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Md. Tax Loophole Targeted Again

Companies Avoiding Levies on Real Estate Sales

By Christian Davenport
Washington Post Staff Writer
Friday, January 21, 2005; Page B01

When Vanda Lee goes to settlement next month on the Damascus townhouse she is buying for $360,000, she expects to pay her share of transfer and recordation taxes.

Lee, a real estate agent, called it a "pretty routine," if not altogether enjoyable, part of buying and selling property. Amount due to Montgomery County and the state of Maryland: $7,884.

House Speaker Michael E. Busch plans to make the legislation a top priority. (File Photo)

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Under the same formula, Towson Place, the Baltimore County shopping center that sold for $85 million last year, should have generated about $1.7 million in taxes. Amount remitted to the county and state: zero.

That's because the seller, Florida-based Talisman Cos., placed the shopping center in a limited partnership. Instead of buying the property outright, Kimco Realty of New York acquired the partnership. When the partnership changed hands, so did the property.

With no direct property sale, no deed was transferred. That meant no transfer and recordation taxes were paid. And that meant $1.7 million in savings for Talisman and Kimco.

It's a perfectly legal mechanism to avoid paying taxes, and some of the state's biggest real estate deals happen that way, according to the Maryland Department of Assessments and Taxation. But Maryland lawmakers, increasingly frustrated with the loss of revenue, have made repeated attempts to close what some call one of the largest loopholes in the state's tax code.

For the second year in a row, Maryland House Speaker Michael E. Busch (D-Anne Arundel) has sponsored legislation that would require companies to pay transfer and recordation taxes when property worth at least $1 million is transferred from one entity to another through the sale of a company's controlling interests. Taxes would kick in if the property accounted for at least 8o percent of the assets of the entity being sold.

Last year, the legislation passed the House 124 to 17, and Busch plans to make it a top priority during the current General Assembly session. When he introduced the measure last week, it was designated House Bill 1.

In an interview, he said the state and those counties that impose transfer taxes are losing out on a key source of revenue at a time when money is tight. He also said it is a matter of fairness. Homeowners have to pay transfer taxes when they sell their property, he said. Large companies should, too.

"It's an equity issue," he said.

The money generated by the bill, estimated at $40 million annually, would be earmarked for school construction through 2008. News reports revealing how companies avoided paying recordation taxes in Virginia, which does not have a transfer tax, prompted lawmakers this month to sponsor legislation similar to Busch's. The District already has a law on the books.

In Maryland, the legislation has died in the Senate in past years -- even though it had the backing of Senate President Thomas V. Mike Miller Jr. (D-Calvert).

Opponents, including the Maryland Chamber of Commerce and the commercial real estate industry, say the measure would drive large employers out of the state and small companies out of business.

Income taxes are paid on the profits from the sale of companies, so imposing a transfer tax "is double taxation," said F. Patrick Hughes, legislative chairman of the Maryland Chapter of the National Association of Industrial and Office Parks.

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