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By: Bruce L. Benshoof
Ballard Spahr Andrews & Ingersoll,
LLP
Although Maryland's recordation and
transfer taxes were originally imposed in exchange for the
numerous legal benefits derived from recording deeds and other
instruments in the public records, such taxes soon will apply to
a type of transfer that does not avail itself of those benefits.
legislature Under §7 of the Tax Reform Act of 2007 (2007 Special
Session, Ch. 3), beginning July 1, 2008, recordation and
transfer taxes will be imposed on the consideration payable of
any transfer of a "controlling interest" in a "real property
entity." Depending on the county or counties in which the real
property is located, the aggregate tax can range from
approximately 1.2% to 3% of the "consideration payable" for such
transfers. The stated intent of the new law is to close what the
General Assembly has viewed as a loophole in the law by taxing
the transfer of ownership of an entity which owns real property
in the same manner as if the transfer was accomplished by
conveying by deed the real estate owned by such entity. The
following summarizes the key parts of the new law:
• Effective Date: The new tax will go into effect on July
1, 2008 and apply to all transfers of controlling interests
completed after June 30, 2008.
• Definition of Controlling Interest: "Controlling
interest" is defined as more than 80% of the total value of all
classes of stock of a corporation, of the beneficial interest in
a trust, or of the total interest in capital and profits of any
other entity. The statute contemplates that such transfers might
occur in more than one step and defines "final transfer" as
"that transfer of any portion of a controlling interest that
completes the transfer of a controlling interest in a real
property entity."
• Exclusions: An entity is not a "real property entity"
if its real property is entirely subject to agricultural use
assessment, other than portions for the homestead and commercial
activity related to agricultural production. Also, a pledge of
ownership interests as security for a loan is not a transfer of
a controlling interest (but an execution or foreclosure on such
interests would be). There also is an exclusion for the
admission of new owners incident to the raising of additional
capital if the effective management of the real property entity
remains substantially unchanged and none of the new members is
expected to participate in the day-to-day management of the real
property entity.
• Definition of Real Property Entity: A "real property
entity" is any type of entity or trust that "directly or
beneficially" owns real property in Maryland if that real
property (1) constitutes at least 80% of the value of its
assets, and (2) has an aggregate value of at least $1,000,000.
The value of the real property is its full value without any
reduction for the amount of any mortgage, deed of trust, or
other lien against it. Ownership of real property includes a
leasehold with a term greater than seven years, but does not
include (a) a lease of seven years or less, or (b) a security
interest in real property, such as mortgages and deeds of trust.
• Reporting Requirements: Unless one of the exclusions
discussed above applies, the real property entity itself (and
not the transferor or transferee of the controlling interest)
has the burden of reporting each transfer of a controlling
interest that is completed within a period of twelve months or
less. The report must be filed with the Department of
Assessments and Taxation ("SDAT") within thirty days after the
completion of the final transfer. Regardless of whether the
transfer qualifies for any exemption from the tax, the report
must include the "consideration payable" for the transfer of the
controlling interest (as discussed below) and the value of the
real property entity's other assets. In addition, regardless of
whether any taxes are due with the report, the real property
entity must pay a $20 filing fee to SDAT.
• Exemptions from Tax: There are five exemptions from the
tax:
(1) if the transfer would have been exempt from recordation tax
if it were a transfer by deed from the transferor to the
transferee of the controlling interest;
(2) if the transfer is effected in more than one step and either
(i) is completed over a period of more than twelve months, or
(ii) is not made in accordance with an intentional plan to
transfer a controlling interest;
(3) if the transferee is an entity owned by the same persons and
in the same proportions as owned the real property entity prior
to the transfer;
(4) if the transferor, transferee, and real property entity are
each wholly owned by a common parent corporation or are such
common parent corporation; and
(5) if the transferee of the controlling interest is a Maryland
nonstock corporation and registered with the Department of Aging
as a continuing care retirement community.
• Calculation of the Consideration Payable: The tax is
calculated based on the "consideration payable" for the transfer
of the controlling interest. In addition to the actual purchase
price for the interests in the real property entity, the
"consideration payable" is to be increased by the amount of all
debts owed by the real property entity and all liens against its
property. However, the "consideration payable" is to be reduced
by the amount allocable to the assets of the real property
entity other than its Maryland real property (but no method of
allocation is provided in the statute). The real property entity
bears the burden of establishing these amounts to the
satisfaction of SDAT.
• Calculation of the Taxes: The amount of tax due is to
be calculated as if the Maryland real property of the real
property entity had been transferred by a recorded deed or deeds
for the calculated "consideration payable." All such
"consideration payable" would be subject to the 0.5% state
transfer tax. In addition, the "consideration payable" would be
allocated to each parcel of Maryland real property owned by the
entity and subject to the Maryland recordation tax and, if
applicable, county transfer tax at the rate set by the county in
which each parcel is located. Combined, these three taxes range
from approximately 1.2% to 3%, depending on the county.
• Liability and Penalties for Non-Payment: The real
property entity, and not the transferor or transferee, is the
one liable for the payment of any tax due. If the tax is not
paid within 30 days after the date of the final transfer, the
real property entity also owes both (i) a penalty equal to 10%
of the total unpaid tax, and (ii) interest on the unpaid tax at
the rate of 1% per month. In addition, if the real property
entity fails to file the report, it also might be subject to
prosecution for the misdemeanors found in §§ 14-1001 and 14-1002
of the Tax-Property Article (negligent or willful failure to
provide required information).
In addition to the foregoing, SDAT is directed to adopt
regulations for administering this new tax and to "assure that:
(i) a tax is imposed when a transaction is structured involving
a controlling interest in a real property entity to avoid
payment of the recordation tax; (ii) exemptions provided by law
when real property is transferred by an instrument of writing
are applicable; and (iii) there is no double taxation of a
single transaction." SDAT has recently released draft
regulations for comments from the bar and intend to issue final
regulations on or before July 1.
Bruce L. Benshoof is currently of counsel in the Baltimore
office of Ballard Spahr Andrews & Ingersoll, LLP. He was the
assistant attorney general to the Clerks of the Maryland Circuit
Courts from June 2004 to April 2007.
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