Reversing a decision of a Kings County Supreme Court judge, the Appellate Division has unanimously held that a residential housing cooperative corporation’s termination of its participation in the Mitchell-Lama Housing Program did not result in a transfer of real property within the meaning of the New York City real property transfer tax law, and therefore was not subject to the tax. Trump Vill. Section 3, Inc. v. City of New York, 2012 NY Slip Op. 6595 (App. Div., 2d Dep’t, Oct. 3, 2012).

Trump Village Section 3, Inc. (“Trump Village”), is the owner of a residential housing cooperative complex consisting of three 23-story buildings located in Brooklyn, New York. When formed in 1961, Trump Village took title to the real property pursuant to the Mitchell- Lama housing program, a program enacted in the 1950s to foster affordable housing in the State for moderate-income families. Under the Mitchell Lama program, the cooperative corporation enjoyed substantial government benefits, but tenant-shareholders were restricted in their ability to make resales to third parties.

After paying off its government mortgage loan in 2005, the shareholders of Trump Village voted in 2007 to terminate participation in the Mitchell-Lama program. As a result, under the Private Housing Finance Law, the corporation “voluntarily dissolved.” It did so by “reconstituting” itself as a corporation under the Business Corporation Law. The “reconstitution” involved amending all references to the Private Housing Finance Law in the certificate of incorporation. New shares of stock in the “reconstituted” cooperative were not issued, although the existing stock certificates were amended to remove language pertinent to the Mitchell-Lama program. The shareholders, the number of shares, and the cooperative corporation’s federal tax identification number all remained the same before and after the “reconstitution,” and no deed was made or recorded.

The Department of Finance assessed $21 million in real property transfer tax (“RPTT”), penalty, and interest against Trump Village, asserting that the transaction involved a conveyance of real property to a new corporation. Trump Village brought a declaratory judgment action in court seeking a declaration that the RPTT was inapplicable. In 2011, a Kings County Supreme Court judge granted summary judgment to the Department, holding that Trump Village had “transferred” or “conveyed” real property. Trump Village appealed.

The Appellate Division, Second Department, unanimously reversed the decision, holding that Trump Village had demonstrated that it had not transferred or conveyed real property within the meaning of the RPTT law. The court began its analysis with the maxim that any doubts as to the scope and application of a tax are to be resolved in favor of the taxpayer. The court then considered the competing arguments: Trump Village argued that a “reconstitution”—a term used in the Private Housing Finance Law, but not in the RPTT law—involves no deed, delivery, grantor, or grantee. The Department claimed that the voluntary dissolution and reconstitution resulted in the formation of a new corporation, and thus the amended certificate of incorporation was in effect a “deed” subject to tax.

The appellate court found no support for the Department’s position, noting that Trump Village remained the same legal entity both before and after the “reconstitution.” Moreover, the court found no basis for interpreting the term “deed” to include an amendment to a corporation’s certificate of incorporation. The Department also argued that the “mere change in form” exemption under the RPTT, by its express terms, does not apply to a conveyance to a cooperative housing corporation. The court held that the exemption provision was not relevant since the tax was inapplicable in the first instance.

Additional Insights. The Appellate Division decision reaches the correct result, since it is difficult to see how the mere act of amending a certificate of incorporation can be considered a “transfer” or “conveyance” of real property from a grantor to a grantee. The court properly viewed Trump Village as the same legal entity throughout, albeit thereafter it was authorized under a different New York law and without the restrictions imposed under the Mitchell-Lama program. The decision reaches a result on nontaxability similar to that in an earlier court decision in Joint Queensview Housing Enterprise, Inc. v. Grayson (Sup. Ct., N.Y. Cty. 1990), rev’d on other grounds, 179 A.D.2d 434 (1st Dep’t 1992). There, a comparable “reconstitution” under a different section of the Private Housing Finance Law was also held not subject to RPTT, although the decision was later reversed on the grounds that the decision had been premature since no tax had yet been assessed by the Department of Finance.