WAC 458-61A-212   Transfers where gain is not recognized under the Internal Revenue Code.  (1) Introduction. A transfer that, for federal income tax purposes, does not involve the recognition of gain or loss for entity formation, liquidation or dissolution, and reorganization, is not subject to the real estate excise tax.

     (2) Internal Revenue Code sections. This exemption includes, but is not limited to, nonrecognition of loss or gain under the following sections of the Internal Revenue Code of 1986:

     (a) Section 332 - Corporate liquidations - Complete liquidations of subsidiaries.

     (b) Section 337 - Corporate liquidations - Nonrecognition for property distributed to parent in complete liquidation of subsidiary.

     (c) Section 351 - Corporate organizations and reorganizations - Transfer to corporation controlled by transferor.

     (d) Section 368 (a)(1) - Corporate organizations and reorganization - Definitions relating to corporate reorganizations - Reorganizations - In general.

     (e) Section 721 - Partners and partnerships - Nonrecognition of gain or loss on contribution.

     (f) Section 731 - Partners and partnerships - Extent of recognition of gain or loss on distribution.

     (3) Extent of exemption. This exemption applies only to transfers that qualify as nonrecognition of gain or loss transactions under the Internal Revenue Code for entity formation, liquidation or dissolution, and reorganization.

     (a) This exemption does not apply to transactions under Internal Revenue Code section 1031 - Exchange of property held for productive use or investment. That section of the Internal Revenue Code does not deal with entity formation, liquidation or dissolution, or reorganization. (See WAC 458-61A-213, IRS "tax deferred" exchanges.)

     (b) This exemption does not apply to sales under Internal Revenue Code section 1034 - Rollover of gain on sale of principal residence. That section of the Internal Revenue Code does not deal with entity formation, liquidation or dissolution, or reorganization.

     (4) Treatment when gain is partially recognized in an otherwise exempt transaction. In the event a transaction qualifies for the exemption under this section as a nonrecognition of gain or loss transaction for entity formation, liquidation or dissolution, or reorganization, but a gain is partially recognized under the Internal Revenue Code provisions, the real estate excise tax applies to the amount of the transaction for which gain is recognized.

     (5) Examples. The following examples, while not exhaustive, illustrate some of the circumstances in which a grant of an interest in real property may or may not qualify for exemption under this rule. These examples should be used only as a general guide. The taxability of each transaction must be determined after a review of all the facts and circumstances.

     (a) In an otherwise nontaxable Internal Revenue Code section 351 transaction, Nate transfers to ZULU Corporation real property which has a true and fair value of $100,000. Nate receives, in exchange, ZULU stock worth $80,000, cash of $5,000, and a promissory note from ZULU to pay Nate $15,000 monthly, starting at closing, for 36 months at 6% interest. The $5,000 cash received and the $15,000 promissory note constitute "boot" under the provisions of section 351 and gain is recognized to the extent of the "boot." For real estate excise tax purposes, the taxable portion is 20% ($20,000/$100,000) and the real estate excise tax applies to 20% of the true and fair value of the real property transferred, or $20,000.

     (b) In an otherwise nontaxable Internal Revenue Code section 351 transaction, Sally transfers real property with a true and fair value of $50,000, and machinery worth $250,000, to ECHO Corporation. In exchange, Sally receives ECHO stock worth $275,000 and cash of $25,000. The cash received constitutes "boot" and gain is recognized. For real estate excise tax purposes, the nonexempt portion of the transaction is 8.3% ($25,000/$300,000). The nonexempt percentage (8.3%) is applied to the true and fair value of the real property ($50,000) to arrive at the amount $4,167. Real estate excise tax is due on $4,167.

     (c) Brenda and Julie are partners in LIMA Partnership. In a nontaxable Internal Revenue Code section 721 transaction, Mike transfers real property to LIMA Partnership in exchange for a partnership interest in LIMA Partnership. No consideration, other than the partnership interest in LIMA Partnership, is given to Mike in exchange for Mike's transfer of real property. Because the transfer is exempt under Internal Revenue Code section 721, the real estate excise tax does not apply to Mike's conveyance of real property to LIMA partnership.

     (d) Brenda and Julie are also partners in GOLF Partnership. In a nontaxable Internal Revenue Code section 721 transaction, Mike contributes cash to GOLF Partnership in exchange for a 60% partnership interest in GOLF Partnership. The cash is used by the partnership to develop real property owned by the GOLF Partnership. Because the transfer is exempt under Internal Revenue Code section 721, the real estate excise tax does not apply to Mike's acquisition of a partnership interest in GOLF Partnership.

     (6) Rules of construction. In determining whether a transfer qualifies for exemption under this section, the department will consider the law, regulations, bulletins, technical memoranda, letter rulings, etc., of the Internal Revenue Code and the Internal Revenue Service, as interpreted by the courts. Determinations of taxability under this chapter will be given the same treatment as the final determination of taxability for federal tax purposes.



[Statutory Authority: RCW 82.32.300, 82.01.060(2), and82.45.150 . 05-23-093, § 458-61A-212, filed 11/16/05, effective 12/17/05.]