MCP ASSOCIATES, L.P. - DETERMINATION - 08/09/96. In the Matter of MCP ASSOCIATES, L.P. TAT(H) 95-97(RP) - DETERMINATION

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1 MCP ASSOCIATES, L.P. - DETERMINATION - 08/09/96 In the Matter of MCP ASSOCIATES, L.P. TAT(H) 95-97(RP) - DETERMINATION NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION REAL PROPERTY TRANSFER TAX - THE EXCHANGE OF PARTNERSHIP INTERESTS IN A NEW YORK GENERAL PARTNERSHIP THAT OW NED REAL PROPERTY IN THE CITY FOR PARTNERSHIP INTERESTS IN A DELAWARE LIMITED PARTNERSHIP (ALTHOUGH PART OF A MERGER OF THE NEW YORK GENERAL PARTNERSHIP INTO THE DELAWARE LIMITED PARTNERSHIP) DID NOT QUALIFY FOR THE MERGER EXCEPTION UNDER CODE SECTION A. THE EXCHANGE W AS THEREFORE SUBJECT TO THE TAX IMPOSED ON THE TRANSFERS OF ECONOMIC INTERESTS IN REAL PROPERTY. AUGUST 9, 1996

2 NEW YORK CITY TAX APPEALS TRIBUNAL ADMINISTRATIVE LAW JUDGE DIVISION : In the Matter of the Petition : : of : : DETERMINATION MCP ASSOCIATES, L.P. : TAT(H) 95-97(RP) : Schwartz, A.L.J.: Petitioner, MCP Associates, L.P. (hereinafter "MCP" or "Petitioner"), 12 Vreeland Avenue, Totowa, New Jersey, 07512, filed a Petition for allowance of a refund of Real Property Transfer Tax ("RPT") under Chapter 21 of Title 11 of the Administrative Code of the City of New York ("Code") in connection with the merger of B.L. Company ("BL") into Petitioner on December 31, 1991 (the "Merger"). The parties submitted a Stipulation of Facts dated January 5, 1996 with accompanying Exhibits. The Stipulation included a consent to have the controversy determined on submission without a hearing pursuant to 20 RCNY sec. 1-09(f). Petitioner filed a brief on January 11, 1996, Respondent filed a reply brief on February 8, 1996, and Petitioner filed its reply brief on February 22, Petitioner was represented by Aaron Friedman, Esq. The Commissioner of Finance (hereinafter "Respondent" or "Commissioner") was represented by Paul A. Crotty, Esq. Corporation Counsel of the City of New York (Assistant Corporation Counsels Amy Nogid, Esq. and George Parker Lynch, Esq. of counsel). Upon reviewing the submission, I discovered that one of the documents included in Exhibit D of the

3 Stipulation was incomplete. By letter dated June 26, 1996, I directed Petitioner's representative to provide me with the missing portion of Exhibit D. That document was received by the Tax Appeals Tribunal on July 29, ISSUE Whether the RPT applies to the merger of a New York general partnership that owned real property located in New York City (the "City") into a newly formed Delaware limited partnership. FINDINGS OF FACT The facts set forth below are based on the stipulated facts and Exhibits submitted: 1. Petitioner is a Delaware limited partnership which is the successor by merger to BL, a New York general partnership and nine other general partnerships (the "Merging Entities"). The Merger pursuant to section of Delaware's Revised Limited Partnership Act, Del. Code. Ann. tit. 6, (hereinafter "Delaware Partnership Law") took effect on December 31, 1991 (the "Merger Date"). 2. Prior to the Merger, BL owned two parcels of real property located in Brooklyn, New York designated as Block 8241, Lot 1 ("Parcel 1"), and Block 7884, Lot 46 ("Parcel 2") (collectively the "Real Property"). The Real Property was encumbered by a single mortgage dated August 30, 1986, the principal amount of which was $1,334,572 on the Merger Date. On the Merger Date, the fair market value of Parcel 1 and Parcel 2 were $860,000 and $950,000, respectively. None of the other nine Merging Entities owned real property located in the City. 2

4 3. Prior to the Merger, BL's partnership interests were held as follows: Partner Percentage Interest Bernard Mandelbaum Leon Mandelbaum BFP Associates ("BFP") LFP Associates ("LFP") MFP Associates ("MFP") Total BFP, LFP, and MFP are New Jersey general partnerships whose partners are ten natural persons (none of whom is either Bernard Mandelbaum or Leon Mandelbaum) and which have, respectively, three, four, and three partners. 4. Petitioner was formed on December 13, 1991 by MCP Investments, Inc. ("Investments") as its sole general partner and a single individual as its initial limited partner (the "Initial Limited Partner"). Investments is a New Jersey corporation whose nineteen shareholders are the ten partners of BFP, LFP, and MFP, and nine trusts for the benefit of certain children of certain of those partners. The Initial Limited Partner contributed nominal cash to the capital of Petitioner in exchange for an interest in Petitioner. The Initial Limited Partner was to withdraw from Petitioner upon the consummation of the Merger. 5. Petitioner's Amended and Restated Agreement of Limited Partnership (the "partnership Agreement") provided in Section 3.3(c) dealing with capital contributions that: As a consequence of the Merger, each Limited Partner is credited with the Capital Contribution set forth opposite their [sic] name on Exhibit "A" and shall acquire the Partnership Percentage as set forth on Exhibit "A". The Limited Partners shall not be required to make any other Capital Contributions to the Partnership. 3

5 6. Exhibit A of the Partnership Agreement does not provide for the amount of each capital contribution opposite the name of each limited partner. Rather it contains a statement that: These amounts will be determined for each of the Limited Partners as the sum of the aggregate fair market value of their former interests in the lower tier partnerships (as reflected in their restated capital accounts). 7. Immediately following the Merger, the partnership interests in Petitioner were held as follows: Partner Percentage Interest Bernard Mandelbaum Leon Mandelbaum BFP LFP MFP Investments 2.00 Total The partners and partnership interests in BFP, LFP and MFP did not change before, during or after the Merger. 9. As a result of the Merger, the partners of Petitioner received interests in Parcel 1 and Parcel 2 which had fair market values of $860,000 and $950,000, respectively. 10. Immediately following the Merger, Bernard Mandelbaum and Leon Mandelbaum retired from Petitioner. Their interests in Petitioner were redeemed for consideration equal to the fair market value of such interests. The portion of the consideration attributable to the Real Property was the fair market value of the Real Property. Since Leon Mandelbaum and Bernard Mandelbaum 4

6 collectively owned fifty-one percent of Petitioner, the fair market value of those interests were calculated at fifty-one percent of the value of each of Parcel 1 and Parcel 2 ($438,600 and $484,500, respectively). On January 30, 1992, RPT returns were filed and the appropriate amounts of RPT were paid with respect to such transfers. Petitioner does not contest the applicability of the RPT to those transfers nor does it seek a refund of the tax that was paid with respect to them. 11. On January 30, 1992, Petitioner filed an RPT return and paid RPT of $47, under protest in connection with the Merger. 12. On September 13, 1992, Petitioner's representative requested a ruling from Respondent that the RPT should not apply to the Merger or to the partners' acquisition of partnership interests in Petitioner. 13. On January 27, 1993, Petitioner's representative filed a refund claim for the RPT paid in connection with the Merger plus any interest or fees to which Petitioner is entitled. 14. On December 7, 1993, Respondent issued a letter ruling to Petitioner's representative in which he concluded that the Merger is subject to the RPT as a conveyance of the Real Property to Petitioner in exchange for interests in Petitioner. 15. On June 7, 1994, Respondent issued a Notice of Disallowance of the refund claim. The reason stated for the disallowance was "per letter ruling issued to you." 16. On August 31, 1994, Petitioner's representative filed a Request for a Conciliation Conference with the Department of Finance's Conciliation Bureau. A Conciliation Conference was held on November 28, A Decision constituting a final order 5

7 confirming discontinuance of conciliation was issued by the Conciliation Bureau on April 7, On June 9, 1995, Petitioner timely filed a Petition for Hearing requesting an allowance of the refund claim. STATEMENT OF POSITIONS Petitioner asserts that under the provision of the Delaware Partnership Law pursuant to which the Merger took place, the Real Property vested in Petitioner as a matter of law. As a result, it argues, there was no conveyance of real property by deed upon which to impose the tax. Petitioner also contends that the tax on transfers of economic interests in real property does not apply because the ownership of the partnership interests in the surviving partnership did not differ from the ownership of the partnership interests in the disappearing partnership by fifty percent or more. Respondent, in the letter ruling upon which the Notice of Disallowance was based, originally asserted that the Merger is subject to the RPT as a conveyance of the Real Property to Petitioner in exchange for interests in Petitioner. In his brief, Respondent now contends that the transaction is taxable as the exchange of partnership interests in BL for partnership interests in Petitioner. In addition, Respondent maintains that the transfer of an economic interest in an entity that owns real property is taxable even where the percentage transferred is less than fifty percent. CONCLUSIONS OF LAW The RPT is imposed on both conveyances by deed (under Code section a) and transfers of "economic interests in real 6

8 1 property" located in the City (under section b(1)). The Code does not specifically address the treatment of mergers under the RPT, but the Rules of the City of New York ("Rules") provide a series of examples which illustrate the taxability of mergers under the RPT. Only one of those examples deals with partnership mergers. That example, 19 RCNY sec (e)(4), deals with the merger of a limited partnership into another limited partnership and provides: Limited Partnership Mergers. A conveyance of real property or a transfer of a controlling economic interest in real property in a merger or consolidation of two or more limited partnerships from a constituent limited partnership to the continuing or new limited partnership is not subject to tax if the merger or consolidation is pursuant to Article 8-A of the New York Partnership Law or pursuant to comparable provisions of the partnership laws of another state, territory, possession of the United states, the District of Columbia, or the Commonwealth of Puerto Rico. However, the related transfer of partnership interests in the merger or consolidation may be subject to tax. To illustrate: A owns a 90% limited partnership interest in capital and profits in each of limited partnerships X and Y. B is a general partner of both partnerships and owns the remaining 10% partnership interest in capital and profits in each limited partnership. X owns real property in New York City. Pursuant to Article 8-A of the New York Partnership Law, X will merge into Y. Following the merger A will have a 90% limited partnership interest in capital and profits in Y, and B will be the general partner with a 10% partnership interest in capital and profits in Y. The related transfers of partnership interests in this transaction are not subject to tax because there is no transfer of an economic interest in real property. The vesting of X's assets in Y, by operation of law, is also not subject to tax. The Merger, however, was a merger of a New York general 1 For either section a or b to apply, the consideration must exceed $25,000. 7

9 partnership into a Delaware limited partnership which was effectuated under section of the Delaware Partnership Law. The Delaware Partnership Law, unlike Article 8-A of the New York Partnership Law (the Revised Limited Partnership Act), permits mergers of limited partnerships with other business entities including general partnerships organized under the laws of other states. The Rules do not address the instant situation which involves a merger not provided for under New York law. 2 Respondent nevertheless contends that because the Merger does not fit squarely within 19 RCNY sec (e)(4) it is a taxable event. He does so by asserting that 19 RCNY sec. 2303(e)(4) is an "exemption" provision (even though it is not contained in the section of the Rules designated "exemptions") and he correctly notes that exemptions must be narrowly construed. Matter of Grace v. N.Y.S. Tax Comm., 37 N.Y.2d 193 (1975). 19 RCNY sec (e)(4), however, is not an exemption provision used to avoid an otherwise applicable tax. Instead, as will be more fully discussed infra, 19 RCNY sec (e)(4) merely illustrates that, under the general statutory provisions which determine taxability under the RPT, certain mergers of limited partnerships under New York law are not subject to the 3 RPT. No provision of the RPT Law mentions that an exemption 2 Mergers of limited partnerships with entities other than limited partnerships would have required amendments to other statutes such as the Business Corporation Law ("BCL"). No such amendments were made, however, as the sponsors of the Revised Limited Partnership Act felt that passage of the Act would be easier if there were not amendments to other laws. Rich, Practice Commentaries to Article 8-A in N. Y. Partnership Law, (McKinney 1996) Pocket Part p An exemption is only needed where the tax would otherwise attach. For example, section of the Code exempts otherwise taxable transfers from the RPT where the transfer is by or to certain charitable organizations. 8

10 4 from the RPT exists for mergers. It is axiomatic that only the Legislature and not the Commissioner has the authority to create grounds for exemptions from taxation. Dudlv v. Kerwick, 52 N.Y.2d 542 (1981); Application of NY Ass'n of Convenience Stores et. al. v. Urbach, N.Y. Sup. Ct., Albany Cty., Index No , May 14, The example contained in 19 RCNY sec (e)(4) therefore is relevant but only to the extent that it provides guidance in determining whether the Merger is taxable under the RPT. The Commissioner may impose the tax only if either a conveyance of real property by deed or a transfer of an economic interest in real property has occurred. If no event described by the operative provisions of a taxing statute has occurred, no tax may be imposed. Debevoise v. NYS Dept. of Taxation and Finance, 80 N.Y.2d 657, 593 N.Y.S.2d 974 (1993); Bloominqdale Bros. v. Chu, 70 N.Y.2d 218, 519 N.Y.S.2d 347 (1987). As the Commissioner makes clear in 19 RCNY sec (e)(4), two separate events occur in a merger which potentially might attract the RPT. The first is the vesting of the disappearing partnership's real property in the surviving partnership. The second is the transfer of interests in a partnership owing the real property. Thus, if the Real Property owned by BL before the Merger were conveyed by deed to Petitioner as a part of the Merger, the Merger would be taxable under Code section a. If the manner in which partnership interests in BL ceased to exist as such or the way in which the partnership interests in Petitioner were acquired constituted a "transfer of an economic interest" in 4 While section b(8) of the Code now provides an exemption from the RPT for transfers that affect a mere change of identity or form of ownership of the real property or economic interest therein to the extent the beneficial ownership remains the same (the "Mere Change" exemption), this provision was not yet in the Code at the time of the Merger and is not at issue. 9

11 the Real Property, the Merger would be taxable under Code section b(1). If, however, the Real Property were not conveyed by deed and there were no transfer of an economic interest in the Real Property, the Merger would not be taxable under the RPT. A. Did the Merger Include a Conveyance by Deed? Under New York law, real property in the City can be conveyed only by the delivery of a deed. New York Real Property Law, sec. 244i Manhattan Life v. Continental Ins., 33 N.Y.2d 370, 353 N.Y.S.2d 161 (1974). Therefore, conveyances of real property to a corporation in exchange for its stock or to a partnership in exchange for a partnership interest therein are taxable events under the RPT. 19 RCNY secs (e)(1)(i), 23-03(e)(3)(i). Similarly, conveyances of real property to shareholders or to partners in the liquidation of a corporation or partnership are taxable. 19 RCNY sec (g)(1)(i). The Commissioner's former Regulations make it clear that even prior to the enactment in 1986 of section b(1), at the time when only conveyances by deed could be taxed, each of these transactions would have been taxable. Former RPT Regs. 13(c)(5)(i); 13(c)(6)(i); 13(c)(7)(i); 13(c)(8)(i). 5 However, the vesting of real property previously owned by the disappearing corporation or partnership in the surviving entity by operation of law as a result of a merger under New York law is not a taxable event. See 19 RCNY secs (e)(2) and 23-03(e)(4). That is because, under New York law, the real property effectively remains owned by the "disappearing" entity as that entity is deemed to remain in existence after the merger although as part of the surviving entity. Thus a deed of 5 Some of these transactions, as well as the transaction at issue in this case, would no longer be taxable because of the Mere Change exemption. 10

12 conveyance is not required in order for real property owned by the disappearing corporation to vest in the surviving corporation after their merger. Torrey Del. v. Chautauqua Serv., 47 A.D.2d 279, 366 N.Y.S.2d 506 (4th Dept., 1975). This result is mandated by section 906(b)(2) of the BCL ("When such merger... has been effected... [a]ll the property, real and personal,... of each of the constituent corporations, shall vest in such surviving... corporation without further act or deed"). See also, N.Y. Partnership Law sec (McKinney 1996) ("When such merger.. has been effected: (a) all the property, real and personal, tangible and intangible, of each constituent limited partnership shall vest in the surviving... limited partnership..."). Property of a disappearing partnership in a partnership merger also is transferred by operation of law under the Delaware Partnership Law. See Del. Code Ann. Tit. 6, , which provides that: When any merger...shall have become effective under this section...all property, real, personal and mixed,...belonging to each of such domestic limited partnerships and other business entities, shall be vested in the surviving or resulting domestic limited partnership or other business entity, and shall thereafter be the property of the surviving... domestic limited partnership or other business entity as they were of each of the domestic limited partnerships and other business entities that have merged... [emphasis added]. While no court has specifically addressed this issue under section of the Delaware Partnership Law, this conclusion was reached in a case which interpreted a similar Delaware statute dealing with corporate mergers. Section 259(a) of the Delaware General Corporation Law provides in relevant part that: 11

13 When any merger... shall have become effective under this chapter... all property, real, personal and mixed,... belonging to each of such corporations shall be vested in the corporation surviving or resulting from such merger...; and all property,... shall be thereafter as effectually the property of the surviving... corporation... as they were of the... constituent corporations. The Federal District Court of Delaware held that under the above quoted provision, since the disappearing corporation combines with the surviving corporation, the latter automatically attains to its property, rights and privileges. Texaco Refining and Marketing, Inc. v. Delaware River Basis Com'n., 824 F. Supp (D. Del. 1993). Therefore, no deed is necessary to convey real property from the disappearing to the surviving corporation. As the Commissioner has pointed to no authority, nor has he provided any analysis that would suggest that a different result should be reached, it is found that the Real Property was transferred by operation of law in the Merger. As there was no conveyance by deed, there is no basis upon which to impose the RPT under Code section a. B. Was there a transfer of an economic interest in real property? Code section b(1) imposes a tax on: each instrument or transaction (unless evidenced by a deed subject to tax under [sec a]) at the time of the transfer, whereby any economic interest in real property is transferred by a grantor to a grantee... 6 The effects of a merger under the Delaware corporate merger statutory provisions are virtually identical to the effects of corporate mergers under the BCL. See, Albert v. Salzman, 41 A.D.2d 501, 344 N.Y.S.2d 457 (1st Dept. 1973). 12

14 The term "economic interest in real property" is defined in section to include ownership of an interest in a partnership or a corporation which owns real property in the City. The partnership interests in BL before the Merger and in Petitioner after the Merger clearly constitute "economic interests in real property." Thus, if the Merger caused a "transfer" of such interests within the meaning of Code section b(1), the Merger would be taxable. The only definition of the term "transferred" contained in the RPT law is as follows: [w]hen used in relation to an economic interest in real property, the terms "transfer" or "transferred" shall include the transfer or transfers or issuance of shares of stock in a corporation, interest or interests in a partnership, association or other unincorporated entity, or beneficial interests in a trust, whether made by one or several persons, or in one or several related transactions, which shares of stock or interest or interests constitute a controlling interest in such corporation, partnership, association, trust or other entity. Section This definition does not specifically address mergers. The Rules merely restate the statutory definition. However, the Rules do provide illustrations of both taxable and nontaxable mergers. 19 RCNY sec The first example involves the merger of two corporations whose shareholders were unrelated prior to the merger (the "Unrelated Shareholders Merger"). 19 RCNY sec (e)(2) Illustration (i). In this example, the disappearing corporation owned real property in the City and all of the shares of this corporation were exchanged or converted into cash, stock and/or securities of the surviving corporation. The example does not state what percentage of shares in the surviving corporation was received by the shareholders of the disappearing corporation. The example concludes that this 13

15 transaction is taxable under the RPT as there was a "transfer of a controlling economic interest." The RPT Rules also provide three examples in which mergers are not taxable under the RPT because there was no "transfer" of a controlling economic interest. The first involves the merger of a wholly owned subsidiary corporation that owned real property in the City into its parent (the "Parent-Sub Merger"). 19 RCNY sec (e)(2) Illustration (ii). The second involves the merger of a wholly-owned subsidiary that owned real property in the City into another wholly-owned subsidiary corporation (the "Brother-Sister Merger"). 19 RCNY sec (e)(2) Illustration (iii). The third and last involves the merger of two limited partnerships where A owned a ninety percent limited partnership interest and B owned a ten percent general partnership interest in both the disappearing limited partnership that owned the New York real property and in the limited partnership that would survive the merger. Following the merger, A still owned a ninety percent limited partnership interest and B still owned a ten percent limited partnership interest in the surviving limited partnership (the "Same Partners Merger"). 19 RCNY sec (e)(4). Petitioner asserts that the three examples dealing with mergers that are not taxed indicate that no transfer of an economic interest occurs where the interests in the disappearing and surviving entity are owned by the same parties. Respondent counters, however, that Petitioner's analysis would graft on to the statute, before its amendment, the Mere Change exemption. 7 As Petitioner notes, common ownership of the merged entities is the decisive factor in the examples. However, that is because where the owners of interests in the disappearing entity also own 7 See, footnote 4, supra. 14

16 interests in the surviving entity before the merger there may be no need to "transfer" interests in either the disappearing or in the surviving entity. By illustration, in the Parent-Sub Merger, the parent owned all the stock in the subsidiary prior to the merger. If the parent, in exchange for its shares in the disappearing corporation, were to have received shares in the surviving corporation, it would have received shares in itself which is an 8 economically meaningless act. Similarly, in the Brother-Sister Merger, since the parent already owned all the shares of the surviving corporation, obtaining additional stock certificates would have been a meaningless act. Finally, in the Same Partners Merger, since the partners of the disappearing partnership already owned one hundred percent of the partnership interests in the surviving partnership, they could not have received additional partnership interests in the surviving partnership. In all three examples, the interests in the disappearing entity were not exchanged nor were additional interests in the surviving entity issued. The interests in the disappearing 8 This analysis is consistent with BCL section 905, which describes the contents of a plan of merger of a subsidiary corporation into its parent and requires the plan to include: The terms and conditions of the proposed merger, including the manner and basis of converting the shares of each subsidiary corporation to be merged not owned by the parent corporation into shares, bonds or other securities of the surviving corporation, or the cash or other consideration to be paid or delivered in exchange for shares of each such subsidiary corporation, or a combination thereof. [Emphasis added.] There is no requirement that the plan of merger describe how shares of the subsidiary corporation that were owned by the parent before the merger would be converted into shares of the parent or have other consideration paid for them because there no conversion or transfer required. Instead, the old shares merely cease to exist as a consequence of the merger. 15

17 entity merely ceased to exist separately as a consequence of the merger and became part of the interests in the surviving entity. The owners of the interests in the surviving entity continued to own what they owned before the merger. This analysis is consistent with the way mergers are treated 9 under the Delaware General Corporation Law. In Shields v. Shields, 498 A.2d 161 (Del. Ch., 1985), the Delaware Court held that where a parent corporation merged into its newly formed subsidiary, there was no "exchange" of stock in the parent for stock in the subsidiary for purposes of applying a shareholders' agreement entered into by shareholders of the parent. Rather, the court held, the stock in the parent disappeared by operation of law. Petitioner asserts that because the partnership interests in BL, the disappearing partnership, became part of the partnership interests in Petitioner, the surviving partnership, and because the BL partners owned ninety eight percent of the partnership interests in Petitioner, then at least to the extent of ninetyeight percent of the interests there was no "transfer." Petitioner's analysis would be correct if the same people owned the partnership interests in BL and in Petitioner before the merger. If that had been the case, then, like the Same Partners 9 The provision at issue, Del. Code Ann. Tit.8, 251, provides in pertinent part that an agreement of merger should include: the manner of converting the shares in each of the constituent corporations into shares or other securities of the corporation surviving or resulting from the merger or consolidation, and, if any shares of any of the constituent corporations are not to be converted solely into shares or other securities of the surviving or resulting corporation, the cash, property, rights or securities of any other corporation which the holders of such shares are to receive in exchange for, or upon conversion of such shares

18 Merger in the Rules, the BL partners would have always owned the MCP partnership interests. There would have been no need to transfer partnership interests, or to exchange them, or to issue new interests in MCP. Partnership interests in a disappearing partnership will always cease to exist as a matter of law. However, some mergers are, nevertheless, taxable. In the Unrelated Shareholders Merger, shares of the disappearing corporation had to be actually "exchanged or converted" into cash, stock, and or securities of the surviving corporation since shareholders of the disappearing corporation did not own shares of the surviving corporation before the merger. For the merger to go forward, the shareholders of the disappearing corporation actually relinquished ownership of those shares in an economically meaningful manner and new shares in the surviving corporation were issued to them. This was the aspect of the merger that was taxable. Here, the BL partners did not own partnership interest in MCP before the Merger. Thus, like the case of the Unrelated Shareholders Merger, these partners had to exchange their partnership interests in BL (and in the other nine Merging Entities) and new partnership interests in Petitioner had to be issued to them in order for the Merger to take place. This aspect of the Merger is a transfer which is taxable under section b(1). The same result would have followed if the merger were of two New York limited partnerships and took place under Article 8-A of the New York Partnership Law. What is significant is the change in ownership of the surviving partnership before and after the merger, and not the state law under which the merger took place or the kind of partnership that was a party to the merger. 17

19 Although the above conclusion renders the last two issues raised by the Commissioner moot, for the sake of completeness, they will be addressed. First, the Commissioner contends that the changes that occurred as a result of the Merger were of such a magnitude that Petitioner, the surviving partnership, was not the same entity as BL, the disappearing partnership, and thus an exchange should be deemed to have taken place. Those changes are: (1) the change in the identity of the Real Property's owner from BL to Petitioner; (2) the change in the legal nature of the entity owning the Real Property from a general partnership to a limited partnership; (3) the change in the place of organization of the entity owning the Real Property from New York to Delaware; (4) the change in the respective percentage partnership interests; (5) the change in the liability of the partners from general partners with personal liability to limited partners with no such liability; (6) the change in the authority of the partners from general partners who could act for the entity to limited partners who could not; (7) the change in the number and identity of partners; and (8) the change in the overall composition and assets of the owning entity from BL alone to Petitioner which included not only BL but also nine other partnerships which merged into Petitioner. Those changes did take place and MCP, the surviving partnership is in many ways different from BL, the disappearing partnership. However, the fact that the surviving partnership is different from the disappearing partnership does not mean that partnership interests were transferred. For example, in Auserehl v. Jamaica Builders Supply Corp., 62 A.D.2d 1098, 404 N.Y.S.2d 421 (3rd Dept., 1978), an individual who was a shareholder of the surviving corporation both before and after a merger exchanged the stock certificates that he had in the surviving corporation prior to the merger for new certificates in that same corporation. The dissenting opinion argued that an exchange or conversion had occurred because the surviving corporation was not 18

20 the equivalent of its predecessor because it included the assets, liabilities and operations of the disappearing corporation. The majority, however, held that the shares of the surviving corporation held by the shareholder before the merger were not converted to different shares as a result of the merger. Applying this analysis to the Merger, Petitioner after the Merger was the same entity as it was before the Merger. Thus no transfer would have occurred had the partners in BL, the disappearing partnership, owned their partnership interests in Petitioner, the surviving partnership, before the Merger. The Commissioner's representative also asserts that since BL's partners did not acquire 100% ownership of the interests in the surviving partnership after the Merger, there must have been a "transfer of an economic interest." Code section b(1) imposes the tax on "transfers of economic interests." Section defines a "controlling interest" in a partnership as "fifty percent or more of the capital, profits or beneficial interest in such partnership." Code section provides in pertinent part that "(w)hen used in relation to an economic interest in real property, the terms 'transfer' or 'transferred' shall include the transfer or transfers or issuance of... interest or interests in a partnership... which... interest or interests constitute a controlling interest in such... partnership." The Commissioner's representative contends that Code section b(1) imposes a tax on transfers of economic interests without regard to whether the interests transferred consist of at least fifty percent of the interests in the entity. Respondent's representative asserts that the definition of "transfer" in section should not be read as a restriction on section b(1) but should be given effect as an expansion rather than a definition of the term "transfer." 19

21 While section b(1) could have been more artfully drafted, the Commissioner's representative's interpretation is simply incorrect. It also is inconsistent with the Commissioner's RPT Rules which state that transfers of less than fifty percent of the interests in an entity are not taxable. See,e.q. 19 RCNY sec , Controlling Interest: (2) Aqqreqation, Illustration (iv). lo In addition, the suggested interpretation is at odds with the fundamental rule of statutory construction that meaning, if possible, must be given to the entire statute. See, N.Y. Statutes 98 (McKinney 1971). Were Respondent's representative correct that a transfer of less than a fifty percent interest is taxable, then the definition of "controlling interest" in Code section would serve no purpose. In addition, there would be no need for the words "whether made by one or several persons, or in one or several related transactions" in section since any transfer would be taxable without the need for aggregation to reach the fifty percent threshold for taxability. The legislative history of section b(1) also contradicts Respondent's interpretation. Prior to 1986, the RPT was imposed only on conveyances by deed. The RPT could be avoided by holding real property in a corporation and transferring ownership of the real property indirectly by a 11 transfer of stock in that corporation. The statute was amended to correct what was perceived as a "loophole" by adding Code section b(1) so that a tax is imposed when certain 10 Under certain circumstances more than one transfer may be aggregated to reach the fifty percent threshold. 11 See, discussion of the legislative history of L 1981 c 915 1, the enabling act for Local Law No. 71, quoted at length in 595 Investors v. Biderman, 140 Misc.2d 441,531 N.Y.S.2d 714 (S.Ct. N.Y., 1988). 20

22 interests in an entity that owns real property in the City are transferred. Except in the case of certain transfers involving cooperative housing corporations, for which special rules were provided in sections b(2) and b(3), the Legislature intended to impose a tax only where fifty percent or more of the interests in the entity are transferred. In his Memorandum in Support of the bill amending the statute, Senator Marchi stated: Generally, the newly authorized tax will apply only where such economic interest represents a controlling interest in the corporation, partnership, etc., the term "controlling interest" being defined,... in the case of a partnership,... as 50% or more of the capital, profits or beneficial interest therein. The bill further provides, however, that where a transfer involves shares of stock in a cooperative housing corporation...the tax will apply, without regard to the controlling interest test... [under certain circumstances]. As a final matter, ignoring the fifty percent threshold would be inconsistent with sound tax policy. For if the Commissioner's representative's interpretation were correct, the sale of shares of stock of a publicly traded multi-national corporation that owned an office building in the City would be taxable if the indirect interest of those shares in that office building exceeded $25,000. This would create significant administrative problems and clearly was not the intent of the legislature or the Department of Finance when the statute was enacted. Accordingly, for a tax to be imposed by Code section b(1), fifty percent or more of the economic interests in a partnership that owned the Real Property must have been transferred. As a final note, the collective fifty-one percent interests 21

23 of Bernard Mandelbaum and Leon Mandelbaum in Petitioner were redeemed immediately following the Merger. Because of such redemption, RPT was paid on fifty-one percent of the value of the Real Property. Thus, as a result of this determination, double tax will be imposed on the same fifty-one percent interest: first on the exchange of BL partnership interests for interests in Petitioner, and then on the redemption that same day of those same interests in Petitioner. This is problematic in view of the fact that this redemption appears to be part of a single overall plan under which the Merger occurred. However, I addressed the parties attention to this issue at a pre-hearing conference and neither side has pursued it. I am thus precluded from doing so. Matter of U.S. Life Realty Corp., TAT Nos.(E) (GC); (GC) (NYC Tax Appeals Tribunal, April 23, 1996); Matter of Andal Corp., TAT No.(E) (GC) (NYC Tax Appeals Tribunal, June 30, 1995). ACCORDINGLY, IT IS CONCLUDED THAT: A. In a merger of a New York general partnership into a Delaware limited partnership under Delaware Partnership Law, real property that had been owned by the disappearing partnership vests in the surviving partnership by operation of law and not by conveyance by deed. Because no conveyance by deed has occurred, no tax may be imposed on the Merger under section a. B. In a merger of a New York general partnership into a Delaware limited partnership under Delaware Partnership Law, to the extent that the owners of partnership interests in the disappearing partnership also owned interests in the surviving partnership both prior to and after the merger, there is no transfer or exchange of partnership interests in the disappearing partnership. Those interests simply cease to exist as a matter of law and become part of the partnership interests in the surviving partnership owned by the partners prior to the merger. 22

24 C. For the RPT to be imposed on transfers of economic interests, there must be a transfer of fifty percent or more of the economic interests in the entity. D. Since all of the partnership interests in BL were exchanged for newly issued partnership interests in Petitioner, there was a transfer of an economic interest in real property within the meaning of section (b) and the tax was properly imposed. Therefore, the Petition of MCP Associates, L.P. dated June 9, 1995 requesting an allowance of the refund claim is denied. DATED: August 9, 1996 New York, New York MARLENE F. SCHWARTZ Administrative Law Judge 23