A shareholder of our corporation, which owns real property, acquired 44% of our stock back in 1981 -- before either the gains tax or the transfer tax's entity-transfer rules existed. He now wants to acquire another 49% now, and the remaining 7% at some future point. Does his old 1981 stake count toward triggering a taxable 'controlling interest' acquisition when he buys the rest?

Plain-English summary

Centennial Estates, Inc. asked the Department when a shareholder is deemed to have acquired a taxable "controlling interest" in the corporation for gains tax, transfer tax, and corporate franchise tax purposes. William W. Mizrahi had acquired 44% of the corporation's outstanding stock back on November 13, 1981. He now proposed to acquire an additional 49% in 1992, and planned to pick up the remaining 7% at some future point once there would be no tax liability.

Both the gains tax and the transfer tax define a "controlling interest" as 50% or more of an entity's voting stock (for a corporation) or capital/profits/beneficial interest (for a partnership or similar entity) acquired by a person or group acting in concert. But each tax has its own grandfather date and aggregation window:

• Gains tax: only stock acquisitions occurring on or after March 28, 1983 (the gains tax's effective date) are added together when testing for a controlling-interest acquisition. Acquisitions are also only aggregated with each other if they occur within three years of one another -- unless they were deliberately timed as part of a plan to avoid the tax (§ 1448 anti-avoidance rule).
• Transfer tax: the same logic applies, but with a July 1, 1989 grandfather date (when Chapter 61 of the Laws of 1989 extended the transfer tax to cover entity/controlling-interest transfers) and the same three-year aggregation window and anti-avoidance backstop.

Applying this, Mizrahi's original 1981 acquisition of 44% predates both grandfather dates, so it doesn't count toward aggregation under either tax. That means his proposed 1992 acquisition of an additional 49% -- standing alone -- is not a controlling-interest acquisition (it's under 50% and has nothing pre-1983/1989 to aggregate with). And if he waits more than three years to pick up the final 7%, that acquisition also escapes aggregation and taxation, unless the whole sequence was timed specifically to dodge the tax.

What this means for you

Investors and shareholders acquiring interests in real-property-holding entities over time

Only stock or entity-interest acquisitions occurring after the relevant grandfather date (March 28, 1983 for the now-repealed gains tax; July 1, 1989 for the transfer tax) are aggregated when testing whether you've crossed the 50% controlling-interest threshold. Acquisitions more than three years apart generally aren't added together either -- but staging your purchases specifically to dodge the threshold (e.g., 80% now, the remaining 20% "three years and one day" later) can still be taxed under the anti-avoidance rule if the Department finds that timing was a deliberate avoidance plan.

Accountants and tax professionals structuring phased stock acquisitions

Document the actual acquisition dates carefully -- a pre-grandfather-date stake is a durable exemption for later purchases, but the three-year aggregation clock and the anti-avoidance backstop (§ 1448 for gains tax; the parallel transfer-tax anti-avoidance rule) mean phased acquisitions still need real business timing, not engineered timing, to stay outside a controlling-interest determination.

Common questions

Q: Does my shareholder's pre-1983 or pre-1989 stock stake count toward a later controlling-interest acquisition?
A: No. Only acquisitions occurring on or after the relevant grandfather date (March 28, 1983 for gains tax; July 1, 1989 for transfer tax) are aggregated.

Q: If I buy 49% now and the remaining 7% years later, will they be added together?
A: Not if they occur more than three years apart -- unless the Department finds the timing was deliberately structured to avoid the tax.

Q: Is the gains tax discussed here still relevant today?
A: No, it was repealed for transfers on or after June 15, 1996. The transfer tax's controlling-interest rules remain current law.

Q: Can I rely on this ruling for my own shareholder's acquisitions?
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 1440(2) of the Tax Law (definition of "controlling interest")
• Section 590.44 of the Gains Tax Regulations (controlling interest determination)
• Section 590.45 of the Gains Tax Regulations (aggregation rules; March 28, 1983 grandfather date; three-year window)
• Section 1448 of the Tax Law (anti-avoidance rule for formulated transfers)
• Section 575.6 of the Transfer Tax Regulations (controlling interest; July 1, 1989 grandfather date; three-year window)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a92_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92(2)-R
Real Property
Transfer Gains Tax
Real Estate Transfer Tax
June 22, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M920324A

On March 24, 1992, a Petition for Advisory Opinion was received from Centennial Estates,
Inc., 36 Richmond Terrace, Staten Island, NY 10301.
The issue raised by Petitioner, Centennial Estates, Inc., is when will a shareholder of
Petitioner be deemed to have acquired a controlling interest for purposes of the Real Property
Transfer Gains Tax (hereinafter the "gains tax"), Real Estate Transfer Tax (the "transfer tax") and
Corporation Franchise Tax.
On November 13, 1981 William W. Mizrahi, acquired 44% of the outstanding stock of
Petitioner. In 1992, Mr. Mizrahi proposes to acquire an additional 49% of the outstanding stock. Mr.
Mizrahi proposes to acquire the remaining 7% of the outstanding stock at such time in the future
when there will be no tax liability for the aforementioned taxes.
Section 590.44 of the Gains Tax Regulations provides, in part, as follows:
(a) Question: How is the phrase "acquisition of a controlling interest in an
entity with an interest in real property" applied?
Answer: The term controlling interest is defined in section 1440(2) of the
Tax Law to mean:
"(i) in the case of a corporation, either fifty percent or more of
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."
Thus, for purposes of the gains tax, 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 percent
or more of the voting stock in such corporation. In the case of a partnership,
association, trust or other entity, the acquisition occurs when a person or group of
persons, acting in concert, acquires a total of 50 percent or more of the capital, profits
or beneficial interest in such entity. Because the statute looks to the acquisition of the
controlling interest, it is the act of the transferee which triggers the tax. (emphasis
added)

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Real Property
Transfer Gains Tax
Real Estate Transfer Tax
June 22, 1992
Section 590.45 of the Gains Tax Regulations provides, in pertinent part, as follows:
(c) Question: If a shareholder owned a 20-percent interest in a corporation
prior to March 28, 1983 and acquires an additional 35 percent on 3uly 10, 1984, has
there been an acquisition of a controlling interest?
Answer: No. For purposes of determining whether a controlling interest is
acquired, only acquisitions of interest occurring after March 28, 1983 are added
together.
(d) Question: If a shareholder acquires a 50-percent interest in a corporation
and gains tax is paid on the transfer, and one year later the same shareholder acquires
an additional 20 percent, is there a second acquisition of a controlling interest?
Answer: Yes. The interests acquired after March 28, 1983 are added together
in determining whether an acquisition of a controlling interest has occurred. No
acquisition of stock will be added to another acquisition of stock if they occur more
than three years apart, unless the acquisitions were so timed as part of a plan to avoid
the gains tax. An example of this would be if T acquired 80 percent of the stock and
simultaneously contracted for the purchase of the remaining 20 percent in three years
and one day. (emphasis added)
Section 1448 of the Tax Law provides that where the Commissioner finds that the transfer
of any interest in real property or an interest therein has been so formulated that the primary purpose
of such formulation is the avoidance or evasion of the gains tax, rather than an adequate business
purpose, the Commissioner shall treat such transfer as subject to tax.
Section 575.6 of the Transfer Tax Regulations provides, in part, as follows:
575.6 Controlling interest. (Tax Law, §l401)(a) In the case of a corporation
which has an interest in real property, the transfer or acquisition of a controlling
interest in the corporation, as defined in section 575.1(b) of this Part, occurs when
a person, or group of persons acting in concert, transfers or acquires a total of 50%
or more of the voting stock in such corporation. In the case of a partnership,
association, trust or other entity having an interest in real property, the transfer or
acquisition occurs when a person, or group of persons acting in concert, transfers or
acquires a total of 50% or more of the capital, profits or beneficial interest in such
entity.
*

*

*

(c) For purposes of determining whether controlling interest is transferred or
acquired, only transfers or acquisitions of interests occurring on or after July 1, 1989
are added together. A transfer or acquisition made on or after July 1, 1989 does not

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Real Property
Transfer Gains Tax
Real Estate Transfer Tax
June 22, 1992
have to be included, for purposes of determining whether a controlling interest is
transferred or acquired, if the transfer or acquisition is made pursuant to a binding
written contract which was entered into on or before February 16, 1989, the date of
which is confirmed by independent evidence such as the recording of a contract,
payment of a deposit or other facts and circumstances as determined by the
Commissioner. (See section 575.5 of this Part.)
(d) Where there is a transfer or acquisition of an interest in an entity that has
an interest in real property, on or after July 1, 1989, and subsequently there is a
transfer or acquisition of an additional interest or interests in the same entity, the
transfers or acquisitions will be added together to determine if a transfer or
acquisition of a controlling interest has occurred. Where there is a transfer or
acquisition of a controlling interest in an entity on or after July 1, 1989, and the real
estate transfer tax is paid on that transfer or acquisition and there is a subsequent
transfer or acquisition of an additional interest in the same entity, it is considered that
a second transfer or acquisition of a controlling interest has occurred which is subject
to the real estate transfer tax. No transfer or acquisition of an interest in an entity that
has an interest in real property will be added to another transfer or acquisition of an
interest in the same entity if they occur more than three years apart, unless the
transfers or acquisitions were so timed as part of a plan to avoid the real estate
transfer tax. An example of this would be if a shareholder acquired 40% of the stock
in a corporation and simultaneously contracted for the purchase of 20% in three years
and one day. (emphasis added)
Accordingly, for purposes of the gains tax pursuant to Sections 590.44 and 590.45 of the
Gains Tax Regulations a controlling interest is deemed to be acquired where 50% or more of the
voting stock of a corporation with an interest in real property is acquired within a three year period.
For purposes of the transfer tax, pursuant to Section 575.6 of the Transfer Tax Regulations a
controlling interest is acquired when a person acquires 50% or more of the voting stock of a
corporation with an interest in real property within a three year period.
In the instant case, pursuant to Section 590.45(c) of the Gains Tax Regulations Mr. Mizrahi's
acquisition of 44% of the outstanding stock of Petitioner on November 13, 1981 would not be
subject to gains tax since such interest was acquired on or before March 28, 1983, the effective date
of the gains tax. Therefore, if Mr. Mizrahi acquires 49% of the outstanding stock in 1992, such
acquisition will not be deemed to be the acquisition of a controlling interest since such acquisition
is not required to be aggregated with his initial acquisition. Pursuant to Section 590.45(d) of the
Gains Tax Regulations if Mr. Mizrahi acquires the remaining 7% of the outstanding stock after three
years, such acquisition will not result in the acquisition of a controlling interest, unless the
acquisitions were so timed as part of a plan to avoid the gains tax.

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Real Property
Transfer Gains Tax
Real Estate Transfer Tax
June 22, 1992
As for the transfer tax, pursuant to Section 575.6 of the Transfer Tax Regulations Mr.
Mizrahi's acquisition of 44% of the outstanding stock of Petitioner on November 13, 1981 would
not be subject to the transfer tax since such interest was acquired on or before July 1, 1989, the
effective date of Chapter 61 of the Laws of 1989 which amended the transfer tax to include entity
transfers. Thus, if Mr. Mizrahi acquires 49% of the outstanding stock in 1992, such acquisition will
not result in the acquisition of a controlling interest since such acquisition is not required to be
aggregated with his initial acquisition. If Mr. Mizrahi acquires the remaining 7% of the outstanding
stock after three years, such acquisition will not be deemed to be the acquisition of a controlling
interest, unless the acquisitions were so timed as part of a plan to avoid the transfer tax.
It is noted that the proposed increase in percentage of stock ownership by a shareholder
would not in and of itself create any Corporate Franchise Tax liability.

DATED: June 22, 1992

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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