Rev. Rul. 62-186

Advice has been requested whether the documentary stamp tax on conveyances of realty sold, imposed by section 4361 of the Internal Revenue Code of 1954, applies to the conveyance of real property under the circumstances described below.

A company adopted a pension plan for the benefit of its employees. To carry out the provisions of this plan, a trust has been created and a trustee has been selected to administer the fund created to pay the benefits under the plan. For Federal income tax purposes, this is a `qualified' trust under the requirements set forth in section 401(a) of the Code. Therefore, the company's contributions to the trust are deductible for income tax purposes under the provisions of section 404(a) of the Code.

Under the plan adopted by the company, no contributions are required from the employees; the entire cost of the plan is to be borne by the company. The retirement benefits to be obtained by the employees are geared to each employee's years of service and average monthly earnings. Although not contractualy required to do so, the company desired to reward the past services of the participants. To fund the past service costs, the company transferred to the trustee certain income-producing real property, which had a fair market value of approximately $4 million. The deed specified that the property was being transferred `in consideration of the sum of ten dollars.' However, subject to the limitations of section 404(a) of the Code, the company claimed an income tax deduction in an amount equal to the fair market value of the property.

The issue presented here is whether the documentary stamp tax imposed by section 4361 of the Code applies to the transfer of real property from the company to the trustee. The company contends that the tax does not apply for the reason that the property was not transferred for a `valuable consideration' for purposes of the documentary stamp tax. The basis for this contention is the claim that the transfer was not in satisfaction of a legal obligation of the company and that no significant tangible benefit was received by the company.

Section 4361 of the Code imposes a documentary stamp tax on each deed, instrument, or writing by which any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his or their direction, when the consideration or value of the interest or property conveyed (exclusive of the value of any lien or encumbrance remaining thereon at the time of sale) exceeds $100.

Section 47.4361-1(a)(2) of the Documentary Stamp Tax Regulations provides, in part, that the tax is limited to conveyances of realty sold and does not apply to other conveyances. Section 47.4361-1(a)(4)(ii) of the regulations provides that the term `sold' imports transfer of an interest for a valuable consideration, which may involve money or anything of value.

Among several examples of conveyances not subject to the tax, as set forth in section 47.4361-2(b) of the regulations, are conveyances of realty without consideration and otherwise than in connection with a sale, including a deed conveying realty as a bona fide gift, although the deed may recite a consideration for the transfer, such as `natural love and affection and $1,' etc.

Whether the realty in the instant case was `sold' for purposes of determining the applicability of the documentary stamp tax depends, therefore, upon whether the company transferred its interest in that property for a `valuable consideration.' The transfer of the property by the company to the trustee is not comparable to a gift of realty to a charitable foundation, such as that involved in the case of Murray v. Hoey , 32 F.Supp. 1008 (1940). Furthermore, the transer in this case is not a mere conveyance of a naked legal title from a principal to an agent for the purpose of managing, conserving, and liquidating the real estate, such as that involved in the decision of the United States Circuit Court of Appeals, Sixth Circuit, in the case of Berry v. Kavanaugh , 137 Fed.(2d) 574 (1943).

In determining the applicability of the documentary stamp tax to the situation described in the instant case, consideration has been given to the decision of the United States Court of Appeals for the Sixth Circuit in the case of United States v. General Shoe Corporation , 282 Fed.(2d) 9 (1959), certiorari denied, 365 U.S. 843 (1961), and to the other cases cited in that decision.

Although that decision relates to an income tax issue, the rationale of the court there is applicable to the instant case. In that case, as here, the company contributed real property to a pension trust which had been created to carry out the provisions of a pension plan adopted by the company for the benefit of its employees. The issue there was whether the company realized a taxable gain because the value of the property contributed to the trust exceeded the company's basis of the property for income tax purposes.

In holding that the company did realize a taxable capital gain, the court stated that the disposition of the real estate by the taxpayer resulted in an `amount realized' within the meaning of the income tax statute. The court further stated, as follows:

The theory of economic gain comes into play. To argue, as the taxpayer does here, that there can be no gain because nothing is realized, is unrealistic. Literally the taxpayer is correct in its contention that it did not receive a tangible benefit * * * however, we do not conceive that in this day and age we are restricted to tangibles in tax matters where there is actual recognizable benefit, albeit intangible, the taxation of which is implicit in the statutory scheme and where such benefit is clearly capable of being evaluated on an objective basis. * * *

* * * The value of what was given up here bears a direct relationship to the fair value of the `property' received. The `property' received is an economic gain to the taxpayer of exactly the market or assessed valuation which the taxpayer used as a deduction on its income tax returns. * * * This is an arm's length situation. Emotional factors are not involved. The measurement of the intangible benefits is easily reduced to dollars and cents. * * *

Among the cases cited in support of its decision in the General Shoe Corporation case, the court referred particularly to the decision of the United States Circuit Court of Appeals, Second Circuit, in the case of International Freighting Corporation v. Commissioner of Internal Revenue , 135 Fed.(2d) 310 (1943). In holding, in that case, that the delivery of stock by a corporation to its employees as a bonus constituted a disposition for a consideration equal to the market value when delivered, the court stated, as follows:

But, as the delivery of the shares here constituted a disposition for a valid consideration, it resulted in a closed transaction with a consequent realized gain. It is of no relevance here that the taxpayer had not been legally obligated to award any shares or pay any additional compensation to the employees; bonus payments by corporations are recognized as proper even if there was no previous obligation to make them; although then not obligatory, they are regarded as made for a sufficient consideration. Since the bonuses would be invalid to the extent that what was delivered to the employees exceeded what the services of the employees were worth, it follows that the consideration received by the taxpayer from the employees must be deemed to be equal at least to the value of the shares in 1936. Here then, as there was no gift but a disposition of shares for a valid consideration equal to at least the market value of the shares when delivered, there was taxable gain equal to the difference between the cost of the shares and that market value.

As indicated in the cases referred to above, the courts recognize intangible benefits in connection with contributions of property for purposes of the Federal income tax, particularly where employers and employees are involved. It follows that those intangible benefits, measured by the fair market value of the property contributed, represent `valuable consideration' for purposes of the documentary stamp tax.

In the instant case, the company received the intangible benefit of improved employer-employee relations when it set up the pension fund and contributed income-producing property to it. In addition, the company received the readily recognized economic benefit of having its capital contribution used to sustain the pension fund, so that its future contributions to the fund would be minimized. It is assumed that a company which sets up a self-sustaining employees' pension fund receives its `money's worth' for its capital contribution. Realistically, the company is receiving consideration measured by the value of the property contributed.

Accordingly, it is held that the conveyance of real property in the instant case is a conveyance of realty `sold' within the meaning of section 4361 of the Code and the applicable regulations. Therefore, the conveyance is subject to the documentary stamp tax imposed by that section of the Code.