I'm selling my 45% shareholder interest in a corporation whose only asset is New York real property, as part of a deal where the buyer will also acquire another shareholder's 50% interest (making the buyer's total acquisition a controlling interest). The price I'm actually getting for my shares is nominal, but the buyer is also assuming and satisfying a lot of debt. Is the 'consideration' for gains-tax purposes just the cash and debt relief I personally receive, or something else?

Plain-English summary

This tax no longer exists. New York's Real Property Transfer Gains Tax (former Article 31-B of the Tax Law) was a 10% tax on the GAIN from transferring New York real property where consideration was $1 million or more. It was repealed for any transfer occurring on or after June 15, 1996. This 1987 opinion is preserved here for historical and research value, not as current law.

Miller Buckley Overseas Limited (MBO), a UK company, owned a 45% stake in Millbuck Homes Inc. (MHI), a U.S. corporation whose only asset was New York real property. The other MHI shareholders were Argent (50%) and Multinational Financial Services Limited (5%, not selling). MBO contracted to sell its 45% interest to TVS Realty Corp. (d/b/a the MacFarlane Company) for a nominal $1, with TVS also agreeing to assume roughly $2.1 million in bank loans and satisfy roughly $1.4 million in other debts owed by MHI to various Buckley-family-related entities. TVS was also separately negotiating to buy Argent's 50% interest for $50,000, which together with the MBO purchase would give TVS a controlling interest (95%) in MHI. MBO argued that its taxable consideration should be its 45/95 proportionate share of the TOTAL consideration TVS paid across both purchases (cash plus all debt assumed/satisfied) -- computing a specific gain and tax liability it proposed the Department accept.

The Department applied former 20 NYCRR § 590.47(a): when an acquisition of a controlling interest occurs, consideration is NOT the price paid for the ownership interest itself -- former Tax Law § 1440.1 instead calls for "an apportionment of the fair market value of the interest in real property to the controlling interest." And under former 20 NYCRR § 590.47(b), that fair market value is generally established by appraisal (the price a willing buyer would pay a willing seller for the real property, without deducting mortgages). Applying this, when TVS acquired MBO's 45% interest, the consideration for gains-tax purposes was 45% of MHI's real property's fair market value at the time -- not MBO's proportionate share of the price TVS actually paid across both purchases. The Department declined to bless MBO's specific proposed dollar computation, noting that determining the exact amount is a factual question for the Department's Audit Division pre-transfer audit procedure, not something an Advisory Opinion resolves -- though it left open that MBO's number COULD turn out to be correct if MBO could show to the Audit Division's satisfaction that its proposed figure actually equaled 45% of MHI's real property's fair market value.

What this means for you

Business owners selling a controlling or partial interest in a real-estate-holding entity

Don't assume the cash price and debt relief you personally receive sets your gains-tax consideration. When a controlling-interest transfer is involved, consideration is measured by the underlying real property's FAIR MARKET VALUE apportioned to your percentage interest -- which can be very different from a low negotiated share price, especially in a distressed or debt-heavy deal.

Accountants and appraisers computing gains-tax exposure on a controlling-interest sale

Be ready to support a fair-market-value appraisal of the entity's real property, not just a tally of purchase price plus assumed debt. The Department's regulation makes clear the latter isn't the measuring stick, even though it may sometimes produce a similar number.

Real estate attorneys structuring related-party debt-heavy stock sales

This opinion is a useful illustration of how nominal cash consideration ($1 for MBO's shares) plus substantial debt assumption doesn't automatically set the gains-tax consideration -- the FMV-apportionment rule can push the taxable consideration higher (or lower) than the deal's headline dollar figures.

Common questions

Q: Does this fair-market-value consideration rule for controlling-interest sales still apply today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Current transfer taxes have their own separate consideration rules.

Q: Did the Department confirm MBO's proposed $281,583 gain and $28,153 tax figure?
A: No -- the opinion explicitly said computing the exact dollar amount is a factual question for the Audit Division's pre-transfer audit procedure, not something decided in an Advisory Opinion, though it left open that MBO's number could match if it could be shown to equal 45% of MHI's real property's fair market value.

Q: Who has to prove the real property's fair market value?
A: The burden of establishing fair market value falls on the parties to the transaction, generally through an appraisal -- though the regulation allows other methods if fair market value can otherwise be reliably established.

Q: Can another minority shareholder in a similar deal rely on this exact ruling?
A: No, apart from the repeal -- an Advisory Opinion binds the Department only as to the petitioner and facts presented.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.1 (consideration for a controlling-interest transfer is the fair market value of the real property interest, apportioned to the controlling interest acquired)
• former 20 NYCRR § 590.47(a) (the price paid for the ownership interest is generally NOT the consideration used to calculate gain in a controlling-interest acquisition)
• former 20 NYCRR § 590.47(b) (fair market value is generally established by appraisal; it is gross value, not "net fair market value" reduced by mortgages)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a87_2r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (2) R
Real Property Transfer
Gains Tax
January 12, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. M861205A

On December 5, 1986, a Petition for Advisory Opinion was received on behalf of Miller
Buckley Overseas Limited located at Millbuck House, Corporation Street, Rugby, England.
The issue raised concerns the method of determining the consideration for purposes of
computing the Real Property Transfer Gains Tax imposed by Article 31-B of the Tax Law
(hereinafter "the gains tax") in the case of an acquisition of a controlling interest of an entity with
an interest in real property.
The facts as presented by Petitioner are as follows: Miller Buckley Overseas Limited
(hereinafter MBO) is a 45% shareholder in Millbuck Homes Inc. (hereinafter "MHI"), a U.S.
corporation whose only asset is real property located in New York State. The other shareholders in
MHI are Argent, a 50% shareholder and Multinational Financial Services Limited (hereinafter
"MFSL"), which owns the remaining 5%.
MBO has entered into a contract with TVS Realty Corp., DBA the MacFarlane Company
(hereinafter "TVS") to sell its interest in MHI. MBO is to receive $1 as consideration for its shares.
In addition, TVS has agreed to assume bank loans of MHI with Barclays Bank and European
American in the amounts of $1,300,000 and $800,000, respectively. TVS has also agreed to satisfy
debts totalling $1,435,100 on loans payable by MHI.
The loans are payable to the following corporations as follows:
Buckley Investments Limited (hereinafter "Investments")
$1,072,300
Buckley Holdings Inc. (hereinafter "Holdings")

142,000

Bertrum Limited (hereinafter "Bertram")

209,000

Catherine Holdings Limited (hereinafter "Catherine")

11,500

Seven hundred thousand dollars of the amount payable to Investments is to be used to satisfy
a loan by Barclays Bank to Investments on which MHI was the guarantor.
MBO is a 49% and 99% stockholder in Holdings and Bertram, respectively, and a 100%
stockholder in Miller Buckley Coignet, which in turn owns 100% of Catherine. Investments is the
parent corporation of MBO. There is no relationship between the other stockholders in MHI and
these corporations.
RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

-2­
TSB-A-87 (2) R
Real Property Transfer
Gains Tax
January 12, 1987

The original purchase price of the realty, the cost of capital improvements made and other
acquisition costs incurred total $3,148,286 as recorded on the books and records of MHI.
TVS has informed MBO that it would acquire Argent's 50% share in MHI in the near future
and that it will pay Argent $50,000 as consideration for its shares. MFSL will not be selling its
shares to TVS.
Petitioner acknowledges that the acquisition by TVS of MBO's 45% interest and Argent's
50% interest in MHI will result in TVS acquiring a controlling interest in MHI, and, therefore, a
transfer within the purview of the gains tax will occur.
It is the contention of Petitioner that the fair market value of the acquisition of a controlling
interest in MHI, a corporation whose only asset is New York real property, is the total consideration
paid by TVS to acquire such interest; that the total consideration for the 95% interest is $3,585,101,
which includes all cash paid plus debts assumed, satisfied or discharged; that the consideration to
be used by MBO in computing its gain subject to tax under Article 31-B should be 47.37% (MBO's
45% share divided by the 95% interest acquired by TVS) of the total consideration paid by TVS to
acquire a controlling interest in MHI; that MBO's original purchase price in the realty should be 45%
of the $3,148,286 original purchase price recorded on the books of MHI and that MBO will derive
a gain of $281,583 on its transfer of stock in MHI and will incur a $28,153 gains tax liability.
Gains Tax Regulations Section 590.47(a) states, in pertinent part, as follows:
"Q.

Is the price paid for the ownership interest in an entity the consideration for a
controlling interest used to calculate gain?

A.

Generally, no. Section 1440.1 of the Tax Law states that '...there shall be an
apportionment of the fair market value of the interest in real property to the
controlling interest to ascertain the consideration for the controlling interest.'"

Also, Gains Tax Regulations Section 590.47(b) states, in pertinent part, as follows:
"Q.

How is fair market value determined?

A.

Generally, by appraisal. It is the amount a willing buyer would pay a willing seller
for the real property. It is not 'net fair market value' which deducts mortgages on the
property from fair market value."

As provided at section 590.47(a) of the Gains Tax Regulations, when an acquisition of a
controlling interest of an entity with an interest in real property occurs, the consideration used to
determine the gains tax due is the fair market value of the interest in real property of the entity
apportioned to such interest acquired.

-3­
TSB-A-87 (2) R
Real Property Transfer
Gains Tax
January 12, 1987

The burden of establishing fair market value of real property for gains tax purposes is on the
parties to the transaction. As stated at section 590.47(b) of the gains tax regulations, such fair market
value is generally established through an appraisal. However, if fair market value of real property
can be established through an alternative method, and without an appraisal, an appraisal may not be
necessary.
In the case at hand, when TVS acquires MBO's 45% interest in MHI, the consideration used
to compute the gains tax will equal 45% of the fair market value of the interest in real property
owned by MHI at the time of such acquisition. The original purchase price used to compute the
gains tax in the MBO to TVS transfer equals 45% of the original purchase price of the interest in real
property in the hands of MHI.
Advisory Opinions are written statements setting forth the applicability to a specified set of
facts of pertinent statutory and regulatory provisions. Thus, questions of fact such as the exact
amount of Petitioner's gains tax liability cannot be determined within the context of an Advisory
Opinion. Rather, such amounts are determined by the Audit Division of the Department of Taxation
and Finance in its pre-transfer audit procedure.
Accordingly, if it can be demonstrated to the satisfaction of the Audit Division that 47.37%
of $3,585,101 is equal to 45% of the fair market value of the interest in real property held by MHI
at the time that MBO sells its stock to TVS, such amount would be the consideration used to
compute the gains tax in the MBO to TVS transfer.

DATED: January 12, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.