New York Law Review

Tag: Transfer Tax

  • Heller v. State, 81 N.Y.2d 60 (1993): Distinguishing Real Property Transfer Gains Tax from a Transfer Tax in Eminent Domain

    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.

  • In re Dows’ Estate, 167 N.Y. 227 (1901): Taxation of Property Transfers Under Powers of Appointment

    In re Dows’ Estate, 167 N.Y. 227 (1901)

    The exercise of a power of appointment by will is a taxable transfer, and the tax is determined by the form of the property at the time the power is exercised, not when the power was created; vested remainders are subject to present taxation even if enjoyment is postponed.

    Summary

    This case addresses whether the exercise of a power of appointment is a taxable transfer under New York’s Taxable Transfer Act, and when such taxes are due. The Court of Appeals held that the exercise of the power of appointment by will is a taxable event. The tax is applied to the property’s form at the time the power is exercised, not when the power was granted. Further, the court found that vested remainders are subject to present taxation, even if the actual possession is delayed. This decision clarifies the application of transfer taxes to property passing through powers of appointment and provides guidance on the timing of taxation for vested remainders.

    Facts

    David Dows, Sr., devised property in trust to his son, David Dows, Jr., for life, granting Dows, Jr., a power of appointment to designate his children as beneficiaries in his will. If Dows, Jr., died intestate, the property would pass to his surviving children. Dows, Jr., exercised this power in his will, granting life estates to three sons with shifting remainders to each other, effectively giving each son one-third of the property absolutely, but with staggered enjoyment. The surrogate imposed a tax on the property transferred under this power of appointment.

    Procedural History

    The Surrogate’s Court imposed a tax on the property passing under the power of appointment. The Appellate Division affirmed the Surrogate’s order. The case was then appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the tax imposed on transfers made under a power of appointment is a tax on property or on the right of succession, and thus applicable to property invested in tax-exempt securities?
    2. Whether the property’s form at the time of David Dows, Sr.’s death (real estate, which was then exempt) or at the time of David Dows, Jr.’s exercise of the power (personalty) controls taxability?
    3. Whether the remainders created in David Dows, Jr.’s will are subject to taxation before the precedent life estates terminate and the remainders vest in possession?

    Holding

    1. Yes, because the tax is on the right of succession, not the property itself.
    2. No, because the form of the property at the time of the execution of the power of appointment controls.
    3. Yes, because the remainders are vested and their value can be readily computed.

    Court’s Reasoning

    The court reasoned that the tax imposed under the Taxable Transfer Act is a tax on the privilege of succeeding to property, not a direct tax on the property itself. Citing Magoun v. Illinois Trust & Sav. Bank, the court emphasized that “the right to take property by devise or descent is the creature of the law, and not a natural right—a privilege, and, therefore, the authority which confers it may impose conditions upon it.” Therefore, the tax applies even to assets that would otherwise be exempt from property tax.

    Regarding the timing and nature of the property, the court distinguished this case from Matter of Sutton, noting that here, at the time of the exercise of the power of appointment, the property was personalty. Since the taxable event is the execution of the power, the state of the property at that time governs.

    The court determined that the remainders created in David Dows, Jr.’s will were presently taxable because they were vested and their value could be readily computed using annuity tables. The court distinguished Matter of Hoffman, stating that those remainders were contingent. The remainders in this case were absolute and not subject to divestment. As such, they fell outside the exception for contingent interests and were subject to immediate taxation.

    The court emphasized the practical impact of its decision, noting that the remainders were alienable, devisable, and descendible, further solidifying their character as presently taxable interests.