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NYC Taxpayer Gets Favorable REIT Transfer Tax Rate – ALJ Rules Everything is Less Than Zero

Wayne K. Berkowitz, Partner, Citrin Cooperman Advisors LLC / Berdon Advisors LLC

03.13.17 | SALT Chat

A recent taxpayer victory[1] related to one of the most onerous taxing schemes, the New York City Real Property Transfer Tax and the New York State Real Estate Transfer Tax (Transfer Tax) provides a light at the end of the tunnel for those of us facing the continued administrative assaults on relatively clear and legitimately enacted tax incentives.

To encourage additional liquidity in the market, both New York State and City have provisions in place that effectively cut the tax rate in half for transfers to real estate investment trusts (REITs).  Without the incentive, combined tax rates can reach as high as 3.025% of the “consideration paid” for the property.  In addition to the rate reduction, the NYC tax has the added bonus of using the estimated market value (EMV), an amount determined by reference to the NYC real property tax assessment.  This amount is usually significantly less than the actual fair market value of the property.

Obtaining the REIT transfer tax benefits are not without difficulties.  The issue in the case at hand revolved around the requirement that the transferor of the real property receive an ownership interest in the REIT equal to an amount not less than 40% of the equity interest in the transferred property.

For simplicity’s sake, let’s assume that the EMV of the property was $100 million and debt on the property was $400 million.  This would result in the seller having a pre-transfer equity interest of something less than zero.[2]  The New York City Department of Finance argued that the EMV should only be used to compute the actual transfer tax ($100 million multiplied by the tax rate) but fair market value should be used to determine whether or not the 40% equity requirement was met.  The Administrative Law Judge (ALJ) was very clear in affirming the statute is not ambiguous and the Legislature intended the taxpayer to receive the $10 million benefit[3] of the REIT provision.

While everything certainly isn’t less than zero, the ALJ made it clear that the 40% equity requirement certainly can be.  Just a reminder, ALJ cases are not binding authority and the upcoming drama needs to be followed closely.

With federal allotments of funds under continued assaults, state and local jurisdictions are going to be under even greater pressure to raise revenues.  It’s only logical that one of the first places they are going to look is to the taxpayers. Given the temper of the times, it is best to have advisors who can help you comply with the law to the letter so that you are prepared should the taxing authorities come calling.  I can help, and if you want to discuss your circumstances, contact me at WBerkowitz@BerdonLLP.com or your Berdon advisor.

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

[1] In the Matter of the Petition of VCP One Park REIT, LLC, New York City Tax Appeals Tribunal, Administrative Law Judge Division, TAT(H)14-26(RP), January 24, 2017.  Note that ALJ decisions are not binding authority.  The Department has not yet appealed the decision to the Tax Appeals Tribunal, but has asked for additional time to do so.

[2] “Less Than Zero” appears on Elvis Costello’s first album, “My Aim is True.”  Mr. Costello has indicated the song was inspired by, let’s say, some bad actors in British politics.  He began to perform the song on the December 17, 1977 episode of “Saturday Night Live.”  He played a few bars of the song and abruptly stopped the band.  Convinced American audiences wouldn’t understand the song (I know I don’t) he began to play another song from his debut album, “Radio, Radio.”  Since it was viewed as an anti-big media song, he was specifically asked before the show not to perform it.  His next appearance on the show wasn’t until 1989.

[3] The Department computed the tax to be approximately $13.8 million, while the return as filed computed the tax at approximately $3 million.