence.

Common questions

Q: Does Connecticut conveyance tax apply when real estate passes on a partnership termination?
A: Not if there's no deed, instrument, or writing conveying the property. Where the realty vests in the remaining partner by operation of law (partnership termination under IRC § 708), the conveyance tax — which needs an actual instrument — doesn't apply.

Q: Why didn't the controlling interest transfer tax apply?
A: Because only a minority partnership interest was transferred. The subsidiary already held the controlling (over 50%) interest, so no controlling interest changed hands.

Q: The federal documentary stamp tax would have applied — why not the Connecticut tax?
A: Connecticut's conveyance tax, though modeled on the federal stamp tax, requires a deed, instrument, or writing conveying the realty. Here title passed by operation of law with no such instrument, so the state tax didn't attach.

Q: Could this be taxed if done in steps?
A: Possibly. DRS assumed the parent wasn't part of a group acting in concert or a series of transfers that together move a controlling interest (LSN-89). A staged plan to shift control can be aggregated and taxed.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-494 et seq. (Real Estate Conveyance Tax Act)
• Conn. Gen. Stat. § 12-638a et seq. (Controlling Interest Transfer Tax); § 12-638a(2)(B) (partnership "controlling interest" = more than 50% of capital, profits, or beneficial interest)
• 26 U.S.C. § 708 (partnership termination); 26 U.S.C. § 4361 (federal documentary stamp tax)
• 26 C.F.R. § 47.4383-1; 26 C.F.R. § 1.708-1(b)(1)(i) (partnership continuation/termination)

Related guidance (described in prose, not linked):

• 1989 Conn. Op. Atty. Gen. 89-020 (conveyance tax modeled on the federal documentary stamp tax)
• Ruling No. 91-2 (controlling interest transfer tax operates where conveyances are not made); Ruling No. 91-3 and Ruling No. 93-12 (federal-stamp-tax guidance)
• LSN-89 (rev. 7/90) (persons acting in concert / series-of-transfers rule)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 94-14

Original ruling text

Ruling 94-14, Real Estate Conveyance Tax / Controlling Interest Transfer Tax

FACTS:

A company ("the Company") and its wholly-owned subsidiary ("the Subsidiary") are the only two partners of a partnership which owns Connecticut real estate with a present true and actual value equaling or exceeding $2000. The Subsidiary has a controlling interest, as defined in Conn. Gen. Stat. §12-638a(2), in the partnership. The Company transfers to the Subsidiary its interest in the partnership, leaving the Subsidiary as the only partner in the partnership.

ISSUES:

Whether the real estate Conveyance tax applies to a partner's transfer of its interest in a partnership that owns Connecticut real estate, where the partnership is not considered to be a continuing partnership within the meaning of 26 U.S.C. § 708.

Whether the controlling interest transfer tax applies to a partner's transfer of its partnership interest, where the transferee already has a controlling interest in the partnership.

DISCUSSION:

The Real Estate Conveyance Tax Act, Conn. Gen. Stat. §12-494 et seq., imposes a tax on "each deed, instrument or writing, whereby any lands, tenements or other realty is granted, assigned, transferred or otherwise conveyed to, or vested in, the purchaser, or any other person by his direction, when the consideration for the interest or property conveyed equals or exceeds two thousand dollars ..."

"The Real Estate Conveyance Tax Act, 1967 Conn. Pub. Acts 693, was modeled on the federal Documentary Stamp Tax provisions of the Internal Revenue Code, 26 U.S.C. § 4361... Therefore, the regulations promulgated under the federal act should be regarded as helpful in interpreting the Connecticut law." 1989 Conn. Op. Atty. Gen. 89-020, quoted in Ruling No. 91-3 and Ruling No. 93-12.

26 C.F.R. § 47.4383-1 provides that "[no [federal documentary stamp] tax shall be imposed under section ... 4361 by reason of any transfer of an interest in a partnership holding ... realty if such partnership (or another partnership) is considered to be a continuing partnership within the meaning of section 708 and if such ... realty [continues] to be held, regardless of the name in which held, by the continuing partnership (or the continuing partnerships if more than one)..." (Emphasis added)

Section 708(a) of the Internal Revenue Code provides that "... an existing partnership shall be considered as continuing if it is not terminated." Additionally, 26 C.F.R. § 1.708-1(b)(1)(i) provides that "[a] partnership shall terminate when the operations of the partnership are discontinued and no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership . For example, ... A and B, each of whom is a 20-percent partner in partnership ABC, sell their interests to C, who is a 60-percent partner. Since the business is no longer carried on by any of its partners in a partnership, the ABC partnership is terminated ... [emphasis added]."

By contributing its interest in the partnership to the Subsidiary, the only other partner, the Company caused the partnership to terminate for purposes of 26 U.S.C. § 708.

26 C.F.R. § 47.4383-1 indicates that the federal Documentary Stamp Tax would have been imposed on the Company's transfer of its interest in the partnership to the Subsidiary. Although the Real Estate Conveyance Tax was modeled on the federal Documentary Stamp Tax, the Real Estate Conveyance Tax does not apply to the Company's transfer because, under the facts provided, the Company did not by "deed, instrument or writing" transfer its interest in real estate to the Subsidiary. Instead, under the facts provided, the Connecticut real property owned by Realty Partnership became the real property of the Subsidiary by operation of law. Accordingly, the Real Estate Conveyance Tax does not apply to the Company's contribution of its interest in the partnership to the Subsidiary.

The next issue is whether the Controlling Interest Transfer Tax applies to the Company's contribution of its interest in the partnership to the Subsidiary.

The Controlling Interest Transfer Tax, Conn. Gen. Stat. §12-638a et seq., imposes a tax "on the sale or transfer of a controlling interest in any entity which possesses an interest in real property in this state when the present true and actual value of the interest in real property equals or exceeds two thousand dollars ... " The General Assembly intended that the controlling interest transfer tax provisions be operable only where [real estate] conveyances were not made. See Ruling No. 91-2. "Controlling interest" is defined in Conn. Gen. Stat. §12-638a(2)(B) as meaning " in the case of a partnership ... more than fifty per cent of the capital, profits or beneficial interest in such partnership ..."

In this case the, the Subsidiary owned the controlling interest in the partnership and the Company owned a minority interest. The minority interest, rather than the controlling interest, in the partnership was conveyed. Therefore, the controlling interest transfer tax does not apply to the transfer at issue. This conclusion assumes that the Company was not a member of a group of transferors acting in concert to transfer a controlling interest in the partnership and that the Company's transfer was not one of a series of transfers that, had they occurred at the same time, would have constituted a transfer of a controlling interest. See LSN-89 (rev. 7/90).

RULING:

Under the facts provided, the Company did not by "deed, instrument or writing" transfer its interest in Realty Partnership (and its real estate) to the Subsidiary. Instead, under the facts provided, the Connecticut real property owned by the partnership became the real property of the Subsidiary by operation of law. Accordingly, the Real Estate Conveyance Tax does not apply to the Company's contribution of its interest in the partnership to the Subsidiary.

In addition, because a minority interest, rather than a controlling interest, was transferred by the Company to the Subsidiary, the controlling interest transfer tax does not apply to the transfer at issue.

LEGAL DIVISION

July 22, 1994