TAXATION ‑- REAL ESTATE EXCISE TAX ‑- TRANSFER OF REAL PROPERTY TO CORPORATION BY SOLE STOCKHOLDER IN EXCHANGE FOR COMMON STOCK

TAXATION ‑- REAL ESTATE EXCISE TAX ‑- TRANSFER OF REAL PROPERTY TO CORPORATION BY SOLE STOCKHOLDER IN EXCHANGE FOR COMMON STOCK.

The transfer of real property to a corporation by the sole stockholder, the consideration being the issuance of common stock to said stockholder, constitutes a sale under chapter 28.45 RCW, the real estate excise tax statute.

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                                                                February 27, 1964

Honorable John G. McCutcheon
Prosecuting Attorney
Pierce County
Tacoma, Washington

                                                                                                                Cite as:  AGO 63-64 No. 86

Dear Sir:

            By a previously acknowledged letter you have requested that we reconsider AGO 59-60 No. 100 [[to Prosecuting Attorney, Pacific County on February 10, 1960]]to determine whether we still adhere to the views expressed therein.

            It was concluded in that opinion that the transfer of real estate to a corporation by the sole stockholder in exchange for additional shares of stock constituted a transaction taxable under chapter 28.45 RCW relating to the real estate excise tax.

            We conclude that the result reached in AGO 59-60 No. 100 is correct.

                                                                     ANALYSIS

            The tax in question is imposed pursuant to RCW 28.45.050 which provides:

            "The county commissioners of any county are authorized by ordinance to levy an excise tax upon sales of real estate not exceeding one percent of the selling price.  The rate of the levy shall be determined annually by the commissioners.  The proceeds of the tax provided for in this chapter shall be placed in the county school fund and shall be used exclusively for the support of the common schools:  Provided, That one percent of the proceeds of the tax provided for herein may be placed in the current expense fund of the county."

             [[Orig. Op. Page 2]]

            The contention has been made that the opinion which you have asked us to review is erroneous because in such a transfer there is no valuable consideration present as required by RCW 28.45.010, 28.45.030.1/

             It is fundamental that a corporation is an entity separate and distinct from its shareholders and this is true even though all of the corporate stock is owned by one person.  Patterson v. Ford, 167 Wash. 121, 8 P.2d 1006 (1932); State v. Northwest Magnesite Co., 28 Wn.2d 1, 182 P.2d 643 (1947).  The sole shareholder is not the legal owner of the assets of the corporation, nor has he any property interest therein.  Patterson v. Ford, supra; State of Cal. v. State Tax Comm., 55 Wn.2d 155, 346 P.2d 1006 (1959).

            Shares of corporate stock are personal property and may be bought and sold.  Their value is measured by the value of all the corporate assets, 11 Fletcher, Cyc. Corporations (Perm. Ed.) §§ 5096, 5100, and when issued, such shares must be paid for in money or in  [[Orig. Op. Page 3]] money's worth.  RCW 23.01.150;Electromatic Cooling Co. v. Milne‑Ryan-Gibson, 160 Wash. 320, 294 Pac. 1113 (1931).

            Under the facts we are considering, the corporation has received something of value‑-real estate, and the transferor has received additional shares which are also of value.  The sole shareholder had the right to use the land, and now, when converted into stock, to use the stock for his own purposes.

            As was said in AGO 59-60 No. 100:

            ". . . An interest in real property has been exchanged for common stock in the corporation. . . . Each party has exchanged one set of rights for another and such an exchange is the very essence of consideration.  See Restatement, Contracts, § 75 (1930). . . ."

            It has been suggested that AGO 59-60 No. 100 is inconsistent with AGO 63-64 No. 44 [[to Prosecuting Attorney, Stevens County on July 31, 1963]]and that the latter is a correct statement of the AGO 63-64 No. 44 and that the latter is a correct statement of the law.  AGO 63-64 No. 44 concluded that the tax in question does not apply to the transfer of real property by one corporation to another corporation where the transferor owns all of the outstanding capital stock of the transferee and no additional stock is to be issued in exchange for the property.

            There is, however, a definite distinction between the two opinions.  In 63-64 No. 44, the sole shareholder transferred real estate and the corporation gave nothing in return.  The real estate became a corporate asset in which the shareholder had no property interest.  Patterson v. Ford, supra.  The shares owned by the transferor may have increased in value as a result of the increase in corporate assets but this was automatic and not because of any action on the part of the transferee.  The corporation did not pay or deliver anything in return for the real property.  There was no "selling price" by which the tax could be measured.  See, RCW 28.45.030.