Our corporation, owned 50/50 by two shareholder groups who now want to go their separate ways, is planning a federal tax-free 'split-up' or 'split-off' reorganization: dividing our real estate between two new subsidiaries, then distributing all the stock of one subsidiary to each shareholder group (in a split-up, with our original corporation then liquidating; or, in a split-off, exchanging one group's original shares for the new subsidiary's shares). Does any step of 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 It was repealed for any transfer occurring on or after June 15, 1996.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 1990 opinion is preserved here for historical and research value, not as current law.

Long Shadow, Inc. was formed in June 1983 to hold and develop one large tract of land, acquired tax-free from its four shareholders -- two husband-and-wife groups, A and B, each holding an equal 50% stake -- who had themselves inherited the land from the Estate of John Henkes, Sr. As development progressed, Groups A and B decided they wanted to pursue different development philosophies for the remaining acreage, and proposed splitting the company via a federal income-tax-free divisive reorganization under IRC §§ 368(a)(1)(D) and 355, structured either as a "split-up" or a "split-off." Under the SPLIT-UP version: the property would be divided roughly equally between two brand-new, wholly-owned subsidiaries; all the stock of one subsidiary would then go to Group A, and all the stock of the other to Group B; Long Shadow itself would then liquidate, having nothing left to hold. Under the SPLIT-OFF version: only ONE new subsidiary would be created (holding half the property); its stock would be distributed to just ONE of the two groups, in exchange for that group's shares of Long Shadow itself -- leaving the other group as sole owner of the remaining (now smaller) Long Shadow.

The Department analyzed each step of both structures. The first step in both plans -- transferring the property from Long Shadow into a brand-new subsidiary that Long Shadow itself owned 100% -- was a "mere change of identity or form of ownership," since beneficial ownership didn't change at all (still Long Shadow, now through a subsidiary instead of directly), so this step was fully exempt (former § 1443.5). The SECOND step is where the tax bit: distributing a subsidiary's stock OUT to a specific shareholder group is an acquisition of a 100% "controlling interest" in that subsidiary (former § 1440.2), with taxable consideration equal to the fair market value of the real property held by that subsidiary -- and because the two subsidiary properties (in the split-up scenario) were contiguous, their combined value had to be aggregated for testing the $1 million threshold. But because each acquiring group ALREADY owned 50% of Long Shadow (and therefore, indirectly, 50% of the underlying property) before the distribution, each group received a PARTIAL mere-change exemption reaching that pre-existing 50% -- so only the remaining, NET increase in beneficial interest was actually subject to tax. In the split-up scenario, Long Shadow's final liquidation wasn't separately taxable, since by that point the corporation no longer held any real property at all. In the split-off scenario, the exiting group's exchange of Long Shadow shares for the new subsidiary's stock was similarly taxed only on its net 50% step-up -- and, notably, the REMAINING group (whose effective ownership of Long Shadow simply doubled from 50% to 100%, purely because the other group left) was ALSO treated as having acquired a controlling interest, to the extent of that same 50% increase.

What this means for you

Closely-held companies splitting ownership between departing shareholder groups

Under this now-repealed tax, a federal tax-free "split-up" or "split-off" divisive reorganization wasn't automatically tax-free at the state level too -- the INITIAL asset transfer into a wholly-owned subsidiary was exempt, but the SUBSEQUENT stock distribution to separate shareholder groups was taxed as a controlling-interest transfer, with only each group's PRE-EXISTING ownership percentage sheltered by the mere-change exemption.

Corporate and real estate attorneys structuring a divisive reorganization involving real estate

This is the FOUNDATIONAL opinion (cited as controlling precedent in TSB-A-91(6)R, also in this corpus) for the "partial mere-change exemption based on pre-existing ownership percentage" doctrine -- essential reading before advising on any split-up, split-off, or similar restructuring involving jointly-held real estate.

Business owners in the "remaining" shareholder group after a split-off

The opinion's finding that the REMAINING group (who didn't receive any new subsidiary stock, and simply kept its original shares) was ALSO deemed to acquire a controlling interest -- purely because its effective percentage of the underlying company doubled once the other group exited -- is a subtle, easy-to-miss consequence worth flagging for anyone structuring a split-off.

Common questions

Q: Does this split-up/split-off analysis still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Current New York real estate and business transfer taxes have their own separate rules for divisive corporate reorganizations.

Q: Why was the FIRST step (creating the subsidiaries) exempt, but the SECOND step (distributing their stock) taxable?
A: Because in the first step, Long Shadow itself still owned 100% of everything (just now through subsidiaries instead of directly) -- no beneficial ownership changed. In the second step, the subsidiary's stock actually moved OUT to a specific, previously-50%-owning shareholder group, meaning that group's effective interest in that specific property genuinely increased.

Q: Why would the group that DIDN'T receive any new stock also be deemed to acquire a controlling interest?
A: Because "acquiring a controlling interest" isn't just about receiving new shares -- it's about a group's PERCENTAGE OWNERSHIP crossing or increasing past the controlling-interest threshold. When the other group exited by trading its Long Shadow shares for subsidiary stock, the remaining group's percentage of Long Shadow automatically jumped from 50% to 100%, which the Department treated as an acquisition in its own right.

Q: Can another closely-held company doing a similar split-up or split-off rely on this exact ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, though this opinion's core mere-change/partial-exemption analysis was applied as generally-stated precedent in at least one later opinion in this corpus.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.2 (defines "controlling interest": 50% or more of voting stock, or 50% or more of capital/profits/beneficial interest, of a corporation)
• former Tax Law § 1440.7 (broad definition of "transfer of real property")
• former Tax Law § 1443.5 (exemption for a transfer that is a mere change of identity or form of ownership, with no change in beneficial interest)
• former 20 NYCRR § 590.44(a) (a controlling-interest acquisition in a corporation occurs when a person or group acting in concert acquires 50% or more of its voting stock)
• former 20 NYCRR § 590.45(a) (property owned by an entity is aggregated, for the $1 million exemption on a controlling-interest acquisition, if it's contiguous or adjacent -- the same rules apply as if the entity had transferred the property directly)
• former 20 NYCRR § 590.47 (consideration for a controlling-interest transfer is the apportioned fair market value of the entity's real property interest, NOT the price actually paid for the stock; fair market value is gross, not reduced by mortgages)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a90_4r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(4)R
Real Property
Transfer Gains Tax
May 11, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M900214B

On February 14, 1990, a Petition for Advisory Opinion was received from Long Shadow,
Inc., 26 Henkes Lane, Latham, New York 12110.
The issues raised by Petitioner, Long Shadow, Inc., are whether the transfer of title to real
property situated in New York State constitutes a taxable transfer under section 1440.7 of the Real
Property Transfer Gains Tax Law (hereinafter the "gains tax"), if the change is pursuant to an income
tax free corporate reorganization under section 368(a)(1)(D) and Section 355 of the Internal Revenue
Code in the split-off or split-up fact pattern. In addition, whether the transfer of title is exempt under
section 1443.5 of the Tax Law as a mere change in form of ownership or organization without a
change in beneficial ownership. Also, whether the distribution of shares of the subsidiaries in the
"split-up" pursuant to a liquidation of the Petitioner constitutes a change of controlling interest of
an entity with an interest in real property.
Long Shadow, Inc., a New York Corporation since its inception in June, 1983, has been
actively engaged in real estate development, improvement, and subdivision for retail sale of one
large tract of land. The Petitioner acquired that tract of land by a tax-free transfer pursuant to Section
351 of the Internal Revenue Code from its four shareholders in June, 1983. Those shareholders had
acquired the parcel by devise from the Estate of John Henkes, Sr.
The four shareholders (two husband and wife groups, hereinafter A and B) have decided to
pursue different philosophies in operating the corporation and developing the remaining portion of
this tract. Accordingly, a plan for a divisive "D" reorganization has been proposed pursuant to
Section 368(a)(1)(D) of the Internal Revenue Code, followed by an income tax-free "split-up" or
"split-off" pursuant to Section 355 of the Internal Revenue Code.
The "split-up" plan envisions an equal division of the real property (each shareholder group
currently holds 50 percent of the Petitioner), followed by a transfer of the land to two newly created
subsidiaries. At this point, the Petitioner will own all the stock of the subsidiaries. Then the shares
of the subsidiaries would be distributed (all of the shares of one subsidiary to Group A and all of the
shares of the other subsidiary to Group B), followed by the liquidation of the Petitioner.
The "split-off" plan envisions the creation of one subsidiary, followed by a transfer of one­
half of the real estate to the newly created subsidiary. At this point, the Petitioner will own all the
stock of the subsidiary. The shares of the newly created subsidiary would then be distributed to one
TP-9 (9/88)

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TSB-A-90(4)R
Real Property
Transfer Gains Tax
May 11, 1990

of the two shareholder groups in exchange for their shares in the Petitioner.
The gains tax is a 10% tax on the gain derived from a transfer of real property, which
includes the transfer or acquisition of a controlling interest of an entity with an interest in real
property, where the consideration for the transfer is one million dollars or more and the real property
is located in New York State.
The term "controlling interest" is defined at Section 1440.2 of the Tax Law to mean, in the
case of a corporation, either 50% or more of the total combined voting power of all classes of stock
of the corporation or 50% or more of the capital, profits or beneficial interest in such voting stock
of the corporation.
Also, Section 590.44 of the Gains Tax Regulations provides that in the case of a corporation
which has an interest in real property, the acquisition of a controlling interest in the corporation
occurs when a person or group of persons acting in concert acquires a total of 50% or more of the
voting stock in such corporation.
Section 590.47 of the Gains Tax Regulations provides as follows:
(a)
Question: Is the price paid for the ownership interest in an entity the consideration
for a controlling interest used to calculate gain?
Answer: Generally, no. Section 1440(1) of the Tax Law states that:
". . . there shall be an apportionment of the fair market value
of the interest in real property to the controlling interest to ascertain
the consideration for the controlling interest."
Example:

(b)

A corporation's only asset is a $4 million fair
market value piece of property. If 100 percent
of the stock is purchased, the consideration if
$4 million ($4,000,000 x 100 percent). If a 50­
percent interest were acquired, only $2 million
consideration is used to calculate gain.

Question: How is the fair market value determined?

Answer: Generally, by appraisal. It is the amount a willing buyer would pay a willing seller
for the real property. It is not net fair market value, which deducts mortgages on the property from
fair market value.
Thus, in the example in subdivision (a) of this section, if the property is encumbered by a $3
million mortgage, and $1 million is paid for 100 percent of the stock, the amount of consideration
for the acquisition is $4 million, not $1 million.

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TSB-A-90(4)R
Real Property
Transfer Gains Tax
May 11, 1990

Further, Section 590.45 of the Gains Tax Regulations provides:
(a)
Question: Is the property owned by an entity aggregated in determining if the $1
million exemption applies when an acquisition of a controlling interest occurs?
Answer: Only if it is contiguous or adjacent. The same rules apply to the property
owned by an entity as if the real property were transferred directly by the entity.
Moreover, Section 1443.5 of the Tax Law provides a partial or total exemption for a transfer
of an interest in real property to the extent that it consists of a mere change of identity or form of
ownership or organization, where there is no change in beneficial interest.
Accordingly, in the case of the "split-up" plan, the equal division and transfer of the real
property to two newly created subsidiaries, the stock of which is wholly owned by the Petitioner,
would be deemed a mere change of identity since there is no change in beneficial interest. Therefore,
such transfer would not be subject to the gains tax.
When all the shares of stock of one subsidiary are distributed to Group A and all the shares
of stock of the other subsidiary are distributed to Group B, such distributions would constitute
transfers of a controlling interest in each subsidiary to the extent of the 100% interest owned by the
Petitioner. The consideration for the transfer would be the apportioned fair market value of each
property to the controlling interest acquired in each subsidiary. Since the properties are contiguous,
the consideration for each property must be aggregated. The gain subject to tax would be the
difference between the consideration and the original purchase price of the property being
transferred. Nevertheless, a partial mere change of identity exemption will be afforded to the extent
of Group A's and Group B's indirect ownership interest in the subsidiaries prior to the distributions.
The subsequent liquidation of the Petitioner would not subject the transaction to the gains tax since
the Petitioner no longer has an ownership interest in real property.
As for the "split-off" plan, the equal division and transfer of one of the parcels of the real
property to a newly created subsidiary, the stock of which is wholly owned by the Petitioner, would
be deemed to be a mere change of identity since there is no change in beneficial interest. Therefore,
the transfer would not be subject to gains tax.
The distribution of all the shares of stock of the newly created subsidiary to one of the
shareholder groups would constitute the transfer and acquisition of a controlling interest to the extent
of the 100% interest transferred and acquired. The acquiring shareholder group would receive a
partial mere change of identity exemption to the extent of the 50% interest it held in the Petitioner

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TSB-A-90(4)R
Real Property
Transfer Gains Tax
May 11, 1990

prior to the distribution. Also, by virtue of the shareholder group surrendering its interest in the
Petitioner, the remaining shareholder group will be deemed to acquire a controlling interest to the
extent of 50% interest in the Petitioner.

DATED: May 11, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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