TAXATION ‑- COUNTIES ‑- REAL ESTATE EXCISE TAX ‑- TRANSFER OF REAL PROPERTY BETWEEN PARENT AND SUBSIDIARY CORPORATIONS
A transfer of an interest in real property by a parent corporation to a subsidiary corporation, or by a subsidiary corporation to a parent corporation, is not subject to the one percent real estate excise tax under chapter 28A.45 RCW where the transferee corporation does not issue or transfer stock certificates to the transferor corporation in exchange for the interest in real property thus transferred.
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February 10, 1977
Honorable Christopher T. Bayley
King County Court House
Seattle, Washington 98104 Cite as: AGLO 1977 No. 6
Attention: !ttMr. Norman K. Maleng
Chief Deputy, Civil Division
By letter previously acknowledged you have asked for our opinion on two questions which we have combined and paraphrased as follows:
Is a transfer of an interest in real property by a parent corporation to a subsidiary corporation, or by a subsidiary corporation to a parent corporation, subject to the one percent real estate excise tax under chapter 28A.45 RCW where the transferee corporation does not issue or transfer stock certificates to the transferor corporation in exchange for the interest in real property thus transferred?
We answer this question in the negative for the reasons set forth in our analysis.
The one percent real estate excise tax is imposed pursuant [[Orig. Op. Page 2]] to chapter 28A.45 RCW upon sales of real property. RCW 28A.45.010 defines a sale for purposes of this tax as follows:
"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, including standing timber, or any estate or interest thereinfor a valuable consideration. . . ." (Emphasis supplied.)
Thus, the two prerequisites for a taxable transaction are (1) actualtransfer of real property and (2) actual consideration paid or contracted to be paid in exchange for the ultimate transfer of the designated interest in real property. State ex rel Namer Inc. Corp. v. Williams, 73 Wn.2d 1, 435 P.2d 975 (1968).
The tax base against which the one percent rate applies is the "selling price." "Selling price" is defined in RCW 28A.45.030 as follows:
"As used in this chapter, the term '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, and shall include the amount of any lien, mortgage, contract indebtedness, or other incumbrance, either given to secure the purchase price, or any part thereof, or remaining unpaid on such property at the time of sale." (Emphasis supplied.)
Construing RCW 28A.45.010 and 28A.45.030 together, our state supreme court has set forth the following guidelines for determining whether (or to what extent) the consideration requirement for the tax has been satisfied.
". . . The basis for any excise tax to be levied, then, must be the actual consideration paid or delivered or contracted to be paid or delivered in exchange for the ultimate transfer of the designated interest in real property. . . ." (Emphasis supplied.) State ex rel. Namer Inc. Corp. v. Williams, at p. 9.
[[Orig. Op. Page 3]]
Bearing the foregoing in mind we turn, next, to three prior opinions of this office. In AGO 59-60 No. 100 [[to Herbert E. Wieland, Prosecuting Attorney of Pacific County, on February 10, 1960]], copy enclosed, the question presented was whether the transfer of real property to a corporation by its sole stockholder in exchange for common stock in the corporation constituted a taxable sale. Our answer was "yes" under the following analysis:
"Consideration is also present and binding in the situation you describe. An interest in real property has been exchanged for common stock in the corporation. The shareholder receives certain rights relative to sharing in the control, operation and profits of the corporate entity in exchange for the ownership of the particular real property in question. Each party has exchanged one set of rights for another and such an exchange is the very essence of consideration. See Restatement, Contracts, § 75 (1930). Accordingly, both conditions [transfer + consideration] essential to taxability are met."1/
Then, in AGO 63-64 No. 44 [[to Sid Buckley, Prosecuting Attorney of Stevens County, on July 31, 1963]](copy enclosed), the question of taxability was raised again with only one relevant change from the fact pattern of AGO 59-60 No. 100; i.e., that no stock was transferred by the corporation in exchange for the real property. We therefore advised, however, that no tax was due ‑ basing our conclusion on the following terse analytical reasoning:
"We concluded in AGO 59-60 No. 100 that the transfer of real estate to a corporation by the sole stockholder in exchange for common stock was a taxable transaction. The shareholder received certain rights relating to the control, operation and profits of the corporation from the receipt of the stock given in consideration of the transfer.
"In the transaction here under consideration no stock or other thing of value was given in exchange for the real estate. There was no consideration or any 'selling price' by which to measure the value. We would conclude that the transfer is not subject to the tax." (Emphasis supplied.) AGO 63-64 No. 44, p. 2.
[[Orig. Op. Page 4]]
Then, six months after issuance of the latter opinion, this office was asked whether the conclusion in AGO 59-60 No. 100, supra, of taxability should be deemed to have been overruled because of an alleged inconsistency with the conclusion of AGO 63-64 No. 44 that the transfer of realty was nontaxable. In response, we issued AGO 63-64 No. 86 (copy enclosed) in which we distinguished the two prior opinions as follows:
"It has been suggested that AGO 59-60 No. 100 is inconsistent with AGO 63-64 No. 44 and that the latter is a correct statement of the law. AGO 63-64 No. 44 concluded that the tax in question does not apply to the transfer of real property by one corporation to another corporation where the transferor owns all of the outstanding capital stock of the transferee and no additional stock is to be issued in exchange for the property.
"There is, however, a definite distinction between the two opinions. In 63-64 No. 44, the sole shareholder transferred real estate and the corporation gave nothing in return. The real estate became a corporate asset in which the shareholder had no property interest. Patterson v. Ford,supra. The shares owned by the transferor may have increased in value as a result of the increase in corporate assets but this was automatic and not because of any action on the part of the transferee. The corporation did not pay or deliver anything in return for the real property. There was no 'selling price' by which the tax could be measured. See RCW 28.45.030.
"In 59-60 No. 100, as we have heretofore stated, there was an exchange of rights. The corporation received real estate and gave its shares of stock in return. These shares are personal property, have a determinable value and could have been sold for cash to any willing buyer. They constituted valuable consideration for the transfer of the real estate."2/
Thereafter, in 1965, the conclusion which we had reached in AGO 59-60 No. 100 was further proven correct when our state [[Orig. Op. Page 5]] supreme court decided the case ofChristensen v. Skagit County, 66 Wn.2d 95, 96, 98, 401 P.2d 335 (1965). In that case the court was faced with the question of applicability of the real estate excise tax to a conveyance of real property by members of a partnership to a corporation in exchange for the issuance of corporate stock to those members. In holding the tax to be applicable the court emphasized the fact of issuance of stock by the transferee corporation, saying:
"The major problem is whether the transfer of the ownership of real property from members of the partnership to the corporation in exchange for stock in the corporation constitutes a 'sale' within the meaning of the term as defined in RCW 28.45.010, supra.
". . .
"Plaintiff and his partners received a valuable consideration in return for this partnership real property ‑ the right to do business in corporate form.
"We conclude that the transactions in question constituted transfers of ownership for a valuable consideration and were 'sales' within the ordinary meaning of the statute."
Also to be noted is the fact that in so ruling the court considered but rejected an argument that such a ruling in favor of taxability would be inconsistent with two prior decisions regarding applicability of the real estate excise tax in the corporate dissolution context: Deer Park Etc. v. Stevens County, 46 Wn.2d 852, 286 P.2d 98 (1955) andThe Doric Co. v. King County, 57 Wn.2d 640, 358 P.2d 972 (1961). In essence the taxpayer in the Christensen case argued that if, as held in the Deer Park and Doric cases, the tax does not apply in the complete3/ dissolution context where stock is redeemed (through exchange for interests in real property) on the rationale that there is no transfer for a valuable consideration, then it is not logical to tax in the corporate creation context (where stock is issued in exchange for interests in real property) for the same reason ‑ lack of valuable consideration.
[[Orig. Op. Page 6]]
The court, however, responded to this argument by first describing and then distinguishing those two earlier cases as follows:
"InDeer Park Pine Industry, Inc. v. Stevens Cy., 46 Wn.2d 852, 286 P.2d 98 (1955), this court held the conveyance was not taxable where a change of title to real property was effected solely as a result of its distribution to stockholders of a solvent corporation in the process of dissolution, except in a case where the stockholders assumed the liabilities of the liquidating corporation; and in such event, the real estate excise tax is applicable to the extent of the corporate liabilities assumed by the stockholders. The rationale ofDeerPark was affirmed and applied in The Doric Co. v. King Cy., 57 Wn.2d 640, 358 P.2d 972 (1961).
". . .
"Even though it might be said that the transfer of real property to a corporation in return for stock is at the opposite end of the spectrum from a transfer of real property by a liquidating trustee to the shareholders, there the analogy ends. Each transaction is based upon a different legal theory.
"InDeer Park andDoric we pointed out, inter alia, that the ownership of corporate stock carries with it the inherent right to share in the assets of a corporation ‑ after creditors ‑ when it is in the process of liquidation; hence a transfer by a liquidating trustee was not a 'sale' in the ordinary meaning of the term, or a transfer of title for a valuable consideration within the ambit of RCW 28.45.050,supra. (66 Wn.2d at pp. 96-97.)
Then, by way of a further explanation of the basis for its ruling in favor of taxability in that case the court in Christensen went on to express itself as follows:
"It is not necessary for us to discuss the various rights arising from individual or partnership ownership of real property as provided in RCW 25.04.100, 25.04.240, 25.04.250. It is sufficient for our purpose to note that following the transfer of the real property to the corporation, and receipt of shares of stock in exchange, the individual [[Orig. Op. Page 7]] partner has none of his previous rights in the real property. They have been surrendered in return for his rights to participate as a stockholder in the management of the corporation. An individual shareholder has no property interest in physical assets of the corporation. California v. Tax Comm'n, 55 Wn.2d 155, 346 P.2d 1006 (1959). The corporations are separate organizations, each with its distinctive privileges and liabilities different from those enjoyed by plaintiff and his partners prior to incorporation. State v. Northwest Magnesite Co., 28 Wn.2d 1, 41, 182 P.2d 643 (1947). Thus we fail to find merit in plaintiff's argument that 'the incorporators are no more than taking it out of one pocket and putting it in another.'"
Of course, it will readily be seen that neither of the fact situations which you have described in your opinion request4/ fits directly within either the corporate dissolution rule of theDeer Park and Doric line of cases or the stock transfer upon corporate formation rule of theChristensen case. But by the same token it is equally evident that at least the first of those situations (and by analogy, the second as well) meshes precisely with our intervening 1963 opinion, AGO 63-64 No. 44,supra ‑ a fact which you have candidly acknowledged in asking for our opinion at this time. Thus, your present question is really the converse of the question answered in AGO 63-64 No. 86 [[to John G. McCutcheon, Prosecuting Attorney of Pierce County, on February 27, 1964]]; i.e., whether AGO 63-64 No. 44 should be overruled as being inconsistent with AGO 59-60 No. 100 (and hence with Christensen) rather than vice versa, as there. We again conclude that AGO 63-64 No. 44 was correct and, therefore, answer your question in the negative.
[[Orig. Op. Page 8]]
To keep this matter in proper perspective we reiterate that there are two basic prerequisites to a taxable situation under chapter 28A.45 RCW: (1) A transfer of realty and (2) a payment or delivery of consideration for that transfer. It is important that these two elements not be confused. And then, in addition, in order to understand the difference between the "transfer of stock" situation and the "nontransfer of stock" situation one must also understand two basic propositions of the body of law of corporations.
The first such proposition, which has been uniformly cited inChristensen, AGO 59-60 No. 100 and AGO 63-64 No. 86, as well as in the above noted corporate dissolution excise tax cases, involves the concept that a corporation has a separate legal existence, independent and distinct from its shareholders, even where all of the corporate stock is owned by one person. See, also,Patterson v. Ford, 167 Wash. 121, 8 P.2d 1006 (1932) andState v. Northwest Magnesite Co., 28 Wn.2d 1, 182 P.2d 643 (1947). The corollary to this concept is, of course, that the shareholders are not the legal owners of the assets of the corporation ‑ nor have they any property interest therein. State of Cal. v. State Tax Comm., 55 Wn.2d 155, 346 P.2d 1006 (1959).
A second fundamental concept of corporation law which has been uniformly followed in the relevant real estate excise tax opinions and decisions concerns thevalue of the shares of stock (if any) involved in the transfers. Shares of corporate stock are personal property which may be bought and sold. Their value is measured by the value of all of the corporate assets, 18 Am.Jur.2d, Corporations, § 218, and such shares, when issued, must be paid for in money or money's worth. RCW 23A.08.160; see, also,Electromatic Cooling Co. v. Milne‑Ryan-Gibson, 160 Wash. 320, 294 Pac. 1113 (1931).
Relating these two propositions to the problem at hand we will refer, first, to the "transfer of stock" cases. In those cases it has been concluded by this office and decided by the supreme court that, consistent with the concept of independent corporate legal existence,supra, when property is transferred from a person or corporation to another corporation for shares of stock, that person or corporation is not simply "taking it out of one pocket and putting it in another,"Christensen, 66 Wn.2d at 975/ but, rather, is making a "transfer" of the real [[Orig. Op. Page 9]] property. Moreover, consistent with the second concept that shares of stock are personal property which have an identity and value of their own apart from the corporation, there is clearly a payment or delivery of "consideration" for the transfer of the realty where stock is exchanged. Thus the two prerequisites for taxation are present in those cases; i.e., (1) a transfer of realty and (2) a payment of consideration for that transfer.
Likewise, in the nontransfer of stock cases including the instant situations posed by your request (i.e., the parent-subsidiary or subsidiary-parent corporate transfers) there clearly is a "transfer" under chapter 28A.45 RCW from one entity to another as discussed in Christensen. However, there simply is not a payment or delivery of anything of value; and with no value exchanged, there is no consideration, and without consideration, there is no transfer which is taxable under the law. Nothing of value is transferred in exchange for the realty. Therefore the transaction is simply not a taxable one.
The facts of the Christensen case are on all fours with those assumed in AGO 63-64 No. 86. Moreover, the decision itself, with its emphasis on the issuance and transfer of stock in a newly created corporate entity in exchange for realty, is completely consistent both with our analysis in that opinion and with the analysis set forth herein. Therefore, in short, we respectfully conclude that the Christensencase does not, as you have urged in your letter requesting our opinion, provide a basis for overturning AGO 63-64 No. 44, [[Orig. Op. Page 10]] supra.6/
Finally, in thus reaffirming that 1963 opinion and answering your present question in the negative on the basis thereof, we have not overlooked the possible argument to the effect that the transfer of realty from parent to subsidiary corporation (or vice versa) presents a special case. The theory behind that argument, as we perceive it, is that when the transaction within the corporate family is complete the stockholders in the two corporations are in the same position financially as they were before the transaction. The suggestion then is to "pierce the corporate veil" and look to the apparent quid pro quo nature of the transaction. We must, however, reject such an approach. The Washington court has consistently followed the proposition that, in the real estate excise tax context, a corporation has a separate legal existence, independent of its shareholders. It was on the basis of this rule that the court in the Christensen case rejected the taxpayers' argument that it should look behind the corporate form (and hence look to the ultimate effect upon the shareholders) [[Orig. Op. Page 11]] and rule that there was no "transfer" but rather a mere shifting of property by the shareholders from one pocket to another.7/ It would, in our opinion, be wholly unreasonable to apply the concept that a corporation is a separate legal entity, independent of its stockholders, for purposes of satisfying the "transfer" requirement (a la Christensen) and then reject the same concept for purposes of satisfying the "consideration" requirement.
In summary, it is therefore our opinion that in the absence of issuance of stock or some other form of lawful consideration, the transfer of an interest in real property from one corporation to another, whether the corporations be parent-subsidiary or otherwise, is a transfer without consideration and hence is not a taxable transaction under chapter 28A.45 RCW.
To this we would only add, in closing, an acknowledgment that under this view of the law an apparent gap in the real estate excise tax law remains. A corporation owning real property apparently can avoid the tax through the following chain of successive transactions: (1) Create a subsidiary corporation; (2) issue stock to itself in the subsidiary corporation; (3) transfer its own realty into the subsidiary corporation; and then (4) sell the stock in the subsidiary corporation to a third person who can then dissolve the latter and acquire the real property without paying the real estate excise tax. That gap, however, has existed as a matter of law in this state ever since the 1955 Washington supreme court decision in Deer Park, supra. Various members of the court have since repeatedly noted that such a gap exists in the statute and that the only appropriate means of change is through legislation. See, e.g., Christensen v. Skagit County, supra, dissenting opinion, 66 Wn.2d at 100-103; Ban-Mac, Inc. v. King County, per curiam opinion, 69 Wn.2d 49, 51, 416 P.2d 694 (1966). It is clear that we also must not legislate in the guise of interpretation in these circumstances.8/
[[Orig. Op. Page 12]]
We trust that the foregoing will be of some assistance to you.
Very truly yours,
JOHN R. WASBERG
Assistant Attorney General
*** FOOTNOTES ***
1/AGO 59-60 No. 100 at p. 2 [[to Herbert E. Wieland, Prosecuting Attorney of Pacific County, on February 10, 1960]].
2/AGO 63-64 No. 86, p. 3 [[to John G. McCutcheon, Prosecuting Attorney of Pierce County, on February 27, 1964]].
3/But see AGO 1974 No. 14 [[to Christopher T. Bayley, Prosecuting Attorney of King County, on July 17, 1974]]with respect to the taxability of a conveyance of corporate realty in partialdissolution of a corporation and note also the exception to the rule of nontaxability which is to be found in the Deer Parkcase where the stockholders assume the liabilities of the liquidating corporation.
4/"Two factual transactions have been presented for our consideration and are addressed in this opinion:
"Transaction A: Parent corporation transfers realty to subsidiary corporation‑-no stock certificates or other legal consideration transferred in exchange for the realty.
"Transaction B: Subsidiary corporation transfers real property to parent corporation‑-no stock certificates or other legal consideration transferred in exchange for the realty."
5/In Christensenthe court rejected the taxpayers' "pocket" metaphor under the following analysis:
". . . An individual shareholder has no property interest in physical assets of the corporation. California v. Tax Comm'n, 55 Wn.2d 155, 346 P.2d 1006 (1959). The corporations are separate organizations, each with its distinctive privileges and liabilities different from those enjoyed by plaintiff and his partners prior to incorporation. State v. Northwest Magnesite Co., 28 Wn.2d 1, 41, 182 P.2d 643 (1947). Thus we fail to find merit in plaintiff's argument that 'the incorporators are no more than taking it out of one pocket and putting it in another.'" (66 Wn.2d at 97.)
6/The supreme court's most recent reference to the Christensencase further illustrates the factual significance of the stock transfer in that case. In the course of its most recent encounter with the corporate dissolutionquestion under chapter 28A.45 RCW in the case of Weaver v. King County, 73 Wn.2d 183, 437 P.2d 698 (1968), the majority opinion discussed the Christensencase as follows:
"Finally, it is urged that Christensen v. Skagit Cy., 66 Wn.2d 95, 401 P.2d 335 (1965), casts some doubt upon the rationale of Deer Park. In Christensen, real property was conveyed to a corporation in return for the issuance of corporate stock. We held the transfer of the land to the corporation in return for the corporate stock to be a sale within the ambit of RCW 28.45.050 and hence taxable. The transaction is the exact reverse of the instant case and is based upon different legal theories which are discussed in Deer Park, and Christensen, supra." (Emphasis supplied.) 73 Wn.2d at 187.
7/See, Christensen v. Skagit County, supra.
8/This gap also serves to remind us that, as in other areas of taxation, "form" rather than "substance" is controlling because the essence of the taxable transaction is form, and not economic substance. We are dealing with a statutorily defined taxable event, not an economic event. See, Kingson, The Deep Structure of Taxation: Dividend Distributions, 85 Yale L.J. 861 (1976), and AGO 1975 No. 6 [[to Christopher T. Bayley, Prosecuting Attorney of King County, on April 3, 1975]]. Thus, in response to the taxpayer's argument in Christensen that he was just "taking it out of one pocket and putting it into another," an appropriate response could well have been: "You may be absolutely right; but that is precisely the kind of event that typically triggers a taxing statute."