Our bank, as trustee, manages a tax-exempt commingled pension trust fund that pools real estate investments for qualified pension and governmental plans. Some of the fund's real estate investments have matured from 'unstabilized' start-up properties to 'stabilized' performing ones, and we want to split the fund in two -- spinning off the unstabilized properties into a brand-new, identical trust fund -- with every participant getting units in the new fund exactly proportional to what they hold in the original fund. Some of these properties are held through New York corporations and a partnership interest. Does this pro-rata spin-off trigger New York's Real Estate Transfer Tax on the controlling interests being transferred to the new fund?

Plain-English summary

Morgan Guaranty Trust Company of New York, as trustee, managed the Commingled Pension Trust Fund (Special Situations Investments-Real Estate) (the "Commingled Fund"), a tax-exempt trust under IRC §501(a) recognized as a "pool fund" and "group trust" under Revenue Ruling 81-100 -- meaning participation is limited to qualified pension plans and governmental plans that are themselves tax-exempt. Each participant owned a designated number of units in the Commingled Fund; Morgan Guaranty, as trustee, held only bare legal title to the Fund's assets (generally stock or partnership interests in entities holding the underlying real estate), with the entire economic and beneficial interest belonging to the participants through their units.

The Commingled Fund was originally formed to invest in "special situation" real estate -- start-up or underperforming properties ("unstabilized properties"). Some of these investments had since reached stabilized performance levels ("stabilized properties"), and it was in participants' best interest to separate the two categories. The plan: create a brand-new "New Fund," identical to the Commingled Fund in every respect (including tax-exempt status) except the nature of its property holdings, again with Morgan Guaranty as trustee holding bare legal title. The Commingled Fund would transfer all of its unstabilized properties to the New Fund and retain the stabilized ones. Critically, participants in the Commingled Fund would be assigned units in the New Fund exactly pro rata to their existing Commingled Fund units -- so immediately after the transfer, ownership of the two funds would be completely identical. (Participants would later be free to redeem or purchase additional units in either fund, meaning the two funds' ownership would likely diverge shortly after the spin-off -- but this ruling explicitly addresses only the conveyances occurring at the spin-off itself, not any later controlling-interest changes from that subsequent divergence.)

Among the properties involved: the Commingled Fund owned 100% of the stock of one New York corporation, a 79% non-stock interest in a Type "C" not-for-profit corporation formed under the New York Not-For-Profit Corporation Law, and a 96.43% interest in an entity that is itself a partner in a partnership owning New York property. All of these interests would transfer from the Commingled Fund to the New Fund.

Why it's exempt. The Department confirmed that any transfer or acquisition of a controlling interest in an entity holding real property -- as would occur here between the Commingled Fund and the New Fund -- constitutes a taxable conveyance under §1401(e). But because, immediately after the conveyances, each participant's pro-rata beneficial interest in the underlying ownership interests is exactly preserved (the same people, in the same proportions, just now holding units in two funds instead of one), the Department held the conveyances qualify for the mere-change-of-form exemption under §1405(b)(6) -- there is no change in beneficial ownership of the real property, even though legal title to the various corporate/partnership interests moves from the Commingled Fund's trustee to the New Fund's trustee.

What this means for you

Splitting a commingled investment fund's holdings into a new, pro-rata-identical fund is a well-established tax-free restructuring

If you're a pension plan, institutional investor, or fund administrator looking to separate different categories of pooled real estate holdings (e.g., by risk profile, maturity stage, or asset type) into a parallel fund, doing so via a pro-rata unit assignment -- so that ownership is identical immediately after the split -- avoids triggering transfer tax on the controlling interests being reallocated.

The exemption covers only the moment of the split, not what happens afterward

This ruling is explicit that it does NOT address any later transfer or acquisition of a controlling interest that results from participants subsequently redeeming units in one fund or buying into the other -- if your restructuring anticipates rapid divergence in ownership between the funds, you may need separate analysis (or a separate advisory opinion) for those later transactions.

The controlling-interest rule reaches indirect real estate holdings through corporate and partnership layers

This ruling confirms the mere-change-of-form exemption applies not just to direct real estate transfers but to controlling interests in corporations (including non-stock/not-for-profit corporations) and partnership-holding entities -- multi-layered fund structures with several tiers of ownership can still qualify, as long as beneficial ownership tracks through consistently.

Common questions

Q: If a pension or investment fund splits its real estate holdings into two funds, with all participants getting proportional interests in both, does that trigger transfer tax on the underlying properties?
A: No -- as long as each participant's pro-rata beneficial interest is preserved immediately after the split, the reallocation qualifies for the mere-change-of-form exemption, even though legal title to corporate or partnership interests changes hands.

Q: Does this exemption also protect later transactions, like a participant redeeming units in one fund and buying into the other?
A: No -- this ruling covers only the conveyances that occur at the moment of the fund split itself; subsequent ownership changes as participants redeem or purchase additional units are a separate analysis.

Q: Does the mere-change-of-form exemption apply only to direct property transfers, or also to transfers of stock/partnership interests in entities that own real estate?
A: It applies to both -- this ruling confirms controlling-interest transfers in corporations (including non-stock entities) and partnership-holding structures qualify for the same exemption as direct property transfers, when beneficial ownership doesn't change.

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 1405(b)(6) of the Tax Law
• Revenue Ruling 81-100, 1981-1 C.B. 326

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_8r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(8)R
Real Estate Transfer Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M971020C

On October 20, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Morgan Guaranty Trust Company of New York, as
Trustee, 522 Fifth Avenue, New York, N.Y. 10036.
The issue raised by Petitioner, Morgan Guaranty Trust, as Trustee, is
whether the Real Estate Transfer Tax imposed by Article 31 of the Tax Law (the
"transfer tax") would be imposed on the transfer of interests in real property
by a trust fund to a newly created trust fund under the following circumstances.
The Commingled Pension Trust Fund (Special Situations Investments-Real
Estate) (the Commingled Fund) is a trust fund created by Petitioner, with
Petitioner as trustee, for the purpose of permitting pooled investments in real
estate by certain tax-exempt entities. For federal income tax purposes, the
Commingled Fund is a tax-exempt trust under Section 501(a) of the Internal
Revenue Code of 1986, as amended (the “Code”), which is treated as a “pool fund”
and “group trust” as described in Revenue Ruling 81-100, 1981-1 C.B. 326.
Accordingly, participation in the Commingled Fund is limited to qualified pension
plans and governmental plans, which are also exempt from federal income tax under
Section 501(a) of the Code. Each participant in the Commingled Fund owns a
designated number of units in the Commingled Fund. Petitioner has no ownership
interest in the Commingled Fund, although, as trustee, it holds bare legal title
to the assets of the Commingled Fund (which generally consist of stock or
partnership interests in entities holding the underlying real estate
investments). The entire economic and beneficial interest in these assets is
owned by the participants through their ownership of the units in the Commingled
Fund.
The Commingled Fund was formed initially for the purpose of investing in
certain special situation real estate investments, i.e., investments in certain
start-up or under performing properties (the “unstabilized properties”). Some
of these investments have now reached stabilized performance levels (the
“stabilized properties”) and it is in the best interest of the Commingled Fund’s
participants to separate the stabilized properties from the unstabilized
properties. Accordingly, the decision has been made to create a new fund (the
“New Fund” which would be identical to the Commingled Fund in every respect,
including its tax exempt status, other than the nature of its property
investments. Petitioner would similarly act as trustee of the New Fund and hold
bare legal title to its assets. The Commingled Fund will then transfer all of
its unstabilized properties to the New Fund and will retain the stabilized
properties.

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TSB-A-97(8)R
Real Estate Transfer Tax

Participants in the Commingled Fund would be assigned units in the New Fund
which would be pro rata to their respective units in the Commingled Fund. Thus,
at the time of the transfer, there would be a complete identity of ownership
between the Commingled Fund and the New Fund. However, participants in the fund
will have the right to have their units in one or both funds redeemed and to
purchase additional units in one or the other fund. Accordingly, it is expected
that shortly after the transfer of the properties, the ownership of the two funds
will no longer be identical. (This opinion addresses only the conveyances that
occur in connection with the creation of the New Fund and does not apply to any
acquisition or transfer of a controlling interest which may result from any
subsequent changes in the ownership interests of the Commingled Fund and the New
Fund).
Among the properties currently held by the Commingled Fund are interests
in two corporations which hold property located in New York State.
The
Commingled Fund owns 100% of the stock of one of the corporations and a 79% non­
stock interest in the other (which is a Type “C” corporation formed under Section
201 of the New York Not For Profit Corporation Law). In addition, the Commingled
Fund owns a 96.43% interest in an entity that is a partner in a partnership that
owns property in New York State. The interests in the entities described in this
paragraph will be transferred from the Commingled Fund to the New Fund pursuant
to the proposed transaction.
Applicable Law
Section 1402 of the Tax Law imposes the transfer tax on each conveyance of
real property or interest therein when the consideration for the conveyance
exceeds $500.00.
Section 1401(e) of the Tax Law defines the term “conveyance”, in part, to
include 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”, as
follows:
“Controlling interest” means (i) in the case of a corporation,
either fifty percent or more of the total combined voting power of
all classes of stock of such corporation, or fifty percent or more
of the capital, profits or beneficial interest in such voting stock
of such corporation, and (ii) 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.
In addition, section 1405(b)(6) of the Tax Law provides that the transfer
tax shall not apply to the extent that a conveyance results in a mere change of
identity or form of ownership or organization where there is no change in
beneficial ownership of the real property.

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TSB-A-97(8)R
Real Estate Transfer Tax

Analysis and Conclusion
Any transfer or acquisition of a controlling interest in an entity with an
interest in real property that occurs between the Commingled Fund and the New
Fund constitutes a conveyance pursuant to section 1401(e) of the Tax Law.
However, the conveyances described in this advisory opinion will be exempt
pursuant to section 1405(b)(6) of the Tax Law because, immediately after the
conveyances, the participants who held a beneficial interest in the ownership
interests held by the Petitioner as trustee of the Commingled Fund have the same
pro rata beneficial interest in the ownership interests transferred to or
acquired by the Petitioner as trustee of the New Fund.

DATED: December 4, 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.