In a unanimous decision, the New York Court of Appeals has rejected the Department of Finance’s attempt to impose New York City real property transfer tax when a residential cooperative corporation terminates its participation in the Mitchell-Lama Housing Program and “reconstitutes” as a cooperative corporation under the New York Business Corporation Law. Trump Vill. Section 3, Inc. v. City of New York, No. 221 (Court of Appeals, Dec. 17, 2014). The decision confirms that in order to constitute a taxable “deed,” there must be an actual conveyance of real property from a grantor to a grantee.
Trump Village Section 3, Inc. (“Trump Village 3”) is a Mitchell-Lama cooperative housing corporation that owns and operates three 23-story buildings in Coney Island, New York. It was formed in 1961 under what is now known as the Private Housing Finance Law. Under the Mitchell-Lama program, the cooperative corporation enjoyed substantial government benefits, while tenant-shareholders were restricted in their ability to make resales to third parties.
In 2007, the shareholders of Trump Village 3 voted to terminate its participation in the Mitchell-Lama program, which it was permitted to do after being in the program for 20 years. As a result, under the Private Housing Finance Law, Trump Village 3 “reconstituted” itself as a corporation under the Business Corporation Law. The “reconstitution” involved amending the corporation’s certificate of incorporation. The shareholders, the number of shares, and the corporation’s federal tax identification number all remained the same before and after the “reconstitution,” and no deed was made or recorded.
In August 2010, the Department of Finance issued a $21 million assessment against Trump Village 3 for real property transfer tax (RPTT), interest, and penalties. The Department claimed that the transaction involved a conveyance of real property to a new corporation and thus there was a taxable “deed” under the RPTT law. Rather than challenge the assessment administratively through the New York City Tax Appeals Tribunal, Trump Village 3 brought a declaratory judgment action in the courts, asserting that the RPTT was inapplicable because there was no transfer of real property. Although the Department initially prevailed before a Kings County Supreme Court judge, that decision was later reversed by the Appellate Division, Second Department (discussed in the November 2012 issue of New York Tax Insights). The Appellate Division granted the Department leave to appeal to the Court of Appeals, which has now issued a unanimous decision agreeing with the Appellate Division that no taxable event had taken place, and applying the same analysis.
In its appeal, the Department continued to claim that the amendment to the certificate of incorporation was a taxable “deed” within the meaning of the RPTT law, which allegedly effectuated the conveyance of real property to a new corporation. The Court rejected this as a “strained interpretation” of the plain language of the RPTT law. It disagreed with the Department’s claim that the “reconstitution” was the equivalent of a “reincorporation,” and cited New York case law as far back as 1857 for the proposition that a reincorporation is regarded as a continuation of an existing corporation. The Court also rejected the Department’s argument that the cooperative corporation “radically altered” its business under the reincorporation, and pointed out that “the RPTT does not tax changes in the business or purpose of the corporation owning real property, but taxes conveyances of property or an interest therein.” As for the Department’s assertion that the certificate of amendment was a “deed” because it conveyed real property rights, the Court found no factual or legal support for that interpretation. Finally, the Court rejected the Department’s reliance on East Midtown Plaza Housing Co. v. Cuomo, 20 N.Y.3d 161 (2012), a decision under the Martin Act, where the Court held that the reconstitution of a Mitchell-Lama cooperative involved the “offering or sale of securities” that imposed certain disclosure requirements. The Court distinguished that decision as addressing the entirely different issue of shareholder rights. The Court concluded that the decision “lends no support” for taxing a Mitchell-Lama privatization.
The Court of Appeals decision should finally end decades-long efforts by the Department to seek to tax the “reconstitution” of Mitchell-Lama cooperatives that leave the program. See Joint Queensview Housing Enterprise, Inc. v. Grayson (Sup. Ct. N.Y. Cnty., 1990), rev’d on other grounds, 179 A.D. 2d 434 (1st Dep’t 1992) (where a reconstitution of a Mitchell-Lama cooperative under a different section of the Private Housing Finance Law was also held not subject to RPTT). The unanimous Court of Appeals decision (which followed a unanimous Second Department decision) constitutes an emphatic rejection of the Department’s legal position, and it is difficult to see how the reconstitution could possibly have constituted a “transfer” or “conveyance” of real property from a grantor to grantee under the RPTT. Moreover, even if there has been a transfer of real property, the transfer should have been exempt from RPTT as a “mere change in form,” since there was no change in beneficial ownership of the cooperative (an issue not reached by the Court).
We understand that in a separate case being litigated administratively that involves the same issue, but for a different Mitchell-Lama cooperative, the Department has now withdrawn its Exception filed with the City Tribunal. Matter of Trump Vill. Section 4, Inc., TAT(H) 10-34(RP) (N.Y.C. Tax App. Trib., Admin. Law Judge Div., July 11, 2013) (discussed in the August 2013 issue of New York Tax Insights). That ALJ decision concluded that there was no transfer of real property, but also addressed related issues, ruling that the reconstitution did not involve the transfer of an “economic interest” in real property and would have qualified for exemption as a “mere change in form,” even if there had been a transfer, since there was no change in beneficial ownership of the cooperative corporation. By withdrawing its Exception, the Department properly acknowledges that the Court of Appeals decision is dispositive on whether there had been a transfer in the first place. However, the withdrawal will also mean that the ALJ’s analysis of those related issues will not be considered precedential with respect to the other issues.