Our company is buying substantially all the assets of a bankrupt railroad, with the sale authorized by the federal bankruptcy court, and financing part of the purchase with a note secured by a mortgage to the Federal Railroad Administration acting as trustee for the United States. Does the asset conveyance owe Real Estate Transfer Tax, and does the mortgage owe Mortgage Recording Tax?

Plain-English summary

D & H Corporation, a Delaware corporation and indirect wholly-owned subsidiary of Canadian Pacific Limited, contracted to purchase substantially all the assets of the Delaware and Hudson Railway Company ("D & H"), a debtor reorganizing under Chapter 11 of the Bankruptcy Code since 1988. On June 8, 1990, the federal Bankruptcy Court for the District of Delaware authorized the sale of D & H's assets to Canadian Pacific (through D & H Corporation) under 11 U.S.C. § 363(b) & (f). To help fund the purchase, D & H Corporation would issue a $35,000,000 nonrecourse contingency note to the United States of America, secured by a mortgage naming the Administrator of the Federal Railroad Administration -- part of the U.S. Department of Transportation -- as trustee for the United States.

The Department addressed two separate tax questions:

• Real Estate Transfer Tax on the asset conveyance: exempt. Tax Law § 1405(b)(8) exempts any conveyance given pursuant to the Federal Bankruptcy Act, and this conveyance -- authorized by the bankruptcy court under 11 U.S.C. § 363 -- squarely qualifies.
• Mortgage Recording Tax on the securing mortgage: exempt. Citing Petition of New York v. New York University and a 1956 New York Attorney General opinion, the Department held that a mortgage is exempt from Mortgage Recording Tax where the mortgagee is an instrumentality of the federal government, since the state has no taxing power over federal government obligations -- and that immunity extends to the mortgagor too, because the mortgage recording tax operates as a tax on the instrument itself, not just on one party to it (citing Pittman v. Home Owners' Corporation, 308 U.S. 21). Since the Federal Railroad Administration (through its presidentially-appointed Administrator) is an agency of the U.S. Department of Transportation, the mortgage naming it as trustee for the United States is immune.

What this means for you

Buyers acquiring assets through a bankruptcy court sale

A conveyance authorized by a federal bankruptcy court under the Bankruptcy Code is exempt from New York Real Estate Transfer Tax under Tax Law § 1405(b)(8), regardless of the purchase price or the buyer's identity -- the exemption turns on the SOURCE of the conveyance authority (the Bankruptcy Act), not on who the parties are.

Parties financing a transaction with a mortgage to a federal agency

A mortgage where the federal government (or one of its agencies/instrumentalities) is the mortgagee is exempt from Mortgage Recording Tax, and critically, that exemption protects the MORTGAGOR too (not just the federal mortgagee) -- the tax is on the instrument itself, so if the instrument is untaxable because of who holds it, neither side owes the tax.

Accountants and tax professionals

Note the distinction between this pure bankruptcy-conveyance exemption and the separate federal-instrumentality-as-TRANSFEROR exemption seen in later rulings (e.g., Freddie Mac TSB-A-91(9)R) -- here the federal nexus is on the FINANCING side (the mortgage), while the transfer-tax exemption rests entirely on the bankruptcy-authorization ground.

Common questions

Q: Does buying assets through a bankruptcy court sale avoid New York transfer tax?
A: Yes, if the conveyance is made pursuant to the Federal Bankruptcy Act -- Tax Law § 1405(b)(8) exempts it regardless of the parties involved.

Q: If I take out a mortgage with a federal agency as the lender, do I (the borrower) owe Mortgage Recording Tax?
A: No. The federal-instrumentality exemption protects the mortgagor as well as the mortgagee, because the tax is legally imposed on the mortgage instrument itself.

Q: Can I rely on this ruling for my own bankruptcy-related purchase?
A: No. This advisory opinion binds the Department only as to the petitioner and the specific facts described.

Citations and references

Statutes and case law:

• Section 1402 of the Tax Law (imposition of the Real Estate Transfer Tax)
• Section 1402-a of the Tax Law (additional tax on residential real property over $1 million)
• Section 1405(b)(8) of the Tax Law (exemption for conveyances pursuant to the Federal Bankruptcy Act)
• Section 253 of the Tax Law (imposition of the Mortgage Recording Tax)
• Petition of New York v. New York University, 3 A.D.2d 954 (federal instrumentality mortgage exemption)
• Opinion of the Attorney General to John J. Murray, Dept. of Agriculture, March 7, 1956 (exemption extends to the mortgagor)
• Pittman v. Home Owners' Corporation, 308 U.S. 21 (mortgage recording tax as a tax on the instrument)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a90_9r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(9) R
Mortgage Recording Tax
Real Estate Transfer Tax
October 29, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M900912C

On September 12, 1990, a Petition for Advisory Opinion was received from D & H
Corporation, 40 University Avenue, Suite 918, Toronto, Ontario, Canada M5J 1T1.
The issues raised by Petitioner, D & H Corporation, are whether:
1.

an exemption from Mortgage Recording Tax is applicable to a mortgagee that is an agency
of the United States, acting as trustee on behalf of the United States.

2.

an exemption from the Real Estate Transfer Tax (hereinafter the "transfer tax") is applicable
when a conveyance has been authorized by the United States bankruptcy court.

Petitioner, a Delaware corporation, is an indirect wholly-owned subsidiary of Canadian
Pacific Limited ("Canadian Pacific"). Petitioner has entered into a contract to purchase substantially
all the assets of the Delaware and Hudson Railway Company ("D & H"), a debtor in bankruptcy
proceedings pursuant to Chapter 11 of the Bankruptcy Code. D & H filed a voluntary petition for
reorganization under Subchapter IV of Chapter 11 on June 20, 1988. On June 8, 1990, the
Bankruptcy Court for the District of Delaware authorized the sale of substantially all the assets of
D & H to Canadian Pacific pursuant to 11 U.S.C. § 363(b) & (f). Canadian Pacific will purchase
such assets through its indirect wholly-owned subsidiary, the Petitioner.
In conjunction with the purchase of the D & H assets, the Petitioner will issue a $35,000,000
principal amount nonrecourse contingency note (the "note") to the United States of America. To
secure the note, the Petitioner will enter into an indenture with the Administrator of the Federal
Railroad Administration, as trustee for the United States of America.
In accordance with Section 1402 of the Tax Law a transfer tax is imposed on each
conveyance of real property or interest therein at the time that the instrument effecting the
conveyance is delivered by a grantor to a grantee when the consideration for the conveyance exceeds
five hundred dollars. In addition in accordance with Section 1402-a of the Tax Law an additional
transfer tax is imposed upon the transfer of residential real property where the consideration exceeds
$1,000,000.
Section 1405(b)8 of the Tax Law provides that the transfer tax shall not apply to any
conveyance given pursuant to the Federal Bankruptcy Act.
TP-9 (9/88)

-2­
TSB-A-90(9) R
Mortgage Recording Tax
Real Estate Transfer Tax
October 29, 1990

In accordance with Section 25B of the Tax Law a mortgage recording tax is imposed on the
recording of any mortgage on real property situated within New York State.
In Petition of New York v. New York University, 3AD2d 954 the court held that "a mortgage
may be exempt from the mortgage recording tax because it is an obligation of an instrumentality of
the Federal government and, as such, is beyond the taxing powers of the State."
Also, in the Opinion of the Attorney General to John J. Murray, Dept. of Agr., March 7,
1956, the Attorney General held that a mortgage instrument is exempt from mortgage recording tax
where the United States government is the mortgagee. The opinion also held that "the tax exemption
also extends to the mortgagor who likewise falls within this governmental immunity since the
mortgage recording tax operates as a tax upon the instrument itself (Pittman v. Home Owners'
Corporation, 308 US 21)"
49 USCS § 103 provides that the Federal Railroad Administration is an administration in the
Department of Transportation. The head of the Administration is the Administrator who is appointed
by the President of the United States.
Accordingly, the conveyance of the assets of D & H to the Petitioner will not be subject to
transfer tax since the conveyance will be made pursuant to the Federal Bankruptcy Act. Furthermore
the mortgage from the Petitioner to the Administrator of the Federal Railroad Administration, will
not be subject to the Mortgage Recording Tax since the mortgagee is an instrumentality or agency
of the United States of America which is immune from taxation by New York State.

DATED: October 29, 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.