Our public utility is restructuring into a holding company structure, as regulators are requiring utilities to separate their generation, delivery, and marketing functions. We'll form a new, wholly-owned holding company, then do a binding share exchange under New York Business Corporation Law Section 913 (structured as a tax-free reorganization under IRC Section 351): our existing shareholders will automatically become shareholders of the new holding company on a one-for-one basis, and we'll become the holding company's subsidiary -- with no physical stock certificate exchange required. We own real property in New York State. Does this share exchange trigger New York's Real Estate Transfer Tax (as a transfer of a controlling interest in a real-property-owning company) or the Stock Transfer Tax?

Plain-English summary

Consolidated Edison Company of New York, Inc. ("Petitioner"), an investor-owned, regulated public utility incorporated in New York in 1884, supplies electricity throughout most of New York City and Westchester County, gas in Manhattan, the Bronx, and parts of Queens and Westchester, and steam in Manhattan -- and owns real property within New York State. Facing a New York State Public Service Commission directive requiring utilities to separate their generation, delivery, and marketing functions, Petitioner determined that a holding company structure was the only economically viable way to comply.

The Share Exchange structure. Petitioner planned to (a) form a new, wholly-owned, non-regulated subsidiary holding company ("HoldCo."); (b) execute a binding "Share Exchange Agreement" with HoldCo. under Business Corporation Law Section 913 -- structured to qualify as a tax-free reorganization under IRC Section 351(a) -- under which, at the Agreement's effective time, Petitioner's common shareholders would automatically be deemed to have exchanged their Petitioner stock for HoldCo. stock on a one-for-one basis; (c) after the exchange, Petitioner would become HoldCo.'s subsidiary, with HoldCo. 100% owned by Petitioner's former common shareholders; and (d) no physical exchange of stock certificates would be required -- existing certificates would automatically represent HoldCo. shares going forward, with new HoldCo.-branded certificates issued only if and when shareholders chose to physically exchange them. Petitioner's preferred stock and debt would be unaffected and remain outstanding securities of Petitioner itself.

Real Estate Transfer Tax: taxable conveyance, but exempt. The Department held that because HoldCo. would acquire 100% of Petitioner's common stock -- and Petitioner is an entity with an interest in New York real property -- the Share Exchange results in HoldCo. acquiring a "controlling interest" in a real-property-owning entity, which is a taxable conveyance under Tax Law Sections 1402, 1401(b), and 1401(e). However, because Petitioner's former shareholders would receive a proportionately equal amount of HoldCo. stock in exchange (i.e., a one-for-one swap preserving each shareholder's relative ownership percentage), the Department held this conveyance is fully exempt under the mere-change-of-form exemption (Section 1405(b)(6)) -- there's no real change in who beneficially owns Petitioner's real estate, just a new corporate layer on top.

Stock Transfer Tax: not applicable at all. Separately, the Department held the Share Exchange isn't subject to the Stock Transfer Tax under Tax Law Article 12. At the effective time, the existing Petitioner stock certificates cease to represent valid Petitioner shares and instead represent, in effect, originally issued HoldCo. shares -- and the ORIGINAL issuance of stock is expressly exempt from the Stock Transfer Tax under Regulations Section 440.1(h). Because no physical certificate exchange is legally required to reflect this change, most shareholders would never trigger any transaction at all. But even for shareholders who DO choose to physically swap their old certificates for new HoldCo.-branded ones, the Department held that mere physical replacement of certificates representing the same underlying ownership interest -- analogous to the certificate-reissuance examples in Regulations Section 440.1(j)(2) and (3) -- doesn't create Stock Transfer Tax liability either.

What this means for you

A regulator-mandated corporate restructuring into a holding company form doesn't escape RETT analysis just because it's compliance-driven, but the mere-change-of-form exemption is readily available if shareholder proportions carry over exactly

Even when a restructuring is externally mandated (here, by a state utility regulator) rather than purely elective, the Department still analyzes it under the same controlling-interest and mere-change-of-form rules that apply to any other corporate reorganization -- the key protective feature is ensuring shareholders end up with identical proportionate interests in the new parent entity.

A one-for-one share exchange that doesn't require physical certificate reissuance is a clean way to avoid Stock Transfer Tax

Structuring a holding company reorganization so that existing certificates automatically represent the new parent's shares (rather than requiring a formal, physical stock swap) supports the "original issuance" characterization that keeps the transaction outside the Stock Transfer Tax entirely.

Even a later, optional physical certificate exchange doesn't retroactively create tax exposure

If some shareholders later choose to trade in their old paper certificates for newly-printed ones bearing the parent company's name, that's treated as a tax-free administrative reissuance (not a new taxable transfer), as long as the underlying ownership interest represented doesn't change.

Common questions

Q: If my regulated utility or company reorganizes into a holding company structure via a share exchange, does that trigger transfer tax on the company's real estate?
A: It's a taxable conveyance in the first instance (since the new holding company acquires a controlling interest in a real-property-owning entity), but it's typically exempt under the mere-change-of-form rule if the same shareholders end up with the same proportionate interests in the new structure.

Q: Does exchanging old stock certificates for new ones (bearing the parent company's name) after a holding company reorganization trigger Stock Transfer Tax?
A: No -- the Department treats a one-for-one share exchange as producing originally issued parent-company shares, which are exempt from Stock Transfer Tax, and any later physical certificate replacement (with no change in underlying ownership) is likewise exempt.

Q: Does it matter that our restructuring was required by a government regulator rather than done for our own business reasons?
A: Not for purposes of the tax analysis itself -- the Department applies the same controlling-interest and mere-change-of-form tests regardless of whether the reorganization was elective or regulator-driven; what matters is whether beneficial ownership changes.

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
• Section 270(1) of the Tax Law, Article 12
• Section 440.1(h) of the Stock Transfer Tax Regulations
• Section 440.1(j) of the Stock Transfer Tax Regulations
• Section 913 of the New York Business Corporation Law
• Internal Revenue Code Section 351(a)

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/multitax/a97_9r_2m.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-97(9)R
Real Estate Transfer Tax
TSB-A-97(2)M
Stock Transfer Tax

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M970912A

On September 11, 1997, the Department of Taxation and Finance received a
Petition for Advisory Opinion from Consolidated Edison Company of New York, Inc.,
4 Irving Place, Room 206-S, New York, New York 10003. Additional information
related to the Petition was received on November 20, 1997.
The issues raised by Petitioner, Consolidated Edison Company of New York,
Inc., relate to the Real Estate Transfer Tax imposed pursuant to Article 31 of
the Tax Law and the Stock Transfer Tax imposed pursuant to Article 12 of such
law.
Issues Raised - Real Estate Transfer Tax
1) Does the Share Exchange, as described below, result in a transfer of a
controlling interest in an entity with an interest in real property and therefore
constitute a conveyance for purposes of the real estate transfer tax?
2) If the Share Exchange results in a transfer of a controlling interest
and therefore a conveyance, is it exempt from the real estate transfer tax as a
conveyance which results in a mere change of identity where there is no change
in beneficial interest?
Issue Raised - Stock Transfer Tax
Is the Share Exchange, as described below, subject to the Stock Transfer
Tax imposed pursuant to Article 12 of the Tax Law?
Facts
Petitioner submits the following facts as the basis for this Advisory
Opinion. Petitioner is an investor-owned, regulated public utility incorporated
in the State of New York on November 10, 1884. Petitioner supplies electricity
and electric services in all of New York City (except a part of the Borough of
Queens) and most of Westchester County. It also supplies gas and gas services
in Manhattan, the Bronx and parts of Queens and Westchester County, as well as
steam and steam services in Manhattan. Petitioner owns real property located
within New York State.
Currently, public utilities are considering a variety of actions to
position themselves for competition in the energy industry. The New York State
Public Service Commission has instructed utilities to segregate their generation,
delivery and marketing functions.
Petitioner has determined that the only
economically viable way that it can accomplish this is to adopt a new corporate
form.
Petitioner believes that the appropriate corporate form is a holding

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company structure.
The holding company, as described in the facts of this
Petition, will oversee a number of subsidiaries, one of which will be Petitioner.
The holding company structure will be created through the mechanism of a binding
share exchange, which is authorized by section 913 of the New York State Business
Corporation Law. The share exchange (the "Share Exchange") is designed to be a
tax-free reorganization under section 351 of the Internal Revenue Code
("I.R.C."). The restructuring will be accomplished through the following steps:
(a) Petitioner will create a wholly-owned subsidiary holding company
("HoldCo."), a non-regulated company incorporated in the State of
New York;
(b) Subsequent to the creation of HoldCo., Petitioner and HoldCo.
will execute a share exchange agreement, execution of which is
subject to regulatory and shareholder approval (the "Agreement").
Pursuant to the Agreement, when the Agreement becomes effective (the
"Effective Time"), Petitioner’s common stock shareholders will, by
operation of law, be deemed to have exchanged with HoldCo.
Petitioner common stock for HoldCo. common stock, on a one-for-one
basis. After the Share Exchange is completed, the former common
shareholders of Petitioner will be common shareholders of HoldCo.
Each share of HoldCo. common stock owned by Petitioner as the parent
corporation prior to the Effective Time will be deemed canceled and
returned to the status of authorized but unissued shares of HoldCo.
Petitioner’s preferred stock and debt will not be affected by the
Share Exchange and will remain outstanding securities of Petitioner;
(c) After the Share Exchange is completed, Petitioner will be a
subsidiary of HoldCo. and HoldCo. will be owned 100% by the former
shareholders of Petitioner;
(d) It will not be necessary for the former shareholders of
Petitioner to physically exchange their existing stock certificates
for certificates of HoldCo.
As of the Effective Time, these
certificates will automatically represent shares of HoldCo. and will
no longer represent shares of Petitioner. New certificates bearing
the name of HoldCo. will be issued if and as the existing
certificates are physically presented for exchange.
Petitioner submits that the Share Exchange constitutes an exchange
qualifying for non-recognition of income under I.R.C. §351(a). No income, gain
or loss is recognized by either Petitioner or HoldCo. as a result of the Share
Exchange. Also, no income, gain or loss is recognized by the former holders of
Petitioner common stock from the Share Exchange.

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The consolidated group of corporations of which, prior to the Share
Exchange, Petitioner was the common parent for federal income tax purposes,
continues after the Share Exchange, with HoldCo. as the new common parent
corporation.
Petitioner maintains that no transfer or conveyance of any real property
or transfer of the direct or indirect ownership of real property from Petitioner
to HoldCo. occurs in connection with the Share Exchange.
Analysis - Real Estate Transfer Tax
Section 1402 of the Tax Law imposes the real estate transfer tax on each
conveyance of real property or interest therein when the consideration exceeds
five hundred dollars. The term "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.
Finally, section 1405(b)(6) of the Tax Law sets forth that conveyances are
exempt from the real estate 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."
Conclusions - Real Estate Transfer Tax
In the Share Exchange, HoldCo. will acquire 100% of the common stock of
Petitioner. As Petitioner is an entity with an interest in real property, the
Share Exchange will result in HoldCo. acquiring a controlling interest in an
entity with an interest in real property. Therefore, the Share Exchange results
in a taxable conveyance of real property in accordance with the aforementioned
sections 1402, 1401(b) and 1401(e) of the Tax Law.
However, since the former common stock shareholders of Petitioner will
receive a proportionately equal amount of HoldCo. common stock as a result of the
Share Exchange the conveyance described in the preceding paragraph will be exempt
from the real estate transfer tax based on the mere change of identity or form
of ownership exemption provided in section 1405(b)(6) of the Tax Law.

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Analysis - Stock Transfer Tax
Subdivision (1) of section 270 of Article 12 of the Tax Law provides in
part:
There is hereby imposed . . . a tax . . . on all sales, or
agreements to sell, or memoranda of sales and all deliveries or
transfers of shares or certificates of stock . . . in any domestic
or foreign association, company or corporation . . . whether made
upon or shown by the books of the association, company, corporation,
or trustee, or by any assignment in blank, or by any delivery, or by
any paper or agreement or memorandum or other evidence of sale or
transfer, whether intermediate or final, and whether investing the
holder with the beneficial interest in or legal title to said stock,
or other certificates taxable hereunder, or merely with the
possession or use thereof for any purpose. . . .
Subdivision (h) of section 440.1 of the Stock Transfer Tax Regulations
provides as follows:
(h) The tax imposed by article 12 of the Tax Law does not apply to
the original issuance of stock.
Subdivision (j) of section 440.1 of the Stock Transfer Tax regulations
provides in part:
(j) The following are examples of transactions not subject to tax:

*

*

*

(2) The surrender of a single certificate for reissuance to the same
stockholder of several certificates representing, in the aggregate,
the same number of shares.
(3) The surrender of a number of certificates of reissuance, to the
same stockholder, of a single certificate for the same number of
shares.
Conclusions - Stock Transfer Tax
The Share Exchange between Petitioner and HoldCo. will not be subject to
the Stock Transfer Tax. At the Effective Time, the shares of Petitioner no
longer represent legally valid stock of Petitioner, but instead represent an
ownership interest in HoldCo. and are, in effect, originally issued shares of
HoldCo. The original issuance of stock is exempt from the imposition of the
Stock Transfer Tax (Regulations, section 440.1(h)).
No physical exchange of certificates is necessary to reflect the change in
ownership interest effectuated by the Share Exchange with respect to the
certificates held by the former shareholders of Petitioner.
However, if a
physical exchange of certificates does take place, these shareholders would be

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deemed to be exchanging existing HoldCo. stock (certificates of Petitioner, which
represent newly issued shares of HoldCo.) for new certificates of HoldCo. stock
(new certificates of HoldCo. stock bearing the name of HoldCo.).
The mere
physical replacement of existing certificates with new certificates of the same
issue, similar to the transactions exemplified in paragraphs (2) and (3) of
section 440.1(j) of the Regulations, where there is no change in the underlying
ownership interest, does not result in any Stock Transfer Tax liability.

DATED: December 19, 1997
/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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