We're restructuring ownership of a Manhattan office building through five coordinated steps happening the same day, maybe within minutes of each other: a bank's new entities will buy out a 74% interest in two upper-tier partnerships; simultaneously, the remaining lower-tier partnership entity will buy out the other partner's 74% stake in the property-owning partnership, which then dissolves and distributes its real estate to the surviving entity; the bank's new entities will then redeem their upper-tier partnership interests for a direct 74% stake in the entity that now holds the real estate; and finally, the original upper-tier partners will form a new joint entity holding the remaining 26%. Which of these steps trigger New York's Real Estate Transfer Tax, and which are exempt restructuring steps?

Plain-English summary

The property at 40 West 53rd Street, New York, was owned by 40 West 53rd Partnership ("Partnership"), which had two partners: 40 West 53rd Associates ("Associates"), holding 26%, and a corporation ("Corporation"), holding 74%. Associates, in turn, had two of its own partners -- Block 1268 New York Limited ("Block 1268") and Hines New York 1985 Associates ("Hines New York"), both themselves partnerships. A bank arranged for new entities (the "Purchasers") to acquire 74% interests in Block 1268 and Hines New York, coordinated with a broader restructuring executed in five steps, potentially all on the same day and within minutes of each other:

1. The Purchasers acquire 74% of the interests in Block 1268 and Hines New York.
2. Simultaneously, Associates acquires Corporation's 74% partnership interest in Partnership.
3. Because Associates now holds 100% of Partnership, Partnership terminates and distributes its assets (the real estate) to Associates.
4. The Purchasers redeem their partnership interests in Block 1268 and Hines New York in exchange for a direct 74% interest in Associates -- which, after Step 3, now directly owns the underlying real property.
5. Block 1268 and Hines New York form a new partnership, 31 West 52nd Associates ("31 West"), contributing their remaining interests in Associates to it in exchange for interests in 31 West proportional to their existing Associates ownership -- so 31 West ends up owning the 26% of Associates that Block 1268 and Hines New York had collectively held, while the Purchasers continue to directly own the other 74%.

Steps 1-2: one taxable conveyance under the step-transaction doctrine. The Department applied the principle that "when taxpayers demonstrate that the economic reality of a series of integrated transactions is to accomplish a specific transfer or acquisition, the transactions may be viewed as one transaction for purposes of the transfer tax." Here, the Purchasers' acquisition of 74% of Block 1268 and Hines New York, combined with Associates' simultaneous acquisition of Corporation's 74% Partnership interest, were integrated steps whose real purpose was to deliver the Purchasers 74% ownership of Partnership -- a real-property-owning entity. The Department therefore treated Steps 1-2 as a single taxable conveyance of a controlling interest under Section 1401(e), with consideration equal to 74% of the fair market value of Partnership's real property (per Section 1401(d)(iii)). The Department also flagged the three-year aggregation rule under Regulations Section 575.6(d): if any further transfer or acquisition of an interest in the same entity (Partnership/Associates) occurs within three years of this transaction, it may be added to this one and could trigger additional transfer tax -- unless the transfers occur more than three years apart (in which case they're generally not aggregated, absent evidence they were deliberately timed to avoid the tax).

Steps 3-5: exempt as mere changes of form. By contrast, the Department held Partnership's dissolution and asset distribution to Associates (Step 3), the Purchasers' redemption of their Block 1268/Hines New York interests for a direct Associates stake (Step 4), and Block 1268/Hines New York's formation of 31 West via contribution of their Associates interests (Step 5) are all exempt under Section 1405(b)(6) as mere changes of identity or form of ownership -- none of these steps changes anyone's underlying beneficial ownership percentage in the real estate; they simply restructure HOW that same ownership is held (directly vs. through layered partnerships).

What this means for you

A multi-step restructuring designed to deliver a specific ownership outcome will be analyzed as one transaction for the step that actually changes beneficial ownership

If your deal involves several simultaneous or same-day steps whose combined economic effect is to hand a buyer a controlling interest in a real-estate-owning entity, expect the Department to collapse those integrated steps into a single taxable conveyance, measured by the buyer's actual resulting percentage interest -- structuring around this by splitting a single acquisition into technically separate transactions won't avoid the tax if the economic substance is one coordinated acquisition.

Not every step in a complex restructuring is taxable -- steps that don't change beneficial ownership can be exempt even in the same transaction sequence

This ruling shows the Department will carefully separate the ONE step that changes real ownership (here, delivering the Purchasers a new 74% stake) from the OTHER steps that are pure form-changes (partnership termination/distribution, interest redemption, and formation of a new holding entity) -- getting this analysis right can significantly reduce your transfer tax exposure on a complex deal.

Watch the three-year clock on any follow-on acquisitions of the same entity

If you've already paid transfer tax on a controlling-interest acquisition, be aware that any ADDITIONAL interest you acquire in the same entity within three years can be aggregated with the earlier acquisition and taxed again -- plan any staged or follow-on buy-ins with this three-year rule in mind, and be prepared to show timing wasn't designed to dodge the tax if transfers happen close to (but outside) that three-year window.

Common questions

Q: If I structure my real estate acquisition as several separate, simultaneous transactions instead of one direct purchase, will that avoid the controlling-interest transfer tax?
A: Not if the transactions are economically integrated steps toward one acquisition goal -- the Department applies a step-transaction analysis and taxes the combined result as a single conveyance measured by your final ownership percentage.

Q: In a multi-step reorganization, are ALL the steps taxable, or just the one where real ownership changes hands?
A: Just the step (or integrated steps) where beneficial ownership actually changes -- other steps that merely restructure how existing beneficial ownership is held (partnership dissolutions, interest redemptions, new holding-entity formations) can be independently exempt as mere changes of form.

Q: If I acquire a controlling interest in a real estate entity and pay transfer tax, can I safely acquire more of that same entity later without additional tax?
A: Only if you wait more than three years -- acquisitions of the same entity's interests within three years of each other are generally aggregated and can trigger additional transfer tax, unless they were clearly not timed to avoid the tax.

Citations and references

Statutes, guidance, and case law:

• Section 1402 of the Tax Law
• Section 1401(e) of the Tax Law
• Section 1401(b) of the Tax Law
• Section 1401(d)(iii) of the Tax Law
• Section 1405(b)(6) of the Tax Law
• Section 575.6(d) of the Real Estate Transfer Tax Regulations

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1997.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a97_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(1)R
Transfer Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.M961210A

On December 10, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from 40 West 53rd Associates, 885 Third Avenue,
Suite 2700, New York, New York 10022. Petitioner submitted additional information
pertaining to the Petition on December 20, 1996 and December 30, 1996.
The issue raised by Petitioner, 40 West 53rd Associates, is to what extent
the Real Estate Transfer Tax imposed by Article 31 of the Tax Law (the "transfer
tax") would be imposed upon a series of transactions as described herein.
Petitioner submits the following facts as the basis for this Advisory
Opinion.
The subject property, 40 West 53rd Street, New York, New York, is
currently owned by 40 West 53rd Partnership (the "Partnership"). The Partnership
consists of two partners - 40 West 53rd Associates ("Associates") and a
corporation (the "Corporation"). Associates owns 26% and the Corporation owns
74% of Partnership, respectively. Associates has two partners - Block 1268 New
York Limited ("Block 1268") and Hines New York 1985 Associates ("Hines New York")
which are also partnerships. Entities to be organized by a bank ("the Bank")
will acquire interests in Block 1268 and Hines New York. The acquisition of the
interests in Block 1268 and Hines New York by these entities (collectively "the
Purchasers") will be coupled with the sale of the partnership interests of
Corporation in the Partnership to Associates. The steps which will be followed
to effectuate the transaction are as follows.
1) The Purchasers will acquire 74% of the interests in Block 1268 and in
Hines New York.
2) Associates will acquire Corporation's 74% partnership interest in the
Partnership.
3) Upon the acquisition by Associates of Corporations's 74% partnership
interest as described above, the existence of the Partnership will terminate and
the Partnership's assets will be distributed to Associates.
4) The Purchasers will redeem their partnership interests in Block 1268 and
Hines New York for a direct 74% interest in Associates which owns the underlying
real property.
5) Block 1268 and Hines New York will form a new partnership, 31 West 52nd
Associates (31 West). Upon formation, Block 1268 and Hines New York will
contribute their interests in Associates in exchange for interests in 31 West and
each will receive the same percentage interest as their respective percentage
ownership interest in Associates. 31 West will own 26% of Associates that had
been held cumulatively by Block 1268 and Hines New York, and the Purchasers will
continue to directly own 74% of Associates.

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TSB-A-97(1)R
Transfer Tax

The above transactions may take place within the same day and perhaps
within minutes of each other.
Analysis
Section 1402 of the Tax Law imposes the transfer tax on each conveyance of
real property when the consideration exceeds $500 at the rate of $2 for each $500
of the consideration or fractional part thereof.
Section 1401(e) of the Tax Law includes in the definition of conveyance a
transfer or acquisition of a controlling interest in any entity with an interest
in real property.
Section 1401(b) of the Tax Law in defining "controlling interest" includes
"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 1401(d)(iii) of the Tax Law provides that in the case of a transfer
or acquisition of a controlling interest consideration means the fair market
value of the interest in real property owned by the entity apportioned based on
the percentage of the ownership interest in the entity transferred or acquired.
Section 1405(b)(6) of the Tax Law sets forth that conveyances are exempt
from the transfer tax to the extent that they "effectuate a mere change of
identity or form of ownership or organization where there is no change in
beneficial ownership�"
Section 575.6(d) of the Real Estate Transfer Tax Regulations provides as
follows:
Where there is a transfer or acquisition of an interest in an entity
that has an interest in real property, on or after July 1, 1989, and
subsequently there is a transfer or acquisition of an additional
interest or interests in the same entity, the transfers or
acquisitions will be added together to determine if a transfer or
acquisition of a controlling interest has occurred. Where there is
a transfer or acquisition of a controlling interest in an entity on
or after July 1, 1989, and the real estate transfer tax is paid on
that transfer or acquisition and there is a subsequent transfer or
acquisition of an additional interest in the same entity, it is
considered that a second transfer or acquisition of a controlling
interest has occurred which is subject to the real estate transfer
tax. No transfer or acquisition of an interest in an entity that
has an interest in real property will be added to another transfer
or acquisition of an interest in the same entity if they occur more
than three years apart, unless the transfers or acquisitions were so
timed as part of a plan to avoid the real estate transfer tax...

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TSB-A-97(1)R
Transfer Tax

Conclusion
Steps 1 and 2
When taxpayers demonstrate that the economic reality of a series of
integrated transactions is to accomplish a specific transfer or acquisition, the
transactions may be viewed as one transaction for purposes of the transfer tax.
The facts presented by Petitioner indicate that Purchaser's acquisition of a 74%
interest in Block 1268 and Hines New York and Associates' acquisition of
Corporation's 74% interest in Partnership are integrated steps done for the
purpose of effectuating Purchaser's acquisition of 74% of Partnership, an entity
with an interest in real property. Therefore, the acquisition is a conveyance
subject to transfer tax. The consideration for the conveyance is 74% of the fair
market value of the interest in real property owned by Partnership. Pursuant to
section 575.6(d) supra any subsequent acquisitions or transfers of Partnership
that occur within three years of Purchaser's 74% acquisition may also be subject
to transfer tax.
Steps 3, 4 & 5
The distribution of the assets of Partnership as a result of its
termination and the redemption by Purchasers of their partnership interests in
Block 1268 and Hines New York would result in conveyances which are exempt from
transfer tax as they are conveyances which would result in a mere change of
identity or form of ownership with no change in beneficial interest pursuant to
section 1405(b)(6) of the Tax Law. Likewise, the formation of 31 West by Block
1268 and Hines New York through their contribution of their interests in
Associates in exchange for interests in 31 West is exempt from the transfer tax
pursuant to section 1405(b)(6).

DATED: January 8, 1997

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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