TAX ‑- REAL ESTATE SALES ‑- AGENTS ‑- UNDISCLOSED PRINCIPAL ‑- CORPORATIONS.
The excise tax on real estate sales applies to a transfer of real property by nominees for an undisclosed principal to a corporation, which is not the undisclosed principal, for consideration; but not to a transfer from such nominees to the corporation, which is the undisclosed principal, where no consideration is paid or delivered for the transfer.
The excise tax on real estate applies to the transfer of real property to a corporation after it is formed, by nominees, who were subscribers for stock in the corporation to be formed and who purchased the real property after their subscription and before the corporation is formed.
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February 21, 1955
Honorable Ray Olsen
Olympia, Washington Cite as: AGO 55-57 No. 29
You have requested our opinion on the following:
(a) A vendor executes and delivers a contract or deed in favor of nominees for an undisclosed principal. The instrument is recorded and the tax paid. The nominees later transfer by assignment or deed to a corporation which was in existence at the time of the execution of the contract or deed to the nominees. Does a tax accrue on the second conveyance?
(b) A vendor executes and delivers a contract or deed in favor of nominees for a named corporation to be formed, which contract or deed is recorded and the tax paid. The corporation is formed after the contract or deed to the nominees is delivered, but stock subscriptions were signed by the nominees for stock in the corporation to be formed before the date of the contract or [[Orig. Op. Page 2]] deed or its delivery. The nominees execute and deliver an assignment or deed to the newly formed corporation. Does a tax accrue on the second transaction?
We conclude that:
(a) The tax applies to the second conveyance, if the transferee corporation was not the undisclosed principal at the time of the conveyance to the nominees and gives consideration. The tax does not apply, if the transferee corporation was the undisclosed principal of the nominee and gives no consideration for the second assignment or deed.
(b) The tax applies to the second conveyance.
The taxability of a real estate transaction under chapter 28.45 RCW depends upon two essentials:
(1) the transfer of an interest in land for
(2) a valuable consideration.
The law relating to an excise tax on real estate sales provides:
"As used in this chapter the term 'sale' shall have its ordinary meaning and shall include any conveyance, grant, assignment, quitclaim, or transfer of the ownership of or title to real property * * * or any estate or interest therein for a valuable consideration, and any contract for such conveyance, grant, assignment, quitclaim, or transfer * * *" (RCW 28.45.010)
The act defines "seller", unless otherwise indicated by the context to mean:
"* * * Any individual, receiver, assignee, trustee in bankruptcy, trust, estate, firm, copartnership, [[Orig. Op. Page 3]] joint venture, club, company, joint stock company, business trust, * * * association, society or any group of individuals acting as a unit, whether mutual, cooperative, fraternal, nonprofit or otherwise * * *" (RCW 28.45.020)
"Selling price" means:
"* * * the consideration, including money, or anything of value, paid or delivered or contracted to be paid or delivered in return for the transfer of the real property or estate or interest in real property * * *" (RCW 28.45.030)
You referred in your letter to the exception provided in RCW 28.45.010 which excludes from the term "sale":
"* * * a transfer in compliance with the terms of any lease or contract upon which the tax as imposed by this chapter has been paid. * * *"
but we do not believe the exception applies to situations to which you refer.
In regard to part (a) of your request, there is a sale when the vendor executes and delivers a contract or deed in favor of the nominees for an undisclosed principal, and you indicate the tax is paid on this. The second transfer from the nominees to a corporation poses the question of whether a second sale takes place. If the corporation is the undisclosed principal and furnished the consideration which passed to the original vendor and the nominees have no other interest in the transfer but to hold title to the property or interest therein for the corporation, the deed or contract from the nominees would not constitute a sale. If the corporation to whom the nominees later transfer real property by assignment or deed, is a legal entity other than the undisclosed principal and consideration is paid or delivered for the transfer, a sale takes place and the excise tax on real estate sales is payable.
The second part of your question in (b) poses a different situation. No corporation, as a legal entity, is in existence at the time of the original transfer [[Orig. Op. Page 4]] from the vendor, who executes and delivers a contract or deed in favor of nominees for a named corporation to be performed. Title passes to the nominees for a consideration, upon which the tax is paid. As we understand your question, there are three legal transactions at three different times.
The first transaction is a subscription by the nominees for shares of stock in a corporation to be formed. At this time the authority of the corporation is set forth by RCW 23.08.040 which provides:
"A corporation shall not incur any debts or begin the transaction of any business, except such as is incidental to its organization or to the obtaining of subscriptions to or the payment for its shares, until:
"(1) A triplicate original of the articles of incorporation has been filed in the office of the county auditor of the county in which it has its registered office;
"(2) The amount of paid-in capital with which it will begin business, as stated in the articles of incorporation, has been fully paid; and
"(3) There has been filed in the office of the auditor of the county in which it has its registered office an affidavit signed by at least a majority of the board of directors stating that the amount of paid-in capital with which it will commence business, as stated in the articles of incorporation, has been fully paid. * * *"
The subscribers have entered into an agreement with one another, or other subscribers, to carry out mutual obligations to purchase stock in the corporation to be formed. The incorporators have only such authority as is conferred by law. The subscription agreement is irrevocable for one year, in the absence of legal or equitable grounds for revocation, RCW 23.08.020, and [[Orig. Op. Page 5]] payment for stock can be in money, property, tangible or intangible or necessary services actually rendered to the corporation, RCW 23.16.030. The corporation has an obligation to issue stock for the stock subscriptions.
The second transaction after the stock subscription is made and prior to the formation of the corporation under the act, is the purchase by the nominees of real property. A sale takes place‑-something of value passes from the nominees to the vendors, and the tax is paid. At this time the nominees hold interest in the real property as individuals.
The authority of the corporation prior to its formation is set forth in the statutes we have already cited, and the provisions of the law relating to authority of corporations which have been formed are relevant in determining the authority prior to formation. These aid greatly in determining the legal position of the nominees.
RCW 23.08.070 provides:
"A corporation which has been formed under this title * * * shall have the capacity to act possessed by natural persons, but such a corporation shall have authority to perform only such acts as are necessary or proper to accomplish its purposes and which are not repugnant to law." (Underlining ours)
Among the powers of the corporation which has beenformed under the act, is the authority to:
"Acquire, hold, sell, dispose of, pledge or mortgage any such property as its purposes may require * * * and to conduct business in this state * * *" RCW 23.08.070.
The third transaction is the transfer from the nominees to the corporation after it is formed under the act. At this time a taxable sale takes place, and something of value will pass from the new corporation to the nominees, either cash or stock or other consideration. These nominees are in a similar position to partners who transfer their interest in real estate to a corporation to [[Orig. Op. Page 6]] be formed. We concluded in our opinion to the Yakima County Prosecuting Attorney, dated May 22, 1952 [[Opinion No. 51-53-313]], that a real estate sales tax applied to land transferred by the partners of a dissolving partnership in consideration for capital stock.
On the basis of the foregoing, we conclude that the excise tax on real estate sales applies to the transfer by nominees to a corporation after it is formed in the situation you set forth in (b) above.
Very truly yours,
W. DELMORE MCDOWELL
Assistant Attorney General