Our company's Employee Stock Ownership Plan (ESOP), an ERISA-covered retirement plan, owns nearly all the stock of our company, which itself holds leasehold interests counting as New York real property. If the ESOP sells all its stock in the company for $100 million allocable to that real estate -- a controlling-interest transfer -- does New York's Real Property Transfer Gains Tax apply?

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 It was repealed for any transfer occurring on or after June 15, 1996.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

Through a 1986-1987 sequence of corporate transactions (an acquisition, a stock transfer, a merger, and a second merger), the Avis, Inc. Employee Stock Ownership Plan (Avis ESOP) -- created for the benefit of Avis, Inc.'s own employees -- ended up owning 100% of Avis, Inc.'s stock in September 1987. By the time of this opinion, the ESOP still held over 90% (some shares had gone to employees who separated from the company). At the time of the relevant transfers, Avis, Inc. held certain leasehold interests that qualified as "real property" for gains-tax purposes. The petition asked about a hypothetical future event: assume the Avis ESOP sells all of its remaining Avis, Inc. stock on January 1, 1998, a transfer of a "controlling interest" (over 50%, as defined in former § 1440.2) with $100 million of the sale price allocable to the underlying real estate.

Ordinarily, transferring a controlling interest in an entity that owns New York real property for $1 million or more triggers the gains tax just like selling the real estate directly (former §§ 1441, 1443.1). But the Department applied the New York Court of Appeals' 1992 decision in Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, which held that the federal ERISA statute preempts the gains tax as applied to a qualified employee benefit plan's real estate sale. The Court's reasoning: ERISA broadly preempts state laws that "relate to" an employee benefit plan (29 U.S.C. § 1144(a)), and the gains tax's compliance and reporting burdens could distort a plan administrator's investment decisions -- for example, forcing a plan to hold an asset longer than it otherwise would to avoid the tax cost -- which conflicts with ERISA's goals and the favorable federal tax treatment Congress gave to employee benefit plans. Applying that precedent, the Department concluded that as long as Avis ESOP remains a plan subject to ERISA, its future sale of its controlling stock interest in Avis, Inc. -- even though it would otherwise squarely trigger the gains tax -- is not subject to the tax.

What this means for you

ESOP sponsors and administrators holding real-estate-heavy companies

This opinion is a clean example of the ERISA-preemption doctrine (first established in Morgan Guaranty) applied specifically to a controlling-interest stock sale by an ESOP, rather than a direct real estate sale by a pension trust -- confirming the preemption reaches indirect, controlling-interest transfers just as much as direct property sales.

ERISA and employee-benefits attorneys researching state real-estate-transfer-tax preemption

The core holding -- that ERISA's broad preemption clause (29 U.S.C. § 1144(a)) reaches a state gains tax because of its effect on plan administration and investment decisions, not just because the tax nominally targets the plan -- is a useful analytical template even outside the gains-tax context, though each state's transfer-tax structure and ERISA's preemption doctrine have evolved since 1993.

Accountants reconstructing 1990s ESOP or pension-fund real estate transactions

If you're researching the gains-tax history of an ERISA-covered plan's New York real estate sale (direct or via a controlling-interest transfer), this opinion and Morgan Guaranty are the key authorities establishing that no gains tax was due, regardless of the transaction's size.

Common questions

Q: Does this ERISA preemption ruling still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. ERISA preemption principles continue to apply to other state taxes and laws today, but this particular tax no longer exists.

Q: Would the answer have been different if the ESOP had lost its ERISA-qualified status by the time of the sale?
A: The opinion's holding was expressly conditioned on the ESOP remaining "subject to the provisions of ERISA" at the time of the sale -- if it had ceased to be an ERISA-covered plan, the preemption analysis would not apply, and the ordinary controlling-interest gains tax analysis (with $100 million in taxable real estate consideration) would presumably control.

Q: Why did the Department discuss all the corporate history (Beatrice, Wesray, Holdings) if the real question was just about a 1998 stock sale?
A: To establish that Avis, Inc. did in fact hold real property that qualified for gains-tax purposes at the relevant times, and to confirm how the ESOP came to hold its controlling stock interest -- background needed to analyze whether a future sale of that interest would be a taxable "transfer of a controlling interest" at all.

Q: Can another ESOP or pension plan 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 the underlying ERISA-preemption holding traces to a New York Court of Appeals decision (Morgan Guaranty) that bound the Department more broadly during the tax's lifespan.

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)
• 29 U.S.C. § 1144(a) (ERISA's broad preemption of state laws that relate to an employee benefit plan)
• Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, 80 N.Y.2d 44 (1992) (New York Court of Appeals: the gains tax is preempted by ERISA as applied to a qualified employee benefit plan's real estate sale, because of the tax's effect on plan recordkeeping, reporting, and investment decisions)

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_9r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-93 (9)R
Real Property
Transfer Gains Tax
June 15, 1993

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M930304A

On March 4, 1993, a Petition for Advisory Opinion was received from Avis, Inc. and Avis,
Inc. Employee Stock Ownership Plan, 900 01d Country Road, Garden City, New York 11530.
The issue raised by Petitioner, Avis, Inc., and Petitioner, Avis, Inc. Employee Stock
Ownership Plan, is whether the future sale of stock of Petitioner, Avis, Inc., by Petitioner, Avis, Inc.
Employee Stock Ownership Plan, is subject to the Real Property Transfer Gains Tax (hereinafter the
"gains tax").
On April 17, 1986, BCI Holdings, Inc. acquired 100% of the stock of Beatrice Companies,
Inc. ("Beatrice"). Immediately afterward, BCI Holdings, Inc. changed its name to the Beatrice
Company. At that time, Beatrice owned 79% of the stock of Petitioner, Avis, Inc.
On July 22, 1986, Beatrice transferred its interest in the stock of Petitioner, Avis, Inc., to
Wesray Rent-A-Car, Inc. ("Wesray"). (The July 22, 1986 transfer by Beatrice shall be referred to
herein as the "Beatrice Transfer".) At the same time Wesray purchased the remaining 21% of the
stock of Petitioner, Avis, Inc., from its owner, a qualified pension plan. Wesray was at that time a
wholly-owned subsidiary of Siva Holdings, Inc. which simultaneously changed its name to Avis
Capital Holdings, Inc. ("Holdings"). On that same day Wesray merged into Petitioner, Avis, Inc.
On September 4, 1987, Petitioner, Avis, Inc., merged into Holdings which immediately
changed its name to that of Petitioner, Avis, Inc.
On September 25, 1987, the shareholders of Petitioner, Avis, Inc., sold 100% of the stock
of Petitioner, Avis, Inc., to Petitioner, Avis, Inc. Employee Stock Ownership Plan, (hereinafter
"Avis, Inc. ESOP"), which had been created for the benefit of Petitioner, Avis, Inc., employees. (The
September 25, 1987 transfer will be referred herein as the "Avis Transfer"). Petitioner, Avis, Inc.
ESOP, is an "employee benefit plan" and an "employee pension benefit plan" as defined in 29 U.S.C.
Sections 1002(3) and 1002(2)(A) of the Employee Retirement Income Security Act. Because some
shares of Petitioner, Avis, Inc., have been transferred to employees upon their separation from
company, Petitioner, Avis Inc., ESOP, no longer owns 100% of the stock of Petitioner, Avis, Inc.
The number of shares believed transferred constitutes less than 10% of the stock of Petitioner, Avis,
Inc.
At the time of both the Beatrice Transfer and the Avis Transfer, Petitioner, Avis, Inc., had
certain leasehold interests that qualified as real property for purposes of the gains tax.
It is to be assumed that Petitioner, Avis, Inc. ESOP, will transfer all its stock in Petitioner,
Avis, Inc., on January 1, 1998. The stock ownership transferred is assumed to be a controlling

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TSB-A-93 (9)R
Real Property
Transfer Gains Tax
June 15, 1993
interest in Petitioner, Avis, Inc. The consideration allocable to the real estate interest that is
attributable to Petitioner, Avis, Inc. ESOP, stock interest in Petitioner, Avis, Inc., is assumed to be
$100 million dollars.
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,
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.
   29 U.S.C. Section 1144(a) of the Employee Retirement Income Security Act provides that
   the provisions of ERISA shall supersede "any and all State laws insofar as they may now or hereafter
   relate to any employee benefit plan."
   In Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, 80 N.Y.2d 44 (1992), the New York
   Court of Appeals held that the gains tax could not be applied to a sale of real estate by a qualified
   employee benefit plan that is subject to the provisions of the Employee Retirement Income Security
   Act, 29 U.S.C. Section 1001 et seq. ("ERISA"). In that case, Morgan Guaranty Trust Company, as
   trustee under the American Motors Corporation Union Retirement Income Plan, had sued for a
   refund of gains tax paid on a sale of real property on the grounds that imposition of the tax is
   preempted by ERISA. The Court held that the gains tax should be viewed as "relating to" an
   employee benefit plan because of the recordkeeping and reporting burdens it would necessarily have
   on the plan's investment strategy. Thus, the Court noted that "an administrator taking cost of the New
   York gains tax into account may be required to retain an asset that would otherwise have been
   liquidated." In addition, the Court held that preemption of the gains tax would be consistent with the
   favorable tax treatment afforded to employee benefit plans under the Internal Revenue Code.
   Accordingly, the transfer of a controlling interest, as defined in Section 1440.2 of the Tax
   Law, by Petitioner, Avis, Inc. ESOP, of its stock in Petitioner, Avis, Inc., for a consideration of $100
   million dollars will fall within the ambit of the gains tax pursuant to Sections 1441 and 1443.1 of
   the Tax Law and Section 590.1 of the Gains Tax Regulations. However, pursuant to 29 U.S.C.

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TSB-A-93 (9)R
Real Property
Transfer Gains Tax
June 15, 1993
Section 1144(a) of ERISA and Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, supra, as long
as Petitioner, Avis, Inc. ESOP, is subject to the provisions of ERISA, its sales of stock in Petitioner,
Avis, Inc., will not be subject to the gains tax.

DATED: June 15, 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.