As bankruptcy trustee for 68 limited partnerships, I'm selling their real estate free and clear of liens under court order, with liens attaching instead to the sale proceeds. Depending on whether the buyer is a stranger to the mortgage, partially assumes it, or is the mortgage-holder itself credit-bidding at a bankruptcy auction, how is 'consideration' calculated for New York's Real Property Transfer Gains Tax in each scenario?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1991 opinion is preserved here for historical and research value, not as current law.

John S. Pereira was appointed, in March 1990, as bankruptcy trustee for 68 limited partnerships that had jointly filed for Chapter 11 bankruptcy in February 1990, each owning at least one parcel of New York real property. Under Bankruptcy Court orders, Pereira was selling and would continue selling the partnerships' real estate free and clear of all liens, claims, and interests, with any such claims attaching instead to the net sale proceeds according to their legal priority (under Bankruptcy Code §§ 363(b), (f), and 506(c)). He asked the Department to clarify exactly how "consideration" should be calculated for gains-tax purposes across three different sale scenarios he expected to encounter.

The Department's baseline rule, from its bankruptcy-transfer regulation (former 20 NYCRR § 590.65): a Chapter 11 sale is a taxable "conveyance upon liquidation" (citing the federal court's holding in In re Jacoby Bender, Inc. that a debtor doesn't escape state gains-tax liability through bankruptcy), and consideration generally means the price paid by the buyer plus any liens the property was taken subject to, or -- for a transfer to a creditor-mortgagee -- the debt actually extinguished. Applying that framework to Pereira's three scenarios: FIRST, where a buyer with NO mortgage interest in the property purchases it WITHOUT assuming or taking it subject to any existing mortgage (because the sale wipes the mortgage out entirely, with the lien attaching to proceeds instead), consideration is simply the price actually paid. SECOND, where such a buyer PARTIALLY assumes or takes subject to some portion of an existing mortgage, consideration is the price paid PLUS the proportionate share of the outstanding mortgage principal that was assumed or taken subject to. THIRD -- the more complex "credit bidding" scenario -- where the BUYER IS ITSELF the mortgagee and acquires the property at a Bankruptcy Court auction sale by bidding in (crediting against) an amount of its own debt that's LESS than the full outstanding mortgage principal, consideration is simply the amount of debt actually extinguished by that bid. But if that mortgagee-buyer isn't the SOLE mortgagee, the calculation branches further: if OTHER mortgages survive the sale, consideration is the extinguished debt plus whatever additional mortgages the buyer assumed or took subject to; if those additional mortgages DON'T survive the sale, consideration is instead the HIGHER of the extinguished debt or the actual bid price.

What this means for you

Bankruptcy trustees selling real estate free and clear of liens

Under this now-repealed tax, exactly how you structure a sale -- whether the buyer is a mortgage-free stranger, partially assumes debt, or is the mortgagee itself credit-bidding -- determined which of several different consideration formulas applied, each producing a potentially very different taxable gain calculation.

Lenders credit-bidding at a Bankruptcy Court auction to acquire mortgaged property

This opinion, cited repeatedly in later opinions in this same lane (including TSB-A-93(3)R involving Prudential Insurance), is THE foundational authority on how the gains tax treats a mortgagee's credit bid -- the "sole mortgagee" versus "other mortgages surviving" distinction is the key branch point worth remembering.

Accountants calculating gains-tax exposure across a multi-partnership bankruptcy liquidation

If you're reconstructing consideration for a historical bankruptcy sale involving dozens of properties like Pereira's 68 partnerships, this opinion's three-scenario breakdown is the master reference for how each sale type should have been calculated.

Common questions

Q: Does this bankruptcy-sale consideration rule 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 taxes have their own separate consideration rules for distressed-property and bankruptcy sales.

Q: Why does it matter whether "additional mortgages survive the transfer" in the third scenario?
A: Because if other liens survive and remain on the property after the sale, the buyer is effectively taking on that additional obligation as part of the deal (added to the extinguished debt) -- but if those other liens are wiped out entirely (attaching to sale proceeds instead, as in a typical free-and-clear bankruptcy sale), the fallback comparison becomes the higher of the extinguished debt or the actual bid price, to make sure a lowball credit bid doesn't artificially shrink the taxable consideration.

Q: What's a "credit bid," in plain terms?
A: Instead of paying cash at an auction, a mortgagee-bidder can bid by crediting (reducing) the amount of debt the borrower owes it -- effectively "paying" with debt forgiveness rather than new money. This opinion establishes how much of that debt forgiveness counts as taxable consideration.

Q: Can another bankruptcy trustee handling a similar multi-property liquidation 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 consideration formulas were treated as generally applicable rules and were cited as precedent in later Advisory Opinions during the tax's lifespan.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.7 (definition of "transfer of real property," including a conveyance upon liquidation or by a receiver)
• former 20 NYCRR § 590.65 (a transfer pursuant to a bankruptcy liquidation or reorganization plan is a taxable transfer; consideration is the amount paid by the purchaser plus liens taken subject to, or, for a transfer to a creditor mortgagee, the amount of indebtedness extinguished; a bankruptcy trustee may file returns on the debtor's behalf and should withhold the tax due until paid)
• In re Jacoby Bender, Inc., 40 B.R. 10, 15 (Bankr. 1984) (the federal Bankruptcy Code does not exempt a debtor from liability for the New York gains tax under 11 U.S.C. § 1146(c))

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a91_4r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (4) R
Real Property
Transfer Gains Tax
May 23, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M910408A

On April 8, 1991, a Petition for Advisory Opinion was received from John S. Pereira, 150
East 58th Street, New York, New York 10155.
The issues raised by Petitioner, John S. Pereira, are whether for purposes of the Real Property
Transfer Gains Tax (hereinafter the "gains tax"):
(1)

Will "consideration" include the outstanding principal amount of mortgages
encumbering the transferred real property to the extent such amount exceeds the price
paid by the transferee if the transferee is not the mortgagee and does not assume the
mortgages or take the real property subject to the mortgages.

(2)

Will "consideration" include the outstanding principal amount of mortgages
encumbering the transferred real property to the extent such amount exceeds the sum
of that portion of the mortgages assumed (or taken subject to) by the transferee and
other consideration paid by the transferee if a non-mortgagee transferee partially
assumes the mortgages encumbering the transferred real property (or takes the real
property subject to a portion of the mortgages less than the outstanding principal
amount of the mortgages).

(3)

What portion, if any, of the outstanding principal amount of mortgages encumbering
the transferred real property will be included in consideration if the transferee is the
sole mortgagee or one of the mortgagees and the transferee/mortgagee acquires the
real property by "credit bidding" an amount less than the outstanding principal
amount of its mortgage encumbering the transferred real property at an auction sale
conducted by order of the Bankruptcy Court.

In March 1990, Petitioner was appointed as trustee of 68 limited partnerships which filed for
bankruptcy under Chapter 11 of the Bankruptcy Code on February 15, 1990. Each limited
partnership owns at least one parcel of real property. Pursuant to orders of the Bankruptcy Court for
the Southern District of New York, Petitioner has sold and will sell the real properties owned by each
limited partnership free and clear of liens, claims or interests, with said liens, claims or interests, if
any, to attach to the net proceeds of the sale in their order of priority, and to the extent of their
validity pursuant to subsections 363(b) and (f) and Section 506(c) of the Bankruptcy Code.
Section 590.65 of the Gains Tax Regulations provides as follows:
Question: Is a transfer pursuant to a plan under the liquidation or
reorganization provisions of the Bankruptcy Code taxable?
TP-9 (9/88)

-2­
TSB-A-91 (4) R
Real Property
Transfer Gains Tax
May 23, 1991

Answer: Yes. Section 1440(7) of the Tax Law defines transfer of real
property to include a transfer of any interest in real property, including a conveyance
upon liquidation or by a receiver. Therefore, such a conveyance is subject to the gains
tax.
The U.S. Bankruptcy Court held that the debtor is not exempt from liability for the
gains tax under section 1146(c) of the Federal Bankruptcy Code, In re Jacoby Bender,
Inc., 40 BR 10, 15 (Bkrtcy. 1984).
Consideration is defined to include the cancellation or discharge of an indebtedness
or obligation. Therefore, the consideration for a transfer of real property pursuant to
a liquidation or reorganization plan is the amount paid by a purchaser of the real
property pursuant to such a plan plus the amount of liens the property was taken
subject to (if any) or, in the case of a transfer to a creditor mortgagee, the amount of
indebtedness extinguished.
A trustee in bankruptcy may file returns on behalf of a bankrupt transferor, and
should withhold the tax due under the gains tax until the tax is paid. (emphasis
added)
Therefore, in issue "1" where the non-mortgagee transferee purchases real property, but does
not take subject to or assume the amount of any existing mortgages on the property, the consideration
for the transfer will be the amount actually paid by the transferee to the transferor pursuant to Section
590.65 of the Gains Tax Regulations.
Accordingly in issue "2", where a non-mortgagee transferee purchases real property and
partially assumes or takes subject to a portion of the mortgage on the property, the consideration for
the transfer will be the price paid by the transferee for the real property plus the proportionate
amount of the outstanding mortgage principal assumed or taken subject to pursuant to Section 590.65
of the Gains Tax Regulations.
Finally in issue "3", where the transferee who is the sole mortgagee acquires the real property
by "credit bidding" an amount less than the outstanding principal amount of its mortgage, the
consideration for the transfer will be the amount of the indebtedness extinguished by the
transferee/mortgagee in accordance with Section 590.65 of the Gains Tax Regulations. In situations
where the transferee is not the sole mortgagee and the amount of any additional mortgages survives
the transfer, the consideration for the transfer will be the amount of indebtedness the transferee
extinguished plus the amount of any additional mortgages assumed or taken subject to. If the

-3­
TSB-A-91 (4) R
Real Property
Transfer Gains Tax
May 23, 1991

additional mortgages do not survive the transfer, then the consideration for the transfer will be the
portion of the indebtedness the transferee/mortgagee extinguished or the bid price, whichever is
higher.

DATED:

May 23, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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