Proposed changes to transfer tax raise questions

Legislative committee to consider new DRA rules in June

As many know, New Hampshire’s tax on the transfer of real estate is one of the highest in the nation – not just because the tax rate is high ($15 per $1,000) but also because of the breadth of its reach.

The New Hampshire transfer tax has been interpreted to apply to every conceivable transfer that touches real estate, whether or not money is passing hands. While a true gift is exempt, setting up a corporation to own real estate, adding an investor to a limited partnership that owns real estate, partners buying out partners, reorganizations of entities (even if the reorganization is exempt for purposes of federal income tax) are all taxable, according to the New Hampshire Department of Revenue Administration.

This was not always the case. Many years ago, all reorganizations that qualified under Section 368(a) were exempt from the real estate transfer tax (think, for example, corporations doing mergers, stock-for-asset exchanges and stock-for-stock exchanges). In addition, transfers between entities that had the same owners were also exempt from real estate transfer taxes.

But as a result of the Claremont school decision and the need to raise more tax revenue, all of these reorganizations became subject to the real estate transfer tax.

The perceived inequity led to lawsuits. Two of the cases were appealed to the New Hampshire Supreme Court. In 2012, the taxpayer won in Say Pease IV LLC et al v. New Hampshire Department of Revenue Administration, and in 2010, the DRA won in First Berkshire Business Trust et al v. Commissioner, New Hampshire Department of Revenue Administration et al, and many believe the cases raised more questions than they settled.

As a result of the increasing pressure, the DRA is proposing some new rules. Some of the changes are promising; some are puzzling. Here are the highlights:

 • New Rule 804.02 states that the conversion of a corporation to a limited liability company shall be taxed at the minimum amount (currently, $40). Great news indeed, because before the rule change it would have been taxed at the fair market value of the real estate. The bad news – any other conversion from one type of entity (say, a partnership) to another type of entity (say, a limited liability company) is still taxed based on fair market value of real estate.

Also, it’s important to note that some conversions from a corporation to an LLC can be subject to federal income tax, so get good tax advice regarding the non-real-estate-transfer-tax consequences of a conversion before making the leap.

 • New Rule 308.04 provides that the transfer tax no longer applies to single entity reorganizations or to a “mere change in identity, form, or place of organization” under the Internal Revenue Code. Reinstatement of these exemptions is a welcome change.

Some puzzlers

All of the good news described above applies to “real estate holding companies.” Previously, these entities were broadly – but clearly – defined as entities in which either a majority of its revenues or majority of the fair market value of its assets is real estate. The test is simple – 51 percent. Now the test has been reworded to say that it must be principally engaged in owning real estate, and principally is determined by comparing the real estate revenues/assets to the non-real estate assets.

What is principally? Is it majority? If so, why did they change it? If not majority, then what?

Another puzzler is the addition of new Rule 802.01(j). For the first time, a transfer by a tenant under a ground lease that has a term of 30 or more years is taxed. This is especially surprising, since the original lease is not taxed unless it is for a term of 99 years.

As you may know, one of the brightest spots in New Hampshire for development has been the Pease International Tradeport. At Pease, development is done using a ground lease between the Pease Development Authority as landlord and the developer as tenant. The tenant then builds a building and oftentimes leases it to one or more subtenants. Now, if a developer wants to sell (in other words, sell the building and assign his lease with Pease), he must pay a transfer tax on the lease based on the fair market value of the real estate. Because this could “chill business,” Pease is watching these proposed rules.

As noted earlier, these rules are proposed and not yet final. While the period to submit written comment has expired, you may follow these rules by contacting the DRA. Currently, the DRA expects to submit the final proposed rules on or before June 6 to the Joint Legislative Committee on Administrative Rules for its meeting scheduled on June 20.

Susan Manchester, a shareholder in the law firm of Sheehan Phinney Bass + Green, can be reached at 603-627-8245 or smanchester@sheehan.com.