Two partners bought real estate through their partnership, later sold a one-third interest to a third partner, and now want to buy that interest back at a higher price before selling everything (or their whole partnership interest) to a new buyer. Depending on WHEN each of these steps happens relative to a mid-transaction regulatory change, what 'original purchase price' can the original two partners use to calculate their gain for New York's Real Property Transfer Gains Tax?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1990 opinion is preserved here for historical and research value, not as current law.

Partners A and B contracted to buy a parcel of real property in September 1979. In 1985 they formed R & V Development Co., a Florida joint venture, and in October 1987 the property was actually purchased in R & V's name for a price the opinion calls "3X." That same month, A and B each sold a one-third interest in the partnership to a third party, C, for "4X" total. By the time of this opinion, A and B proposed reacquiring C's one-third interest for "6X," after which the plan was to sell either the property itself, or 100% of the partnership interest, to a new buyer, D.

The core legal question was what "original purchase price" A and B could use when calculating their taxable gain on the eventual sale to D. Under the gains-tax regulations (former 20 NYCRR § 590.49), acquiring a "controlling interest" in a real-estate-owning entity normally lets the ENTITY's original purchase price be "stepped up" to reflect the price actually paid for that controlling-interest acquisition -- unless the mere-change-of-identity exemption applied to it. Because A and B reacquiring C's one-third interest would restore them to 100% ownership (a controlling-interest acquisition), that reacquisition was a candidate for a step-up. But the regulation governing exactly how the step-up gets calculated was AMENDED effective November 7, 1990, right around the time of this transaction, with its own transitional grandfather rules for contracts and acquisitions that straddled the effective date. The Department worked through the timing combinations methodically: if A and B's sale contract to D was signed on or before November 7, 1990, their original purchase price steps up to "8X" (their retained two-thirds share of the original 3X purchase price, plus the full 6X paid to reacquire C's third) under the OLD rule's grandfather protection. If the D contract came AFTER November 7, 1990, but the reacquisition from C happened BEFORE that date (with R&V paying the tax attributable to that reacquisition under the amended rule's separate grandfather provision), the answer is still 8X. But if BOTH the D sale contract and the C reacquisition occur AFTER November 7, 1990, the original purchase price for A and B's gain calculation drops all the way to just "3X" -- the property's original, un-stepped-up historical cost -- because the amended regulation calculates the step-up differently once both events fall entirely under the new rule. Separately, regardless of any of this timing, if R & V DEVELOPMENT itself (rather than A and B individually) sells the property directly to D, its original purchase price simply stays at 3X throughout, because at the entity level no controlling interest was ever acquired or transferred after the original 1987 purchase.

What this means for you

Real estate partners buying back a co-owner's interest before a later sale

Under this now-repealed tax, the timing of when you reacquire a departing partner's interest, relative to any then-current regulatory changes, could swing your taxable gain calculation dramatically -- moving your "original purchase price" by millions of dollars in relative terms, exactly as this opinion's "3X vs. 8X" spread illustrates.

Real estate attorneys and tax planners sequencing partnership buy-back and resale transactions

This opinion is a rich worked example of how a mid-deal regulatory amendment's grandfather provisions can be stacked and sequenced -- useful groundwork for understanding how the Department analyzed transition-period questions generally under this tax.

Accountants reconstructing partnership-level versus partner-level gains-tax basis after a partial buyback

The opinion's final point -- that selling through the ENTITY itself (rather than the individual partners selling their restored 100% interest) produces a totally different, lower original purchase price -- is a critical structuring detail worth flagging in any historical basis reconstruction involving a partial partnership buyback.

Common questions

Q: Does this stepped-up basis rule still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Current New York real estate and business transfer taxes have their own separate basis rules.

Q: Why did selling through the PARTNERSHIP ITSELF avoid the whole step-up analysis?
A: Because a step-up under this tax was only triggered by an ACQUISITION OR TRANSFER of a controlling interest IN AN ENTITY. If R & V itself sells the underlying real property directly, there's no entity-level ownership-interest transfer at all -- it's an ordinary real estate sale, and the entity's own historical purchase price (3X) simply carries through unchanged.

Q: Why did the specific DATE of the reacquisition and the D sale contract matter so much?
A: Because the regulation governing exactly how a controlling-interest step-up gets calculated changed effective November 7, 1990, with detailed (and different) grandfather protections depending on which side of that date each step of the transaction fell.

Q: Can another partnership doing a similar partial buyback and resale 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, and the specific dollar outcomes here depended on the precise dates of each step relative to the November 1990 regulatory amendment.

Citations and references

Statutes and regulations:

• former Tax Law § 1440.5 (definition of "original purchase price")
• former 20 NYCRR § 590.49(a), (b), as promulgated September 24, 1985 (original purchase price is generally the entity's cost apportioned to the interest transferred; upon a controlling-interest acquisition where the mere-change exemption didn't apply, the entity's original purchase price may be stepped up to reflect the consideration paid for the ownership interest; no step-up if less than a controlling interest was acquired)
• former 20 NYCRR § 590.49(c), as amended effective November 7, 1990 (revised rule for a transferor's original purchase price when a sale results in a transfer or acquisition of a controlling interest: the higher of the entity's un-stepped-up original purchase price times the percentage sold, or the real property's fair market value at the time the controlling interest was transferred/acquired, times the percentage sold; includes grandfather provisions for transfers pursuant to binding written contracts entered into on or before the effective date, and for ownership interests acquired before the effective date where the transferor pays the attributable tax)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a90_10r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (10) R
Real Property
Transfer Gains Tax
November 14, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.M900713B

On July 13, 1990, a Petition for Advisory Opinion was received from R & V Development
Co., c/o Arthur Goldstein, Esq., Goldstein and Rubinton P.C., 18 West Carver Street, Huntington,
New York 11743-3379.
The issue raised by Petitioner, R & V Development Co., is whether A and B and/or Petitioner
are entitled to a "stepped-up" basis for Real Property Transfer Gains Tax (hereinafter "gains tax")
purposes with respect to the reacquisition of a one-third partnership interest from C.
In September, 1979 A and B entered into a contract to purchase a certain parcel of real
property. Subsequently, in 1985, A and B formed Petitioner, a Florida joint venture. In October,
1987, A and B purchased the real property in the name of the Petitioner for 3X. Thereafter, in
October, 1987, A and B each sold one-third of their partnership interests to C for 4X. Currently, A
and B propose to reacquire C's one-third partnership interest for a consideration of 6X. After the
reacquisition, the property or 100% of the partnership interest will be sold to D.
The gains tax is a ten percent tax on the gain derived from the transfer of real property, which
includes the acquisition or transfer of a controlling interest in any entity with an interest in real
property, where the property is located in New York State and where the consideration for the
transfer is $1 million or more. The gain subject to tax is the excess of the consideration over the
original purchase price of the property.
Section 590.49 of the Gains Tax Regulations, as promulgated September 24, 1985, provides
as follows:
(a) Question: What is the original purchase price used by the transferor to calculate gain?
Answer: Generally, it is the original purchase price of the real property as held by the entity,
apportioned to the interest the transferor is transferring.
Example 1:

Assume Corporation T only owns a parcel of real property
with an original purchase price of $2,500,000, including
capital improvements to date.
If individual R sells 100 percent of the stock to F, his original
purchase price is $2,500,000. This produces the same result
as if Corporation T had sold the property to F. If R instead
sells 60 percent of the stock to F, then R's original purchase

TP-9 (9/88)

-2­
TSB-A-90 (10) R
Real Property
Transfer Gains Tax
November 14, 1990
price is $1,500,000 (60 percent x $2,500,000).
(b) Question: Is the original purchase price of the real property as held by the entity
stepped-up upon the acquisition of a controlling interest?
Answer: Yes. In the case of an acquisition of a controlling interest, where the mere change
exemption was not applied, the original purchase price in the real property as held by the entity may
be stepped-up to reflect the consideration recognized on the transfer of the ownership interest.
If less than a controlling interest were acquired, the entity may not step-up its original purchase price
in the property.
Example 2:

Assume the same facts in example 1 of this section and that R sells
100 percent of the stock to F for $6,000,000, which represent the fair
market value of the real property. Since F has acquired a controlling
interest in Corporation T, F's original purchase price (and Corporation
T's original purchase price) is now $6,000,000. If F had acquired a
60-percent interest for $3,600,000, Corporation T's original purchase
price would be partially stepped-up to $4,600,000 ($1,000,000,
interest retained, plus $3,600,000).

Example 3:

Assume the same facts as in example 2 of this section except that R
sells 40 percent of the stock to F for $2,400,000. Since there has not
been an acquisition of a controlling interest, there has been no transfer
of real property. Accordingly, Corporation T's original purchase price
would remain at $2,500,000.

(c) Question: What is the transferor's original purchase price when any percentage interest in an
entity is resold?
Answer: No matter what percentage interest was purchased, when such interest is resold, the
original purchase price is the apportioned amount of the entity's original purchase price (determined
without regard to a step-up in original purchase price due to an acquisition of a controlling interest),
or the apportioned amount of the fair market value of the real property at the time such interest was
acquired, whichever is higher.
Example 4:

T acquired a 40-percent interest in Corporation S, at a time when the
fair market value of the real property was $2,000,000. Corporation
S's original purchase price in the property was $1,000,000.

-3­
TSB-A-90 (10) R
Real Property
Transfer Gains Tax
November 14, 1990
T now sells his 40 percent to W, who has just purchased the other 60
percent. T is taxable since W acquired a controlling interest. The
property is now worth $5,000,000. Corporation S's original purchase
Price is still $1,000,000. T's consideration is $2,000,000, (40 percent
x $5,000,000), and his original purchase price is the greater of
$400,000 (40 percent x $1,000,000) or $800,000 (40 percent x
$2,000,000), thus T's original purchase price is $800,000." (emphasis
added)
Further, Section 590.49(c) of the Gains Tax Regulations, as amended, effective November
7, 1990, provides:
Question: What is the transferor's original purchase price when any percentage interest in
an entity is sold, where such sale results in either a transfer or an acquisition of a controlling
interest?
Answer: Where the transferor or transferors acquired an interest in an entity which has an
interest in real property (see section 590.44 of this Part for further information on controlling
interest) and such acquisition(s) resulted in either a transfer or an acquisition of a controlling
interest in an entity with an interest in real property, such transferor or transferor's original
purchase price is the higher of the following:
1)
the entity's original purchase price (determined without regard to a step-up in
original purchase price due to a transfer or an acquisition of a controlling interest)
multiplied by the percentage ,interest in the entity that such transferor or transferors
is/are selling
or
2)
the fair market value of the real property at the time such controlling interest
was transferred or acquired multiplied by the percentage interest in the entity that
such transferor or transferors is/are selling.
In the cases where a transferor or transferors acquired an interest in an entity with an
interest in real property, and such acquisition(s) did not result in either the transfer
or acquisition of a controlling interest in an entity with an interest in real property,
such transferor's original purchase price for purposes of determining the gains tax due
on a subsequent transfer of such interest in the entity is the amount determined by
multiplying the entity's original purchase price (determined without regard to a step­
up in original purchase price due to a transfer or an acquisition of a controlling
interest) by the percentage interest in the entity that is being sold.

-4­
TSB-A-90 (10) R
Real Property
Transfer Gains Tax
November 14, 1990
Example 4:

T acquired a 60-percent interest in Corporation S on August 1, 1991,
at a time when the fair market value of real property owned by
Corporation S was $2,000,000. Corporation S's original purchase
price in the property was $1,000,000. T sells his 60 percent interest
to W on July 1, 1992. T's transfer to W is taxable since W has
acquired a controlling interest in Corporation S. Corporation S's
original purchase price is still $1,000,000, without regard to a step-up
of original purchase price due to T's acquisition of controlling interest
on August 1, 1991. T's original purchase price is the greater of
$600,000 (60 percent x $1,000,000) or $1,200,000 (60 percent x
$2,000,000). Thus T's original purchase price is $1,200,000.

Example 5:

Same facts as in Example 4, except that T originally acquired a 40
percent interest in Corporation S instead of 60 percent in a transaction
that did not result in an acquisition or transfer of a controlling interest,
and he transferred such interest to W, who had just purchased another
20 percent interest in Corporation S from another person. T's transfer
to W is taxable since W has acquired a controlling interest in
Corporation S (40% + 20% = 60%). T's original purchase price is
$400,000 (40 percent x $1,000,000)." (emphasis added)

It should be noted that the amendments to Regulation 590.49(c) shall not apply to transfers
of real property occurring on or after the effective date of this regulation which are made pursuant
to binding written contracts entered into on or before such date, provided that the date of execution
of such contract is confirmed by independent evidence, such as the recording of a contract or
payment of a deposit. Moreover, the amendments to Regulation 590.49(c) shall not apply to the
transfer of an ownership interest in an entity, where such ownership interest was acquired prior to
the effective date of this regulation, and the transferor pays the tax attributable to his or her transfer.
Accordingly, as for A and B's original purchase price upon their transfer of 100% of their
interest to D, if the contract to transfer such interest was entered into on or before November 7, 1990
their original purchase price will be "stepped-up" to 8X (i.e., 2/3 multiplied by 3X, plus 6X) pursuant
to the grandfather provision of Section 590.49(c), as amended, effective November 7, 1990. If the
contract was entered subsequent to November 7, 1990, their original purchase price will also be 8X,
provided the reacquisition of C's interest took place prior to November 7, 1990 and the Petitioner
pays the tax attributable to the gain derived from its transfer to D pursuant to the grandfather

-5­
TSB-A-90 (10) R
Real Property
Transfer Gains Tax
November 14, 1990
provision of Section 590.49(c), as amended, effective November 7, 1990. However, if the contract
was entered into subsequent to November 7, 1990 and C's interest is reacquired subsequent to
November 7, 1990, the original purchase price will be 3X pursuant to Section 590.49(c), as
amended, effective November 7, 1990.
Regardless of when the contract was entered into, if the Petitioner transfers the real property
to D, instead of A and B transferring their partnership interest, the Petitioners original purchase price
will be 3X since no controlling interests were acquired since the acquisition of the property in
October, 1987.

DATED: November 14, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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