A Dreaded Real Estate Tax Rears Its Ugly Head

CBS loses its argument with New York and is taxed on its "transfer" of real estate to Viacom.
Robert WillensNovember 25, 2008

This month, CBS Corp. lost a tax case against the state of New York when the government successfully proved that the media company’s shareholders lost control over corporate assets as part of a merger deal. The circumstances date back to March 2000, when CBS and Viacom Inc. completed a merger in which Viacom was the “issuing” corporation. (Since that time, a corporate separation has taken place with the result that CBS and Viacom are now, once again, independent entities.

As part of the merger, Viacom issued non-voting common stock to the CBS shareholders in exchange for their voting common stock in CBS. The former CBS shareholders, because of the relative sizes of the constituents, wound up owning more than 50 percent of the value — but none of the voting power — of the merged entity’s stock.

The merger, according to the New York State Department of Taxation and Finance (DOTF), effected a transfer of a controlling interest in CBS for purposes of New York’s real estate transfer tax. Nevertheless, CBS took the position that it was entitled to a substantial exemption from the full rigors of this dreaded real estate tax.

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The value of CBS’s real estate in New York was worth over $200 million at the time of the merger. Apparently, this amount was not disputed. However, the real estate transfer tax returns that CBS filed claimed exemptions aggregating some 70.44 percent of the value. The claims comprised a 15.56 percent exemption based upon the fact that some CBS shareholders had also held Viacom stock before the merger, and a 54.88 percent exemption linked to the fact that holders of CBS voting common stock received non-voting common stock in Viacom as a result of the merger.

The dispute between CBS and DOTF centered on whether the claim related to the exchange of voting and non-voting stock falls within an exemption for conveyances (of real estate). That is, does the claim effect “a mere change of identity or form of ownership” where there is no accompanying change in beneficial ownership.

The DOTF disallowed the exemption because the CBS voting stock had been exchanged in the merger for non-voting stock. CBS, by contrast, argued that the exemption was available because such exemption applies where a transferor retains an ongoing economic interest in the transferred realty without regard to voting power, dominion, and control. Thus, the battle was joined. (See Matter of CBS Corp. v. Tax Appeals Tribunal of the State of New York, N.Y. Sup. Ct. No. 503163, November 13, 2008.)

Voting Power Prevails

In the November case, the court noted that Section 1402(a) of New York State’s tax law imposes the real estate transfer tax “on each conveyance of real property or interest therein where the consideration exceeds $500.” The conveyances subject to the real estate transfer tax are defined as, “transfers of any interest in real property … including … [the] transfer or acquisition of a controlling interest in any entity with an interest in real property.” The court went on to note that, in the case of a corporation, the term controlling interest is defined as either 50 percent or more of the total combined voting power of all classes of stock, or 50 percent or more of the capital, profits, or beneficial interest in such voting stock.

The court concluded that to prevail, CBS had to show that its interpretation of the statute is the only reasonable construction thereof — a nearly impossible burden to shoulder. Not surprisingly, the court then went on to conclude that CBS had failed to carry its burden.

In the absence of a statutory definition of the phrase “beneficial ownership,” the DOTF properly, in the court’s judgment, looked to other portions of new York’s Tax Law article 31 for guidance. In so doing, the court found the DOTF “reasonably concluded” that the transfer of a controlling interest in CBS for non-voting stock in Viacom represented a change in substance and not a change in form because the loss in voting power (experienced by the CBS shareholders) represented a transfer of control over corporate assets.

When CBS’s shareholders exchanged their voting stock for non-voting stock, they lost the right to “command and control” over the operation and disposition of the transferred real property. Moreover, the term, beneficial ownership has been interpreted to include command and control over property and has not been limited to, simply, financial or economic interests. Accordingly, since the State’s determination had a “reasonable basis,” the argument had to be upheld.

Further, to add insult to injury — and in our view somewhat surprisingly — the court upheld the imposition of penalties assessed by the DOTF against CBS. In so doing, it made the following provocative observation: “Advancement of a reasonable legal theory in good faith or reliance on professional advice, in the absence of inquiry to ascertain the position of the DOTF, does not constitute reasonable cause [to fail to remit, on or before the due date, the full amount of transfer tax allegedly owed].” Accordingly, the court concluded that the penalty assessed was valid because CBS’s failure to pay the full amount of transfer tax due had been caused by “willful neglect.”

Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for This extra column was written in response to this week’s Gannett court decision.