Our partnership owns seven Manhattan properties. We're proposing to exchange them for land under a building owned by a related corporate subsidiary, 1133 Building Corp. Both entities are ultimately owned (through different family trusts) by the same thirteen family members ('the Second Generation Children'), but the ownership chains aren't perfectly identical -- our partnership is 99.9% owned by them equally through one set of trusts plus a 0.1% sliver owned by a corporation that only four of the thirteen family members own, while 1133 Corp. is 100% owned by them equally through a different set of trusts. Since the same family effectively owns both sides before and after this exchange, is it exempt from the Real Estate Transfer Tax and Real Property Transfer Gains Tax as a 'mere change of form,' or does the slight difference in cross-ownership percentages make part of it taxable?

Plain-English summary

Eastern Pork Products Company ("Petitioner"), a New York general partnership holding several Manhattan properties, proposed exchanging seven of those properties (on West 43rd Street, West 44th Street, and Ninth Avenue) for the land under 114 West 47th Street, owned by 1133 Building Corporation ("1133 Corp."), a wholly-owned subsidiary of The Durst Buildings Corporation ("DBC"). This ruling addresses Eastern Pork's side of the same transaction covered from 1133 Corp.'s perspective in a companion advisory opinion, TSB-A-95(10)R.

Tracing beneficial ownership through two different family trust structures. Petitioner was 99.9% owned in equal shares by thirteen family trusts dated December 31, 1962 (the "December Trusts"), for the benefit of thirteen individuals (the "Second Generation Children") -- giving each of them approximately 7.6846% beneficial interest in Petitioner's properties before the exchange. The remaining 0.1% of Petitioner was owned by "EPP Corp.," a corporation whose stock was held equally by only four of the thirteen Second Generation Children; tracing only voting stock (per the applicable gains-tax tracing rule), those four family members held an additional 0.25% collective beneficial interest in Petitioner's properties through that corporate stake -- pushing their total beneficial interest to about 7.7096%. 1133 Corp., meanwhile, was 100% owned in equal shares by a different set of thirteen family trusts dated May 1, 1962 (the "May Trusts") for the same thirteen individuals, giving each of them approximately 7.6923% beneficial interest in the land.

The math. After the exchange, all thirteen Second Generation Children would hold their beneficial interest in Petitioner's former properties through their ownership of 1133 Corp. instead. The four family members with an EPP Corp. stake would see their beneficial interest shift from about 7.7096% (via their December Trust plus EPP Corp. interests) down to about 7.6923% (via 1133 Corp.'s May Trust ownership) -- a net decrease. The nine family members without an EPP Corp. stake would see theirs rise from about 7.6846% up to 7.6923% -- a net increase. Netting these shifts across all thirteen family members, the Department calculated the exchange resulted in exactly a 0.069% real change in beneficial ownership of the properties formerly owned by Petitioner -- the mirror image of the 0.069% figure calculated in the companion ruling for the land side of the exchange.

The result. Because the mere-change-of-form exemption applies "to the extent" beneficial ownership doesn't change, the Department held the exchange was exempt as to 99.931% of Petitioner's properties -- the portion representing family members whose beneficial share stayed effectively the same, just routed through a different entity -- while the remaining 0.069%, representing the real shift caused by EPP Corp.'s disproportionate stake, was subject to both the transfer tax and the gains tax.

What this means for you

Family-owned or closely-held businesses restructuring real estate among related entities

As this ruling's companion opinion (TSB-A-95(10)R) also shows, the mere-change-of-form exemption applies proportionally, not all-or-nothing. Every party to a multi-entity exchange within the same family group should expect its own advisory opinion (or its own analysis) tracing its specific ownership chain, since even a common family group can produce a small but real taxable sliver if the entities' ownership structures don't line up perfectly.

Partnerships or entities with a minority corporate co-owner distinct from the main family trust structure

Here, EPP Corp.'s 0.1% partnership stake -- held by only four of thirteen family members rather than all of them -- was the specific structural wrinkle that created a calculable, non-zero shift in beneficial ownership on both sides of the exchange. Identifying and precisely quantifying analogous wrinkles early (minority co-investors, differently-constituted trusts, non-equal trust shares) is essential before assuming an intra-family exchange is fully tax-exempt.

Accountants and tax professionals modeling entity-to-entity real estate exchanges

This ruling and its companion (TSB-A-95(10)R) together show the Department's complete two-sided calculation method for a mere-change exemption analysis -- useful as a worked template for tracing beneficial ownership through parallel but non-identical family trust and entity structures.

Common questions

Q: If the same family owns both sides of a property exchange, is the whole transaction automatically exempt from transfer tax?
A: Not necessarily. New York applies the mere-change-of-form exemption proportionally based on actual beneficial ownership percentages on both sides of the exchange -- if the two entities' ownership structures aren't perfectly identical, only the portion where beneficial ownership truly didn't change is exempt.

Q: Why did both parties to this exchange need separate advisory opinions?
A: Each grantor's conveyance is analyzed independently for transfer tax and gains tax purposes, so both 1133 Building Corporation and Eastern Pork Products Company sought (and received) their own rulings addressing their respective sides of the same exchange, issued the same day.

Q: Does a small minority co-owner (like a corporation held by only some family members) automatically disqualify the whole transaction from the mere-change exemption?
A: No -- it just means the exemption applies proportionally rather than completely. The taxable portion is limited to the actual calculated shift in beneficial ownership.

Q: Where can I see the other side of this exchange?
A: The companion transaction, addressing 1133 Building Corporation's transfer of the land in exchange for Eastern Pork's properties, was issued the same day as TSB-A-95(10)R.

Citations and references

Statutes and regulations:

• Section 1401(e) of the Tax Law (definition of "conveyance" -- includes a conveyance by exchange)
• Section 1402 of the Tax Law (RETT on conveyances over $500 consideration)
• Section 1405(a)(6) of the Tax Law (mere-change-of-form exemption, applies "to the extent" of unchanged beneficial ownership)
• Section 1440.7 of the Tax Law (gains tax definition of "transfer of real property" -- includes a transfer by exchange)
• Section 1441 of the Tax Law (gains tax on transfers of $1 million+; repealed by Chapter 309 of the Laws of 1996 for transfers on/after June 15, 1996)
• Section 1443(5) of the Tax Law (mere-change-of-form exemption from the gains tax)
• 20 NYCRR 590.45(a) (gains tax "controlling interest" tracing test -- looks only to voting stock)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a95_11r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (11) - R
Real Property Transfer Tax
Real Property Transfer
Gains Tax
October 3,1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M950606B

On June 6, 1995, a Petition for Advisory Opinion was received from Eastern Pork Products
Company, c/o The Durst Organization, Inc., 1133 Avenue of the Americas, New York, NY 10036.
The issue raised by Petitioner, Eastern Pork Products Company, is whether the transfer by
Petitioner of certain real properties in exchange for real property held by 1133 Building Corp.
(hereinafter "1133 Corp.") will be exempt from the Real Estate Transfer Tax (the "transfer tax") and
the Real Property Transfer Gains Tax (the "gains tax") as a mere change of identity or form of
ownership or organization to the extent of the 99.93% common ownership interest.
The land under 114 West 47th Street, New York City (the "Land") is currently owned by
1133 Corp., a wholly-owned subsidiary of The Durst Buildings Corporation ("DBC"). DBC has
outstanding three classes of common stock, each class of which is owned, in equal proportions, by
thirteen family trusts dated May 1, 1962, (the "May Trusts") for the benefit of thirteen individuals
(the "Second Generation Children"). DBC also has outstanding three classes of non-voting preferred
stock, more than 50% in value of which is owned by the Second Generation Children, with the
remainder owned by related individuals and a private foundation.
Petitioner is a New York general partnership which owns land and buildings in New York
City. 99.9% of the partnership interests in Petitioner are owned, in equal proportions, by thirteen
family trusts dated December 31, 1962 (the "December Trusts") for the benefit of the Second
Generation Children. EPP Corp., a corporation which is owned by four of the Second Generation
Children, owns the remaining 0.1% interest in Petitioner.
Pursuant to a proposed transaction (the "Exchange"), 1133 Corp. will transfer its interest in
the Land to Petitioner in exchange for the following properties (the EPP Properties"):
352-364 West 43rd Street
New York, New York
407-9 43rd Street
New York, New York
142-44 West 44th Street
New York, New York

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Gains Tax
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447-9 West 43rd Street
New York, New York
425 West 43rd Street
New York, New York
415 West 43rd Street
New York, New York
584-6 9th Avenue
New York, New York
In accordance with Section 1402 of the Tax Law, a 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 dollar.
Section 1401(e) of the Tax Law provides, in pertinent part, that the term "conveyance" means
the transfer or transfers of any interest in real property by any method. This would include a
conveyance of real property by exchange.
Section 1405 of the Tax Law provides, in part, as follows:
Sec. 1405. Exemptions.-- (a) The following shall be exempt from payment
of the real estate transfer tax:
*

*

*

6. Conveyances to effectuate a mere change of identity or form of ownership
   or organization where there is no change in beneficial ownership, other than
   conveyances to a cooperative housing corporation of the real property comprising the
   cooperative dwelling or dwellings;
   Moreover, the gains tax is a 10% tax on the transfer of an interest in real property where the
   property is located in New York State and where the consideration received for the transfer is $1
   million dollars or more.
   Section 1440.7 of the Tax Law defines "transfer of real property", in part, to mean the
   transfer or transfers of any interest in real property by any method. This would include a transfer of
   real property by exchange.
   Section 1443 of the Tax Law provides, in part, as follows:
   Sec. 1443. Exemptions.--A total or partial exemption shall be allowed in the
   following cases:

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Real Property Transfer
Gains Tax
October 3,1995
*

*

*

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.
   To determine whether the Exchange results in a transfer subject to the transfer tax and/or the
   gains tax, it is necessary to ascertain who the beneficial owners of the Land and the EPP Properties
   are both before and after the Exchange. 1133 Corp. is wholly owned by DBC. All of the common
   stock of DBC is owned, in equal proportions, by the May Trusts, the beneficial owners of which are
   the Second Generation Children. Therefore, each of the Second Generation Children is deemed to
   have approximately a 7.6923% beneficial interest in the real property owned by 1133 Corp. before
   the Exchange. Similarly, 99.9% of Petitioner is owned, in equal proportions, by the December
   Trusts, the beneficial owners of which are also the Second Generation Children. Thus, through this
   99.9% ownership interest, each of the Second Generation Children is deemed to have approximately
   a 7.6846% beneficial interest in the real property owned by Petitioner before the Exchange (99.9%
   multiplied by 1/13). In addition, 0.1% of Petitioner is owned by EPP Corp. The stock of EPP Corp.
   is owned, in equal proportions, by four of the Second Generation Children. In entity transfers,
   pursuant to Section 590.45(a) of the Gains Tax Regulations, the statute only looks to the voting stock
   of the corporation in determining whether a transfer of an interest of real property has occurred. The
   definition of the term "controlling interest" provides, in part, that a controlling interest is
   representative of owning fifty percent or more of the total combined voting power of all classes of
   stock of such corporation. Accordingly, through their ownership interest in EPP Corp., four of the
   thirteen Second Generation Children are deemed to have an additional .025% beneficial interest in
   the real property owned by Petitioner prior to the Exchange.
   Therefore, as a result of the Exchange, four of the thirteen Second Generation Children will
   retain approximately a 7.6923% beneficial ownership interest in the real property formally owned
   by Petitioner through their ownership interest in 1133 Corp. Moreover, nine of the thirteen Second
   Generation Children will also be deemed to have a 7.6923% beneficial ownership interest in the real
   property formally owned by Petitioner through their ownership interest in 1133 Corp. Thus, four of
   the thirteen Second Generation Children, in the aggregate, will be deemed to have transferred a
   .069% beneficial ownership in the real property formally owned by Petitioner through their
   ownership interest in 1133 Corp. (7.7096% minus 7.6923% multiplied by 4). Also, nine of the
   thirteen Second Generation Children will be deemed to have acquired, in the aggregate,
   approximately an additional .069% interest in the real property formally owned by Petitioner through
   their ownership interest in 1133 Corp. (7.6923Z minus 7.6846% multiplied by 9).
   Accordingly, the Exchange results in .069% change in the beneficial ownership in the EPP
   Properties formally owned by Petitioner. Thus, the resultant conveyance and transfer of real property
   for purposes of the transfer tax and gains tax constitutes a conveyance and transfer which results in
   a mere change of identity or form of ownership or organization to the extent of 99.931% and the
   respective exemptions provided in Sections 1406.6 and 1443.5 of the Tax Law would apply to such

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extent. Conversely, such conveyance and transfer would be subject to the transfer tax and the gains
tax to the extent of the deemed change in beneficial interest in the EPP Properties of .069%

DATED: October 3, 1995

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

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