§ 91.170. Rule in Baehr Bros. v. Commonwealth, 487 Pa. 233, 409 A.2d 326 (1979).
(a) General rules.
(1) A document will be excludible from tax if each of the following requirements is satisfied:
(i) The document stands in the place of two or more other writings.
(ii) Each of the writings for which the document stands would be excludible from tax under this article and effective notwithstanding the insolvency, bankruptcy or other legal disability of the signatories thereto.
(iii) Title to the affected real estate would not revert or be in any way impaired or encumbered by reason of the recordation of the writings described in subparagraphs (i) and (ii).
(2) Separate transfers of a greater estate and a lesser estate in real property will be taxed as a single transfer of both estates if the transactions are entered into in contemplation of a merger thereof.
(3) Separate transfers of an interest in timber, coal, oil, gas or other appurtenance to real estate and the real estate to which the interest is appurtenant will be taxed as a single transfer of both interests if the transactions are entered into in contemplation of their coinciding and meeting in the same person.
(b) Combining transactions. When a single document represents, in substance, two or more transfers of title to real estate, the document will be viewed as a series of separate transfers and documents.
(1) The tax due on the single document will be the same as the sum of tax that would be due had each transfer been effectuated by a document. The tax liability for the single document will be allocated among the parties as if each transfer had been effectuated by a document.
(2) If each separate transfer in the series is excluded from tax, the single document is excluded from tax. This rule only applies if the following apply:
(i) Each transfer and document in the series could have been accomplished and executed individually under the laws of the Commonwealth or the United States.
(ii) Completing the series of transfers and documents would result in the same transfer accomplished by the single document.
(iii) The series of transfers and documents have not been reduced to one transfer and document in order to avoid a legal, contractual, economic or personal detriment associated with completing the series of transfers and documents.
(iv) The series of transfers and documents would have been completed without the benefit of this rule.
(v) The application of § 91.193(b)(6)(ii) (relating to excluded transactions) will not be avoided by the application of this rule.
Example 1. X enters into an agreement of sale with Y for the conveyance of real estate for $100,000. Y subsequently assigns the sales agreement to Z for $1 million. X executes a deed for the conveyance of the real estate to Z and receives $100,000. Y receives $1 million from Z for the assignment. The taxable value of the deed from X to Z is $1,100,000. X and Y are jointly and severally liable for the tax on $100,000 (See § 91.132(c)). Y and Z are liable for the remaining tax on $1 million.
Example 2. D dies leaving a will that devises real estate to D’s two sons, X and Y. D is also survived by another son, Z. Z wants the real estate. X and Y do not want the real estate. X and Y agree to sell the real estate to Z. D’s estate could execute a deed for the real estate to X and Y as tenants in common without the imposition of tax. See § 91.193(b)(7). X and Y could then sell and transfer their interests in the real estate to Z without the imposition of tax. See § 91.193(b)(6)(i)(C). Therefore, assuming the criteria in subsection (b)(2)(i)—(iv) are met, D’s estate could sell and transfer the real estate to Z without the imposition of tax on the deed of transfer even though the deed from D’s estate to Z would otherwise be taxable.
Example 3. X and Y are siblings. X has a child, Z (Y’s niece/nephew). Y conveys title to real estate to Z by a document. Documents that convey title to real estate from a person’s sibling to the person’s child are subject to tax. Therefore, the document from Y to Z is taxable. This rule does not prohibit the imposition of tax. Although Y could have transferred the real estate to X by a document without the imposition of tax, see § 91.193(b)(6)(i)(C), and X could then, by a separate document, have transferred the same real estate to Z without tax, see § 91.193(b)(6)(i)(B). The document from Y to Z is still subject to tax because the two-step transaction would violate the rule under § 91.193(b)(6)(ii) regarding family transfers made within 1 year.
Example 4. X conveys title to real estate to an industrial development authority (IDA) as security for a loan of $1 million in a financing transaction in which the IDA is the lender. In turn, the IDA enters into an installment land contract with X for the real estate. The total installment payments serve as the debt service on the loan. During the term of the installment land contract, X enters into an agreement of sale with Y for the real estate. The purchase price for the real estate is $5 million. At the end of the installment sales contract, X directs the IDA to convey the real estate directly to Y. In this case, the deed from the IDA to Y will be viewed as two transfers and documents: a transfer from the IDA to X in satisfaction for the repayment of the $1 million loan and a subsequent deed for the sale of the real estate from X to Y for $5 million. The taxable value of the deed from the IDA to Y is $5 million. The taxable value is calculated by adding the taxable value of the transfer from the IDA to X and the transfer from X to Y as if each transfer had been effectuated by a document. The transfer from the IDA to X is excluded as the second leg in a financing transaction. See § 91.193(b)(23). Neither the IDA or X are liable for tax on this transaction. The transfer from X to Y is taxable on the sale value of $5 million. X and Y are jointly and severally liable for the tax on the $5 million sale value.
Example 5. Same facts as in Example 4 except that there is no sale between X and Y. Rather, X is the sole owner of a subsidiary business entity. At the end of the installment sale term between the IDA and X, X directs the IDA to convey the real estate to the subsidiary business entity. The conveyance is for no or nominal consideration. Under this set of facts, the deed to the subsidiary will also be seen as a two step transaction. As in Example 4, the first step of the transaction will be the transfer of the real estate from the IDA to X. That transaction is excluded from tax. The IDA and X have no liability for that transaction. The second step of the transaction is the transfer from X to its subsidiary business entity. The second step is taxable; and because the transaction is for no or nominal consideration, the taxable value is the computed value of the real estate. X and the subsidiary business entity are jointly and severally liable for the tax on that transfer.
(c) Splitting transactions. If a series of two or more transactions and associated writings, one or more of which would not be subject to tax if considered separately, are completed instead of a single transaction and taxable document, the series of transactions and writings will be considered as if completed by the single transaction and document. Therefore, each individual writing in the series of transactions and writings will be subject to tax upon a portion of the value of the title to real estate conveyed in respect of the transactions and writings. If it is not possible to determine how to apportion all or part of the taxable value between two or more of the writings, the value for which apportionment cannot be determined shall be divided equally among all writings that do not have an apportioned value. This rule only applies if:
(1) The parties to the single transaction and document are identical to the parties to the series of transactions and writings. For purposes of this section, parties are identical if they are the same person or the person’s affiliate. The term ‘‘affiliate’’ in this section has the same meaning as the term ‘‘grantor’s affiliate’’ in § 91.131 (relating to definitions).
(2) Completing the series of transactions and writings results in the same outcome that would have resulted from completing the single transaction and document.
(3) The primary purpose for completing the series of transactions and writings rather than completing the single transaction and document is the avoidance of tax.
Example 1. X agrees to sell and convey real estate to Z for $2 million. The conveyance can be accomplished by one, taxable document based upon the sale price of $2 million. To avoid paying tax on the full sale price of the transfer, X and Z agree to divide the conveyance into four separate transactions: D—G. Transaction D involves a deed of conveyance for a portion of the value of the real estate. Z pays $100,000 for the deed. Transactions E—G are effectuated by separate writings that each, by appearance, is nontaxable. Z pays $400,000 for transaction E and its respective writing and a total of $1.5 million for transactions F and G and their respective writings. The four transactions and writings effectuate the same outcome as would have been accomplished by the single transaction and document. Therefore, all four transactions are considered as accomplished by the single transaction and document, and each writing is taxable upon the portion of the value of the real estate that it represents. The deed of conveyance for transaction D represents the conveyance of a portion of the real estate. Z paid $100,000 for the deed. Therefore, its taxable value is $100,000. Transactions E, F and G and the associated writings effectuated the transfer of the remaining portion of the real estate. Because Z paid $400,000 for the writing under transaction E, the taxable value of the writing is $400,000. There was no allocation of the purchase price for transactions F and G and the associated writings. Therefore, the remaining portion of the real estate value that has not been allocated, that is $1.5 million, is divided equally, $750,000 each, between the writings for transactions F and G.
Example 2. X is a land developer and is the sole owner of business entity 1 and 2.
X has business entity 1 purchase vacant real estate. Realty Transfer Tax is paid on the document of transfer for the real estate. X then has business entity 1 lease the real estate under a short term lease (less than 30 years) to business entity 2. Business entity 2 makes $10 million worth of improvements to the real estate. Business entity 1 remains the owner of the underlying real estate and business entity 2 remains the owner of the improvements.
X then enters into an agreement with Y for the sale of the real estate and improvements for $15 million. The agreement provides that X will have business entity 1 convey its ownership in the underlying real estate to Y for a sale price of $2 million. Business entity 1 and Y effectuate the transfer of the underlying real estate and pay realty transfer tax on the deed of conveyance based upon the $2 million sale value.
The agreement also provides that X will have business entity 2 assign its lessee interest in the short term lease to Y for the remaining $13 million sale price. No tax is paid on the assignment of the lessee interest. Y then terminates the lease resulting in a merger of the real estate and improvements in Y. Y has, in substance, purchased both the underlying real estate and improvements. By breaking the simple sale of the underlying real estate and improvements into multiple transactions, X and Y have attempted to avoid paying tax on the full sale price of $15 million. In this case, the multiple transactions will be viewed as a single transaction. Therefore, the total taxable value of the single transaction is the $15 million sale price.
Authority The provisions of this § 91.170 adopted under section under section 1107-C of the Tax Reform Code of 1971 (72 P. S. § 8107-C).
Source The provisions of the § 91.170 adopted December 14, 2007, effective December 15, 2007, 37 Pa.B. 6516.
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