We're merging a related corporation that owns real estate into our company, with its former shareholders receiving stock in ours. The two companies are owned by overlapping family members, but not in identical percentages -- does New York's Real Property Transfer Gains Tax apply to this merger, or does the mere-change-of-identity exemption cover it?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1993 opinion is preserved here for historical and research value, not as current law.

Latham Motors, Inc. leased its business premises from a related corporation, John J. Selkis, Inc., which owned the real estate (fair market value about $1.1 million, original cost $458,000). Both corporations were owned by the same seven Selkis family members and relatives, but with different ownership percentages in each company -- for example, John J. Selkis, Jr. held 94% of Selkis, Inc. but only 76% of Latham Motors before the transaction. The plan was to merge Selkis, Inc. into Latham Motors, with Selkis, Inc. going out of existence and its shareholders receiving Latham Motors voting stock in exchange, sized so that after the merger each shareholder held a blended percentage of the combined company (Selkis, Jr. ending up at 90.4%).

The Department first confirmed this merger was a taxable event: merging a corporation that owns real property into another corporation is an acquisition of a "controlling interest" under former § 1440.2 and former 20 NYCRR § 590.54(a), since the surviving corporation (Latham Motors) ends up owning 100% of the merged-in corporation's stock and, through it, its real estate. But because the former Selkis, Inc. shareholders got voting stock in the surviving Latham Motors as consideration, the mere-change-of-identity exemption (former § 1443.5) kicked in to the extent each shareholder's beneficial interest in the real estate carried through unchanged. Comparing each shareholder's percentage ownership of the Selkis, Inc. real estate before the merger to their percentage of Latham Motors (now holding that same real estate) after the merger, only John J. Selkis, Jr.'s interest actually shifted by a meaningful amount -- his effective share dropped from 94% to 90.4%, a 3.6-percentage-point change. The Department concluded the merger was taxable only to that extent: the 3.6% net change in Selkis, Jr.'s beneficial interest in the real property, with everyone else's proportionate shares treated as an exempt mere change of identity.

What this means for you

Closely-held family businesses considering mergers between related entities

Under this now-repealed tax, merging a related corporation's real estate into a sister company wasn't automatically a fully taxable event just because it technically transferred a "controlling interest" -- the mere-change exemption protected each shareholder's continuing beneficial interest, leaving only the actual net shift in percentage ownership exposed to tax.

Business and real estate attorneys structuring intra-family or intra-group mergers

This opinion is a useful worked example of how to calculate the taxable slice in a merger where shareholders' percentages in the merging entities don't line up perfectly: compare each shareholder's pre-merger indirect interest in the real property to their post-merger direct interest in the surviving entity, and tax only the shareholders (and only the percentage) where that comparison shows an increase or decrease.

Accountants valuing related-party corporate mergers involving real estate

If you're reconstructing the gains-tax exposure of a pre-1996 merger between commonly-owned corporations, this opinion shows the Department's shareholder-by-shareholder percentage-comparison method for isolating the taxable portion.

Common questions

Q: Does this merger/controlling-interest 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 and business taxes have their own separate rules for corporate mergers.

Q: Why was only Selkis, Jr.'s interest treated as taxable, and not the other six shareholders'?
A: Because his percentage ownership of the underlying real estate (94% before, via Selkis, Inc., versus 90.4% after, via Latham Motors) was the only one that changed by an amount the Department flagged as a genuine shift in beneficial interest -- the ruling's math treated the other shareholders' small percentage-point movements as within the mere-change exemption.

Q: Would the answer change if the shareholders had received cash instead of stock?
A: Very likely yes -- the mere-change-of-identity exemption in these opinions consistently turns on shareholders receiving an ownership interest (stock) that preserves their beneficial interest; a cash-out would look more like an ordinary taxable sale.

Q: Can another related-party merger 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 the specific 3.6% taxable slice here depended on Latham Motors' and Selkis, Inc.'s exact pre- and post-merger ownership percentages.

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 § 1440.2 (defines "controlling interest": 50% or more of voting stock/capital/profits/beneficial interest of a corporation or other entity)
• 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 § 590.45(c) (only acquisitions of interests occurring after March 28, 1983 are aggregated in determining whether a controlling interest was acquired)
• former 20 NYCRR § 590.45(d) (successive acquisitions of stock by the same shareholder are added together if within three years, absent an avoidance plan)
• former 20 NYCRR § 590.54(a) (merging a corporation that owns real property into another corporation may be a taxable transfer if it results in an acquisition of a controlling interest)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1993.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a93_6r.pdf

Original ruling text

New York State Department of Taxation and Finance
TSB-A-93 (6)R
Real Property Transfer
Gains Tax
May 17, 1993

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M930302A

On March 2, 1993, a Petition for Advisory Opinion was received from Latham Motors, Inc.,
Old Loudon Road, Latham, New York 12110.
The issue raised by Petitioner, Latham Motors, Inc., is whether a transfer of real estate from
a related corporation to Petitioner qualifies for exemption from the New York State Real Property
Transfer Gains Tax (hereinafter the "gains tax") under Section 1443.5 of the Tax Law as a mere
change of identity or form of ownership or organization, where there is no change in beneficial
interest.
Petitioner is a New York corporation. John J. Selkis, Inc. is also a New York corporation
which owns real estate that it currently leases to Petitioner. It is proposed to merge John J. Selkis,
Inc. into Petitioner. As a result, all of the assets (including real estate located in New York) of John
J. Selkis, Inc. will be transferred into Petitioner and John J. Selkis, Inc. will go out of existence.
The estimated fair market value of the two corporations is as follows:
John J. Selkis, Inc.

Petitioner

Estimated Fair Market Value
(Net Worth):

$1,200,358

$300,000

Estimated Fair Market Value
of the Real Estate:

$1,100,000

$300,000

The Original Cost of the
Respective Real Estate:

$ 458,000

$375,000

The parties involved and their respective ownership interests before and after the merger are
as follows:
Before Merger
After Merger
Shareholders
John J. Selkis, Inc.
Petitioner
Petitioner
John J. Selkis, Jr.
94%
76%
90.4%
Margaret Selkis
1%
3%
1.4%
Robert Selkis
1%
3%
1.4%
John J. Selkis, III
l%
3%
1.4%
Thomas Selkis
l%
6%
2.0%
Mary Ann Carberry
l%
6%
2.0%
Mary Katherine Shanks
1%
3%
1.4%
Totals

100%

100%

100.0%

Pursuant to Sections 1441 and 1443.1 of the Tax Law and Section 590.1 of the Gains Tax
Regulations the gains tax is a ten percent tax on the gain derived from the transfer of real property,

-2­
TSB-A-93 (6)R
Real Property Transfer
Gains Tax
May 17, 1993
which includes the acquisition or transfer of a controlling interest in any entity with an interest in
real property, where the property is located in New York State and where the consideration for the
transfer is one million dollars or more.
Section 1440.2 of the Tax Law provides as follows:

2. "Controlling interest" means (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.
   Section 1443 of the Tax Law provides, in pertinent part, as follows:
   Sec. 1443. Exemptions.-- A total or partial exemption shall be allowed in the
   following cases:
   *

*

*

5. If a transfer of real property, however effected, consists of a mere change
   of identity or form of ownership or organization, where there is no change in
   beneficial interest.
   Section 590.45(c) and (d) of the Gains Tax Regulations provides:
   (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 July 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 interests 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.

-3­
TSB-A-93 (6)R
Real Property Transfer
Gains Tax
May 17, 1993
Section 590.54(a) of the Gains Tax Regulations provides as follows:
590.54 Corporation mergers and redemptions.
(a) Question: Is a merger of a corporation owning real property into another
corporation a taxable transfer?
Answer: Yes. The merger of a corporation which owns real property into
another corporation may result in a transfer within the scope of the gains tax, where
the transaction results in the acquisition of a controlling interest in an entity which
owns real property in New York State.
Therefore, pursuant to Section 1440.2 of the Tax Law and Sections 590.45 and 590.54(a) of
the Gains Tax Regulations, the merger of John J. Selkis, Inc. into Petitioner, as the surviving
corporation of the merger, will result in an acquisition of a controlling interest in an entity with an
interest in real property since Petitioner acquires 100% of the stock of John J. Selkis Inc., an entity
which owns real property. However, in the instant case, since the former shareholders of John J.
Selkis Inc., receive shares of voting stock in Petitioner as a result of the merger, pursuant to Section
1443.5 of the Tax Law, the mere change of identity or form of ownership exemption with respect
to the interest in real property of John J. Selkis Inc. will apply to the extent that such former
shareholder's retain a beneficial interest in such real property as a result of the merger. The
determination of the extent of the application of the mere change of identity exemption will be based
on such individual shareholder's percentage of ownership of the voting stock of Petitioner
immediately after the merger.
Therefore, in accordance with Sections 1441 and 1443.1 of the Tax Law and Section 590.1
of the Gains Tax Regulations, the merger of John J. Selkis, Inc. into Petitioner will be taxable to the
extent of the 3.6% change in beneficial interest of shareholder, John J. Selkis, Jr., following the
transfer.

DATED: May 17, 1993

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

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