An insurance company sold a shopping mall it held in a separate investment account for 190 pension plan clients -- some private (covered by ERISA) and some government pension plans (not covered by ERISA). Is New York's Real Property Transfer Gains Tax on the sale preempted by federal ERISA law for any of these clients' shares of the gain?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1995 opinion is preserved here for historical and research value, not as current law.

Prudential Insurance Company of America owned the Smith Haven Mall in Suffolk County through PRISA (the Prudential Property Investment Separate Account), a separate account that invests primarily in real estate on behalf of 190 contract holders. Of those, 171 were private employer-sponsored pension plans governed by the federal Employee Retirement Income Security Act (ERISA), and 19 were government (state and local) pension plans, which ERISA does not cover. When Prudential sold the mall for well over $1 million, it asked whether ERISA preempted New York's gains tax on the portion of the gain belonging to its plan-holder clients.

Why ERISA preemption mattered. ERISA broadly preempts state laws that "relate to" an employee benefit plan (29 U.S.C. § 1144(a)). The New York Court of Appeals had already held, in Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, that the gains tax itself was preempted as to genuine ERISA plan assets -- because the tax meaningfully affects how pension fiduciaries manage and decide whether to sell real estate investments, not just in some remote or incidental way.

Was PRISA's real estate an ERISA "plan asset"? Federal Department of Labor regulations provide that when a pension plan invests in an insurance company's separate account, the underlying assets of that account are generally treated as plan assets -- unless the account is maintained solely to fund a fixed, guaranteed contractual benefit unaffected by the account's investment performance. PRISA didn't guarantee any fixed return or benefit amount; each contract holder's investment value rose and fell with PRISA's actual investment performance. That meant the Smith Haven Mall was a genuine ERISA plan asset as to the 171 private pension plans, so the Department confirmed the gain attributable to those plans' interests was preempted and not subject to the gains tax.

Why the government pension plans came out differently. ERISA simply doesn't apply to government pension plans, so there was no preemption argument available for their 19/190 share. Prudential argued instead that a government pension plan counts as a "state agency," which is separately exempt from the gains tax -- and the Department agreed that a government pension plan can be a state agency. But that agency exemption only covers property the agency itself holds title to or beneficially owns. Since Prudential -- not the government plans -- held legal title, had all dominion and control over the mall, and the government plans had no direct use of the property, the Department concluded the government plans were not beneficial owners of the mall. Their share of the gain was therefore taxable.

What this means for you

Insurance companies and other managers of separate accounts holding real estate for pension plans

Under this now-repealed tax, ERISA preemption could shelter the portion of a sale's gain attributable to genuinely ERISA-covered plan investors in a pooled separate account -- but only if the account's structure actually passed investment risk through to those investors (no guaranteed fixed return). Mixed accounts serving both ERISA and non-ERISA (e.g., government) clients required apportioning the gain and analyzing each client type separately.

Public pension funds and their counsel investing through commingled vehicles

Simply being a government entity (or a state-agency-adjacent investor) wasn't enough to escape a state transfer tax on your share of a sale -- the Department required actual legal title or beneficial ownership (use, control, or a legally enforceable right to the property itself), which a passive interest in someone else's separate account didn't provide.

Real estate and ERISA attorneys structuring insurance-company separate accounts

This opinion is a useful worked example of layering the ERISA plan-assets look-through regulation on top of a state tax preemption analysis, in a mixed-investor vehicle, with a state-agency exemption argument analyzed and rejected as a backstop for the non-ERISA investors.

Common questions

Q: Does ERISA preemption still matter for New York's Real Property Transfer Gains Tax today?
A: Not for this specific tax -- it was repealed for transfers on or after June 15, 1996. The underlying ERISA preemption principles could still be relevant to other state taxes that similarly "relate to" employee benefit plans, but this opinion addresses only the repealed gains tax.

Q: Why weren't the government pension plans covered by ERISA in the first place?
A: ERISA generally excludes governmental plans (plans established or maintained by federal, state, or local governments) from its coverage, so there was no preemption argument available for that portion of PRISA's investors.

Q: Is a government pension plan always exempt from New York state taxes as a "state agency"?
A: Not automatically for every tax on every asset it's connected to. Even accepting that a government pension plan is a state agency, this ruling shows the exemption only reaches property the agency itself owns title to or beneficially owns -- not property merely held for its economic benefit by a separate third-party manager like an insurance company.

Q: What made PRISA's assets count as ERISA "plan assets" instead of just Prudential's own assets?
A: The federal look-through regulation treats a pension plan's investment in an insurance company's separate account as including the account's underlying assets, unless the account exists solely to fund fixed, guaranteed benefits unaffected by investment performance -- and PRISA offered no such guarantee, so the look-through applied.

Q: Can another insurance company or plan sponsor rely on this specific ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented, and ERISA plan-asset and beneficial-ownership questions like these are highly fact-specific.

Citations and references

Statutes and regulations:

• former Tax Law § 1441 (imposition of the gains tax at 10% of gain, for transfers with consideration of $1 million or more)
• former Tax Law § 1443.1 (the $1 million exemption)
• former Tax Law § 1440.4 (definition of "interest" in real property, including beneficial interests)
• former Tax Law § 1443.3(a) (exemption for transfers by the State of New York, its agencies, instrumentalities, political subdivisions, or public corporations)
• 29 U.S.C. § 1144(a) (ERISA preempts state laws that relate to an employee benefit plan)
• 29 C.F.R. § 2510.3-101(h)(1)(iii) (Department of Labor "plan assets" look-through rule for a plan's investment in an insurance company separate account, with an exception for accounts funding only fixed, guaranteed contractual benefits)

Case law and prior opinions cited:

• Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, 80 N.Y.2d 44 (1992) (the gains tax was preempted by ERISA as to a genuine ERISA plan asset, given its structural, administrative, and economic impact on plan investment decisions)
• 21 Properties, Inc. v. Romney, 360 F. Supp. 1322 (1973) (a state teachers' retirement system, and by extension a government pension plan, is a state agency)
• Avis, Inc. and Avis, Inc. Employee Stock Ownership Plan, TSB-A-93(9)-R (June 15, 1993) (an ERISA-covered ESOP's sale of a controlling stock interest was not subject to the gains tax under ERISA preemption)
• John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 510 U.S. 86 (1993) (ERISA contains no comprehensive statutory definition of "plan assets")
• Yelencsis v. Commissioner, 74 T.C. 1513 (1980); Anderson v. Commissioner, 164 F.2d 870 (7th Cir. 1947) (beneficial ownership marked by command over property or enjoyment of its economic benefits)
• Montana Catholic Missions v. Missoula County, 200 U.S. 118 (1906) (beneficial ownership as a legally enforceable right to a property's use or benefit, distinct from legal title)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a95_9r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-95 (9) R
Real Property Transfer
Gains Tax
August 30,1995

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M950403A

On April 3, 1995, a Petition for Advisory Opinion was received from Prudential Insurance
Company of America, 751 Broad Street, Newark, New Jersey 07102-3777.
The issue raised by Petitioner, Prudential Insurance Company of America, is whether the
Employee Retirement Income Security Act (hereinafter "ERISA") will preempt the assessment of
the Real Property Transfer Gains Tax (the "gains tax") against the gain realized by the Prudential
Property Investment Separate Account (hereinafter "PRISA") from the sale of the Smith Haven Mall.
The Smith Haven Mall is located in Suffolk County and is owned by Petitioner on behalf of
its PRISA. PRISA is a separate account of Petitioner that invests primarily in real estate. As such,
its assets belong to Petitioner as a matter of State law. However, such assets must be segregated from
the other assets owned by Petitioner and must be held for the benefit of the PRISA contract holders.
PRISA has 190 contract holders. Of these contract holders, 171 are private employer
sponsored pension plans and 19 are government (local and state) sponsored pension plans (the
"government pension plan"). The private employer plans are subject to the provisions of the ERISA.
Petitioner states that the PRISA is not an investment company registered under the
Investment Company Act of 1940 and is not required to be registered because the assets it holds are
not securities. Petitioner's contract does not provide a guarantee of a fixed rate of return with respect
to the contract holders investment in the PRISA. Further, Petitioner has not, under the terms of the
contract, provided any guarantee of an aggregate amount of benefits to be payable to contract holders
and/or beneficiaries with respect to a contract holder's investment in the PRISA. The contract's
investment risk remains with the contract holder. The value of a contract holder's share or units in
the PRISA may vary depending upon the success of Petitioner's investments. Petitioner has not
guaranteed that the value of the assets in the PRISA would not fall below a stated level.
Petitioner anticipates that a portion of the proceeds realized from the sale of Smith Haven
Mall will be retained within PRISA for the benefit of the contract holders. The balance of the
proceeds will be distributed to the PRISA contract holders.
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 any interest in
real property, which includes the acquisition or transfer of a controlling interest in any entity with

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Gains Tax
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an interest in real property, where the real property is located in New York State and where the
consideration for the transfer is one million dollars or more.
Section 1440.4 of the Tax Law states as follows:

4. "Interest" when used in connection with real property includes, but is not
   limited to, title in fee, a leasehold interest, a beneficial interest, an encumbrance, a
   transfer of development rights or any other interest with the right to use or occupancy
   of real property or the right to receive rents, profits or other income derived from real
   property. Interest shall also include an option or contract to purchase real property.
   (emphasis added)
   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:
   *
   3.

*

*

If the transferor is one of the following:

(a) The state of New York, or any of its agencies, instrumentalities, political
subdivisions, or public corporations, including a public corporation created pursuant
to an agreement or compact with another state or Canada.
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 21 Properties, Inc. v. Romney, 360 F Supp 1322, 1326 (1973) the Courts held that the New
York State Teachers' Retirement System is a State agency. (emphasis added)
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 was preempted by ERISA because the tax related to an
employee benefit plan "in more than a tenuous, remote or peripheral way." Id., at 46. Morgan
Guaranty involved a transfer of real property located in New York by an employee benefit plan
covered by the provisions of ERISA. The trustee under the American Motors Corporation Union
Retirement Income Plan, paid the gains tax due and thereafter filed a claim for refund of gains tax
paid on the grounds that the imposition of the tax was preempted by ERISA. In construing the
statutory provisions of 29 USC § 1144(a), the Court of Appeals said:
Applying the broad common sense meaning of the statutory phrase 'relate[s] to,' we
conclude that this gains tax has more than a tenuous, remote or peripheral connection
to employee benefit plans and is therefore preempted by ERISA. We reach that

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conclusion from analysis of the structural, administrative and economic impact of the
tax on the Plan, viewed against the backdrop of the terms and objectives of ERISA
[citations omitted].
The gains tax clearly impacts on the structure and administration of the Plan. As the
dissenting Tribunal member noted, the gains tax would impose certain record
keeping and reporting requirements on the Plan, mandating administrative procedures
pertaining to asset disposition not required in other jurisdictions [citations omitted].
Far more significant than this administrative burden, however, is the influence the
gains tax will necessarily have on the Plan's investment strategy. ERISA imposes
federal standards of conduct on the managers of benefit plans, and fiduciaries are
required to tailor investment strategy to those guidelines [citations omitted].
Although real estate transactions such as the one in issue are sanctioned by ERISA,
New York fiduciaries will have to consider the state law that, by directly taxing gains
on the sale of such assets, makes them less attractive investments. By the same token,
an administrator taking the cost of the New York gains tax into account may be
required to retain an asset that would otherwise have been liquidated. Id., at 51.
Thus, based upon the holding in Morgan Guaranty Trust Co. v. Tax Tribunal, supra, if the
Smith Haven Mall is a Plan asset, then the gains tax imposed on the transfer of the real property is
preempted by the provisions of ERISA.
The ERISA statute "contains no comprehensive definition of 'plan assets.' "John Hancock
Mutual Life Insurance Company v. Harris Trust and Savings Bank, 510 US, 126 L Ed 2d 524, 533
(1993). For purposes of ERISA's fiduciary responsibility provisions, certain assets are not
considered to be assets of a pension plan." However, the Department of Labor Regulations does
address the issue of whether the underlying assets are considered to be Plan assets where a Plan
invests in a separate account of an insurance company.
"In attempting to discern and implement the will of Congress in this matter, the Department
of Labor has embraced the general proposition that, where a pension plan invests in an equity interest
of another entity, the underlying assets of that entity are properly viewed as plan assets and must be
managed in accordance with the fiduciary responsibility provisions of ERISA, unless there are
circumstances that make these provisions unnecessary or inappropriate. In the case of any plan
investment in a group trust or common or collective trust of a bank which pools the investments of
more than one plan, or any investment in a separate account of an insurance company, the plan assets
are deemed to include the underlying assets of the entity, except where the entity is a registered
investment company, regardless of any other rules." D.M. McGill and D.S. Grubbs, Fundamentals
of Private Pensions, 440 (6th ed. 1989) (emphasis added)

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Section 2510.3-101(h)(1)(iii) of the Department of Labor Regulations provides, in part, as
follows:
(h) Specific rules relating to plan investments. Notwithstanding any other provisions
of this section ­
(1) Except where the entity is an investment company registered under the
Investment Company Act of 1940, when a plan acquires or holds an interest in any
of the following entities its assets include its investment and an undivided interest in
each of the underlying assets of the entity:
*

*

*

(iii) A separate account of an insurance company, other than a separate account that
is maintained solely in connection with fixed contractual obligations of the insurance
company under which the amounts payable, or credited, to the plan and to any
participant or beneficiary of the plan (including an annuitant) are not affected in any
manner by the investment performance of the separate account.
In Avis, Inc. and Avis, Inc. Employee Stock Ownership Plan, Adv 0p Comm T&F, June 15,
1993, TSB-A-93(9)-R the Commissioner held that the transfer of a controlling interest by Avis, Inc.
ESOP, of its stock in Avis, Inc. for a consideration of $100 million fell within the ambit of the gains
tax, but that pursuant to 29 U.S.C. Section 1144(a) of ERISA and Morgan Guaranty Trust Co. v. Tax
Appeals Tribunal as long as Avis, Inc. ESOP is subject to the provisions of ERISA, its sales of stock
in Avis, Inc. would not be subject to gains tax.
In the instant case, Petitioner on behalf of its PRISA will sell its interest in Smith Haven Mall
for a consideration in excess of $1 million. PRISA has 190 contract holders. Of these contract
holders 171 are private employer sponsored pension plans subject to the provisions of ERISA and
19 are government pension plans. Petitioner states that the PRISA is not an investment company
registered under the investment Company Act of 1940 and is not required to be registered because
the assets it holds are not securities. The real property, the Smith Haven Mall, is held in a separate
account (PRISA) maintained by Petitioner for the benefit of the contract holders. Assuming the
exception provided in Section 2510.3-101(h)(1)(iii) of the Department of Labor Regulations cited
above is not applicable, the underlying real property assets in the PRISA would be considered Plan
assets for purposes of ERISA's fiduciary responsibilities.
The exception specified in Section 2510.3-101(h)(1)(iii) of the Department of Labor
Regulations is not applicable since Petitioner's PRISA is not maintained solely in connection with
fixed contractual obligations. Petitioner's contracts with the 190 contract holders do not provide a
guarantee of a fixed rate of return with respect to the contract holders investment in the PRISA.
Further, Petitioner has not, under the terms of the contract, provided any guarantee of an aggregate
amount of benefits to be payable to contract holders and/or beneficiaries with respect to a contract
holder's investment in the PRISA. The contract's investment risk remains with the contract holder.

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The value of a contract holder's share or units in the PRISA may vary depending upon the success
of Petitioner's investments. Petitioner has not guaranteed that the value of the assets in the PRISA
would not fall below a stated level. Therefore, the contract between Petitioner and the contract
holders represents a separate account of an insurance company whereby the underlying assets of the
PRISA (the real property assets) are considered to be Plan assets, for purposes of ERISA's fiduciary
responsibilities. Accordingly, since the 171 private employer sponsored pension plans are subject
to the provisions of ERISA, and the real property held by Petitioner is a Plan asset of the PRISA,
pursuant to Section 1144(a) of ERISA, Morgan Guaranty Trust Co. v. Tax Appeals Tribunal, supra,
and Avis Inc. and Avis, Inc. Employee Stock Ownership Plan, supra, the gains tax is preempted from
the apportioned amount of the gain attributable to such contract holders.
It is noted, however, that the government pension plans do not fall under the provisions of
the ERISA statute. Therefore, we must examine if pursuant to Article 31-B of the Tax Law the
apportioned amount of the gain attributable to such contract holders would be subject to tax.
Pursuant to Section 1443.3(a) of the Tax Law the transfer of real property by the State of
New York or any of its agencies is not subject to gains tax. In accordance with 21 Properties, Inc.
v. Romney, supra, a State or local governmental pension plan would be deemed to be an agency of
the State of New York. However, the exemption afforded to an agency of the State of New York only
applies to the disposition of real property where the agency is in title to such property or the
disposition of real property beneficially owned by them.
The question of whether the government pension plans are in fact the beneficial owner of the
real property being transferred is an appropriate inquiry because it is well established that for
purposes of taxation the substance, and not the form, of the transaction controls. The term "beneficial
owner" is not defined within Article 31-B of the Tax Law or within the gains tax regulations. In the
context of federal income tax questions, the term beneficial ownership has been described as being
"marked by command over property or enjoyment of its economic benefits." Yelencsis v.
Commissioner, 74 T.C. 1513 (1980), citing Anderson v. Commissioner, 164 F2d 870 (7th Cir.
1947), aff'g. 5 T.C. 443 (1945).
In Anderson v. Commissioner, supra, the Court held:
The Supreme Court has repeatedly said that taxation is an intensely practical process
concerned less with legal formalities than with economic realities and that tax
consequences flow from the substance rather than the form of a transaction; that
command over property or enjoyment of its economic benefits marks the real owner
for federal income tax purposes. (emphasis added)
Factors showing "beneficial ownership" of property may include "a right to [the property's]
enjoyment as exists where the legal title is in one person and the right to such beneficial use or
interest is in another, and where such right is recognized by law, and can be enforced by the courts,
at the suit of such owner or someone in his behalf." Montana Catholic Missions v. Missoula County,
200 US 118, 127-128 (1906). Other factors, such as dominion and control over the property or the

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right to income from the property may also indicate beneficial ownership. Macon, Dublin &
Savannah Railroad Co. v. Commissioner, 40 B.T.A. 1266, (1939), acq., 1940-1 C.B. 3.
While it is true that all income, appreciation, gains or losses with respect to the assets of the
PRISA are for the sole benefit or burden of the participating contract holders, Petitioner and not the
contract holders holds legal title to the real property. Further, the government pension plans do not
have the use of the real property. In addition, they do not have dominion or control over the property.
Accordingly, the government pension plans are not the beneficial owners of the real property.
Therefore, since the governmental plans do not hold legal title to the real property and are not the
beneficial owners of the real property, the apportioned gain attributable to such plans from the
transfer of the real property would be subject to gains tax.

DATED: August 30, 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.