GKK 2 Herald LLC v. City of N.Y.
| Decision Date | 10 October 2017 |
| Docket Number | 82/16, 4074. |
| Citation | 63 N.Y.S.3d 20,154 A.D.3d 213 |
| Parties | GKK 2 HERALD LLC, Petitioner, v. The CITY OF NEW YORK TAX APPEALS TRIBUNAL, et al., Respondents. |
| Court | New York Supreme Court — Appellate Division |
Stempel Bennett Claman & Hochberg, P.C., New York (Richard L. Claman of counsel), for petitioner.
Zachary W. Carter, Corporation Counsel, New York (Amy H. Bassett of counsel), for respondents.
DAVID FRIEDMAN, J.P., KARLA MOSKOWITZ, JUDITH J. GISCHE, MARCY L. KAHN, JJ.
In this article 78 proceeding, invoking this Court's original jurisdiction under CPLR 506(b)(4), we are asked to decide whether the determination of respondent City of New York Tax Appeals Tribunal that petitioner's receipt of $111,375,000 was a taxable event was rationally based and supported by substantial evidence. For the reasons that follow, we find that it was.
On April 9, 2007, petitioner GKK 2 Herald LLC acquired a 45% tenant-in-common (TIC) interest in real property located at 2 Herald Square in Manhattan, while nonparty SLG LLC (SLG) acquired the remaining 55% TIC interest in the property.
On December 14, 2010, 2 Herald Owner LLC (Herald LLC) was formed. On December 22, 2010, pursuant to a "TIC Contribution Agreement," petitioner and SLG contributed their respective 45% and 55% interests in the property to Herald LLC and in return received a 45% and 55% membership interest, respectively, in Herald LLC. The agreement also asserted that petitioner would pay "any and all" transfer taxes arising out of transactions. Furthermore, SLG had the sole right to terminate the TIC Contribution Agreement and sole conditional obligation to close.
That same day, petitioner and SLG executed an operating agreement that provided that available profits and cash flow of the LLC would be "jointly determine[d] by members in their sole discretion," notwithstanding the set 45 percent and 55 percent membership interest. Petitioner and SLG also executed and delivered their respective deeds to their TIC interests in the property to Herald.
Also on December 22, 2010, the parties entered into a Membership Interest Purchase Agreement (Purchase Agreement) under which petitioner agreed to sell and SLG agreed to purchase petitioner's 45 percent membership interest in Herald for $25,312,500, in addition to petitioner's release of its pro rata mortgage obligation, in the amount of $86,062,500 (totaling $111,375,000). Petitioner thereupon withdrew as a member of Herald LLC. Recitals in the Purchase Agreement describe the various separate but related transactions: the formation of Herald LLC, execution of LLC's Operating Agreement, acquisition of real property interest by Herald LLC and sale of petitioner's membership interest to SLG.
Petitioner timely filed a Real Property Transfer Tax (RPTT) return reporting the sale of its membership interest in Herald LLC to SLG. The return reported no RPTT due, claiming that the transaction qualified for the "mere change of form of ownership" exemption to imposition of the RPTT (Administrative Code of the City of NY § 11–2106[b][8] ). Under the Administrative Code's "mere change in form of ownership" exemption, "a deed, instrument or transaction conveying or transferring real property or an economic interest" is exempt "to the extent that the beneficial ownership of such real property or economic interest therein remains the same ..." (Administrative Code § 11–2106[b][8] ). For the purpose of the exemption, a determination of whether the beneficial ownership of the real property or economic interest remains the same before and after the transaction " will be based on the facts and circumstances." (19 RCNY § 23–05[b][8] [iv] ).
Respondent Commissioner of Finance of the City of New York (the Commissioner) audited the transactions and concluded that the entire $111,375,000 consideration paid for petitioner's interest was taxable because the individual transactions resulting in the transfer of property interest should be treated as a single, taxable transaction not subject to the "mere change in form" exemption, however.
Petitioner challenged the Commissioner's ruling before an administrative law judge (ALJ) of the Tribunal, who sustained the Commissioner's ruling.
Petitioner then appealed the decision of the ALJ to the full Tribunal, which affirmed the decision of the ALJ. The Tribunal reasoned that, pursuant to the step transaction doctrine, the series of separate but related events taken by petitioner to transfer its interest may be treated as a single taxable transaction (see Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596 [1935] ; Associated Wholesale Grocers, Inc. v. United States, 927 F.2d 1517, 1527–1528 [10th Cir.1991] ). The Tribunal found that the series of steps taken by petitioner met the criteria of both alternative tests for application of the doctrine. The Tribunal determined that the transactions met the "end result test," pursuant to which the doctrine may be applied if a series of apparently separate transactions were prearranged parts of what was actually a single transaction cast from the outset to achieve the ultimate result (see Greene v. United States, 13 F.3d 577, 583–584 [2d Cir.1994] ), in that after all steps were completed, petitioner no longer held any interest in the property directly or indirectly, was relieved of any liability under the mortgage and was entitled to receive $25,312,500.
Alternatively, the Tribunal found that the series of transactions in question satisfied the "interdependence test," under which the doctrine may be applied because the transactions in question were "so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series" ( King Enters. v. United States, 418 F.2d 511, 516 [Ct.Cl. 1969] ), in that the various agreements described each of the steps taken by the parties, all of which were interrelated and completed within one day. The Tribunal noted that nothing in the record suggested that any of the steps would have been taken independently of the others.
Additionally, the Tribunal found that the "mere change in form of ownership" exemption did not apply, since the one step in the series that had to be substantive was the receipt by petitioner of a beneficial interest in Herald LLC, yet it was the most ephemeral step in the transaction. The Tribunal found that the "facts and circumstances" analysis of the RPTT Rules, which determines the extent to which the beneficial ownership of real property remains the same following the transaction, represents an independent basis for concluding that petitioner's conveyance of its TIC interest did not satisfy the "mere change" exemption. In the Tribunal's view, the "facts and circumstances," including the simultaneous occurrence of various steps in the overall conveyance process, established that neither petitioner nor SLG had any intention of petitioner retaining a beneficial ownership in the property following the parties' transactions of December 22, 2010. Furthermore, the Tribunal noted that the Herald LLC agreement failed to identify the interests of the petitioner and SLG in the LLC such as profits, losses and cash flow, further evincing a change in beneficial ownership. The Tribunal observed that other provisions of the TIC Contribution Agreement were more typical of a sale than the formation of a joint venture, including the fact that the petitioner was released from obligations under the mortgage loan and received back its collateral.
Petitioner also argued that it was entitled to the "mere change in form" exemption applied because the circumstances of this case were similar to those presented in "Example C" of 19 RCNY § 23–05(b)(8)(ii), which regulation includes several examples of scenarios in which the "mere change" exemption would be applicable. Example C reads as follows:
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The Tribunal also found that Example C was not relevant to the overall transaction at hand. The Tribunal found Example C to be wholly distinguishable, because the question presented was not whether the contribution should be aggregated with the sale of petitioner's interest in Herald to SLG to comprise a controlling economic interest transfer, but whether the facts and circumstances of that sale caused the initial contribution to be taxable.
Finally, the Tribunal rejected petitioner's claim that a New York State ALJ's finding that petitioner was exempt from taxes in these transactions under New York state law warranted a different result in this case (see Matter of GKK 2 Herald, 2016 WL 3131497 [N.Y.Div.Tax App. DTA No. 826402, May 26,...
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