We're a 1771-chartered not-for-profit hospital. We formed a separate not-for-profit affiliate solely to acquire, hold, and manage real property for our benefit -- all of the affiliate's members are, by its bylaws, automatically our own Governors, and our bylaws ensure we control the affiliate's business and affairs. We're proposing to transfer one of our psychiatric care facilities to this affiliate, which will then lease it back to us for 99 years at nominal rent so we keep operating exactly as before, subject to an existing $154 million mortgage. Does this transfer-and-leaseback to our own controlled not-for-profit affiliate trigger New York's Real Estate Transfer Tax or Real Property Transfer Gains Tax?

Plain-English summary

The Society of the New York Hospital ("Petitioner") is a not-for-profit membership corporation originally incorporated in 1771 by royal charter from King George III, operating under New York's Not-for-Profit Corporation Law. Petitioner formed Royal Charter Properties - Westchester, Inc. ("RCPW"), also a not-for-profit membership corporation, specifically to acquire, hold, manage, and develop real property serving Petitioner's needs. Both corporations were exempt from federal income tax under Internal Revenue Code Section 501(c)(3).

The control structure. Although both entities were technically independent not-for-profit membership corporations (which don't have "shareholders" in the traditional sense), RCPW's bylaws provided that all of RCPW's members were, ex officio, the sitting Board of Governors of Petitioner -- and RCPW's five-person Board of Directors had to consist of a majority of Petitioner's own Governors. This structurally guaranteed that Petitioner controlled RCPW's business and affairs, even though RCPW existed as a separate legal entity.

The proposed transaction. Petitioner proposed transferring a psychiatric care facility on Bloomingdale Road in White Plains, New York, to RCPW, subject to an existing $154 million mortgage held by the Dormitory Authority of the State of New York (which covered other Petitioner properties too) but no other consideration. RCPW would then immediately lease the same facility back to Petitioner for 99 years at nominal annual rent, letting Petitioner continue operating the psychiatric facility exactly as it had before -- no change in use, occupancy, or operations.

Why the transfer tax didn't apply. The mere-change-of-form exemption specifically covers conveyances between a corporation and its wholly-owned subsidiary (20 NYCRR 575.10(c)). While Petitioner and RCPW weren't a traditional stock parent/subsidiary, the Department relied on a New York State Supreme Court decision, Royal Charter Properties, Inc. v. Biderman, involving two of Petitioner's sister real-property affiliates (RCP and RCPE, structured identically to RCPW) -- which held that ownership of hospital-related properties by such an affiliate "effected no change," because the affiliate was closely tied to the hospital (essentially identical governing boards, hospital employees, and continued hospital-purpose use of the property). Applying that reasoning, the Department found Petitioner and RCPW functioned as a parent/wholly-owned-subsidiary-equivalent, so both the initial transfer to RCPW and the 99-year leaseback back to Petitioner qualified as a mere change of identity or form of ownership with no change in beneficial ownership -- exempt from the transfer tax.

Why the gains tax didn't apply. Because both Petitioner and RCPW were exempt organizations under Internal Revenue Code Section 501(c)(3) (equivalent to New York Tax Law Section 1116(a)(4)), the gains tax had its own dedicated exemption for transfers by such charitable transferors -- independently exempting the transaction regardless of the mere-change analysis. The Department separately noted the transfers would also qualify under the gains tax's own mere-change-of-form exemption, for the same beneficial-ownership reasons as the transfer tax.

What this means for you

Not-for-profit hospitals and healthcare systems structuring real-property-holding affiliates

Transferring property to a separately incorporated but functionally-controlled not-for-profit real estate affiliate -- where the affiliate's governance is structurally tied to the parent organization's own board, and the property continues serving the same charitable purpose -- can qualify for the mere-change-of-form exemption even though not-for-profit membership corporations don't have "wholly-owned subsidiaries" in the traditional stock-ownership sense.

Charitable organizations transferring real property among affiliated 501(c)(3) entities

If both the transferor and transferee are Internal Revenue Code Section 501(c)(3) organizations, the (now-repealed) gains tax offered its own independent exemption specifically for charitable transferors -- a separate, additional basis beyond the mere-change-of-form analysis, worth checking when reviewing historical charitable real estate transactions.

Healthcare real estate and nonprofit governance attorneys

The key factual anchors here were structural control (RCPW's members were ex officio Petitioner's Governors, and Petitioner controlled RCPW's board majority) and continuity of use (the property continued serving the exact same hospital purpose). A prior state court decision involving sister entities in an identical structure (Royal Charter Properties, Inc. v. Biderman) was doing much of the analytical work -- confirming that closely-tied nonprofit affiliate structures can satisfy a "no change in beneficial ownership" standard even without stock ownership.

Common questions

Q: Can a not-for-profit organization transfer property to its own controlled affiliate without triggering New York transfer tax, even though nonprofits don't have stock or shareholders?
A: Yes, according to this ruling -- if the affiliate's governance structure functionally guarantees the parent organization's control (e.g., the affiliate's members are ex officio the parent's own board), the Department can treat the relationship as parent/wholly-owned-subsidiary-equivalent for mere-change-of-form purposes.

Q: Does a sale-leaseback between a hospital and its own real estate affiliate raise separate tax concerns from the initial transfer?
A: In this ruling, the leaseback was analyzed under the same mere-change-of-form exemption as the initial transfer, since it didn't change beneficial ownership either -- both sides of the transaction were exempt.

Q: If both parties to a real estate transfer are 501(c)(3) charitable organizations, does that independently help avoid tax?
A: For the now-repealed Real Property Transfer Gains Tax, yes -- there was a dedicated exemption for transfers where the transferor was a Section 501(c)(3)-equivalent organization, separate from the mere-change-of-form exemption.

Q: Is the Real Property Transfer Gains Tax discussed in this ruling still relevant today?
A: No -- it was repealed for transfers occurring on or after June 15, 1996 and no longer applies to new transactions. Only the Real Estate Transfer Tax analysis remains directly relevant.

Citations and references

Statutes, regulations, and case law:

• Section 1401(e) of the Tax Law (definition of "conveyance")
• Section 1402 of the Tax Law (RETT on conveyances over $500 consideration)
• Section 1405(b)(6) of the Tax Law (mere-change-of-form exemption from the transfer tax)
• 20 NYCRR 575.10(c) (mere-change exemption applies to parent/wholly-owned-subsidiary conveyances)
• Section 1443(3)(c) of the Tax Law and 20 NYCRR 590.7(3)(iii) (gains tax exemption for a Section 1116(a)(4)/501(c)(3)-equivalent transferor)
• Section 1443(5) of the Tax Law (gains tax mere-change-of-form exemption)
• Royal Charter Properties, Inc. v. Biderman, Sup Ct, NY County, October 11, 1988 (Scott, J.) (affiliate ownership of hospital property "effected no change" where closely tied to the hospital)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1994.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a94_5r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-94 (5)R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
May 16, 1994

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M940404A

On April 4, 1994, a Petition for Advisory Opinion was received from The Society of the New
York Hospital, 525 East 68th Street, New York, New York 10021.
The issue raised by Petitioner, The Society of the New York Hospital, is whether the transfer
of real property from Petitioner to Royal Charter Properties - Westchester, Inc. (hereinafter "RCPW")
and the subsequent leaseback of the real property from RCPW to Petitioner will be exempt from the
Real Property Transfer Tax (the "transfer tax") and the Real Property Transfer Gains Tax (the "gains
tax").
Petitioner is a not-for-profit membership corporation incorporated in 1771 by royal charter
from King George III and operates under the Not-for-Profit Corporation Law of the State of New
York. RCPW is also a not-for-profit membership corporation incorporated under the Not-for-Profit
Corporation Law. Both corporations have received exemption for Federal income tax purposes
under Section 501(c)(3) of the Internal Revenue Code.
RCPW was formed by Petitioner for the purpose of acquiring, holding, managing and
developing real property to serve the needs of Petitioner. All members of RCPW, ex officio, are also
members and Governors of Petitioner. In addition, the by-laws of the respective corporations assure
that the business and affairs of RCPW are controlled by Petitioner and following the transfers the
real property will continue to be used by Petitioner for the same purposes and in the same manner
as before.
Petitioner proposes to transfer to RCPW certain real property located at Bloomingdale Road,
White Plains, New York. The property consists of a psychiatric care facility operated by Petitioner.
RCPW will then lease the same property back to Petitioner for a term of ninety-nine years at a
nominal annual rent, enabling Petitioner to continue to operate its facility on the property as before.
The real property is encumbered by a mortgage from Petitioner to the Dormitory Authority
of the State of New York in the amount of $154,000,000, which mortgage covers other properties
of Petitioner. The transfer of the property (and the leaseback) would be made subject to the
mortgage, but for no other consideration. The property will continue to be occupied and operated
by Petitioner in furtherance of its stated not-for-profit goals with no change from the manner existing
prior to the transfer and leaseback.
The By-laws of Petitioner provide that its operations shall be directed by a Board of
Governors, each of whom must be a member of Petitioner. Article I, Section 1.1 of the By-laws of
RCPW provides that the members of the corporation shall be ex officio the Board of Governors in
office of Petitioner. Moreover, Article II, Section II.1 of the By-law of RCPW provides that the
property, business and affairs of the corporation shall be managed by a Board of Directors, which

-2­
TSB-A-94 (5)R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
May 16, 1994
shall consist of five persons, and that while Directors need not be members, a majority of Directors
shall be Governors of Petitioner.
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.
Section 1401(e) of the Tax Law provides, in pertinent part, that the term "conveyance" means
the transfer or transfers or any interest in real property be any method.
Section 1405(b) of the Tax Law provides, in part, as follows:
(b) The tax shall not apply to the following conveyances:
*

*

*

6. Conveyances to effectuate a mere change of identity or form of ownership
   or organization where there is no change in beneficial ownership, other than
   conveyances to a cooperative housing corporation of the real property comprising the
   cooperative dwelling or dwellings;
   Section 575.10 of the Transfer Tax Regulations provides, in part, as follows:
   575.10 Mere Change of Identity. [Tax Law, § 1405(b)(6)] To the extent that a
   conveyance effectuates a mere change of identity or form of ownership or
   organization and there is no change in beneficial ownership, the real estate transfer
   tax does not apply. Examples of transactions where the issue of change in beneficial
   ownership would arise include the following:
   *

*

*

(c) the conveyance by a corporation to its wholly-owned subsidiary, from a
wholly-owned subsidiary to its parent, or from one wholly-owned subsidiary to
another. Such conveyance is not taxable to the extent that there is no change in
beneficial ownership.
Pursuant to Sections 1441 and 1443.1 of the Tax Law and Section 590.1 of the Gains Tax
Regulations 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 one million dollars or more.

-3­
TSB-A-94 (5)R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
May 16, 1994
Section 1443 of the Tax Law provides, in pertinent part, as follows:
Sec. 1443. Exemptions.--A total or partial exemption shall be allowed in
the following cases:
*

*

*

3. If the transferor is one of the following:
   *

*

*

(c) An organization described in paragraph (4) of subsection (a) of section
one thousand one hundred sixteen of this chapter.
Section 590.7 of the Gains Tax Regulations provides, in part, as follows:
Question: Which transactions are totally or partially exempt from the Gains Tax?
Answer: A total or partial exemption will be allowed in the following cases:
*

*

*

(3) If the transferor is one of the following:
(iii) any religious, charitable, educational, or other organization which is
or would be exempt under section 1116(a)(4) of the New York State Sales and Use
Tax Law (which is the same as an exempt organization under section 501(c)(3) of the
Internal Revenue Code).
In Royal Charter Properties, Inc. vo Biderman, Sup Ct, NY County, October 11, 1988, Scott,
J., an Article 78 proceeding in which Royal Charter Properties, Inc. and Royal Charter Properties East, Inc. ("RCP" and "RCPE", two entities that stand in the same relation to the Petitioner as
RCPW) sought to maintain the real estate tax exemption for various properties in the City of New
York that had been transferred to RCP and RCPE from Petitioner the Court held as follows:
"... ownership by the affiliate has effected no change. The staff housing was always
self-supporting and any profits continue to be transferred to the Hospital [Petitioner].
In St. Joseph's v. Srogi, supra, the Court of Appeals held a property used for hospital
exempt purposes could be exempt even if not owned by the hospital. It could be
exempt if owned by an affiliated corporation provided that the affiliated corporation
is closely tied to the hospital to assure that is purposes is hospital related. In St.
Joseph's, the Court found the affiliated corporations was closely tied to the hospital

-4­
TSB-A-94 (5)R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
May 16, 1994
when (1) the Board of Directors of the two corporations were essentially the same,
(2) when the employees of the hospital and (3) when the property was actually used
for hospital purposes. In the instant case, the affiliated corporations [RCP and
RCPE] are not only closely tied to the parent corporation [Petitioner], but use the
property for the exact same hospital purpose as [Petitioner] when it held title. The
record reveals no new facts to alter the tax exempt status... The fact is that the
hospital purpose initiated by [Petitioner] and elected to its affiliate corporations
remains the same..." (emphasis added)
In the instant case, Petitioner will transfer real property to RCPW and RCPW will leaseback
the real property back to Petitioner for ninety-nine years for a nominal consideration. The By-laws
of RCPW provide that Petitioner "owns" (to the extent that a not-for-profit membership corporation
can be said to be "owned") and controls RCPW. Moreover, in Royal Charter Properties, Inc. v.
Biderman, supra, the Court held that two entities in the same relation to Petitioner and RCPW were
affiliated corporations closely tied to the parent corporation [Petitioner] and that ownership of the
real property by the affiliate corporations effected no change in use to that of the use by Petitioner.
Therefore, Petitioner and RCPW, while both not-for-profit membership corporations, have a
relationship between them which is akin to a parent corporation and a wholly-owned subsidiary.
Accordingly, since Petitioner owns and controls RCPW and, in effect, maintains a parent-subsidiary
relationship with RCPW, pursuant to Sections 1405(b)(6) of the Tax Law and Section 575.10 of the
Transfer Tax Regulations and the rationale set forth in Royal Charter Properties, Inc. v. Biderman,
supra, the transfer of the property from Petitioner to RCPW and the leaseback of the real property
from RCPW to Petitioner will not be subject to the transfer tax imposed pursuant to Sections 1402(e)
and 1402 of the Tax Law since the conveyances of the real property effectuate a mere change of
identity or form of ownership or organization and there is no change in beneficial ownership of the
real property.
As for the gains tax consequences, Petitioner and RCPW have both received exemption from
Federal income tax under Section 501(c)(3) of the Internal Revenue Code. Pursuant to Section
1443.3(c) of the Tax Law and Section 590.7(3)(iii) of the Gains Tax Regulations the transfer of real
property by an organization exempt under section 1116(a)(4) of the Tax Law (which is the same as
an exempt organization under Section 501(c)(3) of the Internal Revenue Code) is exempt from the
payment of gains tax. Therefore, since Petitioner and RCPW are exempt organizations described
in Section 1116(a)(4) of the Tax Law, pursuant to Section 1443.3(c) of the Tax Law and Section
590.7(3)(iii) of the Gains Tax Regulations the transfer of the real property by Petitioner to RCPW
and the transfer of real property by RCPW to Petitioner will not be subject to the gains tax.

-5­
TSB-A-94 (5)R
Real Property Transfer
Gains Tax
Real Estate Transfer Tax
May 16, 1994
It is further noted that, for purposes of the gains tax, pursuant to Section 1443.5 of the Tax
Law the transfers of real property between Petitioner and RCPW would also effectuate mere changes
of identity or forms of ownership or organization since such transfers would not result in a change
in the beneficial ownership of the real property.

DATED: May 16, 1994

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

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