10 West 66th Street Corp. v. Finance Administration, 73 N.Y.2d 19 (1988)

A mortgage placed on real property as an integral part of financing a contemplated sale, such as a cooperative conversion, is considered to be placed “in connection with the sale,” and therefore is not deductible from the net consideration subject to the real property transfer tax, regardless of the time elapsed between the placement of the lien and the taxable sale.

Summary

10 West 66th Street Corp. challenged a determination by the Finance Administration of the City of New York disallowing deductions for two mortgages from the net consideration subject to real property transfer tax. The mortgages were placed on an apartment building in anticipation of its conversion to a cooperative. The Court of Appeals held that these mortgages were placed “in connection with the sale” to the cooperative corporation, and thus were not deductible. The court reasoned that the mortgages were integral to the financing of the cooperative conversion and the building’s ultimate sale, regardless of the time between the mortgage placement and the sale.

Facts

In 1979, 10 West 66th Street Corp. obtained a loan from Chemical Bank, secured by a mortgage, to purchase an apartment building, with the express intention of converting it into a cooperative. The loan agreement required the corporation to submit a proposed offering plan to the Attorney-General. The mortgage terms allowed for its transition into permanent financing upon the building’s resale to a cooperative corporation. Later, a portion of the mortgage was assigned to Connecticut General Life Insurance Co. (CGLIC). In 1980, the corporation contracted to sell the building to a cooperative corporation, which would assume the CGLIC mortgage. At the closing in 1981, a series of complex financing transactions resulted in the consolidation and splitting of the mortgages, with the Chemical Bank mortgage assigned to the grantee (cooperative corporation). The grantee then assumed the CGLIC mortgage.

Procedural History

The 10 West 66th Street Corp. deducted the amounts outstanding under both the Chemical and CGLIC mortgages from the total consideration paid when computing the real property transfer tax. The Finance Administration disallowed these deductions. The corporation initiated an Article 78 proceeding to challenge the determination. The Appellate Division initially concluded that there was not substantial evidence to support the finding that the mortgages had been placed on the property “in connection with the sale.” The Court of Appeals reversed the Appellate Division’s ruling, reinstating the Finance Administration’s original determination.

Issue(s)

Whether mortgages placed on real property in anticipation of a future sale, as part of a cooperative conversion plan, are considered to be placed “in connection with the sale” under the Real Property Transfer Tax Regulations, thereby precluding their deduction from the net consideration subject to the tax.

Holding

No, because the mortgages were an integral part of the financing for the cooperative conversion and the ultimate sale to the cooperative corporation, regardless of the time elapsed between the placement of the lien and the sale. Therefore, the regulation disallowing deductions for encumbrances placed “in connection with the sale” applies.

Court’s Reasoning

The Court of Appeals found that the Finance Administration’s interpretation of the regulation was rational, as it does not impose a temporal proximity requirement between the placement of the lien and the sale. The explicit terms of the mortgages and their modifications demonstrated that they were intended to be an integral part of the financing for the cooperative conversion and the building’s ultimate sale. The court emphasized that it was clear that a cooperative conversion involving a sale to some corporate entity was contemplated from the outset. The Court distinguished this situation from ordinary assumable mortgages, stating that the mortgages in this case “required petitioner to exert its best efforts to effect a resale and expressly provided for conversion to permanent financing upon completion of that resale.”

The court further reasoned that the regulation was a reasonable measure to prevent the circumvention of the transfer tax through manipulation of the timing of mortgage and sale closings. The court supported this interpretation by noting that similar regulations exist under similar State and Federal transfer tax statutes. As the Court stated, respondents’ interpretation of the regulation “permits its application without regard to the amount of time elapsed between the placement of the lien and the taxable sale.”