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New regulations by the Pennsylvania Department of Revenue would tax assignments of agreements of sale under certain circumstances. This position is now officially confirmed in Realty Transfer Tax Bulletin 2008-01, issued Jan. 3, 2008, that attempts to clarify the application of the department’s Realty Transfer Tax Regulation under 61 Pa. Code Section 91.170. That bulletin purports to provide “guidance” through a series of hypothetical scenarios including, among other things, assignments of sale agreements. All lawyers who deal with real estate transactions should review this bulletin because, if these new rules are enforceable, taxpayers will have to pay substantial transfer taxes for transactions that most lawyers never even imagined could be taxable. The hypothetical scenarios are somewhat complicated, but it now appears that the department intends to tax assignments of agreements of sale, with certain limited exceptions. Let’s look at a relatively routine assignment of an agreement of sale in light of these new rules. A buyer enters an agreement to purchase real estate and later either assigns the agreement or nominates an unrelated purchaser to close with the seller at settlement. The owner of the property then conveys the property by deed to the assignee or nominee of the original purchaser. Up until now, just about everyone in the real estate industry viewed that transaction as taxable based on the stated purchase price in the agreement of sale. The transfer tax was generally split equally between the grantor and the grantee. Pennsylvania’s transfer tax is 1 percent, and the transfer tax by the local municipality ranges from an additional 1 percent in most places to 3 percent in Philadelphia. A Double Tax Now the Pennsylvania Department of Revenue takes the position that there are two transactions involved in that scenario, one involving the transfer of the agreement of sale to the assignee or nominee, and the other involving the deed from the original owner. In effect, the department is treating the assignment as though it were a separate deed and looking at what it calls the “substance of a transaction rather than its technical form.” It wants to tax both transactions. A double tax! Don’t just take my word for it. Read the bulletin and regulations yourself. How could this possibly happen? For this purpose, the department has dragged out a 30-year-old case of the Pennsylvania Supreme Court called Baehr Bros. v. Commonwealth, 409 A.2d 326 (Pa. 1979), which honors substance over form. The problem with that choice of precedent is that it arose in a completely different context, and the court in that case did the opposite of what the regulations purport to do here. The Baehr Bros. case gave the taxpayer a break and held that the department could not tax a deed that, on its face, is taxable if the deed actually represents a series of excluded transactions that have been reduced to one deed for the convenience of the parties. Flawed Concept Even more astounding, the new rules ignore the realty transfer tax statute, which defines a taxable “document” as “any deed, instrument or writing that conveys, transfers, demises, vests, confirms or evidences any transfer or demise of title to real estate.” In addition, the definition of “document” specifically excludes wills, mortgages and “land contracts whereby legal title does not pass to the grantee until the consideration specified in the contract has been paid or any cancellation thereof unless the consideration is payable over a period of time exceeding 30 years. . . . ” This exclusion for agreements of sale is confirmed in the department’s regulations (Sec. 91.101, Definition of “ Document”(iii)). How then do agreements of sale or assignments of these agreements become taxable “documents”? The department’s concept that an assignment of an agreement of sale is in “substance” like a deed is substantially flawed. As any lawyer knows, a whole set of different legal rules apply to a purchaser who has rights under an agreement of sale than to a grantee who has rights under a deed. For example, rights and obligations vary considerably whether one owns the property or merely owns rights under an agreement. Judgments against real estate ownership are treated differently than judgments against interests in an agreement of sale. Lenders’ rights will be secured differently against holders of real estate interests than against interests in agreements of sale. A whole recording system and established rules stem from the concept of mortgaging real estate ownership. Control over the property and obligations for environmental problems, torts and code violations vary considerably depending on whether one is a titleholder or an assignee under an agreement of sale. End Run around Court The Supreme Court decision in Allebach v. Comm., 546 Pa. 146 (1996), held that a seller did not have to include assignment payments from an assignee in the purchase price. Although the court wasn’t specifically asked to determine the liability of an assignee, the new regulations seem to be an end run around that Supreme Court decision. In Allebach, the department argued that if it did not tax assignment payments, that would create a tax “loop-hole.” The court responded that even if that were true, it is up to the Pennsylvania Legislature to deal with that issue, and it’s not within the scope of the courts to change those laws “simply because we may believe that they do not adequately address the fiscal needs of this commonwealth.” Complications, Confusion The department’s new position will create anxiety and confusion in the real estate community. It will stir up unnecessary complications and fees in some real estate transactions. It will cause a certain amount of second-guessing of completed transactions that might now be exposed to claims for additional taxes. It will inspire tax planning and new structuring of transactions to avoid possibilities of double or triple taxation on assignments of agreements of sale. For example, if the original buyer under an agreement wants to nominate a purchaser for closing, it could just arrange to cancel the original agreement with the seller and encourage the seller to enter into the same agreement with the new buyer. Also, what will be the position of the department about options to purchase and assignments of those options? Will they also be considered taxable in the same way as the department intends to treat agreements of sale? How will agreements of sale, or assignments of them or designation of nominees to take title ever be detected? Unlike deeds, these documents are rarely recorded. The bulletin is so misguided that some lawyers and real estate purchasers may decide just to ignore it. In any event, it seems unlikely that courts will agree with the department’s position on assignments when it is challenged. The Department of Revenue is grasping at straws to support its position with the Baehr Bros. case. That stretch hangs on a misreading of the court’s comment that substance may control over form. This rather arbitrary reliance on a case that helped taxpayers expand their exemptions, plaintively invokes a hunter-inspired lament: “Some days you get the Baehr, and other days the Baehr gets you.” HARRIS OMINSKY is with the law firm of Blank Rome and is a former president of the board of the Pennsylvania Bar Institute.

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