Realty company claimed property transfer was exempt from City taxes. In April 2007, the Gramercy Capital Corporation purchased a forty-five percent ownership share in the Marbridge building at 2 Herald Square in Manhattan, and the SL Green Realty Corporation purchased the remaining fifty-five percent interest. In December 2010, the two owners formed the 2 Herald Owner LLC and each transferred their respective interests into the Owner LLC. On the same day in December 2010, SL Green bought out Gramercy’s membership interest in the Owner LLC for $111,375,000.

Gramercy filed a Real Property Transfer Tax return, reporting the sale and claiming that the transaction was exempt from property taxes because it was a “mere change in form of ownership.” Transfers of ownership are exempt under the Administrative Code when the beneficial ownership of the property remains the same.

The City’s Finance Commissioner determined that the transfer was taxable and Gramercy challenged the ruling. The City’s Tax Appeals Tribunal upheld the Commissioner’s decision, ruling that the series of separate but related events may be treated as a single taxable transaction. The Tribunal found that the steps taken by Gramercy met both alternative tests under the step transaction doctrine—the end result test and the interdependence test. Gramercy filed an Article 78 proceeding challenging the Tax Tribunal’s determination.

The Appellate Division, First Department, upheld the Tax Tribunal’s determination. The appellate court found that the Gramercy transaction had satisfied both tests under the step transaction doctrine. Under the end result test, after all the transactions had occurred, Gramercy no longer held any interest in the property directly or indirectly. Under the interdependence test, nothing suggested that any of the steps would have been taken independently of the others. Gramercy, furthermore, did not qualify for the “mere change in form of ownership” exemption because at the conclusion of the transactions Gramercy no longer had any ownership interest in the property or the Owner LLC.

GKK2 Herald LLC v. City of New York Tax Appeals Trib., 2017 N.Y. Slip Op. 07102 (1st Dep’t 2017) (Attorneys: Richard L. Claman, for GKK2; Zachary W. Carter, Amy H. Bassett, for City).