Does Connecticut's controlling interest transfer tax apply when a parent merges one wholly-owned subsidiary that owns Connecticut real estate into another wholly-owned subsidiary of the same parent?

Plain-English summary

Connecticut's controlling interest transfer tax applies when someone sells or transfers a controlling interest — more than 50% of the voting power — in a company that owns Connecticut real property worth at least $2,000. It's a way of taxing real estate that changes hands by transferring control of the entity that owns it, rather than by deeding the land itself.

Here, parent corporation R owned two subsidiaries outright: P, which owned the Connecticut real property, and Q. The plan was to merge P into Q, with Q surviving and P disappearing. Because R owned 100% of both companies, the question was whether shifting the real-property-owning entity from one wholly-owned subsidiary into its sibling triggered the tax.

DRS said no. A taxable transfer requires all six elements in LSN-89 to be present, and the first two are that a transferor must transfer a controlling interest and a transferee must receive it. When R owns all of both P and Q, merging P into Q doesn't move a controlling interest from one person (or group acting in concert) to another — R controlled the property before the merger and still controls it after. Because the first two of the six required elements are missing, the merger is not a taxable sale or transfer of a controlling interest.

DRS later relied on this reasoning in Ruling No. 99-6, which reached the same result for a first-tier subsidiary merging into its own second-tier subsidiary. (That companion ruling is named here in prose, not linked, because different facts and later guidance can change the answer.)

What this means for you

Corporations restructuring wholly-owned subsidiaries

Reorganizations that only shuffle real-estate-owning entities within a single wholly-owned group — merging one subsidiary into a sibling, or a subsidiary into its parent — generally don't trigger Connecticut's controlling interest transfer tax. The parent controls the property the whole time, so no controlling interest actually passes to anyone new. The tax targets real transfers of control to a different party, not internal housekeeping.

M&A and real-estate counsel

The pivotal question is whether a controlling interest actually moves — LSN-89's first two elements. If a single parent owns 100% of both the merging entities, those elements fail and there's no taxable transfer. Trace each step of a multi-part reorganization: the moment an outside interest enters or control shifts to a new party, the analysis changes.

Accountants and tax professionals

Operative statute: § 12-638b (tax on transfer of a controlling interest in an entity owning Connecticut realty worth $2,000+); "controlling interest" is more than 50% of voting power under § 12-638a(2)(A). The six-element test is in LSN-89 (Rev. 7/90). Confirm the whole transaction stays within a wholly-owned controlled group so the transferor/transferee elements are never satisfied.

Common questions

Q: What is Connecticut's controlling interest transfer tax?
A: A tax under § 12-638b on the sale or transfer of a controlling interest (more than 50% of voting power) in an entity that owns Connecticut real property worth $2,000 or more — a way of reaching real estate that changes hands via entity control instead of a deed.

Q: Does merging one wholly-owned subsidiary into a sibling subsidiary trigger it?
A: No. When the same parent owns 100% of both, no controlling interest passes to a new party. The first two of LSN-89's six required elements — a transferor transferring a controlling interest and a transferee receiving it — are absent, so the merger isn't taxable.

Q: Why do "all six elements" matter?
A: DRS treats the controlling interest transfer tax as applying only when every one of LSN-89's six elements is present. If any element is missing — here, the first two — there is no taxable sale or transfer.

Q: When would an internal merger be taxable?
A: When it actually transfers a controlling interest to a different party, so that ultimate control changes. A merger that brings in an outside owner, or that moves control outside the wholly-owned group, can be a different story.

Citations and references

Statutes:

• Conn. Gen. Stat. § 12-638b (tax on the sale or transfer of a controlling interest in an entity owning Connecticut real property worth $2,000 or more)
• Conn. Gen. Stat. § 12-638a(2)(A) (definition of "controlling interest": more than 50% of a corporation's total combined voting power)

Administrative guidance and related rulings:

• LSN-89, Revised Special Notice Concerning Controlling Interest Transfer Taxes (Rev. 7/90) (the six elements, all required, of a taxable transfer)
• Ruling No. 99-6 (later ruling that cites and follows this one; merger of a first-tier subsidiary into its own second-tier subsidiary also not taxable)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 98-3

Original ruling text

Ruling 98-3, Controlling Interest Transfer Tax

Ruling 98-3

Controlling Interest Transfer Tax

This Ruling is cited in  Ruling 99-6

FACTS:

P , a corporation , owns Connecticut real property, the present true and actual value of which is not less than $2,000. All of P ’s shares are owned by R , a corporation . P will merge into Q , a corporation, with Q being the surviving corporation in the merger and P ceasing to exist. All of Q ’s shares are also owned by R .

ISSUE:

Will the merger of a first-tier wholly-owned subsidiary of a parent corporation into another first-tier wholly-owned subsidiary of the same parent corporation be a sale or transfer subject to the controlling interest transfer tax?

DISCUSSION:

Conn. Gen. Stat. §12-638b 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 ...." "Controlling interest" is defined in Conn. Gen. Stat. §12-638a(2)(A) as meaning "in the case of a corporation, more than fifty per cent of the total combined voting power of all classes of stock of such corporation ..."

The elements of a taxable transfer, all six of which must be present, are set out in LSN-89 , Revised Special Notice Concerning Controlling Interest Transfer Taxes (Rev. 7/90):

A. A transferor (or a group of transferors acting in concert) must transfer a controlling interest in an entity...

B. The controlling interest must be transferred to a transferee (or a group of transferees acting in concert).

C. The transfer must be for consideration.

D. The entity must own Connecticut real property...

E. The present true and actual value of the Connecticut real property must not be less than $2,000...

F. The transfer of a controlling interest must occur on or after July 1, 1989..."

Where R owns all of P ’s shares and all of Q ’s shares, the merger of P into Q will not transfer a controlling interest in P from one person (or a group acting in concert) to another person (or a group acting in concert). Such a merger does not constitute a taxable sale or transfer of a controlling interest, because the first two of six elements of a taxable sale or transfer that are set out in LSN-89 are not present, and, in order for a taxable sale or transfer to occur, all six of the elements must be present.

RULING:

The merger of a first-tier wholly-owned subsidiary of a parent corporation into another first-tier wholly-owned subsidiary of the same parent corporation is not a sale or transfer subject to the controlling interest transfer tax.

LEGAL DIVISION

September 28, 1998