My general partnership owns two commercial properties in Manhattan. Six family members hold interests directly in the partnership (14.2857% each) plus additional indirect interests through a sub-partnership we also all own equally (MESH Associates) -- so between the direct and indirect layers, each of us actually holds a 16.66% beneficial interest in both properties. We want to transfer each property into its own new LLC, with the partnership and MESH each initially receiving LLC shares proportional to their ownership, then distributing those shares down to us as individuals so each of us ends up with an identical 16.66% stake in each new LLC. Is this two-step, tiered restructuring exempt from New York's Real Estate Transfer Tax?

Plain-English summary

The Denihan Company ("Partnership"), a New York general partnership, owned two parcels of commercial real estate in Manhattan: Parcel A (503-509 East 75th Street) and Parcel B (502-512 East 76th Street), neither of which were cooperative housing dwellings. The Partnership had seven partners, each sharing equally in profit, loss, capital, voting, and distribution rights: six individuals (Daniel Denihan Jr., Benjamin Denihan Jr., Brooke Barrett, Maureen Ferrari, Donald Denihan, and Laurence Denihan), each holding 14.2857%, plus MESH Associates ("MESH") -- itself a separate New York general partnership -- also holding 14.2857%. MESH, in turn, was owned by those same six individuals in equal 16.66% shares. Because of this two-tier structure, each of the six individuals actually held a combined 16.66% (1/6) beneficial interest in both Parcel A and Parcel B: 14.2857% directly through the Partnership, plus 2.3809% (14.2857% × 16.66%) indirectly through their share of MESH's interest.

The proposed restructuring. The Partnership proposed transferring Parcel A to a newly formed LLC A and Parcel B to a newly formed LLC B, in exchange for shares in each LLC, while the Partnership itself would continue to exist afterward. The mechanics required two distribution steps: first, the Partnership would distribute LLC shares to its seven partners (the six individuals and MESH) in their existing 14.2857% Partnership interests; then MESH would distribute ITS 14.2857% LLC interest down to its own six individual partners, giving each an additional 2.3809% interest in the LLC shares. After both steps, each of the six individuals would hold an identical 16.66% ownership interest in both LLC A and LLC B -- exactly matching the look-through beneficial interest they held in Parcels A and B before the restructuring began.

Why it's exempt. The Department confirmed that transferring Parcel A and Parcel B to LLC A and LLC B, respectively, are both taxable conveyances under Tax Law §§1402 and 1401(e). But because each of the six individuals would end up with the identical 16.66% ownership interest in each LLC that they held (directly and indirectly) in the underlying parcels before the transfers, there is no change in beneficial ownership as a result of the restructuring. The transfers therefore qualify for the mere-change-of-form exemption under §1405(b)(6), notwithstanding the extra layer of complexity introduced by unwinding the tiered Partnership/MESH structure.

What this means for you

The mere-change-of-form exemption looks through tiered partnership structures to each individual's ultimate beneficial interest

If your real estate is held through a partnership that itself has a partnership (or other entity) as one of its partners, the exemption analysis doesn't stop at the first tier -- what matters is whether each individual's ultimate, look-through percentage interest in the property is unchanged after the restructuring, even if getting there requires an extra distribution step to unwind the tiered structure.

A multi-step restructuring plan is fine, as long as the end state preserves identical beneficial ownership

This ruling confirms the Department doesn't require a single, simple transfer to qualify for the exemption -- a plan involving an intermediate distribution to a sub-partnership, followed by that sub-partnership distributing shares down to its own partners, is exempt as long as the FINAL ownership percentages match the pre-restructuring beneficial interests.

Precise math matters -- document the look-through percentages carefully

The Department's conclusion rested on the exact arithmetic showing each individual's combined direct-plus-indirect interest was 16.66% before and after -- if your tiered structure doesn't produce exactly matching percentages at each step, the exemption may not fully apply, so it's worth confirming the math (as this taxpayer did, down to four decimal places) before restructuring.

Common questions

Q: If my property is owned by a partnership that itself has another partnership as a partner, does converting to LLCs still qualify for the mere-change-of-form exemption?
A: Yes, if the restructuring unwinds the tiered structure so that each ultimate individual owner ends up with the same look-through percentage interest in the new LLC that they held (directly and indirectly) in the original partnership structure.

Q: Does the exemption require a single, one-step transfer, or can it involve multiple distributions?
A: It can involve multiple steps -- here, the sub-partnership first received LLC shares matching its partnership interest, then distributed those shares down to its own individual partners -- as long as the end result preserves identical beneficial ownership for everyone.

Q: How precise does the ownership-percentage matching need to be to qualify for this exemption?
A: Very precise -- this ruling's conclusion depended on confirming that each individual's combined direct-and-indirect interest (calculated to four decimal places) was identical before and after the restructuring.

Citations and references

Statutes, guidance, and case law:

• Section 1402 of the Tax Law
• Section 1401(e) of the Tax Law
• Section 1401(f) of the Tax Law
• Section 1405(b)(6) of the Tax Law

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/real_estate_tran_ao_1998.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/real_estate/a98_5r.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-98(5)R
Real Estate Transfer Tax
December 30, 1998

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. M980922B

On September 22, 1998, the Department of Taxation and Finance received a Petition for
Advisory Opinion from The Denihan Company, 500 West 37th Street, New York, NY 10018.
The issue raised by Petitioner, The Denihan Company, is whether the conveyance of two (2)
parcels of real property from Petitioner to two limited liability companies will be exempt from the
Real Estate Transfer Tax imposed pursuant to Article 31 of the Tax Law.
Petitioner presents the following facts. The Denihan Company, a general partnership
organized under New York law (the "Partnership"), currently owns two parcels of commercial real
estate located at 503-509 East 75th Street, New York, NY ("Parcel A") and 502-512 East 76th Street,
New York, NY ("Parcel B"). Neither Parcel A nor Parcel B comprises cooperative housing
dwellings. As indicated in the following ownership chart, the Partnership is owned by seven
partners, each of which share equally in all items of partnership profit, loss and capital and each of
which have equal voting and distribution rights, as follows:
Ownership of the Partnership:
Partner

Ownership
Percentage

Daniel Denihan, Jr.
Benjamin Denihan, Jr.
Brooke Barrett
Maureen Ferrari
Donald Denihan
Laurence Denihan
MESH Associates

14.2857%
14.2857%
14.2857%
14.2857%
14.2857%
14.2857%
14.2857%

MESH Associates ("MESH"), the last partner listed above, is itself a general partnership
organized under New York law. As indicated below, MESH is owned by the six individual partners
of the Partnership in equal shares (carrying identical rights), as follows:

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TSB-A-98(5)R
Real Estate Transfer Tax
December 30, 1998

Ownership of MESH:
Partner

Ownership
Percentage

Daniel Denihan, Jr.
Benjamin Denihan, Jr.
Brooke Barrett
Maureen Ferrari
Donald Denihan
Laurence Denihan

16.66%
16.66%
16.66%
16.66%
16.66%
16.66%

Therefore, taking into account both their interests in the Partnership and their interests held
through MESH, each of the six individual partners holds a 16.66% (1/6) beneficial interest in each
of Parcels A and B -- that is, the sum of 14.2857% through the Partnership and 2.3809% (14.2857%
x 16.66%) through MESH.
The Partnership proposes to transfer Parcel A to one limited liability company ("LLC A")
and Parcel B to a second limited liability company ("LLC B") in exchange for shares in such
companies; both LLCs are to be organized under New York law. The Partnership itself will continue
to exist as a general partnership subsequent to the transfers of Parcels A and B.
The LLC shares will be distributed by the Partnership to its six individual partners and to
MESH in their respective ownership interests (i.e., each will receive a 14.2857% interest in the LLC
shares). MESH will then distribute its 14.2857% interest in the LLC shares to its six individual
partners, whereby each partner will receive an additional 2.3809% interest in the LLC shares.
Thereafter, each LLC will be owned in equal shares by such six individuals, as members of each
LLC, as follows:
Proposed Ownership of LLC A and LLC B:
Partner

Ownership
Percentage

Daniel Denihan, Jr.
Benjamin Denihan, Jr.
Brooke Barrett
Maureen Ferrari
Donald Denihan
Laurence Denihan

16.66%
16.66%
16.66%
16.66%
16.66%
16.66%

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TSB-A-98(5)R
Real Estate Transfer Tax
December 30, 1998
Applicable Law
Section 1402 of the Tax Law imposes the real estate transfer tax on each conveyance of real
property or interest therein when the consideration exceeds five hundred dollars. The term
"conveyance" is defined in section 1401(e) of the Tax Law. Included in the definition of conveyance
is the transfer or transfers of any interest in real property by any method.
Subdivision (f) of section 1401 of the Tax Law provides:
(f) "Interest in the real property" includes title in fee, a leasehold interest, a
beneficial interest, an encumbrance, development rights, air space and air rights, or
any other interest with the right to use or occupancy of real property or the right to
receive rents, profits or other income derived from real property. . . .
Finally, section 1405(b)(6) of the Tax Law sets forth that conveyances are exempt from the
real estate transfer tax to the extent that they "effectuate a mere change of identity or form of
ownership or organization where there is no change in beneficial ownership. . . ."
Conclusions
The transfers of Parcel A and Parcel B from the Partnership to LLC A and LLC B,
respectively, are both taxable conveyances of real property pursuant to sections 1402 and 1401(e)
of the Tax Law.
However, because each of the six members will possess an identical 16.66% ownership
interest in each LLC as they did in the Partnership prior to the transfers, and would thus have the
same beneficial interest in Parcels A and B as they did prior to the transfers, such transfers would
be exempt from the real estate transfer tax based on the mere change of identity or form of ownership
exemption provided in section 1405(b)(6) of the Tax Law.

DATED: December 30, 1998

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

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