If I use a grantor trust's swap power to trade tangible personal property I own for trust property of equal value, is that subject to NY sales or use tax?
Plain-English summary
The petitioner created an irrevocable "grantor" trust -- an intentionally-defective grantor trust (IDGT) in which he keeps the power to reacquire trust property by substituting property of equal value at any time. He wanted to use that power to swap tangible personal property he owns into the trust in exchange for other (non-tangible) trust property of equivalent value, and asked whether that swap is subject to New York sales and use tax.
The Office of Counsel concluded yes -- the swap is a taxable sale:
- The trust and the settlor are separate taxpayers. For sales tax, "person" includes a trust/trustee (Tax Law 1101(a)). A transfer of property to a trust is a transfer to a separate entity, even for a grantor trust or revocable living trust (TSB-A-99(22)S).
- The swap is a "sale." A "sale" includes any transfer of title or possession for consideration (Tax Law 1101(b)(5); 20 NYCRR 526.7). Receiving something of value in the exchange is consideration -- no negotiation or bargaining is required, and even involuntary transfers count.
- Income-tax treatment doesn't control. Although an IDGT swap is a non-event for income tax (the settlor keeps non-fiduciary dominion under IRC 671-679), it is still a sale for sales tax because it goes to a separate entity (TSB-A-06(8)S).
- Tax is on the value received. Sales/use tax applies to the value of the property the settlor receives from the trust, unless some other exemption applies.
- Resale exclusion is narrow. The settlor's original purchase of the tangible property could escape tax under the resale exclusion (Tax Law 1101(b)(4)) only if, at the time he bought it, it was purchased for one and only one purpose: resale (here, transfer to the trust). Later use of the property can defeat that intent (P-H Fine Arts; D.J.H. Construction).
What this means for you
Estate planners and grantor-trust settlors
The popular IDGT "swap power" is income-tax-free, but in New York a swap of tangible personal property between the grantor and the trust is a sales-tax event. Plan around it -- consider swapping non-tangible assets (cash, securities) rather than tangible property, where possible.
The grantor-trust shortcut doesn't carry over
"Disregarded for income tax" does not mean "disregarded for sales tax." The two taxes treat the same trust differently; don't assume an income-tax non-event is sales-tax-free.
Common questions
Q: My trust is a grantor trust I'm taxed on -- isn't a swap with it a non-event?
A: For income tax, yes. For New York sales tax, no -- the trust is a separate taxpayer, so a swap of tangible property for consideration is a taxable sale.
Q: There was no negotiation -- how can there be "consideration"?
A: Receiving property of equivalent value is itself consideration. No bargaining is required; even involuntary transfers are sales.
Q: Could the resale exclusion save me?
A: Only on the original purchase, and only if you can show you bought the property solely to resell it to the trust. Any other use undermines that claim.
Citations and references
- Tax Law section 1105(a) (sales tax on retail sales of tangible personal property)
- Tax Law section 1101(a) (definition of person; includes a trustee/trust)
- Tax Law section 1101(b)(5) (definition of sale; transfer of title or possession for consideration)
- Tax Law section 1101(b)(4) (definition of retail sale; resale exclusion)
- 20 NYCRR section 526.7 (sale; involuntary transfer included)
Source
- Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2014.htm
- Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a14_6s.pdf
Original ruling text
New York State Department of Taxation and Finance
TSB-A-14(6)S
Sales Tax
January 29, 2014
Office of Counsel
Advisory Opinion Unit
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION
PETITION NO. S131007A
The Department of Taxation and Finance received a Petition for an Advisory Opinion
from name and address redacted. Petitioner requests guidance on whether the substitution of
property between himself and the trust is subject to sales and use taxes in New York.
We conclude that the Petitioner and the trust are separate taxpayers capable of entering
into a sale. Any substitution of property between the two entities would be a sale, because it
would constitute a transfer of title or possession for consideration. Therefore, sales and use taxes
are due on any substitution of property transferred between the Petitioner and the trust.
Facts
Petitioner (the “Settlor”) created an irrevocable trust (the “Trust”) pursuant to a trust
agreement between the Trustees and the Settlor. The Settlor is deemed to own the Trust property
for Federal and New York State income tax purposes, as provided in §§ 671-679 of the Internal
Revenue Code (IRC). Under the terms of the Trust Agreement, the Settlor has the administrative
right to reacquire trust property by substituting property of equivalent value at any time (the
“Power to Reacquire”). The provision of the Trust Agreement creating the Settlor’s Power to
Reacquire reads as follows:
POWER TO REACQUIRE. Except as otherwise provided below, the Grantor, in
an individual and nonfiduciary capacity, without the approval or consent of any
person in a fiduciary capacity, shall have the power to reacquire property of the
trust, other than shares of voting stock of a controlled corporation (within the
meaning of Section 2036(b) of the Code), whether owned directly or indirectly
through one or more limited liability companies, partnerships or other entities, by
substituting other property of an equivalent value; provided that the Independent
Trustees are satisfied that the substituted property is of equivalent value. If no
Independent Trustee is then serving, upon the exercise of this power by the
Grantor, the Trustees shall appoint an Independent Trustee in accordance with
subparagraph (C)(1) of Clause EIGHTH. Notwithstanding the foregoing, the
Grantor may not exercise his power under this paragraph in such a manner that
may shift benefits among the trust beneficiaries within the meaning of Revenue
Ruling 2008-22 and Revenue Ruling 2011-28. The Grantor may at any time and
from time to time release, in whole or in part, the powers retained by him under
this Clause SEVENTH. Such release may be for a limited period or under stated
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TSB-A-14(6)S
Sales Tax
January 29, 2014
conditions or indefinitely. Such release shall be made by an instrument in writing
delivered to the Trustees
The Settlor in this case wishes to exercise the Power to Reacquire by substituting tangible
personal property he owns (the “Substituted Property”) for Trust property other than tangible
personal property (the “Trust Property”) having an equivalent value to the Substituted Property.
He has requested guidance on whether this substitution is considered a sale subject to New York
State sales and use taxes.
Analysis
When a Settlor establishes an irrevocable trust for another’s benefit but retains nonfiduciary dominion and control, pursuant to IRC §§ 671-679, the Settlor has created an
intentionally defective grantor trust. This trust is treated differently by different parts of the IRC.
For the Estate tax, the property is no longer considered to be part of the Settlor’s estate. However,
for the Personal Income Tax, income from the trust is considered part of the Settlor’s income,
because he retains non-fiduciary dominion and control over the income produced by the trust and
can enter into transactions for his own benefit. The question presented in this case is how the trust
should be treated for purposes of the sales and use tax in New York.
Section 1105(a) of the Tax Law imposes sales tax on the receipts from every retail sale of
tangible personal property, unless otherwise exempt. Section 1101(a) of the Tax Law provides
that the term “person” includes “an individual, partnership, limited liability company, society,
association, joint stock company, corporation, estate, receiver, trustee, assignee, referee, and any
other person acting in a fiduciary or representative capacity, whether appointed by a court or
otherwise, and any combination of the foregoing.” In addition, for sales tax purposes, a “sale”
includes “[a]ny transfer of title or possession or both, exchange or barter, rental, lease or license
to use or consume . . . conditional or otherwise, in any manner or by any means whatsoever for a
consideration, or any agreement therefor . . . .” Tax Law § 1101(b)(5); see also 20 NYCRR §
526.7 (a), (b).
When an individual transfers title or possession of property to a trust, a transfer has been
made to a separate entity. See TSB-A-99(22)S. This is true even in the case of a grantor trust or
a revocable living trust. Id. If there is consideration given in any form in connection with the
transfer, a retail sale of tangible personal property occurs and sales tax is imposed. Id. Even
though such a transfer may be a non-event for income tax purposes, it will still be a sale under
the sales tax as long as it is made to a separate entity. See TSB-A-06(8)S.
Petitioner contends that the terms of the trust agreement do not allow the exchange
between the Settlor and Trust to be supported by consideration. The Settlor alone, in a nonfiduciary capacity, decides whether to exercise the Power to Reacquire and what property will be
substituted. The Trustees have no power to consent or agree to the substitution. Under these
terms, the Petitioner contends there is no negotiation or bargaining between the parties and the
exchange is not supported by consideration.
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Sales Tax
January 29, 2014
However, a transfer to a trust does not require negotiation to be supported by
consideration. See TSB-A-99(22)S; see also 20 NYCRR 526.7(a)(3) (definition of sale includes
involuntary transfer). As long as the individual receives something of value in the transfer,
consideration is present. Id. Because Petitioner plans to transfer tangible personal property to
the trust and receive other than tangible personal property of equivalent value from the trust in
return, this transaction is a sale for sales tax purposes and, unless some other exemption applies,
the sales tax will be imposed on the value of the property received in the exchange.
Sales tax is imposed on retail sales of tangible personal property. See Tax Law §
1105(a). A “retail sale” is defined, in part, as sale “for any purpose other than . . . resale as such .
. . .” Tax Law § 1101(b)(4). Petitioner’s initial purchase of the tangible personal property that is
to be transferred to the trust may qualify for the resale exclusion if Petitioner intended at the time
the property was purchased to transfer it to the trust for consideration. See Matter of D.J.H.
Construction v. Chu, 145 AD2d 716 (3d Dep’t 1988). However, to establish that he purchased
the property for resale and thereby qualify the purchase for the resale exclusion, Petitioner must
“show that [the property] was purchased for one and only one purpose: resale.” Matter of the
Petition of P-H Fine Arts, Ltd, Tax Appeals Tribunal, October 13, 1994, confirmed 227 AD2d
683 (3d Dep’t 1996) (petitioner's purchase of artwork does not qualify for the resale exclusion
because petitioner displayed the artwork before reselling it). Although not determinative, later
activities may be relevant to ascertain Petitioner’s intent at the time of sale. See Matter of D.J.H.
Construction, supra.
DATED: January 29, 2014
NOTE:
/S/
DEBORAH R. LIEBMAN
Deputy Counsel
An Advisory Opinion is issued at the request of a person or entity. It is limited to the
facts set forth therein and is binding on the Department only with respect to the
person or entity to whom it is issued and only if the person or entity fully and
accurately describes all relevant facts. An Advisory Opinion is based on the law,
regulations, and Department policies in effect as of the date the Opinion is issued or
for the specific time period at issue in the Opinion. The information provided in this
document does not cover every situation and is not intended to replace the law or
change its meaning.