Heller v. State, 81 N.Y.2d 60 (1993)
The real property transfer gains tax, imposed under Article 31-B of the New York Tax Law, is not a “transfer tax” or “similar expense” under Eminent Domain Procedure Law (EDPL) 702(A)(1) and therefore is not reimbursable by the state in eminent domain proceedings.
Summary
This case clarifies the distinction between a real property transfer gains tax and a real estate transfer tax, particularly in the context of eminent domain. Heller, the claimant, sought reimbursement from the state for real property transfer gains taxes paid after the state acquired his property through eminent domain. The New York Court of Appeals held that the gains tax, calculated on the profit from the transfer, is not a reimbursable “transfer tax” under EDPL 702(A)(1). The court reasoned that EDPL 702(A)(1) was intended to cover incidental expenses tied directly to the transfer, not taxes based on the financial gain realized from the transaction. The court emphasized the difference between a tax on the transfer itself (real estate transfer tax) and a tax on the gain derived from that transfer (real property transfer gains tax).
Facts
In 1982, Heller purchased property for $7,015,975. In 1989, the State Department of Environmental Conservation acquired the property from Heller through eminent domain for $15,000,000. As a result of the conveyance, Heller was required to pay $845,638.99 in real property transfer gains tax, calculated as 10% of the net profit. Heller paid the tax under protest and sought reimbursement from the state, arguing that it was a transfer tax under EDPL 702(A)(1). The state denied the reimbursement.
Procedural History
Heller sued the state to recover the $845,638.99. The State counterclaimed for unpaid personal income taxes. The Court of Claims dismissed Heller’s claim and granted summary judgment to the state on its counterclaim. The Appellate Division modified the ruling, reversing the award of interest and penalties on the counterclaim, but affirmed the dismissal of Heller’s claim regarding the transfer gains tax. The New York Court of Appeals then reviewed the portion of the Appellate Division order pertaining to the transfer gains tax issue.
Issue(s)
Whether the real property transfer gains tax imposed pursuant to Article 31-B of the Tax Law is a transfer tax or other similar expense within the meaning of EDPL 702(A)(1), requiring reimbursement by the State when property is acquired through eminent domain.
Holding
No, because the real property transfer gains tax is a tax on the gain derived from the transfer, not on the transfer itself, and therefore does not constitute an incidental expense incurred “in connection with the transfer of the property” as contemplated by EDPL 702(A)(1).
Court’s Reasoning
The court reasoned that EDPL 702(A)(1) was intended to reimburse for incidental expenses directly related to the property transfer, such as recording fees or real estate transfer taxes. It distinguished the real property transfer gains tax, which is triggered by a profitable transfer of real property, from a traditional real estate transfer tax, which is based on the consideration paid for the property regardless of profit. The court emphasized that the gains tax is calculated based on the “difference between the consideration for the transfer of real property and the original purchase price of such property” (Tax Law § 1440 [3]).
The court also addressed Heller’s argument that, like other transfer taxes, the gains tax must be paid before a deed can be recorded. The court pointed out that only a “tentative assessment” of the gains tax is required for recording, whereas the full amount of a real estate transfer tax must be paid. Furthermore, while both transferors and transferees can bear the burden of real estate transfer taxes, the liability for real property transfer gains tax primarily falls on the transferor. The court stated that the legislature did not intend “to place a condemnee of real property in a better position than a regular seller of real property.” To reinforce this point, the court cited Tax Law § 1440(7), which explicitly includes “taking by eminent domain” within the definition of “transfer of real property.”
Ultimately, the court concluded that the real property transfer gains tax lacks the direct relationship to the transfer itself that characterizes reimbursable “transfer taxes” under EDPL 702(A)(1). Therefore, the state was not required to reimburse Heller for the gains tax paid.