REAL ESTATE SALES TAX -- TRANSFER OF CORPORATE REAL PROPERTY TO SHAREHOLDERS PURSUANT TO VOLUNTARY DISSOLUTION OF CORPORATION
Transfers of corporate real property to shareholders pursuant to voluntary dissolution proceedings are subject to real estate sales tax. Opinion to Prosecuting Attorney, King County, August 10, 1951, No. 51-53-101; overruled.
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August 19, 1953
Honorable Charles O. Carroll
Seattle, Washington Cite as: AGO 53-55 No. 116
Attention: !ttK. G. Smiles
!tChief Civil Deputy
It has become necessary to re‑examine [[reexamine]]an opinion rendered to you by the attorney general on August 10, 1951 [[Opinion No. 51-53-101 to Charles O. Carroll, Prosecuting Attorney, King County]], holding that transfers of corporate real property to shareholders pursuant to a voluntary dissolution proceeding are not taxable. That opinion is in error and is inconsistent with the balance of our pertinent holdings. It is hereby overruled‑-such transfers are taxable.
The problem is posed by the following factual pattern:
A Washington corporation is being voluntarily dissolved pursuant to statute, chapter 23.44 RCW. The real property assets of the corporation are being distributed, in kind, to shareholders in exchange for their surrender of corporate stock.
Taxability is conditioned upon two essentials: (1) transfer of an interest in land (2) for consideration. Both elements are clearly present and we can find no language in chapter 28.45 RCW exempting such transfers.
1.Corporate as distinct from shareholders' interest:
It goes without citation that the corporate entity exists entirely separate and distinct from the persons owning its stock, State ex rel. Tacoma v. Tacoma R. & P. Co., 61 Wash. 507, 112 Pac. 506, 32 L.R.A. (N.S.) 720 (1911); State V. Northwest Magnesite Co., 28 Wn. (2d) 1, 182 P. (2d) 643 (1947). The shareholders' interest in corporate assets is separate and distinct from that of the corporation. It is generally described as the right to participate in management, to share in net earnings, and to be subject to corporate liabilities to the extent of stock investment. Whitman v. Consolidated Gas, Electric Light and Power Co., 148 Md. 90, 129 A. (2d) 27 (1925). The stockholder has an interest in seeing that corporate real property is managed properly, etc., but he has no interest or estate in the real property as such. Title to the realty and the rights attendant thereto lie only in the corporation. Miller v. United States, 78 U.S. (Wall.) 268 (1870); 13 Am.Jur. 465 sec. 412; see also Title 23 of RCW.
[[Orig. Op. Page 2]]
2.Transfer of Interest:
Since a corporate "person" is distinct and separate from the shareholder, distribution of an asset, whether on dissolution or otherwise, works a transfer of that asset. If the asset is realty, title and ownership pass from one separate, legal person to another within the meaning of the real estate sales tax act (see AGO 51-53 No. 280 [[to Hugh Evans, Prosecuting Attorney, Spokane County on April 4, 1952]]; AGO 51-53 No. 313 [[to John J. O'Connell, Prosecuting Attorney, Pierce County on April 22, 1952]]; and AGO 51-53 No. 289 [[to Ronald R. Hull, Prosecuting Attorney, Yakima County on May 22, 1952]].)
The opinion of August 10, 1951, which we herein overrule was based upon the belief that the distributee shareholder receives nothing but assets already his. This overlooks the very nature of consideration.
Consideration is the exchange received by a promisor for his promise. Restatement of Contracts, sec. 25 (1). In an executed transaction. it is one item of contractual value which has been exchanged for another. In this situation an interest in real property has been received by the shareholder in exchange for his share in the right to manage a business enterprise‑-the corporation. Now he has specific land to do with as he desires where before he had only a limited voting right. Contractual consideration is present andbinding upon all parties. "Profit" is not an element and consideration, of course, need not be in money.
The distributee shareholders now have title to specific land (or an interest therein) where they had none before. Their previous interests relative to a particular tract of land were in community with other shareholders. Their rights, duties, and privileges with relation to that tract of land are now entirely different. Their rights relative to management, sharing in the profits, etc., are extinguished, as evidenced by the surrender of corporate stock. Further, in return for receiving the full interest in a particular tract, each shareholder relinquishes his general interest in the particular tract each other shareholder receives. An exchange is made and an exchange is the very essence of consideration.
4."Casual" Sales Doctrine:
Our previous opinion was perhaps based upon the so-called "casual sales" theory. This doctrine argues that where a transaction contemplates no commercial profit, or where the beneficial interest is not transferred or the holding entity substantially altered, such as here, or a transfer from a parent corporation to a totally owned subsidiary, the transfer should not be taxed. This is a legislative, not a judicial doctrine. Exempting such transactions is valid legislative classification but until such a transaction is made exempt by specific statute it does not and cannot apply. See Volume 1,Prentice‑Hall, State and Local Tax Service, par. 92, 572; and C.C.H. State Tax Cases Reporter, All States, par. 60-203; and see Reif v. Barrett, 355 Ill, 104, 188 N.E. 889 (1933) cited inMorrow v. Henneford, 182 Wash. 625 at 634, 47 P. (2d) 1016 (1935).
[[Orig. Op. Page 3]]
The legislature only may grant exemptions, and exemptions are strictly construed. Boeing Aircraft Co. v. R. F. C., 25 Wn. (2d) 652, 171 P. (2d) 838, 168 A.L.R. 539 (1946);Yakima Fruit Growers Assn. v. Henneford, 182 Wash. 437, 47 P. (2d) 831, 100 A.L.R. 435 (1935); and Norwegian Lutheran Church v. Wooster, 176 Wash. 581, 30 P. (2d) 381 (1934). The doctrine of "piercing the corporate veil" does not exist to permit tax avoidance. Palmolive Co. v. Conway, et al., 43 F. (2d) 226 (D.C.), affirmed 56 F. (2d) 83 (1932)cert.denied 287 U.S. 601 (1932); see also 7 Wis. Law Rev. 250 (1932); and 80 U. Pa. Law Rev. 892 (1932).
We therefore advise that transfers of the real property assets of a corporation pursuant to a voluntary dissolution are subject to the real estate sales tax. Judicial proceedings do not make taxable transfers exempt (see AGO 51-53 No. 289 and AGO 51-53 No. 447 [[to J. J. O'Connell, Prosecuting Attorney, Pierce County on December 22, 1952]]) unless made so by statute (see for example, sec. 1, chap. 94, Laws of 1953), which has not here been done.
Very truly yours,
JENNINGS P. FELIX
Assistant Attorney General