Reversing a decision of the New York State Tax Appeals Tribunal, the Appellate Division, Third Department, has held that the former real property transfer gains tax could not be imposed on the transfer of property to which the City of New York obtained title in a condemnation proceeding, since the City did not compensate the taxpayer for the property until years after the gains tax was repealed. Matter of Malba Cove Properties, Inc. v. Tax App. Trib., 2014 NY Slip Op. 00145 (3d Dep’t Jan. 9, 2014).

Underlying Transaction. In 1995, the City sought title to vacant waterfront land in Queens in order to build Powell’s Cove Environmental Waterfront Park (the “Park”), which it was required to create by a consent decree entered into with the Department of Environmental Conservation. While claiming it already owned the property, the City brought a condemnation proceeding naming as parties Malba Cove Properties (“Malba”) and the State of New York. In 1996, the City was permitted to withdraw its condemnation proceeding as it applied to the State, and its petition to condemn the property was granted. The condemnation order provided that title to the subject property would vest in the City as of February 29, 1996, the date it filed the order and acquisition map.

Although the Park was completed in 2001, years of litigation continued, in which Malba sought payment for the property and the City claimed that it already owned the property. In October 2001, the State trial court held that Malba had established title to the property, and ordered the City to make an advance payment. The City continued to contest that order, and did not make any advance payment until May 2005, when Malba received $880,000 plus interest, and then another $10,000 in April 2006. In February 2007, the value of the property as of the February 1996 vesting date was determined to be $9,067,480, which the City was directed to pay to Malba. After further appeals, payment was finally made by the City to Malba in September 2008.

Meanwhile, the gains tax was repealed by the State Legislature, effective June 16, 1996. After finally receiving payment in September 2008, Malba paid the gains tax and interest under protest and challenged the imposition of the tax, claiming that the tax did not apply to a payment it did not receive until eight years after the gains tax was eliminated.

Decision Below. The Tax Appeals Tribunal, affirming an Administrative Law Judge determination, upheld the imposition of the tax. Matter of Malba Cove Properties Inc., DTA No. 823671. (N.Y.S. Div. of Tax App., May 17, 2012). The Tribunal relied on the court determination of title and found that the City took Malba’s property on February 29, 1996, and the property was valued as of that date. The Tribunal rejected Malba’s attempt to rely on the “open transaction rule” to argue that the transaction remained “open” until the condemnation proceeding concluded, because the value of the property was determined by the court to be the value on the date of the 1996 transfer.

Decision on Appeal. The Appellate Division held that, in this unusual situation, where the condemnor both claimed existing title to the property and also sought condemnation, it was “not clear that there would be a payment of any compensation until the City lost the aspect of the litigation in which it claimed title.” The court rejected the Tribunal’s reliance on Matter of Forty Second St. Co. v. Tax Appeals Trib., 219 A.D.2d 98 (3d Dep’t 1996), because in that case the fact that there would be a payment was settled at the outset, so that the property value was fixed as of the taking, with only the amount of that value in dispute. In Malba’s case, it was not clear that Malba would receive any compensation at all until the title issue had been determined. Since that determination did not occur until after the gains tax statute had been repeated, the court held that the tax could not be imposed.

Additional Insights

As the appeals court noted, if the City had been successful in its position that it had owned the property from the outset, no transfer would have taken place, so there was no certainty that any entity would owe a tax at the time of the 1996 order. By proceeding as it did, the City was able to acquire undisputed title, while it continued to litigate the issue of whether it already owned the property.

Given its finding that the tax did not apply, the court did not need to reach the question of how much interest would have been owed. However, the Tribunal – since it upheld the tax – did reach that issue, and sustained the full amount of interest sought by the City, despite noting that it was “sympathetic” to Malba’s position that it should not have been required to pay interest over the years in which the City contested Malba’s ownership, noting that “it would appear that the City advanced a questionable position in its litigation for almost a decade.”