Sec. 575.6. Controlling interest

Tax Law, § 1401

(a) In the case of a corporation which has an interest in real property, the transfer or acquisition of a controlling interest in the corporation, as defined in section 575.1(b) of this Part, occurs when a person, or group of persons acting in concert, transfers or acquires a total of 50 percent or more of the voting stock in such corporation. In the case of a partnership, association, trust or other entity having an interest in real property, the transfer or acquisition occurs when a person, or group of persons acting in concert, transfers or acquires a total of 50 percent or more of the capital, profits or beneficial interest in such entity.

(b) Acting in concert.

(1) Persons are acting in concert when they have a relationship such that one person influences or controls the actions of another. For example, if a parent corporation and a wholly-owned subsidiary each sell or purchase a 25 percent interest in an entity, the two corporations will be considered to have acted in concert to transfer or acquire a controlling interest (i.e., 50 percent) in the entity.

(2) Where the individuals or entities are not commonly controlled or owned, persons will be treated as acting in concert when the unity with which the sellers or purchasers have negotiated and will consummate the transfer of ownership interests indicates they are acting as a single entity. If the transfers or acquisitions are completely independent, each grantor selling or grantee buying without regard to the identity of the other grantors or grantees, then the transfers or acquisitions will be treated as separate transfers or acquisitions. The grantors or grantees may be required to provide a sworn statement that their transfers or acquisitions are independent of each other. Factors that will indicate whether persons are acting in concert include the following:

(i) The transfers or acquisitions are closely related in time.

(ii) There are few grantors or grantees.

(iii) The contracts of sale contain mutual terms.

(iv) The grantors or grantees have entered into an agreement in addition to the sales contract binding themselves to a course of action with respect to the transfer or acquisition.

Example 1:

A owns 100 percent of X corporation, the only asset of which is real property. B, C, D and E as a group, negotiate to buy all of A's interest with B, C, D and E each buying 25 percent of A's interest. The contracts of B, C, D and E are identical and the purchases are to occur simultaneously. B, C, D and E have also negotiated an agreement binding themselves to a course of action with respect to the acquisition of X corporation and the terms of a shareholders, agreement which would govern their relationship as owners of X Corporation. The acquisitions by B, C, D and E would be treated as a single acquisition which is subject to the real estate transfer tax.

Example 2:

Partnership X, which owns real property, is composed of partners A and B, each having a 50 percent partnership interest. In November, 1989, A and B, decided to raise more capital by agreeing that they each will sell a percentage of their partnership interest. On November 20, 1989, A and B each sold a 12½ percent partnership interest to C. On October 11, 1990, A and B each sold a 15 percent partnership interest to D. Since A and B have acted in concert and transferred a 55 percent interest (12½ + 12½ + 15 + 15) within a three year period (see subdivision (d) of this section for the three year aggregation rule), the transfers are subject to the real estate transfer tax. A and B would each owe transfer tax on the respective transfers of their 12½ percent and 15 percent interests.

Example 3:

Corporation X has 2 stockholders. Individual A owns 90 shares of stock (90 percent) and individual B owns 10 shares of stock (10 percent). Corporation X owns 60 percent of the stock of corporation Y, which owns real property. Individual A, by virtue of owning 90 percent of the stock of corporation X, has a 54 percent interest in corporation Y (90 percent interest in corporation X multiplied by the 60 percent interest corporation X has in corporation Y equals the 54 percent interest individual A has in corporation Y). Individual A sells his 90 shares of stock in corporation X to individual G. Individual A, by selling his 90 shares of corporation X stock, has transferred a controlling interest (54 percent) in an entity that owns real property (corporation Y) which transfer is subject to the real estate transfer tax. The consideration used to determine the transfer tax due would be equal to 54 percent of fair market value of the real property owned by corporation Y.

Example 4:

Assume the same facts as in example 3 except that corporation X owns 50 percent of the stock of corporation Y. Since A has not transferred nor has G acquired a controlling interest in corporation Y (90 percent × 50 percent = 45 percent), the tax would not apply. If, however, corporation X had transferred its 50 percent interest in corporation Y, the transfer would be subject to tax.

Example 5:

Corporation X is a publicly held corporation, the stock of which is owned by many unrelated shareholders. X owns an interest in real property. D, E, F and G pursuant to a plan to gain control of X, make a tender offer of $100 per share to the public shareholders to acquire such control. As a result of the tender offer, D, E, F and G acquire, in total, 80 percent of the stock of X with each getting 20 percent. D, E, F, and G would be treated as acting in concert to acquire a controlling interest, and the tax would apply to this transaction as an acquisition of a controlling interest.

(c) For purposes of determining whether a controlling interest is transferred or acquired, only transfers or acquisitions of interests occurring on or after July 1, 1989 are added together. A transfer or acquisition made on or after July 1, 1989 does not have to be included, for purposes of determining whether a controlling interest is transferred or acquired, if the transfer or acquisition is made pursuant to a binding written contract which was entered into on or before February 16, 1989, the date of which is confirmed by independent evidence such as the recording of a contract, payment of a deposit or other facts and circumstances as determined by the commissioner. (See section 575.5 of this Part.)

(d) Where there is a transfer or acquisition of an interest in an entity that has an interest in real property, on or after July 1, 1989, and subsequently there is a transfer or acquisition of an additional interest or interests in the same entity, the transfers or acquisitions will be added together to determine if a transfer or acquisition of a controlling interest has occurred. Where there is a transfer or acquisition of a controlling interest in an entity on or after July 1, 1989, and the real estate transfer tax is paid on that transfer or acquisition and there is a subsequent transfer or acquisition of an additional interest in the same entity, it is considered that a second transfer or acquisition of a controlling interest has occurred which is subject to the real estate transfer tax. No transfer or acquisition of an interest in an entity that has an interest in real property will be added to another transfer or acquisition of a interest in the same entity if they occur more than three years apart, unless the transfers or acquisitions were so timed as part of a plan to avoid the real estate transfer tax. An example of this would be if a shareholder acquired 40 percent of the stock in a corporation and simultaneously contracted for the purchase of 20 percent in three years and one day.

(e) The tax is only imposed once when there is both a transfer and an acquisition of a controlling interest in the same conveyance.