Taxation; Excise Stamp Tax on Conveyances; Conveyance of Leasehold Improvements Owned by Lessee

Subject:

Taxation; Excise Stamp Tax on Conveyances; Conveyance of leasehold improvements owned by lessee; G.S. 105-228.30

Requested By:

Thomas Russell Odom Durham County Attorney

Question:

Is an instrument conveying ownership of leasehold improvements, owned by a lessee, from the lessee to a purchaser subject to the excise stamp tax on conveyances?

Conclusion:

No.

The Durham County Attorney states the following facts:

"A Foundation is the owner of certain lands situated in Durham County, State of North Carolina. The Foundation enters into multi long-term ground leases with T and affiliates of T. The ground leases provide for the construction upon the leased land of certain improvements by the Lessee with specific clarification that the improvements so construed would remain in the ownership of the Lessee during the term of the ground lease. Subsequent to completion of the construction of the improvements upon the leased land by T, T entered into a contract of sale and purchase of the ground leases and the improvements constructed thereon with Purchaser. Purchaser consummates the purchase of the leasehold interest of T and the purchase of the improvements constructed upon the leasehold from T. The transactions for transfer of ownership of the leases and leasehold improvements were evidenced by two documents for each leasehold interest. They were (1) an assignment to Purchaser of the Lessee’s interest in the ground lease to T, and (2) an instrument in the form of a deed of conveyance transferring the ownership from T to Purchaser of T’s interest in the improvements constructed on the leased lands which, (by the terms of the underlying ground lease, remained in the ownership of Lessee during the full term of the ground lease."

He asks:

"Is the instrument in the format of a deed transferring the ownership of the leasehold improvements from T Lessee to Purchaser subject to the payment of North Carolina Real Estate excise tax?"

The statute levying the tax imposes the tax "on each deed, instrument or writing by which any lands, tenements or other realty shall be granted, assigned or otherwise conveyed to, or vested in, the purchaser or purchasers. . . ." G.S. 105-228.30.

Perhaps the most accurate way to characterize the nature of the property transferred is to call it a "chattel real."

"Chattels real are interests in real estate less than freehold, and are personal property. They are to be distinguished, on the one hand, from things which have no concern with the land, such as mere movables and rights connected with them, which are chattels personal, and on the other hand, from a freehold, which is realty. Where a person erects buildings on leased premises under an agreement in the lease that he may remove them, or places machinery in buildings under a similar agreement, the buildings and the machinery follow the term and partake of its character as a chattel real."

63A Am.Jur.2d, Property, § 23. Such property is both "an interest in real estate," and personal property. Is the conveyance of such property the transfer of "lands, tenements or other realty," in the words of the statute? G.S. 105-228.30.

The quoted language of the statute comes directly from the former federal law. IRC § 4361. The applicable regulation which dealt with the meaning of the statute provided:

"(4) For purposes of the regulations in this part-

(i)

The term "realty" includes-

(a)

Those interests in real property which endure for a period of time, the termination of which is not fixed or ascertained by a specific number of years, such as an estate in fee simple, life estate perpetual easement, etc., and

(b)

Those interests enduring for a fixed period of years but which, either by reason of the length of the term or the grant of a right to extend the term by renewal or otherwise, consist of a bundle of rights approximating those of the class of interests mentioned in (a) of this subdivision.

Reg. § 47.4361-2.

It is clear from the regulation that the interest conveyed here does not rise to the level envisioned by the regulation. It is consequently likely that the Legislature intended to track the federal result in adopting a state law patterned after the federal statute. It is therefore our opinion the described instrument, conveying ownership of leasehold improvements owned by the lessee and conveyed by it to a purchaser, is not subject to the excise stamp tax on conveyances.

LACY H. THORNBURG Attorney General

Myron C. Banks Special Deputy Attorney General