|Organization:||Massachusetts Department of Revenue|
|Referenced Sources:||Massachusetts General Laws|
May 10, 2005
*************** LLC has asked for a letter ruling dealing with the correct application of the Massachusetts deeds excise, G.L. c. 64D, to sales of real estate under a "Declining Balance Co-Ownership Program" (the "Program"). *************** has established the Program to assist individuals ("Consumer/s") who, for religious reasons, are prohibited from paying interest to attain home ownership.
The program consists of two kinds of transactions, "Purchase Money Transactions" and "Refinance Transactions."
The key documents for the Program are as follows:
1) Definition of Key Terms;
2) Co-Ownership Commitment Agreement;
3) Co-Ownership Agreement;
4) Obligations to Pay;
5) Security Instrument; and
6) Assignment Agreement and Amendment of Security.
Purchase Money Transactions
In a Purchase Money Transaction, the Consumer purchases a home from a third party as a tenant-in-common with an affiliate of *************** (the "Co-Owner"), a single member LLC specifically created for that purpose. The Consumer and the affiliate are unrelated parties. Following the purchase, the Consumer will make "monthly payments" to the Co-Owner, until the Consumer has acquired full ownership of the property. This transaction is described in greater detail below.
The following will occur:
- The Consumer will enter into the Co-Ownership Commitment Agreement with ***************, which will include a list of conditions that must be satisfied prior to closing and an itemization of estimated closing costs. The list and itemization are the same as those typically included in a loan commitment agreement.
- At closing, the parties will execute the documents listed as well as other documents that would apply in a traditional mortgage situation. The Consumer will make the "Initial Acquisition Payment," which is the equivalent of a down payment. The remaining part of the purchase price will be paid by the Co-owner, the funds having been advanced by *************** to its affiliate, the Co-Owner, and placed into escrow for use in the transaction. The property will be purchased by the Consumer and the Co-Owner as tenants-in-common. The deeds excise tax will be paid at the time of the acquisition on the full purchase price paid by the Consumer and the Co-owner.
- Under the Co-Ownership Agreement, the Consumer has the sole and exclusive right to occupy and possess the property. The Co-Ownership Agreement also provides that the Consumer will have all of the tax benefits and burdens related to the property including the obligation to pay 100% of any taxes related to the property and the right to claim tax credits (if any) and the applicable deductions for the payments of any items related to the property which give rise to deductions. In addition to taxes, the Consumer is obligated to pay all general assessments levied and assessed against the property, utility bills and homeowners' association dues, if any. The Consumer is also obligated to maintain and repair the property and is required to obtain property insurance. At any time, the Consumer has the right to purchase the Co-Owner's interest in the property by paying the "Buyout Amounts," which is essentially the equivalent to the remaining principal balance in a standard mortgage loan.
- Under the Obligation to Pay, the Consumer is required to make monthly payments to the Co-Owner that are similar to the payments made under a typical mortgage agreement. The main components of the monthly payment, as delineated in the "Definition of Key Terms," are the "Profit Payment" and the "Acquisition Payment." The Profit Payment is the monetary equivalent of the interest portion of a conventional mortgage loan. The Acquisition Payment is that portion of the Consumer's monthly payments that is applied to increase the Consumer's ownership interest in the property, which varies month by month in accordance with the Schedule. Acquisition Payments are calculated in the same manner as, and will simulate, principal amortization under a traditional mortgage loan. As a result of the Acquisition Payment portion of the monthly payments, the Consumer's ownership interest in the property increases and the Co-Owner's interest decreases during the term of the agreement in accordance with the Schedule.
- The Security Instrument encumbers the Consumer's interest in the property as security for payment of amounts due under the Obligation to Pay and the Co-Ownership Agreement. The Security Instrument sets forth in detail the protections afforded the Co-Owner, which are similar in all material respects to the rights of a mortgagee in a traditional home mortgage financing.
- It is anticipated that at closing, the Co-Owner will enter into the Assignment and Amendment of the Security Instrument in order to assign its rights and interests under the Co-Ownership Agreement, the Obligation to Pay and the Security Instrument to *************** and to grant to *************** a mortgage on Co-Owner's interest in the property. Notwithstanding the assignment, the Co-Owner will remain the legal owner of its interest as tenant-in-common in the property. *************** will then assign, for consideration, the interests it received from Co-Owner to Freddie Mac, which treats the transaction in a manner similar to other mortgage transactions in its system.
- Upon the payment in full of the Buyout Amount, the Consumer is deemed to have acquired 100% of the ownership interests of the Co-Owner in the property. A deed will then be delivered by Co-Owner to Consumer to reflect, on record, that Co-Owner has transferred 100% of its ownership interest in the property to Consumer. Such Deed will state that the consideration for such transfer is nominal (e.g., one dollar and other good and valuable consideration).
In a Refinance Transaction, the Consumer initially owns 100 percent of the fee simple interest in the property. Thus, there is no need for a residential sales contract from a third party seller to the Consumer and the Co-Owner. The deeds excise tax will have been paid at the time Consumer originally acquired the property.
In a Refinance Transaction, *************** will do one of the following: it will either (i) require the Consumer to transfer title to the Consumer and the Co-Owner as tenants-in-common and record a new deed to reflect this co-ownership or (ii) allow the Consumer to retain 100% of the fee simple interest in the property, in which case no deed will be delivered. *************** anticipates that it will initially use the structure described in (ii) (i.e., allow the Consumer to retain title), but it wishes to retain the flexibility to require the structured described in (i) above (i.e, take title as tenants in common). Regardless of whether Consumer retains 100% of the fee simple interest in the property, the Co-Owner's ownership interest, as described in the Obligation to Pay and the Co-Ownership Agreement, is determined by dividing the "mortgage replacement amount" by the initial property value.
In other respects, Refinance Transactions resemble Purchase Money Transactions. *************** states that, in particular, the respective rights of the parties and monthly payment requirements are quite similar. Accordingly, in those situations where *************** requires a transfer of title to Consumer and Co-Owner as tenants in common, a deed back to Consumer will be delivered by Co-Owner upon payment in full of the Buyout Amount. Where *************** allows the Consumer to retain 100% of its interest in the property, there is no need for a deed to be delivered upon payment in full of the Buyout Amount.
II. RULINGS REQUESTED
*************** requests the following rulings:
- The deeds excise tax is payable in a Purchase Money Transaction only on the transfer of the property by the seller to the Consumer and the Co-Owner as tenants-in-common.
- No deeds excise tax is payable on account of any agreement executed in a Purchase Money Transaction under the Program, regardless of the transfer of ownership interests, by deed or otherwise, from Co-Owner to Consumer.
- No deeds excise tax is payable on account of any agreement executed in a Refinance Transaction under the Program, regardless of the transfer of ownership interests, by deed or otherwise, from Consumer to Co-Owner or from Co-Owner to Consumer.
Under G.L. c. 64D, § 1, there shall be levied, collected and paid an excise upon a
[d]eed, instrument, or writing, whereby any lands, tenements or other realty sold shall be granted assigned, transferred or otherwise conveyed to, or vested in, the purchaser or purchasers . . . when the consideration of the interest or property conveyed, exclusive of the value of any lien or encumbrance remaining thereon at the time of sale, exceeds one hundred dollars.
Section 1 also provides, in pertinent part, that this "chapter shall not apply to any instrument or writing given to secure a debt . . .."
In order to determine if a deed or transaction is entered into solely for the purpose of securing a debt, the Department looks to the economic substance of the transaction, rather than its form. See, LR 95-3. Thus, although there was no transfer of record title, the Department has ruled that transfers of ownership of cooperative apartments  and leases for extended periods  were subject to the deeds excise. On the other hand, the Department has stated that a re-conveyance of real property from a building and loan association to the owner in conjunction with a loan transaction was not subject to the deeds excise, although there was a change in record title. 
Because the pertinent language of G.L. c. 64D is nearly identical to that of IRC § 4361, repealed January 1, 1968, the Department in the past looked to federal regulations and rulings for guidance. IRS has held, for example, that where an investor provided funds to construct a building and then leased it to a government agency until the agency repaid the construction funds, the subsequent conveyance of the building to the agency by the investor was a release of a security interest and not subject to the federal documentary stamp tax. Rev. Rul. 64-295, 1964-2 C.B. 446.
In addition, a number of federal cases have analyzed the federal income tax implications of lease financing arrangements. Generally, one line of cases disregards both record title and the characterization of the transaction by the parties and treats the lessee as the owner of the realty entitled to claim applicable income tax deductions. See, Helvering v. F. & R. Lazarus & Co., 308 U.S. 252 (1939) and Rev. Rul. 68-590, 1968-2 C.B. 66. Another line of cases holds that in a genuine multiple-party transaction with economic substance resulting from business or regulatory considerations, which is not structured solely for tax-avoidance purposes, the form of the transaction adopted by the parties controls for tax purposes. See, Frank Lyon Co. v. United States, 435 U.S. 561 (1978).
The substance of this transaction is the acquisition of property by the Consumer, that acquisition being financed by *************** and its affiliate, whose interests are protected by the financing arrangement. While the federal income tax cases are not controlling here, the reasoning in both the Lazarus and Lyon cases is consistent with the Consumer being treated as the owner of the property throughout this transaction. Thus, the deeds excise tax is due upon the transfer of the Property from the seller to the Consumer and the Co-owner and not upon the transfer of the property from the affiliate Co-owner to the Consumer upon fulfillment of the Consumer's obligations to the Co-owner.
Very truly yours,
Commissioner of Revenue
 See, Letter Ruling 90-1.
 See, Letter Ruling 79-52.
 See, Letter Ruling 95-3