As sole shareholder of the company that owns and operates my newspaper, I plan to contribute the newspaper's real estate (still subject to a $25 million mortgage) into the company for no additional consideration, to help stabilize the business -- and separately, we're planning to set up an employee stock ownership plan that will eventually hold 20% of the company's stock. Does either step trigger 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 It was repealed for any transfer occurring on or after June 15, 1996.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 1991 opinion is preserved here for historical and research value, not as current law.

Peter S. Kalikow was the sole shareholder of the corporation that owned and operated The New York Post newspaper. He personally owned the newspaper's headquarters building (land and improvements) at 210 South Street, subject to a mortgage of approximately $25 million. As part of a broader effort to shore up the Post's finances -- alongside other operational and labor-relations changes, and in anticipation of forming an Employee Stock Ownership Plan (ESOP) for the paper's workers -- Kalikow planned to convey the building into the Company itself, subject to the existing mortgage and for no other consideration. The Company wasn't legally obligated to create the ESOP, and Kalikow wasn't legally obligated to make the real estate contribution; the property transfer would happen in the ordinary course of business regardless of whether the ESOP was ultimately formed. The anticipated ESOP, governed by the federal Employee Retirement Income Security Act (ERISA), would eventually hold 20% of the Company's stock and, correspondingly, 20% of all the Company's assets, including the newspaper building.

The Department analyzed the two steps separately. The building's conveyance from Kalikow personally into the wholly-owned Company was technically a "transfer of real property" under the gains tax's broad statutory definition (former § 1440.7). But because Kalikow was the Company's SOLE shareholder both before and after the conveyance, his beneficial ownership of the real estate didn't actually change -- it simply moved from being held directly in his own name to being held indirectly through his 100%-owned corporation. That made it a "mere change of identity or form of ownership," fully exempt under former § 1443.5. Separately, the later ESOP stock issuance -- giving employees a 20% stake in the Company -- wasn't taxable at all, for an entirely different reason: the gains tax's controlling-interest rules only apply when 50% or more of an entity's voting stock (or capital, profits, or beneficial interest) changes hands (former § 1440.2). Since the ESOP would hold only 20%, neither Kalikow nor the ESOP ever crossed that threshold, so the stock issuance simply fell outside the gains tax's reach from the start.

What this means for you

Sole owners of closely-held businesses contributing personally-held real estate into their own company

Under this now-repealed tax, moving real estate you personally own -- even mortgaged real estate -- into a corporation you 100% own wasn't a taxable sale in substance, because your beneficial ownership doesn't actually change; it qualified as an exempt mere change of identity.

Business owners establishing an ESOP that will hold a MINORITY stake

This opinion is a clean confirmation that a minority (here, 20%) ESOP stock allocation never even reaches the gains tax's controlling-interest analysis -- the 50%-or-more threshold is a hard gate, not a percentage-based partial exemption like the mere-change rule.

Real estate and ESOP attorneys structuring similar ownership consolidations

The opinion is useful for showing these two doctrines (mere-change-of-identity for a sole-owner contribution, and the flat 50% controlling-interest threshold for a later stock issuance) analyzed side by side in a single transaction sequence, even though the two steps were legally independent of one another.

Common questions

Q: Does this sole-owner-contribution exemption 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 taxes have their own separate rules for contributions of property to a wholly-owned entity.

Q: Would the answer have been different if Kalikow had co-owned the Company with other shareholders?
A: Likely yes, at least partially -- the mere-change exemption in this line of opinions consistently turns on whether beneficial ownership stays the same; if other shareholders held stakes in the Company that didn't mirror Kalikow's pre-transfer ownership of the real estate, some portion of the contribution could have been taxable.

Q: Why did it matter that the mortgage stayed on the property rather than being paid off?
A: It didn't change the exemption analysis here -- the property was contributed "subject to" the mortgage for no additional consideration, and since the whole transfer qualified as a mere change of identity regardless of value, the mortgage amount wasn't a separate obstacle.

Q: Can another sole shareholder making a similar contribution 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, though the underlying mere-change-of-identity principle (100% ownership before and after) was a generally applicable rule during the tax's lifespan, not something unique to this taxpayer.

Citations and references

Statutes and regulations:

• former Tax Law § 1441 (the gains tax: 10% of gain on NY real property transfers, including a controlling-interest transfer, with consideration of $1 million or more)
• former Tax Law § 1440.7 (broad definition of "transfer of real property": any method, including but not limited to sale and transfer/acquisition of a controlling interest in an entity with a real property interest)
• former Tax Law § 1440.2 (defines "controlling interest": 50% or more of voting stock, or 50% or more of capital, profits, or beneficial interest, of a corporation)
• former Tax Law § 1443.5 (exemption for a transfer that is a mere change of identity or form of ownership or organization, with no change in beneficial interest)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a91_1r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91 (1) R
Real Property
Transfer Gains Tax
January 18, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M901219B

On December 12, 1990, a Petition for Advisory 0pinion was received from Peter S. Kalikow,
210 South Street, New York, New York.
The issue raised by Petitioner, Peter S. Kalikow, is whether the transfer of real property by
Petitioner to The New York Post Co., Inc. (the "Company") and the subsequent transfer by the
Petitioner of 20% of the stock of said corporation in the formation of an employee stock option plan
(the "ESOP") for the workers of the newspaper is subject to the Real Property Gains Tax (the "gains
tax").
Petitioner is the sole shareholder of the Company. The Company owns and operates the
newspaper known as The New York Post. The fee interest to the real property, consisting of the land
and the improvements thereon commonly known as 210 South Street, New York, New York (the
"premises"), relating to the New York Post, is presently owned 100% by Petitioner. The premises
is subject to a mortgage of approximately $25 million.
Petitioner intends to convey the premises to the Company subject to the mortgage and for
no other consideration. The conveyance is in anticipation of the formation of an ESOP for the
workers of the newspaper. The ESOP (which is governed by the Employee Retirement Income
Security Act of 1974, 29 USC 51001) is anticipated to own 20% of the stock of the Company and,
thereby, 20% of all assets utilized in the operation of the newspaper, including the premises.
The Company is not legally obligated to form the ESOP nor is Petitioner legally obligated
to transfer the premises to the Company. Rather, Petitioner's actions are an attempt to preserve the
continued economic vitality, of The New York Post in conjunction with other changes in operations
and labor relations. The transfer of the premises to the Company, therefore, is not dependent upon
the creation of the ESOP and will occur in the ordinary course of business.
Section 1441 of the Tax Law imposes a ten percent tax on the gain derived from the transfer
of real property, which includes the transfer or acquisition 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 one million dollars or more.
Section 1440.7 of the Tax Law defines the term "transfer of real property", in part, to mean
"the transfer or transfers of any interest in real property by any method, including but not limited to
sale. . .transfer or acquisition of a controlling interest in any entity with an interest in real property.
. ."
Section 1440.2 of the Tax Law defines the term "controlling interest", in part, to mean "(i)
in the case of a corporation, either fifty percent or more of the total combined voting power of all
TP-9 (9/88)

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TSB-A-91 (1) R
Real Property
Transfer Gains Tax
January 18, 1991

classes of stock of such corporation, or fifty percent or more of the capital, profits or beneficial
interest in such voting stock of such corporation. . ."
Further, Section 1443.5 of the Tax Law provides, that a total or partial exemption from the
gains tax shall be allowed "If a transfer of real property, however effected, consists of a mere change
of identity or form of ownership or organization, where there is no change in beneficial interest."
Accordingly, the transfer of real property from Petitioner to the Company is a transfer of real
property pursuant to Section 1440.7 of the Tax Law, but is, nevertheless, exempt from gains tax
pursuant to Section 1443.5 of the Tax Law since the transfer consists of a mere change of identity
or form of ownership or organization. Further, the transfer by Petitioner of 20% of the Company's
stock to ESOP is not subject to gains tax since Petitioner has not transferred a controlling interest
nor has ESOP acquired a controlling interest in the real property pursuant to Sections 1440.2 and
1440.7 of the Tax Law.

DATED: January 18, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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