We have obtained under the Freedom of Information Law several Finance Letter Rulings of interest, most involving the New York City real property transfer tax, issued by the New York City Department of Finance. They constitute all letter rulings issued by the Department in 2015 and during the first half of 2016. None of these rulings currently appear on the Department's website. They are summarized below.
- Transfer of realty by LLC owned by a nonprofit qualifies for exemption from the RPTT. One of the more interesting real property transfer tax ("RPTT") letter rulings involved an educational organization exempt from federal income tax under IRC 501(c)(3) that operates a museum in New York City and that occupies real property owned by a real estate holding limited liability company, which leased the real property to the organization. The transaction involved the sale of the real property by the LLC to a developer for cash, after which the developer would construct two condominium units on the property, one unit to house the educational organization, the other unit consisting of residential apartments to be sold or rented by the developer. Upon completion of the project, the developer would transfer the first unit either to the educational organization or to a new LLC owned by the organization.
The Department ruled that the LLC's sale of the real property to the developer would qualify as an exempt transfer made by a nonprofit educational organization under Administrative Code 11-2106(b)(2), even though the LLC is not itself a 501(c)(3) organization. The Department concluded that had the educational organization sold the real property directly, the sale clearly would have qualified for exemption from RPTT, and since the sole purpose of the LLC was to own and hold the property on behalf of the organization, the Department concluded that the same result should apply. Finance Letter Ruling, FLR-15-4974 (N.Y.C. Dep't of Fin., May 23, 2016).
- RPTT calculation of consideration for the sale of air rights. In another RPTT letter ruling, the Department was asked how to calculate taxable consideration on a sale of air rights (including development rights) relating to Manhattan real property currently being used as a parking lot, which would be the site of a new building to be constructed by the purchaser. The purchaser paid the seller $15.2 million for the air rights, although the purchaser will also spend $978,000 to construct retail space that will be retained by the seller, who will reimburse the purchaser $500,000 toward those construction costs.
The Department ruled that the consideration is the $15.2 million paid to the seller for the air rights, plus the purchaser's construction costs for the retail space retained by the seller, less the seller's $500,000 contribution toward those costs. A quitclaim deed confirming that the seller will own only the retail portion of the new building, and another confirming title in the purchaser for the other portions of the building, both made without additional consideration, were found to be exempt from RPTT as mere changes in form of ownership under Administrative Code 11-2106(b)(8). Finance Letter Ruling, FLR-15-4967 (N.Y.C. Dep't of Fin., Nov. 13, 2015).
- RPTT rate on transfers of residences and individual co-op and condo apartments. Most of the RPTT letter rulings address questions of whether the lower RPTT rate on sales of residential real property (including individual cooperative apartments and condominium units) (1.425% where the consideration is more than $500,000) or at the higher rate (2.625% where the consideration is more than $500,000) applies to the sale. The Department tends to take a flexible facts and circumstances approach regarding the applicable RPTT rate:
- The sale by a trust of two Manhattan co-op apartment units that were physically connected through an internal hallway, and that were long occupied as a single apartment, qualified for the lower RPTT rate on sales of individual cooperative apartments. Finance Letter Ruling, FLR154970RPTT (N.Y.C. Dep't of Fin., Oct. 16, 2015). The same result was obtained regarding the sale of two Manhattan co-op apartment units that were not physically connected, but where the two units were occupied as a single residence for 44 years, and the purchaser of the two units intended to have them physically combined. Finance Letter Ruling, FLR164977RPTT (N.Y.C. Dep't of Fin., June 9, 2016). The Department has even sanctioned the lower RPTT rate for the sale of two condominium units to an individual purchaser where the two units were physically combined many years earlier, but where permits for the combination were never filed with the New York City Buildings Department. Finance Letter Ruling, FLR-15-4973/RPT (N.Y.C. Dep't of Fin., Sept. 24, 2015).
- The Department held that the sale of a singlefamily house classified as a Class A-1 single family dwelling for real property tax purposes qualified for the lower RPTT rate on transfers of residential real property, even though the Certificate of Occupancy described the property as including a doctor's office. Finance Letter Ruling, FLR-14-4962/RPTT (N.Y.C. Dep't of Fin., May 19, 2015). In another ruling, the transfer of Manhattan property classified as Class 1 residential real property, 17% of which comprised commercial space on the ground floor, was also found to qualify for the lower RPTT rate because the property is a one-, twoor three-family house and categorized as a Class 1 property (the ruling referred to the property as both a "building" and a "one family home"). Finance Letter Ruling, FLR-15-4975 (N.Y.C. Dep't of Fin., May 13, 2016).
- The sale of a residential condominium unit and the sale to the same purchaser of a noncontiguous "suite unit" in the condominium's tower--where suite usage was limited to, among other things, residential use only by domestic employees of the condo unit owner or by certain family members of the owner--qualifies for the lower RPTT rate on sales of individual condominium units. Finance Letter Ruling, FLR-14-4963-RPTT (N.Y.C. Dep't of Fin., June 15, 2015). The ruling cites to Matter of Rosenblum, TAT(E)01-31(RP) (N.Y.C. Tax App. Trib., Sept. 12, 2006), where the City Tribunal held that a similar arrangement regarding "suite units" was an integral part of the primary residential condominium unit. A similar ruling was issued regarding the sale of individual residential condominium units where the purchaser could also purchase a "studio unit" with restrictions similar to those discussed in the prior ruling. Finance Letter Ruling, FLR-144965-RPTT (N.Y.C. Dep't of Fin., June 15, 2015).
- Effect of corporate reorganization on S corporation's general corporation tax filing obligation. A letter ruling under the general corporation tax ("GCT") involved a federal S corporation that underwent a mid-year reorganization in 2014 in a transaction that qualified for exemption under IRC 368(1)(a)(F). Under that reorganization, Old S Corp. (a GCT filer) converted to a single-member LLC ("NewCo LLC") owned by NewCo, a newly created federal S corporation. Thereafter, all of Old S Corp.'s assets were owned by NewCo LLC, a disregarded entity for income tax purposes. The question presented was whether NewCo (formed in mid-2014) should file a single GCT return for the entire 2014 year or whether short period GCT returns should be filed by Old S Corp. (for the period through the date of the reorganization) and by NewCo (for the period after the reorganization).
The Department ruled that NewCo should file a single GCT return for the entire 2014 year. It reasoned that since NewCo LLC (which, after the reorganization, owned the assets held by Old S Corp.) was a disregarded entity, NewCo is considered the owner of those assets for income tax purposes. Even though the GCT law does not recognize federal S corporation status, the Department concluded that the same tax year for federal purposes should apply for GCT purposes. Under IRC 368(a)(1)(F), the two short years constituted a single taxable year of the acquiring entity, in this case NewCo. Finance Letter Ruling, FLR-15-4966-GCT (N.Y.C. Dep't of Fin., June 3, 2015).
It appears that the Department is no longer posting its letter rulings on its website, thereby making it necessary for taxpayers to obtain them through the Freedom of Information Law, a cumbersome process. Even though letter rulings are only binding on the Department with respect to the named requester, they provide useful guidance about the Department's positions. Needless to say, the Department should post all letter rulings on its website in a timely fashion.