§ 23-05 — Exemptions

§ 23-05 Exemptions.

(a) The following persons are exempt from the payment of tax and from filing a return: (1) The State of New York, or any public corporation (including a public corporation created pursuant to agreement or compact with another state or the Dominion of Canada), improvement district or other political subdivision of the state. (2) The United States of America, and any of its agencies and instrumentalities insofar as they are immune from taxation. (3) A foreign government, a person acting on behalf of a foreign government, or the head of a foreign government's diplomatic mission, with respect to premises used exclusively for diplomatic or consular purposes, or as the residence of the head of the diplomatic mission or consular post, to the extent exempt from the payment of tax pursuant to the Vienna Convention on Consular Relations (21 UST 77; TIAS 6820) or the Vienna Convention on Diplomatic Relations (23 UST 3227; TIAS 7502). (4) A foreign government or a person acting on behalf of a foreign government to the extent exempt from the payment of tax pursuant to a treaty or convention to which the United States and the foreign government are parties, other than as provided under paragraph (3), above. The exemption of such governmental bodies or persons shall not, however, relieve a grantee from them of liability for the tax or from filing a return. (b) The tax does not apply to any of the following deeds, instruments, or transactions: (1) A deed, instrument, or transaction conveying or transferring real property or an economic interest therein by or to the United Nations or other world-wide international organizations of which the United States of America is a member. (2) A deed, instrument, or transaction conveying or transferring real property or an economic interest therein by or to any corporation, or association, or trust, or community chest, fund or foundation, organized and operated exclusively for religious, charitable or educational purposes or for the prevention of cruelty to children or animals, and no part of the net earnings of which inures to the benefit of any private shareholder or individual and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation, provided, however, that nothing in this paragraph shall include an organization operated for the primary purpose of carrying on a trade or business for profit, whether or not all of its profits are payable to one or more organizations described in this paragraph. (3) A deed, instrument, or transaction conveying or transferring real property or an economic interest therein to any governmental body or person exempt from payment of the tax pursuant to paragraph (1) or (2) of subdivision (a) of 19 RCNY § 23-05. (4) A deed delivered pursuant to a contract made prior to May 1, 1959. (5) A deed delivered by any governmental body or person exempt from payment of the tax pursuant to 19 RCNY § 23-05(a) as a result of a sale at a public auction held in accordance with the provisions of a contract made prior to May 1, 1959. (6) A deed or instrument given solely as security for, or a transaction the sole purpose of which is to secure, a debt or obligation or a deed or instrument given, or a transaction entered into, solely for the purpose of returning such security. (7) A deed, instrument, or transaction conveying or transferring real property or an economic interest therein from a mere agent, dummy, straw man or conduit to a principal, or a deed, instrument or transaction conveying or transferring real property or an economic interest therein from the principal to his agent, dummy, straw man or conduit. The following are examples of deeds, instruments and transactions in which this exemption applies: (i) The conveyance of realty by an individual to a corporation solely for the purpose of obtaining mortgage financing, followed by the immediate reconveyance of the realty by the corporation to the individual after such mortgage financing is obtained. (ii) A deed transferring real property to an existing corporation solely for the purpose of effectuating the terms of a mortgage spreader agreement. The deed returning the mortgaged realty to its true owner is also exempt from the tax. (iii) A conveyance between a principal and its agent where (A) a written agreement is entered into at the time of the transaction establishing such a relationship with respect to the realty or economic interest therein, (B) the purported agent functions as an agent with respect to the realty or economic interest therein for all purposes, and (C) the purported agent is held out as the agent and not the principal in all dealings with third parties relating to the realty or economic interest therein. Since the tax does not apply to any deed, instrument, or transaction described in 19 RCNY § 23-05(b), neither the grantor nor the grantee is required to pay the tax. However, a return relating to the deed, instrument, or transaction must be filed. (8) A deed, instrument or transaction conveying or transferring real property or an economic interest in real property to another person or entity, otherwise subject to tax, that effects a mere change of identity or form of ownership or organization to the extent the beneficial ownership of such real property or economic interest remains the same. A sale of real property or an economic interest therein for cash or other valuable consideration will be exempt to the extent the beneficial ownership remains the same, provided the transaction represents a mere change of identity or form of ownership or organization. (i) Applicable tax rate. Where this exemption applies, the consideration subject to tax is reduced proportionately to the extent the beneficial ownership of the real property or economic interest in the real property remains the same. However, for transfers or transactions occurring on or after January 1, 1999, the determination of the applicable tax rate will be made prior to the application of this exemption. The tax rate applicable to transfers for consideration of more than $500,000 will apply even though the portion of the consideration taxable after applying the exemption provided for in this paragraph is $500,000 or less. (ii) Controlling interests. For transactions involving economic interests, the determination of whether a controlling economic interest has been transferred is made prior to the application of this exemption. Thus, the transfer of a controlling economic interest will be taxable to the extent the beneficial ownership does not remain the same, even though the portion of the interest subject to tax represents, in the case of a corporation, less than 50 percent of the total combined voting power of all classes of stock of such corporation; and, in the case of a partnership, association, trust or other entity, less than 50 percent of the capital, profits, or beneficial interest in such partnership, association, trust or other entity. The exemption is not applicable to a conveyance to a cooperative housing corporation of the land and building or buildings comprising the cooperative dwelling or dwellings. For purpose of this paragraph a cooperative housing corporation does not include a housing company organized and operating pursuant to the provision of article two, four, five or eleven of the private housing finance law. To illustrate: Example A: A and B, two equal tenants-in-common of Parcel 1, transfer their interests in Parcel 1 to X Corporation on January 1, 1995, each receiving 50% of the outstanding stock of X. The transfer is wholly exempt from tax as a mere change in identity or form of ownership or organization because the beneficial ownership of the real property remains 100%, the same as before the transfer. Example B: A and B are equal partners in AB Partnership. AB Partnership owns two properties. Parcel 1 is unencumbered commercial real property with a fair market value of $1,000,000. Parcel 2 is unencumbered commercial real property with a fair market value of $2,000,000. AB has other assets valued at $1,000,000. On January 1, 1995, AB Partnership distributes all of its assets to A and B in complete liquidation. B receives Parcel 2. A receives Parcel 1 and all the other assets. The tax on the distribution of Parcel 1 to A is measured by the fair market value of Parcel 1 of $1,000,000 reduced by 50% because A had a 50% beneficial interest in the parcel prior to the liquidation and has retained that interest after the distribution. Therefore, $500,000 (50% × $1,000,000) of the measure of the tax is subject to tax. The tax due on the distribution is $13,125 (2.625% × $500,000). Similarly, the distribution of Parcel 2 to B is exempt from tax as a mere change of identity or form of ownership or organization to the extent of 50% because B owned a 50% beneficial interest in the property prior to the liquidation and has retained that beneficial interest. Therefore, the taxable amount is $1,000,000 (50% × $2,000,000) and the tax due on the distribution of Parcel 2 is $26,250 (2.625% × $1,000,000). Example C: X Company is a New York general partnership composed of two equal partners, A and B. X Company owns unencumbered real property located in New York City with a fair market value of $1,000,000. On January 1, 1995, X Company is converted to a limited liability company through the filing of articles of organization under applicable state law. After the conversion, B sells a 49% interest in X Company to A so that A owns a 99% interest and B owns a 1% interest. If under the applicable state law, X Company is considered to be the same entity as before the conversion, the conversion will not be considered a transfer of real property or an economic interest in real property. Immediately after the conversion, the beneficial ownership of X Company is deemed identical to the beneficial ownership of the old general partnership and no transfer of an economic interest has occurred. B's transfer of a 49% interest in X Company to A will not constitute a controlling economic interest transfer subject to tax. However, the transfer of the 49% interest may be aggregated with a subsequent related transfer within three years so as to constitute a transfer of a controlling economic interest. See 19 RCNY § 23-02(2) definition of "Controlling interest" governing aggregation of related transfers. Example D: Limited Partnership X has four equal limited partners A, B, C, and D, each with a 24% interest and one general partner, E with a 4% partnership interest. X owns an unencumbered office building with a fair market value of $1,000,000 and $100,000 of other assets. A, B, C, D and E form a new limited partnership, Y, in which A, B, C, and D have respective interests in capital and profits as follows: A owns 29%, B owns 29%, C owns 24% and D owns 14%. E is the general partner and has a 4% interest in capital and profits. Pursuant to an agreement of merger approved on January 4, 1999, under Article 8-A of the New York Partnership Law, the partners merge Limited Partnership X into Y. The transfer of the assets of X to Y is not a taxable transfer of real property, however, the resulting transfers of interests in X may be. See 19 RCNY § 23-03(e)(4). Pursuant to the merger, 100% of the interests in X are deemed exchanged for interests in Y. The transaction is exempt as a mere change of identity or form of ownership or organization to the extent the partners retain the same beneficial interest in the property following the merger as they held before the merger. In this case, A, B and C each retain a 24% interest in the property, D retains a 14% interest in the property and E retains a 4% interest in the property. Therefore, the merger is exempt as a mere change of identity or form of ownership or organization to the extent of 90%. The tax is imposed on $100,000 (10% × $1,000,000). The tax due is $2,625 ($100,000 × 2.625%). The tax rate is based on the full value of the consideration, $560,000, rather than the amount subject to tax. Example E: Corporation X has five shareholders (col. 1 of table below) and owns real property in New York City. Pursuant to a plan of merger agreed upon and adopted by shareholders of Corporation X on January 4, 1999, Corporation X is to be merged under Article 9 of the New York Business Corporation Law into Corporation Y, which owns no real property in New York City. Four of the five shareholders of Corporation X also own stock in Corporation Y prior to the merger (col. 3 of table below). Corporation Y has 30,000 outstanding shares but will increase that number to 50,000. Pursuant to the merger, the Corporation X shares will be converted into Corporation Y shares in a ratio of four Corporation Y shares for every five Corporation X shares. The mere change exemption is computed as follows: 1. X shares owned 2. % held in X 3. Y shares owned (before) 4. Y stock issued 5. Y shares owned (after) 6. % held in Y 7. % interest retained A 4,000 shares 16% 10,000 shares 3,200 shares 13,200 shares 26.4% 16% B 2,000 shares 8% 1,000 shares 1,600 shares 2,600 shares 5.2% 5.2% C 3,000 shares 12% 1,000 shares 2,400 shares 3,400 shares 6.8% 6.8% D 5,000 shares 20% 3,000 shares 4,000 shares 7,000 shares 14% 14% E 11,000 shares 44% 0 shares 8,800 shares 8,800 shares 17.6% 17.6% Total 25,000 shares 100% 15,000 shares (out of 30,000) 20,000 shares 35,000 shares (out of 50,000) 70% 59.6% The transfer of the City real property from Corporation X to Corporation Y pursuant to the merger would be exempt from tax. See 19 RCNY § 23-03(e)(2). Pursuant to the merger, 100 percent of the Corporation X shares are deemed exchanged for Corporation Y stock, which constitutes a transfer of a controlling economic interest in New York City real property. Because the transfers by the shareholders were made pursuant to the approved plan of merger they are aggregated in determining whether the transaction constitutes a transfer of a controlling economic interest. However, the transaction is exempt to the extent that each of the Corporation X shareholders retains its beneficial interest in the real property formerly held by Corporation X. Column 7 reflects the percentage interest in the property retained by each shareholder, which is the lesser of the amounts in Columns 2 and 6. The transfer is exempt as a mere change of identity or form of ownership or organization to that extent, i.e., 59.6 percent. Shareholders A, B, C, D and E are the grantors and pursuant to the merger, are considered to have transferred their shares in X to Corporation Y in exchange for Y shares. Example F: T, an individual, owns 20 shares in a cooperative housing corporation attributable to an apartment in the building. The apartment is leased to a tenant for residential use. T transfers the shares attributable to the apartment to Y Corporation, her wholly owned corporation. Because T retains a 100% beneficial ownership of the apartment, the transfer is exempt from tax as a mere change of identity or form of ownership or organization. Example G: J owns 70% of the stock of X Corp., whose sole asset is 80% of the stock of Y Corp. Y Corp.'s sole asset is an unencumbered parcel of commercial real property in New York City with a fair market value of $1,000,000. On February 1, 1999, J transfers all of her stock in X Corp. to a newly formed corporation, Z Corp. in return for 60% of Z Corp.'s stock. (The other 40% of Z Corp.'s stock is owned by shareholders who have no independent interest in X Corp., Y Corp. or Y Corp.'s parcel of real property.) J's transfer of the X stock is a transfer of a 56% interest (70% × 80%) in the real property and is, therefore, subject to tax as a transfer of a controlling economic interest. The value of the consideration received in exchange, the Z Corp. stock, is $560,000 ($1,000,000 × 56%). The transaction is exempt as a mere change of identity or form of ownership or organization to the extent that A retains a beneficial interest in the property following the merger. In this case, J retains a 33.6% interest in the property (56% × 60%). Therefore, the merger is exempt as a mere change of identity or form of ownership or organization to that extent. The tax is imposed on $224,000 (.224/.56 × $560,000). The tax due is $5,936 ($224,000 × 2.625%). The tax rate is based on the full value of the consideration, $560,000, rather than the amount subject to tax. (iii) Transfers to and from trusts. [Reserved.] (iv) For purposes of determining whether and to what extent the mere change of identity or form of ownership or organization exemption applies, the determination of the beneficial ownership of the real property or economic interest therein prior to a transaction and the extent to which the beneficial interest therein remains the same following the transaction will be based on the facts and circumstances. (c) Cross reference. For the rule concerning transfers of interests in housing companies organized and operating pursuant to Article 2, 4, 5 or 11 of the Private Housing Finance Law, see subparagraph (2) of 19 RCNY § 23-03(h).