My corporation owns New York real estate. Before it liquidates under IRC § 333, its shareholders will first contribute all their stock to a new limited partnership pro rata to their existing ownership (some getting general-partner interests, some only limited-partner interests), and the corporation will then distribute all its assets to that partnership and dissolve. Does this trigger New York's Real Property Transfer Gains Tax?

Plain-English summary

This tax no longer exists. New York's Real Property Transfer Gains Tax (former Article 31-B of the Tax Law) was a 10% tax on the GAIN from transferring New York real property where consideration was $1 million or more. It was repealed for any transfer occurring on or after June 15, 1996. This 1986 opinion is preserved here for historical and research value, not as current law.

B. Bros. Realty Corporation, which owned New York real property, planned a multi-step restructuring: first, all of its shareholders would contribute their B. Bros. stock to a newly formed limited partnership, each receiving a partnership interest exactly proportionate to their prior stock interest in B. Bros. -- though some shareholders would receive general-partner interests and others only limited-partner interests. Separately, all of B. Bros.'s preferred stock would be converted to common stock in a tax-free recapitalization under IRC § 368(a)(1)(E). B. Bros. might also borrow funds and mortgage some of its properties beforehand to retire outstanding bonds and other debts. Finally, within one month, B. Bros. would completely liquidate under IRC § 333, distributing essentially all of its assets (including the real estate) to the partnership in exchange for cancelling its stock, and then dissolve.

The Department applied former Tax Law § 1443.5, which exempts a transfer of real property, however accomplished, that "consists of a mere change of identity or form of ownership or organization where there is no change in beneficial interest." Because each shareholder ended up holding a partnership interest exactly proportionate to what they held in B. Bros. before -- regardless of whether their new interest was a general- or limited-partner interest -- the Department found no change in beneficial ownership resulted from the whole sequence. The proposed transaction was therefore ruled a mere change of form, exempt from the gains tax, though B. Bros. still had to file the required Gains Tax Questionnaires to claim the exemption.

What this means for you

Business owners restructuring a real-estate-holding corporation into a partnership

Converting a corporation that owns real property into a partnership form -- even through the extra steps of a stock contribution followed by a formal corporate liquidation -- can qualify as an exempt mere change of form, as long as each owner's ultimate proportionate beneficial interest stays the same as before.

Accountants and tax attorneys structuring corporate-to-partnership conversions

The mix of general-partner and limited-partner interests among the converting shareholders did NOT matter to the Department's analysis -- what mattered was that each shareholder's percentage interest carried over unchanged. This is a useful precedent for any multi-step corporate-to-partnership conversion where the entity classifications differ but the economic percentages don't.

Real estate attorneys documenting liquidation-into-partnership transactions

Even though the transaction involved intervening steps (a stock-for-partnership-interest exchange, a possible pre-liquidation mortgage financing, and a separate preferred-to-common stock recapitalization), the Department looked at the transaction as a whole and found no change in beneficial interest. Filing the Gains Tax Questionnaires was still required to formally claim the exemption.

Common questions

Q: Does this ruling still matter for real estate restructurings today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Any similar restructuring today would be analyzed under current transfer tax rules, not this repealed statute.

Q: Why didn't the general-partner vs. limited-partner distinction matter?
A: The gains tax's mere-change exemption asked whether beneficial interest changed, not what type of ownership interest (general vs. limited partner, voting vs. non-voting stock) a person held. Since every shareholder's overall percentage share carried through unchanged, the formal partner classification was irrelevant.

Q: Did the pre-liquidation mortgage borrowing or the preferred stock conversion affect the outcome?
A: No -- the ruling treated those as separate, non-taxable events that didn't disturb the core analysis: the mortgage financing was used only to retire existing debt, and the preferred-to-common conversion was itself a tax-free recapitalization that didn't change any shareholder's proportionate interest in B. Bros.

Q: Can another company relying on a similar liquidation-into-partnership plan rely on this ruling?
A: No. An Advisory Opinion binds the Department only as to the petitioner and facts presented, and this tax no longer exists in any event.

Citations and references

Statutes and regulations:

• former Tax Law § 1443.5 (exemption for a transfer that is a mere change of identity or form of ownership or organization, with no change in beneficial interest)
• IRC § 333 (former corporate liquidation provision, since repealed at the federal level)
• IRC § 368(a)(1)(E) (tax-free recapitalization, used here for the preferred-to-common stock conversion)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a86_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB–A-86 (1) R
Real Property Transfer
Gains Tax
January 6, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M851106C

On November 6, 1985, a Petition for Advisory Opinion was received from B. Bros. Realty
Corporation located at 641 Lexington Avenue, New York, New York 10022.
The issue raised concerns the application of the Real Property Transfer Gains Tax imposed
by Article 31-B of the Tax Law (hereinafter the "gains tax") to the following factual situation.
It is proposed that B. Bros. Realty Corporation (hereinafter "B. Bros."), which owns certain
real property in New York State, be completely liquidated within one calendar month pursuant to
Section 333 of the Internal Revenue Code (hereinafter the "Code"). Prior to the liquidation, all of
the stock will be contributed by B. Bros. shareholders to a newly formed limited partnership
(hereinafter the "Partnership"). After the contribution, each shareholder of B. Bros. will receive a
pro rata interest in the Partnership based upon such shareholder's proportionate stock interest in B.
Bros. However, some of the shareholders of B. Bros. will receive general partner interests in the
Partnership, whereas other shareholders will receive only limited partner interests. Notwithstanding
the fact that some shareholders of B. Bros. will acquire general partner interests and other
shareholders of B. Bros. will acquire only limited partner interests in the Partnership, the
shareholders of B. Bros. will receive ownership interests in the Partnership equal to their pro rata
ownership interest in B. Bros.
All of the property of B. Bros., except money necessary to satisfy obligations, will be
distributed to the Partnership in full payment in exchange for the stock in complete liquidation and
all of its stock will be cancelled. Upon receipt of the assets of B. Bros. distributed in liquidation, the
Partnership will carry on the activities formerly conducted by B. Bros.
Prior to the date of the liquidation, B. Bros. may borrow funds and, with respect to the
borrowing, may permit a mortgage to be placed on certain of its properties. The proceeds of the
borrowing will be used to retire the bonds of B. Bros. that are outstanding and to satisfy other
liabilities of B. Bros.
Prior to the date of the liquidation, it is anticipated that all of the preferred stock of B. Bros.
will be converted to common stock pursuant to a tax free reorganization under section 368(a)(1)(E)
of the Code, with each preferred shareholder of B. Bros. converting his or her preferred stock, as
provided in the certificate of incorporation of B. Bros., for common stock of B. Bros. of equal value.

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB–A-86 (1) R
Real Property Transfer
Gains Tax
January 6, 1986
On the date of liquidation, all the assets and liabilities of B. Bros. will be distributed to the
Partnership in liquidation and the outstanding stock of B. Bros. will be cancelled. B. Bros. will
thereafter be dissolved under State law.
It is the contention of the Petitioner that the proposed transaction herein described should be
exempt from the Real Property Transfer Gains Tax. This contention is based on the exemption
provided in Section 1443.5 of the Tax Law which provides for a total or partial exemption from the
gains tax when a transfer of real property, however affected, consists of a mere change of identity
or form of ownership or organization where there is no change in beneficial interest.
Based on the facts presented, the proposed transfer of stock of B. Bros. by its shareholders
to a partnership in exchange for a pro rata ownership interest in the partnership and the subsequent
liquidation of B. Bros. would constitute a mere change of identity or form of ownership or
organization with no change in beneficial interest resulting. Accordingly, the exemption provided
in Section 1443.5 of the Tax Law is applicable and the proposed transaction would not be subject
to the Real Property Transfer Gains Tax. However, the appropriate Gains Tax Questionnaires must
be filed to claim the exemption under Section 1443.5 of the Tax Law.

DATED: December 12, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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