A New York City Administrative Law Judge rejected a tax-exempt partner’s claim that the exemption from New York City real property transfer tax (“RPTT”) for transfers of real property to or from a tax-exempt entity should be applied to a sale by a taxable partnership to the extent of the tax-exempt entity’s percentage interest in that partnership. Matter of Jacob & Anita Penzer Foundation, Inc., TAT(H) 18-18(RP) (N.Y.C. Tax App. Trib., Admin. Law Judge Div., July 31, 2019, released Oct. 8, 2019).

Facts. The Jacob & Anita Penzer Foundation, Inc. (the “Foundation”) is an entity exempt from income tax pursuant to IRC § 501(c)(3). As such, both the Foundation and the Department of Finance agreed that it was a tax-exempt organization for RPTT purposes. The Foundation was a 33 1/3% partner in a limited liability partnership (the “Partnership”) that owned real property in New York City. The Partnership itself was not a tax-exempt organization for federal or RPTT purposes. 

In 2017, the Partnership sold the real property for approximately $83 million and paid RPTT in the amount of $2,182,057 on that sale. The entire amount of RPTT was paid by the Partnership, not the Foundation. The Foundation filed a claim for refund for 1/3 of the RPTT paid by the Partnership ($727,352), claiming that the exemption from RPTT for a tax-exempt entity should also apply to the extent of a tax-exempt entity’s ownership interest in a non-exempt seller (here, the Partnership). The Department denied the Foundation’s refund claim, and the dispute proceeded to a summary determination action.

Law. Administrative Code § 11-2108(a) provides that a refund claim “may be made by the grantor, the grantee or other person who has actually paid the tax.” The RPTT law exempts from tax “any deed, instrument, or transaction conveying or transferring real property or an economic interest therein by or to” a tax-exempt organization. Admin. Code § 11-2106(b)(2). The RPTT law also provides an exemption from RPTT for any deed, instrument, or transaction conveying real property or an economic interest therein 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 therein remains the same.” Id. at (b)(8).

ALJ Determination. The ALJ first determined that the Foundation did not have standing to assert a claim for refund because it did not pay the tax, and therefore held that the Petition must be dismissed. Despite finding that the Foundation did not have standing, the ALJ proceeded to address the Foundation’s tax exemption claim. In doing so, the ALJ applied the well-settled principle that tax exemption provisions are to be construed in favor of the taxing authority. 

The parties had agreed that if the Foundation had conveyed the real property, the sale would have been exempt from RPTT. However, the ALJ concluded that the exemption did not extend to the conveyance of the real property in this case because the Partnership conveyed the property, and the Partnership was not a tax-exempt entity. The ALJ noted that nothing in the statute suggested that the exemption for tax-exempt entities applied to entities which are not themselves tax-exempt but are owned by tax-exempt entities.

The ALJ also rejected the Foundation’s claim that it was appropriate to rely by analogy on the exemption for transactions that “effect[] a mere change of identity or form of ownership.” The “mere change in form” exemption applies to conveyances of real property “to the extent” the beneficial ownership of the real property conveyed remains the same. The ALJ concluded that, unlike the language of the “mere change in form” exemption, the tax-exempt entity exemption clearly requires that the grantor or grantee be a tax-exempt entity, which the Partnership was not. 


While the ALJ held that the transfer by the Partnership was subject to RPTT under the plain language of the statute, it is possible that the desired result would have been reached had the transaction been structured differently. For example, if each of the partners in the Partnership had sold their interests in the Partnership to the grantee instead of the Partnership selling the real property to the grantee, perhaps the result would have been different. Under the aggregation rules in 19 RCNY 23-02, transfers of an economic interest in entities that own real property made within three years of each other are aggregated in determining whether a taxable transfer of a controlling interest has occurred. While the three transfers would be aggregated, nonetheless, the Foundation’s transfer of its 1/3 interest in the Partnership would have likely qualified for the exemption under Administrative Code § 11-2106(b)(2).