In re 995 Fifth Ave. Associates, LP

• Decision Date: 13 July 1990
• Docket Number: Adv. No. 89-5449A.,Bankruptcy No. 88 B 10237(TLB)
• Citation: 116 BR 384
• Parties: In re 995 FIFTH AVENUE ASSOCIATES, L.P., Debtor. 995 FIFTH AVENUE ASSOCIATES, L.P., Plaintiff, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, James W. Wetzler as Commissioner of Taxation and Finance, and Edward V. Regan as Comptroller of the State of New York, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

116 B.R. 384 (1990)

In re 995 FIFTH AVENUE ASSOCIATES, L.P., Debtor.

995 FIFTH AVENUE ASSOCIATES, L.P., Plaintiff, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, James W. Wetzler as Commissioner of Taxation and Finance, and Edward V. Regan as Comptroller of the State of New York, Defendants.

Bankruptcy No. 88 B 10237(TLB), Adv. No. 89-5449A.

United States Bankruptcy Court, S.D. New York.

July 13, 1990.

Angel & Frankel, P.C. by Joshua J. Angel, Leonard H. Gerson, Ira R. Abel, New York City, for debtor.

Robert Abrams, Atty. Gen. by David Cook, Marcie Mintz, New York City, for defendants.

DECISION GRANTING MOTION FOR SUMMARY JUDGMENT

TINA L. BROZMAN, Bankruptcy Judge.

At issue in this adversary proceeding is whether section 1146(c) of the Bankruptcy Code, 11 U.S.C.A. § 1146(c) (West Supp. 1990) (Section 1146(c)) exempts a debtor in possession from payment of the tax imposed on the gains derived from the transfer of real property within the State of New York pursuant to N.Y.Tax Law § 1441 (McKinney 1987) (the Gains Tax). 995 Fifth Avenue Associates, L.P. (the Debtor), the debtor in this chapter 11 case, moves for summary judgment arguing that Section 1146(c) does apply and that the $2,608,603.80 Gains Tax payment it made under protest should be returned. The New York State Department of Taxation and Finance (the Tax Department), James W. Wetzler as Commissioner of Taxation and Finance, and Edward V. Regan as Comptroller of the State of New York (collectively, New York) have cross-moved for summary judgment to dismiss for failure to state a claim, arguing that the Section 1146(c) exemption does not apply and that the Eleventh Amendment and the doctrine of sovereign immunity are complete defenses to the adversary proceeding. For the reasons set forth below, I conclude that Section 1146(c) does exempt the Debtor from liability for the Gains Tax and that neither the Eleventh Amendment nor the doctrine of sovereign immunity precludes entry of judgment against New York because it filed a proof of claim relating to the Gains Tax after it interposed its claim of immunity.

I. Background

The salient facts are largely undisputed. The Debtor filed its Chapter 11 petition on February 4, 1988. Its business was the operation of a hotel and related restaurant and catering facilities known as the Stanhope Hotel (the Stanhope), a business which the Debtor continued to operate as debtor in possession. Over the course of the bankruptcy case, the Debtor filed an original and three subsequent amended plans of reorganization (collectively, the Plan), all of which contemplated the sale of the Debtor's interest in the Stanhope. On July 20, 1989, the Plan was confirmed.

Prior to confirmation and by order dated November 29, 1988 (the Sale Order), I authorized the Debtor to sell and/or assume and assign its interest in the Stanhope for $76,000,000. The Sale Order declared that the sale was being made under a plan of reorganization and, pursuant to Section 1146(c), would be exempt from any federal, state, or local transfer taxes. The closing of the sale was scheduled for January 13, 1989. On January 12, pursuant to the pretransfer audit procedures provided by N.Y.Tax Law § 1447 (McKinney 1987), New York issued a Tentative Assessment and Return imposing a Gains Tax of $2,608,603.80 on the proposed sale and transfer. Citing the relevant provisions of the Sale Order and Section 1146(c), the Debtor requested but was denied an exemption from the Gains Tax. Because state law prohibits recordation in the local land records without payment of any tax due under the Tentative Assessment and Return, the Debtor paid the Gains Tax under protest to allow the deed to be recorded and the sale to close the following day. N.Y.Tax § 1447, subd. 1(f) (McKinney 1987). Since the filing of the petition, New York has filed claims against the Debtor's estate based on both pre and post-petition tax obligations, with the most recent amended claim including a liability for the Gains Tax.¹

II. The 1146(c) Exemption

Section 1146(c) provides:

The issuance, transfer, or exchange of a security or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.

For the exemption from tax liability to apply, a three pronged test must be fulfilled: 1) the tax must be a stamp or similar tax; 2) imposed upon the making or delivery of an instrument transferring an interest in real property; and 3) in connection with a confirmed bankruptcy plan. In re The Baldwin League of Independent Schools, case No. 88 B 10401(CB) (June 21, 1988) (oral op.), aff'd, 110 B.R. 125 (S.D.N.Y.1990). The major challenge in this case is the satisfaction of the first prong, that is, whether the Gains Tax qualifies as a stamp or similar tax. New York relies almost exclusively on the bankruptcy court's decision in In re Jacoby-Bender, Inc., 40 B.R. 10 (Bankr.E.D.N.Y.1984), aff'd mem., No. 84-1564 (E.D.N.Y. Sept. 18, 1984), aff'd, 758 F.2d 840 (2d Cir.1985), which held that the Gains Tax was not exempt under Section 1146(c). So much of the bankruptcy court's decision as dealt with the Gains Tax was never appealed.

In Jacoby, the debtor sought an order exempting it from payment of the New York City Real Estate Transfer Tax, the New York State Real Estate Transfer Tax (collectively the Transfer Taxes) and the New York State Capital Gains Tax, the same Gains Tax presently in issue. The Jacoby court inquired into the meaning of the phrase "stamp or similar tax" but found no legislative history or court decisions directly construing Section 1146(c) or its precursors. It reasoned that two essential characteristics of stamp taxes are that the amount of tax is usually determined by the consideration recited in the deed of transfer and that the taxes must be paid as a prerequisite to recording. Other characteristics of lesser importance to the court's analysis included the use of stamps as visible evidence that the tax had been paid (deemed not "crucial" to the purpose served by the statutory exemption) and the "technical" feature that stamp taxes are charged on written instruments recognized in law as evidence of the enforcement of legal rights. Jacoby, 40 B.R. at 13; see also In re Amsterdam Ave. Dev. Assoc., 103 B.R. 454, 456-57 (Bankr.S.D.N.Y.1989) (citing Jacoby). Further, the Jacoby court noted that stamp taxes are similar to excise taxes, which are generally imposed upon the sale or use of certain articles and on certain transactions.

Carefully examining the characteristics of the Transfer Taxes, the court held them to fall within the purview of Section 1146(c). It noted that the amount of the Transfer Taxes is determined by the consideration or value of the property conveyed; that payment of the taxes is a precondition to recording; that recordation of the deed is "clear and convenient evidence" of payment of the Transfer Taxes so that affixing stamps to the instrument of transfer is not necessary; and that the Transfer Taxes are taxes upon deeds recognized in law as important evidence of legal rights.

When considering the possible exemption from the Gains Tax, the Jacoby court did not address any of the characteristics it so meticulously reviewed with regard to the Transfer Taxes. Rather, the court found that the only similarity between the Gains Tax and taxes exempt under Section 1146(c) is that both are imposed at the time of transfer. Without further ado, the court held that the Gains Tax was an income tax rather than an excise tax, because it was levied only upon the gain realized by the debtor and not upon the instrument of transfer. The court stated that unlike the Gains Tax, all of the stamp taxes it had previously discussed were imposed regardless of whether the transferor gained or lost money on the transaction. With good reason, New York relies on Jacoby, emphasizing that the Jacoby holding has been codified in the New York State tax regulations. See N.Y.Comp.Codes R. & Regs. tit. 20, § 590.65 (1988).

Although the Jacoby debtor appealed the unfavorable determination regarding the Gains Tax, New York State subsequently stipulated to return the Gains Tax payment,² thereby mooting appellate review. Accordingly, the decision is not binding precedent as to the Gains Tax. Of lesser precedential value is the incorporation of the Jacoby result in the tax regulations of the State of New York; the reach of Section 1146(c) is a federal question to be resolved by defining the scope of federal law. See Amsterdam, 103 B.R. at 458 (citing United States v. L.N. White & Co., 359 F.2d 703, 714 n. 16 (2d Cir.1966)). Moreover, where a state tax has an impact upon a federal right, federal courts are not only free to, but must, look beyond the label affixed by the state to determine the nature of the tax and its effect on the federal right. Amsterdam, 103 B.R. at 458 (citing Carpenter v. Shaw, 280 U.S. 363, 367-68, 50 S.Ct. 121, 122-23, 74 L.Ed. 478 (1930)). It is therefore entirely appropriate to analyze the Gains Tax in light of Baldwin League's three pronged test for an exemption under Section 1146(c).

The amount of the Gains Tax is determined by adding statutorily permitted adjustments (including certain capital improvements and fees paid to brokers, surveyors, engineers and attorneys) to the transferor's original purchase price and then subtracting that amount from the consideration received for the transfer. See generally N.Y.Tax Law § 1440(5) (McKinney 1987); 20 N.Y.Comp.Codes R. & Regs., §§ 590.14-17 (1988). When the consideration paid for the transfer exceeds the adjusted original purchase price, a gain is realized upon which a ten percent tax is levied. Thus, the consideration paid to the transferor and recited in the instrument of transfer plays an essential role in assessing the Gains Tax due. For all intents and purposes, the Gains Tax must be paid at the time of...