In a PSC-driven utility restructuring, are spin-off transfers subject to the real estate transfer tax, and do they generate section 186 gross earnings, 186-a gross income, or excess dividends?

Plain-English summary

Central Hudson Gas & Electric Corporation filed a follow-up to an earlier advisory opinion about its PSC-driven restructuring (forming a holding-company structure and spinning off subsidiaries, including its generation/competitive entities). This multi-tax opinion -- Real Estate Transfer Tax (00(2)R) and Corporation Tax (00(4)C) -- addressed how the spin-offs are taxed.

The Department held:

• Issue 1 -- Real Estate Transfer Tax (section 1405): A spin-off of a subsidiary holding real property is a conveyance of an interest in real property. Where the recipient is already the beneficial owner (e.g., the Spin-Off of CHEC to its existing owner), it is a mere change of identity with no change in beneficial ownership and is exempt under section 1405(b)(6). A spin-off that does change beneficial ownership is a taxable conveyance.
• Issue 2 -- section 186 / 186-a (gross earnings/income): Following Matter of Long Island Lighting Co. (TSB-A-98(3)C), Central Hudson does not employ its capital within the meaning of section 186 by restructuring its organization, so the transactions generate no "gross earnings." But for the section 186-a excise tax, Central Hudson will realize "gross income" to the extent a profit is generated -- equal to the amount by which the fair market value of each subsidiary's common stock exceeds Central Hudson's book value of that stock.
• Issue 3 -- section 186 excess dividends: A "dividend" implies a division or distribution of corporate profits. The spin distributions made to implement the holding-company structure do not represent a distribution of profits, so they are not dividends subject to the section 186 excess dividends tax.

What this means for you

Restructuring spin-offs can be transfer-tax exempt -- if beneficial ownership doesn't change

A spin-off conveying real property is exempt from the real estate transfer tax when it is a mere change of identity with no change in beneficial ownership (section 1405(b)(6)). When beneficial ownership does change, the conveyance is taxable.

Reorganizing is not "employing capital" for section 186 gross earnings

A utility that restructures its organization is not employing its capital within section 186, so the restructuring yields no "gross earnings." But section 186-a can still reach a profit -- the excess of FMV over book value of the spun subsidiary stock is gross income.

Spin distributions are not excess dividends

Distributions made to set up a holding-company structure are not a distribution of profits, so they escape the section 186 excess dividends tax -- consistent with the broader Article 9 treatment of utility reorganizations (and TSB-A-00(14)C/Brooklyn Union Gas).

Common questions

Q: Is a utility spin-off of real property subject to the transfer tax?
A: Only if beneficial ownership changes. A mere change of identity with no change in beneficial ownership is exempt under section 1405(b)(6).

Q: Does restructuring generate section 186 gross earnings?
A: No. Restructuring the organization does not employ the utility's capital, so it generates no gross earnings -- but section 186-a gross income arises on any profit (FMV over book value of the subsidiary stock).

Q: Are the spin distributions excess dividends?
A: No. They do not represent a distribution of profits, so they are not dividends subject to the section 186 excess dividends tax.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1405(b)(6) (real estate transfer tax; mere change of identity exemption)
- Tax Law section 186 (Article 9 franchise tax; gross earnings; excess dividends) [repealed eff. 2000]
- Tax Law section 186-a (utility services tax; gross income)
- Matter of Long Island Lighting Co., TSB-A-98(3)C
- Central Hudson Gas & Electric Corporation, TSB-A-00(2)R, TSB-A-00(4)C (Feb. 29, 2000)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a00_2r_4c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(2)R
Real Estate Transfer Tax
TSB-A-00(4)C
Corporation Tax
February 29, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z991215A

On December 15, 1999, a Petition for Advisory Opinion was received from Central Hudson
Gas & Electric Corporation, 284 South Avenue, Poughkeepsie, New York 12601-4879.
The issues raised by Petitioner, Central Hudson Gas & Electric Corporation, are a follow-up
to an advisory opinion issued to Petitioner on July 29, 1998, TSB-A-98(2)R, (12)C and (2)M, with
respect to Petitioner’s proposed restructuring as required under the New York State Public Service
Commission’s (“PSC”) Competitive Opportunities Proceeding and the PSC’s policy objectives set
forth in the Opinion No. 96-12 (“Issued Advisory Opinion”):
1. Is the spin-off by Petitioner of its ownership of three wholly-owned subsidiaries
to CH Energy Group, Inc., the parent (“Holdco”) of Petitioner, by a distribution of
stock (“Existing Subsidiaries Spin-Off”), a mere change of form of ownership or
organization where there is no change in beneficial ownership (“Mere Change”) and,
therefore, exempt, pursuant to section 1405(b)(6) of the Tax Law, from tax, to the
extent applicable, under section 1402(a) of the Tax Law?
2. Since tax exempt treatment under section 355 of the Internal Revenue Code
(“IRC”) is not recognized for purposes of sections 186 and 186-a of the Tax Law
with respect to the Existing Subsidiaries Spin-Off (i.e., for purposes of taxation
under the IRC, the Spin-Off would be considered to be a taxable distribution by
Petitioner of appreciated property under section 311(b) of the IRC), would any
amount be recognized by Petitioner as “gross earnings” under section 186 of the Tax
Law or as “gross income” under section 186-a of the Tax Law?
3. Since tax exempt treatment under section 355 of the IRC is not recognized for
purposes of section 186 of the Tax Law, and assuming Petitioner were subject to the
4.5% excess dividends tax under section 186 (“Excess Dividends Tax”), would any
portion of the value of the stock in the Existing Subsidiaries Spin-Off be subject to
the Excess Dividends Tax?
Petitioner submits the following facts as the basis for this Advisory Opinion.
Issues 1, 2 and 3 of this Advisory Opinion relate to Questions 2, 9 and 10, respectively, of
the Issued Advisory Opinion. The Issued Advisory Opinion sets forth a proposed restructuring of

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TSB-A-00(2)R
Real Estate Transfer Tax
TSB-A-00(4)C
Corporation Tax
February 29, 2000

Petitioner’s organization and operations pursuant to the PSC’s Competitive Opportunities
Proceeding and the PSC’s policy objectives set forth in the Opinion No. 96-12 and implemented
under the restructuring plan described in the Restated Settlement Agreement dated January 2, 1998,
as modified February 26, 1998, which includes a proposed structure for its subsidiaries spin-off.
Subsequent to the issuance of the Issued Advisory Opinion, Petitioner revised its proposed structure
of its subsidiaries spin-off . All other facts presented in the Issued Advisory Opinion remain the
same. Petitioner states that although the form of the restructuring is different than originally
envisioned, the substance is the same and continues to be a Mere Change with no change in
beneficial ownership. The revised facts are as follows:
Petitioner states that on or about December 15, 1999, Petitioner restructured as follows:
1. Central Hudson Services, Inc. was established as a new subsidiary (“Newco”) of
CH Energy Group, Inc. (CH Energy Group, Inc. was a subsidiary of Petitioner).
2. The shareholders of Petitioner exchanged their shares of stock for shares of CH
Energy Group, Inc. (“Share Exchange”), making CH Energy Group, Inc. the parent
(Holdco) of Petitioner as well as Newco.
3. The original shares of stock issued by Holdco to Petitioner were cancelled (100
shares @ $.10 / share) such that 100 percent of the Holdco stock is now owned by
outside shareholders.
4. Petitioner spun up three of its subsidiaries (Central Hudson Enterprises Corp.
(“CHEC”), CH Resources, Inc., and Greene Point Development Corp.) to Holdco
(the Existing Subsidiaries Spin-Off).
5. Holdco dropped down the three subsidiaries to Newco.
Discussion
Issue 1: Refer to Issue A: New York State Real Estate Transfer Tax of the Issued Advisory Opinion
for the applicable law.
In the Existing Subsidiaries Spin-Off, Petitioner would distribute to Holdco 100% of the
common stock of Central Hudson Enterprises Corp. (“CHEC”), CH Resources, Inc., and Greene
Point Development Corp. As CHEC is an entity with an interest in real property, the Existing
Subsidiaries Spin-Off will result in Holdco acquiring a controlling interest in an entity with an

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TSB-A-00(2)R
Real Estate Transfer Tax
TSB-A-00(4)C
Corporation Tax
February 29, 2000

interest in real property. Therefore, the Spin-Off of CHEC results in a taxable conveyance of real
property in accordance with sections 1402, 1401(b) and 1401(e) of the Tax Law.
However, as determined in the Answer to Question 2 of the Issued Advisory Opinion, as a
result of the Share Exchange, Holdco became the sole owner of Petitioner and, thus, the indirect
owner of CHEC. Therefore, the Spin-Off of CHEC represents a mere change of identity with no
change in beneficial ownership and would be exempt from the real estate transfer tax as provided
in section 1405(b)(6) of the Tax Law.
Similarly, when the stock of Existing Subsidiaries is distributed down from Holdco to
Newco, Newco will acquire a controlling interest in an entity (CHEC) with an interest in real
property. Therefore, the transaction will result in a taxable conveyance of real property in
accordance with sections 1402, 1401(b) and 1401(e) of the Tax Law.
However, because Holdco is the parent company of Newco, the distribution down to Newco
of the stock of the Existing Subsidiaries represents a mere change of identity with no change in
beneficial ownership and would be exempt from the real estate transfer tax as provided in section
1405(b)(6) of the Tax Law.
Issue 2: Refer to Issue B: Sections 186 and 186-a – Spin-Offs and Generation Assets of the Issued
Advisory Opinion for the applicable law.
As stated in the Answer to Question 9 of the Issued Advisory Opinion, the Existing
Subsidiaries Spin-Off is part of a series of transactions being entered into by Petitioner as mandated
by the PSC pursuant to the Competitive Opportunities Proceeding and the PSC’s policy objectives
set forth in the Order (Opinion No. 96-12), and implemented under the restructuring plan described
in the Restated Settlement Agreement dated January 2, 1998, and modified February 26, 1998. The
facts, as presented in this Advisory Opinion, provide that after the Share Exchange with CH Energy
Group, Inc. (Holdco), Petitioner will distribute to Holdco all of the common stock of its wholly
owned subsidiaries, CHEC, CH Resources, Inc. and Greene Point Development Corp. The fact that
subsequent to the Spin-Off of the stock of the subsidiaries from Petitioner to Holdco, Holdco will
drop down those subsidiaries to Newco will not affect the tax ramifications of the transactions for
Petitioner.
As determined in the Answer to Question 9 of the Issued Advisory Opinion, like Matter of
Consolidated Edison Co. of NY v State Tax Commission, 24 NY2d 114, 119, and Long Island
Lighting company, Adv Op Comm T&F, February 27, 1998, TSB-A-98(3)C, Petitioner does not
employ its capital within the meaning of section 186 of the Tax Law for the purpose of restructuring
its organization. Therefore, these transactions will not generate any “gross earnings” for Petitioner.

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TSB-A-00(2)R
Real Estate Transfer Tax
TSB-A-00(4)C
Corporation Tax
February 29, 2000

With respect to the excise tax imposed under section 186-a of the Tax Law, Petitioner will
realize “gross income” to the extent that a profit is generated. The profit, if any, would equal the
amount that the fair market value of the common stock of each of the subsidiaries exceeds
Petitioner’s book value of the common stock.
Issue 3: Refer to Issue B: Sections 186 and 186-a – Spin-Offs and Generation Assets of the Issued
Advisory Opinion for the applicable law.
As stated in the Answer to Question 10, of the Issued Advisory Opinion, in People ex rel
Adams Electric Light Co v Graves, 272 NY 77,79, the Court of Appeals stated that under the
franchise tax imposed by section 186, “[a] dividend implies a division or distribution of corporate
profits.” In this case, Petitioner’s distribution to Holdco, after the Share Exchange, of all of the
common stock of Petitioner’s subsidiaries, CHEC, CH Resources, Inc. and Greene Point
Development Corp., (the Existing Subsidiaries Spin-Off), is part of the series of transactions being
entered into by Petitioner as mandated by the PSC pursuant to the Competitive Opportunities
Proceeding and the PSC’s policy objectives set forth in the Order (Opinion No. 96-12), and
implemented under the restructuring plan described in the Restated settlement Agreement dated
January 2, 1998 and modified February 26, 1998, whereby Petitioner is reorganized into the holding
company structure. It does not represent a distribution of the profits of Petitioner. Accordingly, these
restructuring distributions are not treated as dividends subject to the Excess Dividends Tax under
section 186 of the Tax Law.

DATED: February 29, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.