Our limited partnership and a sister partnership are contributing all our real estate joint-venture assets to a newly formed REIT in exchange for 98% of its stock, then liquidating and distributing that stock directly to our limited partners. Does the initial contribution to the REIT, or the follow-on liquidating distribution of REIT stock to our partners, trigger New York Real Estate Transfer Tax?

Plain-English summary

Krupp Cash Plus IV Limited Partnership and a sister partnership, Krupp Cash Plus-V, jointly owned Spring Valley Partnership, a Massachusetts general partnership holding a shopping center (Spring Valley Market Place) and 30 acres of land in Spring Valley, New York. Cash Plus IV held a 50.10% interest in the joint venture; Cash Plus-V held the remaining 49.90%.

Cash Plus IV, together with a third affiliated partnership (Cash Plus-III), exchanged all of their assets -- including Cash Plus IV's 50.10% joint-venture interest -- for 98% of the common stock of a newly formed REIT, Berkshire Realty Company, Inc. Shortly afterward, Cash Plus IV and Cash Plus-III planned to liquidate and distribute all of their REIT stock directly to their own limited partners, in the same proportions those partners already held in the liquidating partnerships (the general partners, who held only a profits interest with no capital interest, would receive nothing and had waived any claim).

The Department broke this into two separate transactions:

1. The contribution of the joint-venture interest to the REIT is a transfer of a "controlling interest" in an entity with a New York real property interest (Cash Plus IV's 50.10% stake exceeds the 50% controlling-interest threshold), so it's taxable. But a PARTIAL mere-change-of-form exemption applies to the extent of Cash Plus IV's own resulting stake in the REIT -- because after the whole restructuring, the people who beneficially owned roughly 99% of the profits interest and 100% of the capital interest in the original joint venture ended up owning only about 74.6% of it (through their REIT and Cash Plus-V holdings combined). The math: Cash Plus IV's former limited partners would end up owning about 49.32% of REIT, which (times REIT's 50.10% stake in the joint venture) works out to about 24.71% indirect beneficial ownership of the joint venture -- a real, measurable dilution from their prior near-total ownership, and that dilution is what gets taxed.
2. The follow-on liquidating distribution of REIT stock from Cash Plus IV to its own limited partners, in their existing pro rata partnership shares, is a full mere change of form -- no additional tax, since the limited partners already indirectly held that same REIT stock through their partnership interest, and the liquidation just moves it into their own names directly.

What this means for you

Real estate partnerships considering a REIT roll-up or UPREIT-style contribution

Contributing your partnership's real-property interest to a new REIT in exchange for REIT stock can trigger a PARTIAL (not full) mere-change-of-form exemption if the restructuring dilutes the contributing owners' beneficial stake in the underlying property -- run the beneficial-ownership math both before and after the whole transaction chain (contribution + any subsequent liquidation) to find the taxable sliver, following the same tracing approach later formalized in the companion Durst family rulings (TSB-A-95(10)R/95(11)R).

Sponsors distributing REIT/entity stock to limited partners on liquidation

A liquidating distribution that simply moves already-indirectly-held interests directly into the same partners' names, in the same proportions, is a separate and fully exempt mere-change-of-form event -- don't conflate it with the (potentially taxable) upstream contribution transaction that funded it.

Accountants and tax professionals

Note this opinion predates the 1994 statutory reduced-rate regime for REIT-formation transfers (§ 1402(b), added by Chapter 170 of the Laws of 1994, discussed in the later Reckson Associates ruling TSB-A-96(2)R) -- this 1991 analysis applies only the general mere-change-of-form framework, not that later special REIT rate.

Common questions

Q: Does contributing a real-property partnership interest to a new REIT always trigger full Real Estate Transfer Tax?
A: Not necessarily -- if you're the transferor and you (or your resulting entity) retain a beneficial stake in the transferred property afterward, only the portion representing an actual DILUTION of beneficial ownership is taxable; the rest gets a partial mere-change-of-form exemption.

Q: Is the follow-on distribution of REIT stock to limited partners on liquidation separately taxable?
A: No, if it just distributes stock the partners already indirectly owned, in their existing proportions -- that's a full mere change of form.

Q: Does the 1994 REIT reduced-rate rule apply to this transaction?
A: No -- this opinion predates that 1994 amendment; only the general mere-change-of-form exemption applies here.

Q: Can I rely on this ruling for my own REIT formation transaction?
A: No. This advisory opinion binds the Department only as to the petitioner and the specific facts described.

Citations and references

Statutes and regulations:

• Section 1401(b) of the Tax Law (definition of "controlling interest")
• Section 1401(e) of the Tax Law (definition of "conveyance," including a conveyance upon liquidation)
• Section 575.10 of the Transfer Tax Regulations (mere change in identity or form of ownership exemption)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a91_10r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (10) R
Real Estate
Transfer Tax
September 24, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M910701A

On July 1, 1991, a Petition for Advisory Opinion was received from Krupp Cash Plus IV
Limited Partnership, 470 Atlantic Avenue. Boston, MA 02210.
The issue raised by Petitioner, Krupp Cash Plus IV Limited Partnership, is whether an
exchange by Petitioner, together with another limited partnership of all of their assets for 98.00%
of the shares of common stock of Berkshire Realty Company, Inc. and the subsequent liquidation
of Petitioner and the other limited partnership are subject to New York State Real Estate Transfer
Tax (the "transfer tax").
Petitioner and another limited partnership, Krupp Cash Plus-V Limited Partnership ("Cash
Plus-V"), formed Spring Valley Partnership, a Massachusetts general partnership (the "Joint
Venture"), as of December 13, 1988. Petitioner owns a 50.10% interest in the capital, profits and
beneficial interest of the joint venture, and Cash Plus-V owns a 49.90% interest in the capital, profits
and beneficial interest of the joint venture. The joint venture owns a shopping center known as
Spring Valley Market Place together with 30 acres of land (collectively, the "Property") located in
Spring Valley, New York.
Petitioner, together with another limited partnership, Krupp Cash Plus-III Limited
Partnership ("Cash Plus-III"). exchanged on June 27, 1991 all of their assets for 98.00% of the shares
of common stock of Berkshire Realty Company, Inc., a Delaware corporation which will qualify as
a real estate investment trust for federal income tax purposes and whose shares will be listed for
trading on the New York Stock Exchange (the "REIT"). As part of the exchange, Petitioner will
transfer its 50.10% interest in the joint venture to the REIT. Cash Plus-V will continue to hold its
49.90% interest in the Joint Venture. Immediately after the exchange, the common stock of REIT
(which is the only class of stock authorized under REIT's Articles of Incorporation) will be owned
as follows: (a) 49.32% by Petitioner; (b) 48.68% by Cash Plus-III; and (c) 2.00% by Krupp Realty
Advisors Limited Partnership, the advisor (the "Advisor") to REIT.
Shortly after the exchange, Petitioner and Cash Plus-III will liquidate (the "liquidation") and
distribute to their respective limited partners all of the stock of REIT held by Petitioner and Cash
Plus-III. No distributions will be made to the general partners of Petitioner and Cash Plus-III, who
have a profits interest in such entities immediately prior to the liquidation, but do not have any
capital interest in such entities which would entitle them to any distributions of REIT's stock
pursuant to the liquidation. The partnership agreements of Petitioner and Cash Plus-III require
liquidating distributions to be made in accordance with capital interests. To guarantee that they will
not receive any distributions of REIT's stock, such general partners have waived all rights, if any,
that they have to distributions.
TP-9 (9/88)

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TSB-A-91 (10) R
Real Estate
Transfer Tax
September 24, 1991

Following the exchange and the liquidation the partners of Cash Plus-V and the former
limited partners of Petitioner beneficially will own approximately 74.61% of the interest in the joint
venture. Cash Plus-V will own 49.90% of the joint venture. REIT will own 50.10% of the joint
venture. The partners of Cash' Plus-V will own 100% of Cash Plus-V and through such ownership
beneficially will own 49.90% of the joint venture. The former limited partners of Petitioner will own
approximately 49.32% of REIT and through such ownership beneficially will own approximately
24.71% (49.32% of 50.1%) of the joint venture. Consequently, the partners of Cash Plus-V and the
former limited partners of Petitioner, who beneficially owned approximately 99.00% of the profits
interest and 100.00% of the capital interest in the joint venture prior to the transactions, will own
approximately 74.61% of the joint venture after the transactions.
Section 1401(e) of the Tax Law defines the term "conveyance", in pertinent part, to mean the
conveyance upon liquidation. . . or transfer or acquisition of a controlling interest in any entity with
an interest in real property.
Section 1401(b) of the Tax Law provides as follows:
(b) "Controlling interest" means (i) in the case of a corporation, either fifty
percent or more the total combined voting power of all classes of stock of such
corporation, or fifty percent or more of the capital, profits or beneficial interest in
such voting stock of such corporation, and (ii) in the case of a partnership,
association, trust or other entity, fifty percent or more of the capital, profits or
beneficial interest in such partnership, association, trust or other entity.
Section 575.10 of the Transfer Tax Regulations provides, in part, as follows:
575.10 Mere change in identity. (Tax Law, 1405(b)(6)) To the extent that a
conveyance effectuates a mere change of identity or form of ownership or
organization and there is no change in beneficial ownership, the real estate transfer
tax does not apply.
Examples of transactions where the issue of change in beneficial ownership
would arise include the following:
(a) the conveyance by tenants-in-common of their interest in
real property to a partnership or a corporation, the partnership or
corporation interests being in the same pro rata shares as the tenants­
in-common held prior to conveyance. Such conveyance is not taxable
as there is no change in beneficial ownership;

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TSB-A-91 (10) R
Real Estate
Transfer Tax
September 24, 1991

(b) the conveyance by a corporation to its shareholders who
will hold the real property as tenants-in-common in the same pro rata
share as they own the corporation. Such conveyance is not taxable as
there is no change in beneficial ownership;
*
*
*
(d) the conveyance by a person to a partnership in exchange
for an interest in the partnership. Such conveyance is not taxable to
the extent of the grantor's interest in the partnership.
Pursuant to Sections 1401(b) and 1401(e) of the Tax Law the conveyance by Petitioner of
its 50.10% interest in the joint venture to REIT is a transfer of a controlling interest in an entity with
an interest in real property. Accordingly, such conveyance is subject to transfer tax. Nevertheless,
a partial mere change of identity exemption to the extent of Petitioner's interest in REIT will be
afforded to Petitioner pursuant to Section 575.10 of the Transfer Tax Regulations. Moreover,
pursuant to Sections 575.10 of the Transfer Tax Regulations the distribution of the stock of REIT
to the limited partners upon the liquidation of Petitioner and Cash Plus III will constitute a mere
change of identity to the extent there was no change in the beneficial ownership of the stock held by
the limited partners in REIT prior to the liquidation.

DATED:

September 24, 1991

PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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