“Put two or three men in positions of conflicting authority. This will force them to work at loggerheads, allowing you to be the ultimate arbiter.” While President Roosevelt’s advice may let one get their way in the political arena, conflicting authority is of no help in New York State and City real estate transactions.
New York State and New York City have their own real property transfer taxes. So it’s no surprise that the separate and distinct Administrative Law Judge (ALJ) sections of each jurisdiction’s Tax Appeals Tribunals should come to completely opposite decisions on the taxability of the same transaction. In a deal taking place in 2010, the City ALJ found the transaction subject to tax by applying the step transaction doctrine. In the more recent State ALJ decision, the transaction was not subject to tax and not one mention of the step transaction doctrine was made.
The good news is that both State and City ALJ decisions are not binding authority and the City ALJ decision is being appealed by the taxpayer. The bad news is the State is likely to appeal the taxpayer’s victory. The worst news of all is how is one to proceed in planning a similar transaction.
While this case raises many issues and complex planning opportunities, a brief overview is as follows: 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.
For my readers who are transfer tax aficionados, you are well aware that the sale of a tenancy in common, no matter what percentage, is subject to the tax, while a transfer of an entity below the 50% controlling interest threshold, absent any aggregation of prior or subsequent transfers, is not subject. In the view of the City ALJ, since the transfer to the LLC and the buyout of the taxpayer happened on the same day, the transaction would be treated as if the tenancy in common interest was sold and accordingly subject to the tax. The State ALJ respected the form of the transaction and held that since there was no controlling interest transfer, the tax did not apply.
The takeaway here is to follow these cases carefully and not to count on conflicting authorities to do as you please. Careful planning is always in order for transfer taxes and the differing authorities make it even that much more essential.
Should you have questions about a transfer tax issue, contact your Berdon advisor or me at WBerkowitz@BerdonLLP.com.
 In re GKK 2 Herald LLC, New York City Tax Appeals Tribunal, No. TAT(H) 13-25(RP) (4/1/15)
 In the Matter of the Petition of GKK 2 Herald LLC, NYS Division of Tax Appeals, ALJ, DTA No. 826402 (05/26/2016)
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.