- When Is A Statutory Trust Or A REIT A "Corporation?
- September 26, 2011 | Author: Edward J. Levin
- Law Firm: Gordon Feinblatt LLC - Baltimore Office
As a result of efforts of an ad hoc group that included Christopher Scott of Gordon, Feinblatt’s Tax Planning Practice Group, Ed Levin of Gordon, Feinblatt’s Real Estate Practice Group, and the chairs of three sections of the Maryland State Bar Association, the Maryland State Department of Assessments and Taxation (“SDAT”) stated in an e-mail dated August 10, 2011 that it would change its recent position and go back to treating statutory trusts as corporations for purposes of the Tax-Property Article of the Maryland Code.
This announcement was significant because statutory trusts and Maryland real estate investment trusts (REITs) are the preferred vehicles for people who acquire new commercial real estate in Maryland, and falling within the definition of “corporation” for recordation and transfer taxes purposes is important for these landowners. The exemptions for intra-group transfers of real estate between related corporations enable a parent or subsidiary to transfer real estate without incurring tax. Md. Code, Tax-Property (“TP”), §§ 12-108(p)(1) and (3) and 13 207(a)(9). Similarly, an exemption for transfers of real estate made as part of an income tax-free reorganization is available for mergers and acquisitions involving corporations. TP §§ 12-108(p)(2) and 13-207(a)(9).
There are, however, no similar exemptions available for transfers of real estate between related unincorporated entities. See generally TP § 12-108. Consequently, property owners that own multiple properties in different entities or intend to subdivide real property for different uses usually prefer entities treated as corporations for recordation and transfer tax purposes because they can transfer parcels from one entity to a related entity without incurring additional recordation and transfer taxes.
Earlier this summer, the SDAT stated that it was going to change its longstanding interpretation of the definition of “corporation” for the purposes of Maryland state and local recordation and transfer taxes so as to not include Maryland statutory trusts. Such a new interpretation would be contrary to opinions of the office of the Maryland Attorney General. It would also be inconsistent with the approach currently used by the clerks of court when a landowner files a deed. Additionally, it called into question whether the SDAT took a similar view with respect to REITs.
The relevant statutory language is “(1) ‘corporation’ includes an association or joint stock company.” TP § 1-101(f). At least since 1998, Maryland statutory trusts (which were formerly called business trusts) and REITs have both been viewed by the SDAT and the clerks of the circuit courts as associations taxable as corporations within the meaning of this statutory definition. See June 3, 1998 Tax Memo by David Lyons; June 11, 1998 Tax Letter by Julia Freit; and August 5, 2004 Letter and Memo to Clerks from Bruce Benshoof. The word “association” is a term of art that means an unincorporated business entity that has most of the characteristics of a corporation. Morrissey v. CIR, 296 U.S. 344 (1935) (a Massachusetts business trust is an “association” taxable as a corporation). The legislative history for the statutory predecessor of TP § 1-101(f) explicitly states that Massachusetts business trusts should be considered as within the definition of “corporation” for all Maryland real estate tax purposes. Maryland statutory trusts and REITs are codifications of the common law business trusts that were pioneered in Massachusetts. Therefore, the Maryland legislature specifically intended for these entities to be included within the definition of “corporation” for recordation and transfer taxes purposes.
For income tax purposes, Maryland statutory trusts and REITs are generally taxed as partnerships if there are two or more owners, and they are considered as disregarded entities if there is only one owner, unless the owners have made a valid election to be taxed as a corporation. See 26 CFR § 301.7701-3(a). Generally, property owners prefer to own real estate through a partnership or a disregarded entity instead of through a corporation because (a) there are fewer restrictions on the ability to deduct losses, (b) real estate owned by a partnership can be stepped up upon a sale of an ownership interest or death or an owner, (c) a partnership can generally liquidate without adverse income tax consequences, and (d) unincorporated entities are easier to govern.
Due to the work of the ad hoc group and the SDAT’s announcement that it will continue to treat statutory trusts as corporations, as a general matter, people who acquire new commercial real estate are well advised to continue taking title in a statutory trust or a REIT.