Our cooperative housing corporation ended up owning back its own unsold shares (for 8 vacant and 22 occupied units) after a messy chain of foreclosures and a bank settlement, paying the bank $1,215,000 for the first mortgage, second mortgage, and all the unsold shares combined. When we eventually resell those unsold units, is that subject to New York's Real Property Transfer Gains Tax, and what's our original purchase price?

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 It was repealed for any transfer occurring on or after June 15, 1996.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.

40 Schenck Owners, Inc., a cooperative housing corporation, got caught in a tangled multi-lender dispute over its own unsold shares. The building's sponsor, David Shichman (through several related entities), had defaulted on both an original first mortgage and a separate $500,000 bank loan from the Bank of Great Neck, which was secured partly by a pledge of the sponsor's still-unsold cooperative shares (covering 8 vacant and 22 occupied apartments) and a $1,000,000 second mortgage on the building. After competing foreclosure efforts -- including a court-ordered halt to a UCC auction the bank had planned -- the parties settled: the bank successfully bid $675,000 to acquire the sponsor's pledged shares, the second mortgage, and (through the first mortgagee) the first mortgage. The bank then conveyed all of it -- both mortgages and all the unsold shares -- to the cooperative corporation itself for $1,215,000, simultaneously lending the cooperative that same amount under a new consolidated mortgage.

The cooperative asked two things: whether its future sales of these now-reacquired unsold shares to actual buyers would be subject to the gains tax, and what original purchase price it could use to calculate gain on those future sales. The Department confirmed that selling shares to "tenant stockholders" (people who buy shares and get a proprietary lease) is always a taxable event under the gains-tax rules (former 20 NYCRR § 590.35(a)), and that all such sales must be aggregated together to test whether the combined consideration hits the $1 million exemption threshold (former 20 NYCRR § 590.40(a)). On original purchase price, the Department applied the straightforward statutory definition (former Tax Law § 1440.5(a)): the cooperative's original purchase price for the shares is simply the $1,215,000 it actually paid the bank to acquire them -- the price from this settlement transaction, not any earlier or lower historical value tied to the sponsor's original cost. The Department flagged that it wasn't addressing whether a SEPARATE gains-tax liability arose from the bank's own brief ownership and transfer of the shares in the settlement.

What this means for you

Cooperative corporations that reacquire unsold sponsor shares through foreclosure or settlement

Under this now-repealed tax, when a co-op ends up owning back its own unsold units through a lender workout, its "original purchase price" for future resale purposes resets to what it actually paid in that reacquisition -- a straightforward but important basis-tracking point for messy multi-party foreclosure settlements.

Real estate and workout attorneys structuring lender settlements involving pledged cooperative shares

This opinion shows how a complex settlement chain (defaulted sponsor, competing first and second mortgagees, a UCC auction, and a final consolidated loan to the cooperative itself) gets reduced to a single, simple original-purchase-price answer for gains-tax purposes -- useful groundwork before structuring a similar workout.

Accountants tracking cooperative gains-tax exposure across multiple ownership changes in a workout

The Department's note that it wasn't addressing the bank's OWN potential gains-tax liability during its brief intermediate ownership is a reminder that each link in a multi-step settlement chain can carry independent gains-tax consequences, even when only one party (here, the co-op) asked for an opinion.

Common questions

Q: Does this original-purchase-price 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 basis and consideration rules.

Q: Why did the Department set the original purchase price at $1,215,000 rather than some other historical cost?
A: Because the statute defines original purchase price as the consideration the transferor actually paid to acquire the interest -- and $1,215,000 was exactly what the cooperative paid the bank in this settlement, superseding any earlier sponsor-level cost basis.

Q: Did this opinion resolve ALL the gains-tax questions from this transaction?
A: No -- the Department expressly noted it was NOT addressing whether the bank itself owed gains tax for its brief intermediate ownership and transfer of the shares and mortgages during the settlement.

Q: Can another cooperative corporation in a similar lender workout 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, and this result depended on the specific settlement price and transaction structure described.

Citations and references

Statutes and regulations:

• former Tax Law § 1441 and § 1443.1 (the gains tax: 10% of gain on NY real property transfers with consideration of $1 million or more)
• former Tax Law § 1440.5(a) ("original purchase price" means the consideration paid or required to be paid by the transferor to acquire the interest in real property, plus qualifying capital improvement costs)
• former 20 NYCRR § 590.35(a) (transfers of cooperative shares to tenant stockholders -- persons who buy shares and are granted proprietary leases -- require payment of gains tax)
• former 20 NYCRR § 590.40(a) (all transfers by the realty transferor, and by owners who received shares tax-free, are aggregated to test the $1 million exemption)

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_8r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (8) R
Real Property
Transfer Gains Tax
August 6, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M910517A

On May 17, 1991, a Petition for Advisory Opinion was received from 40 Schenck Owners,
Inc., 40 Schenck Avenue, Great Neck, New York 11021.
The issues raised by Petitioner, 40 Schenck Owners, Inc., are whether for purposes of the
Real Property Transfer Gains Tax (hereinafter the "gains tax"):
(1)

Will the sales of unsold cooperative units by Petitioner be subject to gains tax.

(2)

Will the Petitioner's original purchase price be $1,215,000.

On February 28, 1980 Arax Exerjian and Eldad Realty Corp. (hereinafter "First Mortgagee")
made a loan to David Shichman ("Shichman") in the original principal amount of $499,420.50 as
evidenced by a promissory note dated February 28, 1980 made by Shichman in favor of First
Mortgagee in the principal amount of $499,420.50. The note was secured by a first mortgage dated
February 28, 1980, made by Shichman to First Mortgagee in the principal amount of $499,420.50,
which first mortgage encumbered the premises known as 40 Schenck Avenue, Great Neck, New
York (the "Premises").
On May 12, 1987, the Bank of Great Neck ("Bank") made a loan to Shichman in the original
principal amount of $500,000, as evidenced by a promissory note dated May 12, 1987 made by
Shichman in favor of Bank in the principal amount of $500,000. The note was secured pursuant to
a security agreement dated May 12, 1987 made by Shichman, Michael A. Shichman, Karen M.
Shichman, and Janet Shichman doing, business as 40 Schenck Realty Company (collectively,
"Assignor") to Bank, by the pledge of a first security in and collateral assignment of a $1,000,000
note dated March 25, 1987 made by the Petitioner to assignor and secured by a second mortgage
dated March 25, 1987 made by Petitioner to assignor in the original principal amount of $1,000,000.
The second mortgage also encumbered the premises.
On April 3, 1990 Shichman, Assignor, 40 Schenck Realty Co. and Bank entered into a
modification and extension agreement (the "Extension Agreement") which provided for, inter alia,
the extension of the $500,000 loan and the pledge to Bank, as further and additional collateral
security, of certain unsold shares (the "Shares") in Petitioner, allocated to the cooperative units of
the premises and the proprietary leases appurtenant thereto (the "Leases").
The $499,420.50 loan was in default, and as a result First Mortgagee filed a lis pendens
against the premises and commenced a foreclosure action.
TP-9 (9/88)

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Real Property
Transfer Gains Tax
August 6, 1991
Moreover, since the $500,000 Loan was in default, Bank notified the various parties that it
intended to sell at a public auction sale pursuant to the Uniform Commercial Code, the second
mortgage, the shares and the leases.
The Supreme Court of the State of New York, County of Nassau, issued a temporary
restraining order, dated June 5, 1990, which temporarily enjoined Bank from proceeding with its
auction of the second mortgage, the shares and the leases.
During discussions between the parties, Bank and the Petitioner agreed to bring about a
settlement to encompass all of the open issues, including but not limited to, the $499,420.50 loan,
the first mortgage, the $499,420.50 foreclosure action, the $500,000 loan, the second mortgage, the
shares and leases, the priority of Petitioner's lien for unpaid maintenance and Bank's action.
On December 14, 1990, Bank loaned to Petitioner, the total sum of $1,215,000.00. Said loan
was made pursuant to the settlement agreement between Bank, Petitioner, and the First Mortgagee.
The closing followed a successful bid of $675,000.00 made by Bank at an auction sale. At
the sale the bank purchased all the shares of Petitioner owned by 40 Schenck Realty Co. and the
$1,000,000.00 second mortgage made by Petitioner to 40 Schenck Realty Co. all of which were
pledged to Bank as security for a $500,000.00 loan made by Bank to Shichman upon which there
were numerous defaults.
Once Bank owned the first mortgage in the face amount of $499,420.50, the second mortgage
in the face amount of $1,000,000.00 and all the shares of stock allocated to the 8 vacant and 22
occupied apartments owned by 40 Schenck Realty Co., as unsold shares, Bank conveyed the same
to Petitioner for the sum of $1,215,000.00, simultaneously lending that amount to Petitioner. As
collateral for, said loan, Petitioner made and/or pledged the following:
1.

A first mortgage to Bank in the sum of $1,215,000.00 as evidenced by a First
Mortgage Consolidation and Security Agreement.

2.

All the unsold shares in Petitioner allocated to the cooperative units at the premises
known as 40 Schenck Avenue, Great Neck, New York, together with the proprietary
leases appurtenant thereto.

In effect, Bank first took by assignment and then consolidated, extended and reduced notes
and mortgages totalling the original principal amount of $1,499,420.50 to new debt of
$1,215,000.00.
The restructured mortgage debt provided for payment as follows:

1. Interest only monthly at the rate of 12% on the first $540,000.00 of indebtedness, until
   December 13, 1994 when the principal balance becomes due;

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Real Property
Transfer Gains Tax
August 6, 1991

2. A payment on December 13, 1992 of all accrued interest over the first $540,000.00 to date
   together with a principal payment of $675,000.00;
3. Payment in full of all remaining principal and continuing accrued interest on December
   13, 1994.
4. The mortgage and pledge agreement contained a release clause. All payments made
   pursuant to this clause are applied to and reduce the $675,000.00 principal payment due on
   December 13, 1992 after all unpaid accrued interest is paid.
   Pursuant to Sections 1441 and 1443.1 of the Tax Law and Section 590.1 of the Gains Tax
   Regulations a ten percent tax is imposed on the gain derived from the transfer of real property where
   the property is located in New York State and where the consideration for the transfer is $1,000,000
   or more.
   Section 590.35 of the Gains Tax Regulations provides, in part, as follows:
   590.35 Transfers of shares which require payment of tax.
   Question: Which transfers of cooperative shares by the person who transfers an
   interest in real property to the cooperative housing corporation (the realty transferor), or by
   the owners of the realty transferor, or by the cooperative corporation itself, require payment
   of tax?
   (a) Transfers to tenant stockholders?
   Answer: Yes, gains tax must be paid when the shares are transferred to persons
   who buy shares and are granted proprietary leases with respect to units.
   Moreover, Section 590.40 of the Gains Tax Regulations provides, in part, as follows:
   590.40 Million-dollar exemption.
   Question:
   In the case of transfers pursuant to a cooperative plan, how does the
   aggregation clause of section 1440(7) of the Tax Law, and accordingly, the $1 million
   exemption apply to the following transfers?
   (a) The transfer of shares by the realty transferor and the owners of the realty
   transferor?
   Answer: All transfers by the realty transferor are aggregated with all the transfers
   by any transferor who received his shares in a transaction that did not require payment of tax,
   as described in section 590.35 of this Part, because the transferee was an owner of the realty

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Real Property
Transfer Gains Tax
August 6, 1991
transferor. This total aggregation will determine the application of the $1 million exemption
to all transfers by the realty transferor and to all such owners.
Section 1440.5(a) of the Tax Law provides that:
"Original purchase price" means the consideration paid or required to be paid
by the transferor; (i) to acquire the interest in real property, and (ii) for any capital
improvements made or required to be made to such real property, including solely
those costs which are customary, reasonable, and necessary, as determined under
rules and regulations prescribed by the tax commission, incurred for the construction
of such improvements. Original purchase price shall also include the amounts paid
by the transferor for any customary, reasonable and necessary legal, engineering and
architectural fees incurred to sell the property and those customary, reasonable and
necessary expenses incurred to create ownership interests in property in cooperative
or condominium form, as such fees and expenses are determined under the rules and
regulations prescribed by the tax commission.
Accordingly, pursuant to Sections 1441 and 1441.3 of the Tax Law and Sections 590.1,
590.35 and 590.40 of the Gains Tax Regulations the transfer of unsold cooperative units by
Petitioner will be subject to gains tax if the aggregate consideration received for such transfers is
$1,000,000 or more. Pursuant to Section 1440.5(a) of the Tax Law the original purchase price to be
used by Petitioner in determining its gain is the price it paid for the cooperative shares which was
$1,215,000.
It is noted that this opinion does not address the gains tax consequences of the transfer of
cooperative shares by 40 Schenck Realty Co. and the Bank of Great Neck for which a gains tax filing
may be required.

DATED:

August 6, 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.