SDAT Issues Regulations on Controlling-Interest Legislation
The Maryland State Department of Assessments and Taxation ("SDAT") recently issued proposed regulations which administer new legislation imposing Maryland transfer and recordation taxes on transfers of controlling interests in real property entities.
The proposed regulations broadly interpret this new legislation. For example, a "real property entity" is defined in the new legislation as a corporation, partnership, LLC, or trust that directly or beneficially owns real property that: (a) constitutes at least 80% of the value of its assets in Maryland, and (b) has an aggregate value of at least $1,000,000.00. SDAT's proposed regulations have interpreted the phrase "beneficially" in its broadest sense so that transfers of controlling interests (more than 80%) in upper-tier entities may be subject to transfer and recordation taxes in Maryland. For example, a Delaware LLC ("Parent") which has as its sole asset ownership of 100% of the membership interest in a Maryland LLC ("Sub") which, in turn, owns as its sole asset certain real property in Maryland valued at more than $1,000,000.00 will be subject to transfer and recordation taxes in Maryland if the owner of Parent transfers more than 80% of its membership interest in Parent to a third party purchaser, just as the transfer of 80% of the membership interests in Sub by Parent would subject Sub to the payment of transfer and recordation tax.
Moreover, while the new legislation exempts transfers completed over a period of more than 12 months, the proposed regulations issued by SDAT state that the "Step Transaction Doctrine" will apply and that SDAT will consider the substance of a transaction over its form. The result is that a multi-step transaction which occurs over a period exceeding 12 months may be taxed as if it is one transaction if SDAT determines that the transaction was structured in multiple steps in order to avoid transfer and recordation taxes.
The new legislation also provides that within 30 days from the date of the final transfer of a controlling interest, the real property entity must file a report with SDAT stating the consideration paid for the controlling interest, the amount of excluded assets and any exemption claimed by the real property entity, and the tax owing must be paid at the time the report is filed. SDAT's proposed regulations do not include a form of the report to be used in connection with the transfer of a controlling interest.
SDAT is soliciting comments from the public on its proposed regulations through May 27, 2008. The final regulations and the new legislation will become effective on July 1, 2008, so, owners of real property entities in Maryland have 2 more months to take advantage of the favorable tax treatment previously given to these types of transfers.
If you have questions or concerns about this change in the law or to discuss planning options which remain available after the effective date of the legislation and regulations, please contact Dave Cohen (301) 961-5167); dcohen@linowes-law.com; or Jack Orrick (301) 961-5213); jorrick@linowes-law.com.
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