New York State easing stance on Cuomo tax

Real Estate Weekly, Jan 20, 1993 by Therese Fitzgerald

Good news for the workout crowd! In workouts, an owner being relieved of indebtedness is usually liable for paying New York State Gains Tax on the full mount of the debt that is forgiven even if the borrower has an economic loss on the property.

New York State, however, has issued an opinion that will allow in one circumstance for the Gains Tax to be applied to "fair market value."

According to this ruling by the New York State tax commissioner, this mechanism would diallow the gains tax from being applied to the "phantom" gain or the differential betwean the mount owed on the property and the mount the property could realize if it were sold at the time the property was handed over to the lender.

The opinion was based on a hypothetical situation presented to the state by Andrew Feiner, an attorney with Zellermayer Gratch & Jacobs, and William Korman, an attorney with Deloitte & Touche.

In the scenario, a partnership had a property worth $10 million with a mortgage of $15 million and a $50,000 cash bank account.

Because the bank received an interest in the partnership, instead of the property itself, the consideration on which the gains tax was based was allocated between the real property and the personal property, under an allocation rule that provides for no more than the fair market value to be allocated to the property.

After the property returns to the lender, Feiner said, the institution "arguably' might have to keep the partnership alive for some period of time by possibly having an affiliate of the bank take some interest in the partnership.

According to Feiner, the ruling is beneficial for the former owner who would not owe any gains tax on the property unless it had a true economic gain. And it is helpful to the banks, which often have to pay the gains tax if the borrower is bankrupt.

Bankruptcy attornies, who are hampered by the strict Gains Tax law, were pleased last week because of the ruling's long-term ramifications.

What is important here, said Stephen Ziegler, Esq. of the law firm of Ziegler, Sagal & Winters, is the state 'let its guard down.'

'Though it may be difficult to practically apply,' said Ziegler, 'it's a precursur for [structures] that will be much easier to apply. Somebody is going to argue the same reasoning should apply to the transfer of property.'

And while the tax commission may not be the one to extend the ruling, a court may take the cue.

Most banks, however, Ziegler said, prefer to take direct deed. They do not want the additional items because of the risk of other liabilities.