The difficulties in establishing that a transferee increased his or her beneficial interest in real property before a taxable transfer occurs for purpose of claiming the “mere change in form” exemption under the New York City real property transfer tax are illustrated in a recent New York City Tax Appeals Tribunal decision. Matter of Vestry Acquisition LLC, TAT (E) 15-14(RP) (N.Y.C. Tax App. Trib., Dec. 1, 2017) (released Jan.10, 2018). The decision upheld the denial to a member of a limited liability company (“LLC”) who purchased a condominium unit from the LLC of a 25% increased “mere change in form” exemption beyond his initial 25% membership interest upon formation of the LLC several years earlier.

In 2002, three individuals formed the Petitioner, Vestry Acquisition LLC (“Vestry”), to sponsor a seven-unit condominium development on Vestry Street in downtown Manhattan. Under the LLC Agreement, the three members made initial cash contributions and acquired corresponding capital interests of 50% (Harlan Waksal), 25% (Charles Dunne), and 25% (Andreas Kaubisch). The LLC Agreement provided that, notwithstanding any other provision in the Agreement, each member was entitled to a distribution of condominium unit based on the member’s pro rata percentage. It also imposed various conditions in order for a member to transfer a membership interest in the LLC.

By 2012, five of the seven units had been sold, leaving two units remaining. In March 2012, Vestry distributed one of those two units to Mr. Dunne for $10 million. A real property transfer tax (“RPTT”) return was filed claiming a 50% mere change in form exemption and remitting tax on half of the $10 million consideration. Following an audit, the Department assessed additional tax of approximately $35,000 on the grounds that the transaction only qualified for a 25% mere change in form exemption.

Despite the fact that the grantee (Mr. Dunne) had initially held only a 25% interest in the LLC, Vestry claimed that in 2006, he acquired Mr. Kaubisch’s 25% membership interest. Vestry made this claim on the basis of a letter dated September 5, 2006, indicating that by agreement Mr. Kaubisch relinquished to Mr. Dunne his right in the unit, reducing Mr. Kaubisch’s future capital contribution requirements and establishing that Mr. Dunne’s contribution requirements correspondingly increased. Thus, Vestry claimed that Mr. Dunne’s interest in the unit had increased from 25% to 50% several years prior to the 2012 transfer.

An ALJ had held that Vestry did not meet its burden of proof that Mr. Dunn’s beneficial interest was greater than 25% at the time the unit was transferred in 2012, and the City Tribunal has now affirmed that determination.

Under the “mere change in form” exemption, no transfer tax is due to the extent the beneficial ownership of the realty or economic interest in an entity owning the real property remains the same after the transfer. The City Tribunal remained unconvinced that Mr. Dunne’s beneficial interest had in fact increased to 50% before the 2012 transfer. One reason was that the 2006 letter purporting to increase his ownership percentage did not satisfy the explicit requirements of Vestry’s LLC Agreement for transfers of units. Another reason was that the City Tribunal found there to be inconsistencies between Mr. Dunne’s capital accounts as reported in his federal K-1s from Vestry for 2011 and 2012, and his claimed 50% interest at the time of transfer. The City Tribunal noted that “Petitioner opted to proceed . . . without a hearing and, therefore, without any testimony from the individuals involved.” 


The decision illustrates the potential hurdles of proceeding in New York City tax disputes without a hearing and, in particular, without testimony to explain potential factual discrepancies. Here, likely given the amount of tax in issue, the case proceeded on submission without an evidentiary hearing and also without oral argument or briefing before the City Tribunal. Moreover, the outcome could conceivably have been different had the parties amended the LLC Agreement to reflect the changes in the members’ ownership interests, rather than doing it by a separate letter agreement in which the third member did not participate.