NYC TAT Opinion Puts Example C on Par with “Plan 9”

SALT Chat

08.22.16 | SALT Chat

Ed Wood’s classic B movie, “Plan 9 from Outer Space,[1]” tells the story of extraterrestrials sent to Earth to stop the human race from creating a doomsday weapon and obliterating itself.  Similarly, the New York City Tax Appeals Tribunal[2] (“TAT”), affirming the Administrative Law Judge (see my July 11, 2016 blog post…[3]) sets out to obliterate a relatively common New York State and City Transfer Tax planning technique.

Those of us who are experts in the State and City Transfer Tax have often taken the position that the transfer of a deed cannot be aggregated with the transfer of an entity interest.  A critical part of this position relied on the assertion that the Transfer Taxes are very formalistic in nature and accordingly the step-transaction doctrine could never apply.  In what is now authority citable as precedent, the Tribunal let us know in no uncertain terms that as long as there is nothing in the law prohibiting the application of the step transaction doctrine, the Tribunal has the ability to do so. That means that two transactions, that on their own would not be subject to transfer taxes, will be collapsed into one and accordingly subject to the tax.

But did the case really hinge on the step transaction doctrine and did the Tribunal even need it to reach its decision?  I think not.  There are repeated and well-reasoned discussions in the opinion as to the “first step,” the formation of the LLC, completely lacking economic substance.  Wouldn’t the better moral of the story be the first step in this case simply didn’t exist?  How can one put two steps together where only one step exists?  My point here is that after this case, I can assure you every auditor is going to be waving this case at us insisting that anything involving more than one step should be collapsed when doing so results in additional tax.

I’ve already made my point, but still need to explain to you dear reader, where the title comes from.  The New York City Rules contain an Example C, which the Tribunal emphasizes is not relevant to the case at hand.  You be the judge:  A partnership converts to an LLC and subsequently the 49% member sells his interest to the 51% member.  The Example says that the conversion will not be considered a transfer and accordingly the transfer of a 49% interest won’t be aggregated with the conversion.  Is this lack of transfer from the conversion the equal of the mere change exemption?  Apparently not.

Questions? Contact your Berdon advisor or Wayne Berkowitz at WBerkowitz@Berdonllp.com.

Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, New York Accountants, advises on the unique requirements of governments and municipalities across the nation.

[1] For those of you who have never seen an Ed Wood film, you might not want to rush out and do so.  However, one of my favorite movies of all-time is the biographical comedy, “Ed Wood.”  My daughter and I both love this film and neither one of us can really put our finger on why.

[2] In the Matter of GKK 2 Herald LLC, TAT (E) 13-25 (RP) (July 15, 2016).

[3] A quick recap of the facts from the July 11 post:  In 2007, the “taxpayer” and SLG each acquired a co-tenancy interest in a piece of Manhattan real estate.  The taxpayer owned 45% and SLG owned 55%.  In December 2010, taxpayer and SLG contributed the co-tenancy interests to Owner LLC, in exchange for proportional interests in the LLC.  On the same day, taxpayer sold its interest in Owner LLC to SLG.