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The Tax Man Cometh
by Ron Davis

A simple transfer of ownership of a Pennsylvania shopping center almost became a $54,000 liability for the center's principals.

The shopping center, Exton Plaza, in suburban Philadelphia, has since 1976 been owned by a partnership--Exton Plaza Associates--consisting of three individuals. And the transfer of ownership occurred when the principals decided to refinance the shopping center mortgage.

At the time of the refinancing, Exton Plaza Associates was a general type of partnership. But the lender's commitment to the loan included a special requirement that the general partnership become a "single purpose and bankruptcy remote entity." That meant that the general partnership must change to a limited partnership to comply with the lender's requirement.

The three principals therefore converted Exton Plaza Associates to a limited partnership. When they recorded the deed, however, the state Revenue Department slapped them with a "realty transfer tax" of $54,000, representing 1 percent of the value of the shopping center property.

In response, the principals pointed out that the conversion of Exton Plaza Associates from a general partnership to a limited partnership was merely a formality. They added that the new deed accomplished nothing more than recording a name change and did not result in a change of ownership or transfer of title.

State tax officials noted, however, that Pennsylvania law dictates that any transfer of ownership between partnerships is fully taxable. The principals appealed.

The Commonwealth Court of Pennsylvania reversed the decision of state tax officials, explaining, "The realty transfer law is not intended to tax all transfers of realty, only those transactions that effect a real transfer of interest in realty conveyed through the medium of a 'document'; that is, transfers in which the interest is passing to a person or persons other than the grantor.... In this case, the execution of the deed transferring the shopping center merely memorialized the conversion from a general partnership to a limited partnership. (Exton Plaza Associates v. Com., 763 A.2d 521 [Pa. Cmwlth. 2000])

Decision: December 2000
Published: March 2001



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