Our client, a publicly traded corporation that owns New York real estate, is being acquired by another publicly traded company through a reverse triangular merger structured as a tax-free reorganization -- our client's shareholders will exchange their stock for less than 50% of the acquirer's voting power and value. Since our client itself is a real-estate-owning entity being acquired via its shareholders exchanging stock, is our client (the acquired company) primarily and jointly liable, along with its own shareholders, for New York's Real Estate Transfer Tax on this controlling-interest transfer -- or is that liability solely the acquiring company's?

Plain-English summary

Coopers & Lybrand, LLP asked the Department, on behalf of its client ("Company X"), about tax liability -- not exemption -- for a proposed acquisition. Company X was a widely held, publicly traded C corporation that owned interests in New York real property. Under a proposed plan of reorganization, Company X would be acquired by Company Y (also widely held and publicly traded) through a reverse triangular merger: Company Y would form a new wholly owned subsidiary ("Newco"), Newco would merge into Company X (with Company X surviving as Company Y's wholly owned subsidiary), and Company X's shareholders would exchange their Company X stock for Company Y stock. The deal was structured as a tax-free reorganization under IRC Section 368(a), with Company X's shareholders receiving Company Y stock representing less than 50% of Company Y's total voting power and value.

A taxable controlling-interest conveyance. The Department confirmed the transaction results in Company Y acquiring a "controlling interest" (Tax Law Section 1401(b): 50% or more of voting power, or 50% or more of capital/profits/beneficial interest) in Company X -- an entity with a New York real property interest -- making it a taxable conveyance under Section 1401(e) and subject to the transfer tax under Section 1402. (Because Company X's own shareholders end up with less than half of the combined company, this isn't a mere-change-of-form situation with identical before-and-after ownership -- unlike the pro-rata restructurings seen in other RETT rulings.)

Who's liable: both the target AND its shareholders, jointly. The key question Coopers & Lybrand raised was about WHO bears responsibility for paying that tax. Tax Law Section 1401(g) defines "grantor," where the conveyance is a transfer or acquisition of a controlling interest in a real-property-owning entity, to mean BOTH the entity itself (here, Company X) AND the shareholder(s) or partner(s) transferring the stock or partnership interest (here, Company X's transferring shareholders). Under Section 1404(a), the grantor is primarily liable for the transfer tax -- so the Department concluded Company X and its transferring shareholders are EQUALLY liable for the entire tax due, not just the individual shareholders who are technically exchanging their shares. Company Y, as the grantee, only has a duty to pay if the grantor(s) fail to pay within the prescribed time (or if the grantor is exempt) -- but once that duty arises, the tax liability becomes the joint and several liability of Company X, its transferring shareholders, AND Company Y together.

What this means for you

In a stock-for-stock merger involving a real-estate-owning target, the target company itself -- not just its selling shareholders -- is on the hook for transfer tax as "grantor"

If you're advising on (or are) the acquired company in a controlling-interest transaction involving real property, don't assume your company escapes primary transfer tax liability just because it's the shareholders who are technically exchanging stock -- New York's statute makes the entity and its transferring shareholders equally, primarily liable together.

The acquiring company's liability is secondary, but it becomes joint and several if the primary parties don't pay

Structuring who actually cuts the check for transfer tax in a merger agreement's indemnification or tax-allocation provisions is worth doing explicitly -- the acquirer (grantee) isn't off the hook entirely; it inherits liability the moment the grantor side fails to pay, and that liability then extends across all parties jointly and severally.

A reorganization that leaves target shareholders with less than 50% of the combined entity is NOT automatically exempt as a mere change of form

Unlike cases where restructuring preserves identical proportionate ownership, this deal genuinely changed control -- Company X's former shareholders ended up owning a minority stake in a different, larger company -- so the mere-change-of-form exemption wasn't even in play here; this ruling is purely about allocating liability for a tax the parties didn't dispute was owed.

Common questions

Q: In a merger where an acquirer obtains a real-estate-owning target's stock, is the target company liable for the resulting transfer tax, or just its selling shareholders?
A: Both -- New York's statute defines "grantor" to include both the real-estate-owning entity and its transferring shareholders, who are equally, primarily liable together.

Q: Does the acquiring company ever have to pay the transfer tax in this kind of deal?
A: Yes, but only secondarily -- if the grantor (the target and/or its shareholders) fails to pay, the acquiring company (as grantee) then has a duty to pay, at which point liability becomes joint and several among all parties.

Q: If target shareholders end up with a minority stake in the combined company after a merger, does that qualify for any transfer-tax exemption?
A: Not automatically -- the mere-change-of-form exemption generally requires that beneficial ownership remain essentially unchanged; a shareholder group receiving less than 50% of a different combined entity represents a real change in control, not a mere change of form.

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(g) of the Tax Law
• Section 1404(a) of the Tax Law

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_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(2)R
Real Estate
Transfer Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.M961223B

On December 23, 1996, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Coopers & Lybrand, LLP, One Canterbury Green,
POB 10108, Stamford, Ct. 06904-2108.
The issue raised by Petitioner, Coopers & Lybrand, LLP is whether its
client (Company X), is considered to be primarily and jointly, with its
shareholders, liable for payment of the New York State Real Estate Transfer Tax
(the transfer tax) imposed by Section 1402 of Article 31 of the Tax Law upon the
transfer of a controlling interest in Company X by its shareholders pursuant to
a proposed plan of reorganization.
Petitioner submits the following facts as the basis for this Advisory
Opinion. Company X is a widely held and publicly traded C corporation that owns
interests in real property located in New York State. Pursuant to a proposed
plan of reorganization, Company X will be acquired in a reverse triangular merger
by Company Y, also a widely held and publicly traded C corporation.
It is
anticipated that Company X will thereafter exist as a wholly owned subsidiary of
Company Y. Under terms of the current proposal, Company Y will form a new wholly
owned subsidiary, Newco. The Company X shareholders will exchange their shares
of Company X stock for Company Y stock in connection with the merger of Newco
into Company X. The transaction will be a tax free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. In
exchange for their stock, the shareholders of Company X will receive stock of
Company Y constituting less than fifty percent of the total voting power and
value of Company Y.
Analysis
Section 1402 of the Tax Law imposes the transfer tax on each conveyance of
real property or interest therein when the consideration exceeds five hundred
dollars. "Conveyance" is defined in Section 1401(e) of the Tax Law. Included in
the definition of conveyance is the transfer or transfers of any interest in real
property by any method, including the transfer or acquisition of a controlling
interest in any entity with an interest in real property.
Section 1401(b) of the Tax Law defines the term "controlling interest".
This section provides, in the case of a corporation, that controlling interest
means either fifty percent or more of the total combined voting power of all
classes of stock or fifty percent or more of the capital, profits or beneficial
interest in such voting stock.
Section 1404(a) of the Tax Law provides that the grantor shall be liable
for the payment of the transfer tax. It further provides that if the grantor
fails to pay the tax within the prescribed time, or if the grantor is exempt from

-2­
TSB-A-97(2)R
Real Estate
Transfer Tax

tax, then the grantee shall have the duty to pay the tax. Also, this section sets
forth that where the grantee has the duty to pay the tax because the grantor has
failed to pay, the grantor and grantee are jointly and severally liable for the
payment of the tax.
Section 1401(g) of the Tax Law provides that the term "grantor" means the
person making the conveyance of real property or interest therein. Where the
conveyance consists of a transfer or an acquisition of a controlling interest in
an entity with an interest in real property, "grantor" means the entity with an
interest in real property or a shareholder or partner transferring stock or
partnership interest.
Conclusion
The proposed plan of reorganization will result in an acquisition of a
controlling interest in Company X, an entity with an interest in real property,
by Company Y. Therefore, it is a conveyance subject to transfer tax pursuant to
section 1401(e) of the Tax Law.
As provided in section 1401(g) of the Tax Law the grantor of this
conveyance is deemed to be both Company X and the Company X shareholders
transferring their stock in the transaction. The grantee of this conveyance is
Company Y. Therefore, pursuant to section 1404(a) of the Tax Law, Company X and
its shareholders are equally liable for the entire transfer tax due as a result
of the conveyance. If the grantor(s) of the conveyance fail to pay the tax, then
Company Y, as grantee, will have the duty to pay the tax. The tax liability then
will become the joint and several liability of Company X, the transferring
shareholders of Company X and Company Y.

DATED: February 21, 1997

NOTE:

John W. Bartlett
Deputy Director
Technical Services Bureau

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