As a bank, I made a construction loan to a cooperative sponsor, secured by a pledge of the sponsor's unsold co-op shares, proprietary leases, and purchase-money notes. The sponsor defaulted, and I'm about to foreclose under the UCC by bidding in my share of the debt. Will I become personally liable, as 'transferee,' for any unpaid Real Property Transfer Gains Tax the sponsor owes, once I take ownership of the pledged shares and leases through the foreclosure?

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 It was repealed for any transfer occurring on or after June 15, 1996.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 1992 opinion is preserved here for historical and research value, not as current law.

European American Bank had loaned $5.4 million to the sponsor of a cooperative housing conversion (Bennett Avenue Owners Corp.), secured by a pledge of the sponsor's unsold cooperative shares and the corresponding proprietary leases, plus certain purchase-money promissory notes the sponsor had received from buyers of already-sold units. The bank had also brought in a participating lender, CorEast Federal Savings Bank, which bought a subordinate $1.2 million slice of the loan. When the sponsor defaulted, the bank planned to enforce its security interest through a UCC foreclosure proceeding, "bidding in" its share of the debt and taking legal ownership of the unsold shares, leases, and notes. Because the sponsor had never paid gains tax on the ORIGINAL transfer of the apartment building to the cooperative corporation (though it apparently had paid roughly $60,000 in gains tax on its sales of 31 already-sold units), the bank worried it might become personally liable, as the incoming "transferee," for that unpaid gains-tax debt once it foreclosed.

The Department applied a newly-enacted statutory provision, former Tax Law § 1447.3(b)(2), added by Chapter 172 of the Laws of 1992 and effective just weeks before this opinion (June 16, 1992). That provision specifically releases a cooperative housing corporation or "other secured party" -- like the bank here -- from personal liability as transferee for gains tax owed by the transferor, when the secured party is enforcing a lien, security interest, or other right on cooperative shares, a proprietary leasehold, or both. Since the bank's planned UCC foreclosure fell squarely within that release, the Department held the bank would NOT incur transferee liability for the sponsor's unpaid gains tax -- which made the bank's other three questions (about splitting the loan between two collateral classes and the specific consideration calculation) moot, since they only mattered if transferee liability existed in the first place. The Department was careful to note the limits of the relief: while the bank was protected from liability arising FROM THE FORECLOSURE itself, it would still be treated as an ordinary transferor -- and owe its own gains tax -- whenever it later sold the shares it acquired through the foreclosure to a third party.

What this means for you

Lenders financing cooperative or condominium conversions with unsold-unit collateral

Under this now-repealed tax, a 1992 law change gave secured lenders real protection: foreclosing on pledged cooperative shares or proprietary leases to recover a defaulted loan wouldn't saddle the lender with the sponsor's own unpaid gains-tax liability -- a meaningful risk reduction for construction and conversion lending secured by unsold-unit collateral.

Real estate and banking attorneys structuring sponsor construction loans

This opinion is a clean illustration of how a mid-tax-life statutory amendment (§ 1447.3(b)(2), effective June 1992) directly addressed and resolved a specific lender concern -- useful context if you're researching how the gains tax's transferee-liability rules evolved over its lifetime.

Accountants tracking gains-tax exposure through a cooperative sponsor default

The opinion draws a sharp line worth remembering when reconstructing a lender's gains-tax history: no liability for the FORECLOSURE itself, but ordinary transferor liability kicks back in the moment the lender resells the foreclosed collateral.

Common questions

Q: Does this transferee-liability release still matter today?
A: Not under this specific tax -- it was repealed for transfers on or after June 15, 1996. Current New York taxes on cooperative and condominium transfers have their own separate transferee-liability rules.

Q: Did the bank end up owing ANY gains tax as a result of this transaction?
A: Not as a result of the foreclosure itself -- but the Department noted the bank would still owe gains tax as an ordinary transferor when it later sold the foreclosed-on shares to a buyer.

Q: Why did the Department decline to answer the bank's other three questions?
A: Because those questions (how to split the loan between two types of collateral, and whether a specific consideration computation was correct) only mattered if the bank had transferee liability in the first place -- once the Department found the new statute released the bank from that liability, those calculation questions became moot.

Q: Can another lender in a similar UCC foreclosure 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 statutory release (former § 1447.3(b)(2)) applied more broadly to secured parties during the tax's lifespan, not just to this one bank.

Citations and references

Statutes and regulations:

• former Tax Law § 1447.3(b)(2), added by Chapter 172 of the Laws of 1992, effective June 16, 1992 (in an action, proceeding, or enforcement of rights on shares/other ownership interests evidenced by stock certificates and a leasehold evidenced by a proprietary lease, the cooperative housing corporation or other secured party in that enforcement proceeding is released from personal liability as transferee for taxes due from the transferor)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_prop_tran_ao_1992.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_property/a92_3r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-92(3)-R
Real Property
Transfer Gains Tax
July 17, 1992

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M920114A

On January 14, 1992, a Petition for Advisory Opinion was received from European American
Bank, EAB Plaza, Uniondale, New York 10053.
The issues raised by Petitioner, European American Bank, are whether for purposes of the
Real Property Transfer Gains Tax (hereinafter the "gains tax"):
1.

Petitioner will incur transferee liability in a U.C.C. foreclosure proceeding against
Bennett Avenue Associates (hereinafter the "borrower") as a result of the
applicability of Section 1447.3(b) of the Tax Law.

2.

If Petitioner is subject to transferee liability, for purposes of computing the
"consideration" in the foreclosure, would it be appropriate to treat the loan to
borrower as having been bifurcated as a result of a participation agreement into two
indebtednesses.

3.

If Petitioner is subject to transferee liability, is it appropriate to apportion the
outstanding amount of the loan between the two classes of collateral.

4.

If Petitioner is subject to transferee liability, is the computation of the gains tax as
annexed to the Petition correct.

On September 20, 1989, Petitioner made an acquisition, development and conversion loan
of $5,400,000 to the borrower, the sponsor of the Bennett Avenue Owners Corp., a cooperative
housing corporation. The loan is secured by certain assets of the borrower consisting of (a) a pledge
of certain shares of stock of the cooperative housing corporation respecting certain co-operative
apartment units which have not been sold pursuant to the offering plan commenced by the borrower
as sponsor, (b) a collateral assignment of certain proprietary leases appurtenant to the units, and (c)
certain purchase money promissory notes issued to the borrower by certain purchasers of shares of
stock (and the corresponding proprietary leases with respect to certain apartment units) of the
cooperative housing corporation, which shares of stock were sold by the borrower as sponsor
pursuant to the offering plan.
Simultaneously with Petitioner extending the loan to the borrower, Petitioner entered into
a loan participation agreement with CorEast Federal Savings Bank (hereinafter "CorEast"). Pursuant
to the participating agreement, CorEast purchased a $1,200,000 interest in the loan. The participation
agreement provides that the CorEast interest is subject and subordinate to Petitioner's interest in the
loan. In the event of a default on the loan, Petitioner is entitled to recover its entire share of the loan
and all accrued interest thereon prior to CorEast receiving any payment of principal or interest due
on its interest.

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TSB-A-92(3)-R
Real Property
Transfer Gains Tax
July 17, 1992
The borrower defaulted under the terms of the loan agreement, and, accordingly, Petitioner
intends to initiate a U.C.C. foreclosure proceeding against borrower. Pursuant thereto, Petitioner
anticipates "bidding-in" its portion of the loan and thereby taking legal ownership of the unsold
shares, the leases and the purchase money promissory notes.
The aggregate face amount of the notes is $1,167,022. Petitioner estimates that the aggregate
fair market value of the notes is $757,000. The aggregate fair market value of the units has been
appraised by Petitioner to equal $800,000. The total amount of borrower's indebtedness outstanding
(the principal amount of the loan outstanding together with the accrued and unpaid interest thereon)
equals $3,200,000, $1,750,000 of which is allocable to Petitioner and $1,450,000 of which is
allocable to CorEast under the terms of the participation agreement. The cooperative housing
corporation apartment building was originally transferred by the borrower to the cooperative housing
corporation subject to certain wraparound mortgage indebtedness in the aggregate principal amount
of $2,500,000 (the "Underlying Mortgage"), and as of the date of the foreclosure, the outstanding
principal of the underlying mortgage allocable to the units equals $1,779.644.
The borrower did not pay any gains tax upon the original transfer of the apartment building
to the cooperative housing corporation. Petitioner estimates that the amount of gains tax due as a
result of the borrower's sale of 31 units pursuant to the offering plan was $60,269.40. Petitioner
assumes that such amount was in fact paid by the borrower upon the sale of such units. Petitioner
estimates that the original purchase price of the cooperative housing corporation's apartment building
allocable to the units to be $3,668,751. It is assumed that the borrower will be unable to pay the gains
tax due as a result of the foreclosure and any tax liability will be satisfied by Petitioner if so required
by the Tax Law.
Section 1447.3(b)(2) of the Tax Law, as added by Chapter 172 of the Laws of 1992, effective
June 16, 1992, provides as follows:
(2) Notwithstanding paragraph (a) of this subdivision, in an action,
proceeding, or an enforcement of rights to enforce a lien, security interest or other
rights on or in shares or other ownership interest evidenced by stock certificates or
other instruments, and a leasehold evidenced by a proprietary lease, or either of the
foregoing, the cooperative housing corporation or other secured party in such action,
proceeding or enforcement procedure shall be released from personal liability as
transferee for taxes determined to be due from the transferor under this article.
Accordingly, concerning issue "1", pursuant to Section 1447.3(b)(2) of the Tax Law if
Petitioner enforces its lien, security interest or other right on or in the shares and proprietary leases
pledged as security by the borrower, Petitioner will not incur transferee liability for purposes of the
gains tax.

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TSB-A-92(3)-R
Real Property
Transfer Gains Tax
July 17, 1992
With respect to issues "2", "3" and "4" since Petitioner will not incur transferee liability as
a result of the U.C.C. foreclosure proceeding against the borrower, these issues are moot and need
not be addressed.
It is noted that while Section 1447.3(b)(2) of the Tax Law relieves Petitioner of transferee
liability as a result of the foreclosure proceeding, it does not relieve Petitioner as transferor of any
gains tax liability when it later transfers the shares foreclosed on to third parties.

DATED: July 17, 1992

/s/
PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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