Our client died leaving five tenancy-in-common interests in New York real property to her charitable foundation under her will. Rather than deed the properties to the foundation first and then have the foundation deed each one again to five separate title-holding corporations it just formed (one per property), the estate's executors want to deed each property directly from the estate to the matching title-holding corporation, skipping the foundation as an intermediate step. Does conveying directly to the title-holding corporations -- instead of first to the foundation itself -- still count as an exempt bequest, or does the extra corporate layer make it a taxable conveyance subject to the Real Estate Transfer Tax or Real Property Transfer Gains Tax?

Plain-English summary

Beatrice Seaver died on September 23, 1992, owning tenancy-in-common interests in five Manhattan properties (on East 26th Street, West 39th Street, West 40th Street, West 33rd Street, and Seventh Avenue). Her will's residuary clause bequeathed these interests to the Beatrice and Samuel A. Seaver Foundation -- a charitable trust she had established in 1984 for charitable, religious, scientific, literary, and educational purposes, exempt from federal income tax under Internal Revenue Code Section 501(c)(3).

Setting up the title-holding structure. Before the estate could distribute the properties, the Foundation formed five separate New York corporations -- each exempt under Internal Revenue Code Section 501(c)(2) -- with each corporation's sole purpose being to hold title to one of the five tenancy-in-common interests, collect the rental income, and turn over the net proceeds to the Foundation. To avoid the administrative expense and complexity of two separate conveyances (estate to Foundation, then Foundation to each holding corporation), the executors proposed deeding each property directly from the estate to its matching holding corporation.

Why it's still exempt. Both the transfer tax and (before its 1996 repeal) the gains tax specifically carve conveyances "pursuant to devise, bequest or inheritance" out of their respective definitions of a taxable "conveyance" or "transfer of real property" -- meaning ordinary estate distributions under a will were never taxable transactions to begin with, regardless of who ultimately receives them. The Department found that the five holding corporations were "merely alter egos" of the Foundation, formed solely to facilitate the Foundation in carrying out Beatrice Seaver's testamentary wishes -- they held no independent purpose beyond passing each property's income through to the Foundation. Because the properties were, in substance, still being bequeathed to the Foundation (just administered through its wholly-controlled alter-ego entities), deeding them directly to the holding corporations remained "a conveyance pursuant to devise, bequest or inheritance," outside the definition of a taxable conveyance under either tax -- entirely without needing to invoke the separate "mere change of form" exemption that applies to non-bequest transfers.

What this means for you

Estate executors distributing real property to a charitable beneficiary's holding entities

If a will bequeaths real property to a charity that plans to hold title through wholly-controlled, alter-ego subsidiary entities (a common structure for liability isolation or administrative convenience), you may be able to deed the property directly from the estate to those subsidiary entities -- skipping an intermediate conveyance to the charity itself -- without losing the bequest exclusion from transfer tax, as long as the subsidiaries are genuinely mere alter egos serving the charity's bequeathed purpose.

Charitable foundations and their administrators setting up title-holding subsidiaries

Structuring separate title-holding corporations per property (a standard technique to isolate liability and simplify management) doesn't itself trigger transfer tax exposure on the initial funding conveyance, as long as that conveyance is still, in substance, effectuating the original bequest -- not a separate, independently-motivated transfer.

Trusts and estates attorneys structuring efficient estate distributions

This ruling illustrates a useful drafting and administration technique: rather than conveying to a beneficiary and then having the beneficiary immediately re-convey to its own subsidiary, a direct conveyance to the ultimate holding entity can preserve exempt tax treatment while cutting a redundant transaction step, provided the "alter ego" relationship is clearly documented.

Common questions

Q: Is a bequest under a will automatically exempt from New York's transfer tax?
A: Yes -- conveyances made "pursuant to devise, bequest or inheritance" are excluded from the very definition of a taxable "conveyance" under the transfer tax (and were similarly excluded from "transfer of real property" under the former gains tax), so they're not taxable transactions to begin with.

Q: Does deeding the property directly to a beneficiary's subsidiary or holding company (instead of the beneficiary itself) break the bequest exemption?
A: Not necessarily, according to this ruling -- if the holding entity is genuinely a mere alter ego of the named beneficiary, formed solely to facilitate the beneficiary's bequeathed purpose, the direct conveyance is still treated as effectuating the original bequest.

Q: Is the Real Property Transfer Gains Tax discussed in this ruling still a live concern today?
A: No -- it was repealed for transfers occurring on or after June 15, 1996 and no longer applies to new transactions. Only the parallel Real Estate Transfer Tax bequest exclusion remains relevant.

Q: Can I rely on this ruling for a similar direct-to-subsidiary estate distribution?
A: No. This is an advisory opinion binding the Department only as to the Estate of Beatrice Seaver and its specific facts. Whether your own holding entities qualify as genuine "alter egos" of the named beneficiary needs its own factual analysis.

Citations and references

Statutes:

• Section 1401(e) of the Tax Law (definition of "conveyance" -- expressly excludes a conveyance pursuant to devise, bequest, or inheritance)
• Section 1402 of the Tax Law (RETT on conveyances over $500 consideration)
• Section 1440.7 of the Tax Law (gains tax definition of "transfer of real property" -- expressly excludes a transfer pursuant to devise, bequest, or inheritance)
• Sections 1441, 1443.1 of the Tax Law; 20 NYCRR 590.1 (gains tax on transfers of $1 million+; repealed for transfers on/after June 15, 1996)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a94_7r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (7) R
Real Property
Transfer Gains Tax
Real Estate Transfer Tax
May 26, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M940422D

On April 22, 1994, a Petition for Advisory Opinion was received from Estate of Beatrice
Seaver, c/o Tenzer, Greenblatt, Fallon & Kaplan, 405 Lexington Avenue, New York, New York
10174.
The issue raised by Petitioner, Estate of Beatrice Seaver, is whether the conveyance of five
separate tenancy-in-common interests by the executors of Petitioner directly to the Beatrice and
Samuel A. Seaver Foundation's title holding companies will be subject to the imposition of the Real
Property Transfer Gains Tax (hereinafter the "gains tax") and the Real Estate Transfer Tax .....
(hereinafter the "transfer tax").
The Beatrice and Samuel A. Seaver Foundation (the "Foundation") was established pursuant
to a trust agreement, dated December 13, 1984, between Beatrice Seaver, as Settlor, and Beatrice
Seaver, Hirschell B. Levine and Lawrence Newman, as Trustees. The Foundation was established
for charitable, religious, scientific, literary and educational purposes, and the Trustees directed to
hold and use the trust property and proceeds (as well as the trust's net income) exclusively for such
purposes. The Foundation was afforded exemption for Federal income tax purposes under Section
501(c)(3) of the Internal Revenue Code.
On September 23, 1992, Beatrice Seaver died. At the time of her death, Ms. Seaver owned
tenancy-in-common interests in the following New York real properties:
11-13 East 26th Street, New York, New York
42-52 West 39th Street, New York, New York
110 West 40th Street, New York, New York
10 West 33rd Street, New York, New York
370 Seventh Avenue, New York, New York
Under Article Thirteenth of Ms. Seaver's Last Will and Testament, the residuary assets are
bequeathed to the Foundation.
On July 14, 1993, the Foundation formed five New York corporations, each for the exclusive
purpose of holding one of the five tenancy-in-common interests, collecting the income therefrom,
and turning over the entire amount thereof, less expenses, to the Foundation. All five corporations
have received exemption from Federal income tax under Section 501(c)(2) of the Internal Revenue
Code. The names of the five corporations are:

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TSB-A-94 (7) R
Real Property
Transfer Gains Tax
Real Estate Transfer Tax
May 26, 1994
11-13 E. 26th St. Holding Corp.
42-52 W. 39th St. Holding Corp.
110 W. 40 St. J/V Holding Corp.
10 W. 33 St. Holding Corp.
370 J/V Holding Corp.
To avoid having to make two separate transfers, first from the Seaver Estate to the
Foundation, and then from the Foundation to each of the five separate title holding companies, the
executors propose to transfer the tenancy-in-common interests directly to the Foundation's title
holding companies.
In accordance with Section 1402 of the Tax Law, the transfer tax is imposed on each
conveyance of real property or interest therein at the time that the instrument effecting the
conveyance is delivered by a grantor to a grantee when the consideration for the conveyance exceeds
five hundred dollars.
Section 1401(e) of the Tax Law provides, in part, as follows:
(e) "Conveyance" means the transfer or transfers of any interest in real
property by any method, including but not limited to sale ... Notwithstanding the
foregoing, conveyance of real property shall not include a conveyance pursuant to
devise, bequest or inheritance ... (emphasis added)
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 1440.7 of the Tax Law provides, in part, as follows:

7. "Transfer of real property" means the transfer or transfers of any interest
   in real property by any method, including but not limited to sale ... Notwithstanding
   the foregoing, transfer of real property shall not include a transfer pursuant to devise,
   bequest or inheritance... (emphasis added)
   In the instant case the Foundation was established for charitable, religious, scientific, literary
   and educational purposes and to hold and use bequeathed property and proceeds (as well as the trust's
   net income) exclusively for such purposes. The Foundation, in turn, formed five separate
   corporations for the purpose of holding one of each of the five tenancy-in-common interests,
   collecting the income therefrom and turning over the entire amount thereof to the Foundation.
   Thus, the five separate corporations are merely alter egos of the Foundation to facilitate the

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TSB-A-94 (7) R
Real Property
Transfer Gains Tax
Real Estate Transfer Tax
May 26, 1994
Foundation in carrying out Beatrice Seaver's Last Will and Testament.
Accordingly, since the five tenancy-in-common interests are bequeathed, pursuant to Article
Thirteenth of the Last Will and Testament, to the Foundation and the five separate corporations are
merely holding such interests as alter egos for the facilitation of the Foundation's purposes, the grant
of the tenancy-in-common interests directly to the five separate corporations is deemed to be a
conveyance pursuant to devise, bequest or inheritance and therefore does not constitute a conveyance
subject to transfer tax pursuant to Section 1401(e) of the Tax Law. Similarly, pursuant to Section
1440.7 of the Tax Law such bequests are not transfers of real property and are, therefore, not subject
to the gains tax.

DATED: May 26, 1994

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

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