December, 2006

IRS Rules That Stock in New York Cooperative Apartment is
Real Property For Purposes of Code § 1031


In Private Letter Ruling 200631012, issued on August 4, 2006, the IRS concluded that stock in a cooperative apartment located in New York constitutes real property for purposes of the like-kind exchange rules of Internal Revenue Code §1031. The IRS reasoned that (1) the question of whether interests in a New York cooperative apartment constitute real property is determined based on New York law and (2) several New York statutes treat interests in a cooperative apartment as the equivalent of interests in real property. (1 - below)

New York practitioners may be surprised by PLR 200631012 because New York courts generally treat interests in cooperative apartments as intangible personal property. The New York Court of Appeals, for example, has held that such interests are not real property for purposes of the New York rule that entitles judgment creditors to a lien on the property by docketing his judgment. (2 - below) In Danforth v. McGoldrick, 109 NYS 2d 387 (N.Y. Sup. Ct. 1951), the New York State Supreme Court held that a person who purchases stock in a cooperative buys shares in a corporation and contractual rights to occupancy of an apartment in a building. Similarly, in re Miller’s Estate, 130 N.Y.S.2d 295 (N.Y. Surr. Ct. 1954), the Surrogate’s Court held that “considered separately, the shares of stock (in the incorporated cooperative organization) and the proprietary apartment lease (for the hire of an apartment for 21 years) each would be considered personalty.”

The New York State Department of Taxation and Finance has also long taken the position that interests in cooperative apartments are intangible personal property for purposes of New York income (3 - below) and estate tax, (4 - below) a position confirmed, as to the estate tax, by the New York Surrogate’s Court. (5 - below) In each instance in which an interest in a cooperative apartment is treated as real property for New York tax purposes, there is a particular provision of the New York tax law that specifies this treatment. For example, in 2004, the legislature amended the New York Tax Law to tax gains recognized by non-New York residents who sell interests in New York cooperative apartments. To impose tax on such gains, the legislature modified a provision of the statute dealing with intangible personal property. Specifically, New York Tax Law § 631(b)(2) was amended to provide that any gain from a disposition of stock in a New York cooperative apartment is subject to tax, notwithstanding the general rule that a non-resident is not subject to New York income tax on income from intangible property. (6 - below)

Furthermore, the IRS has itself concluded that, based on New York case law, interests in a cooperative apartment constitute personal property. In Rev. Rul. 66-40, which dealt with former Code § 2515, (7 -below) the IRS ruled that because the stock and leasehold interests of a New York cooperative apartment constitute personalty, a transfer of these interests by their owner to her spouse and herself as joint tenants with rights of survivorship did not fall within an exception to gift tax for joint tenancies in real property between spouses.

The New York cases cited in Rev. Rul. 66-40 still appear to be good law, so why has the IRS changed its view about the appropriate classification of interests in New York cooperative apartments? It is possible that the IRS was swayed by the New York statutory sections cited in PLR 200631013 (see footnote 1), none of which existed in their present form at the time that Rev. Rul. 66-40 was released. Alternatively, it is possible that, in reaching its conclusion in PLR 200631012, the IRS did not consider authorities such as New York Tax Law §631(b), Danforth v. McGoldrick and in re Miller’s Estate.



(1) The IRS cited the following New York statutes: N.Y. Civ. Prac. L.& R. § 5206(a) ( McKinney 1997) (homestead exemption); N.Y. Real Prop. Law § 279(5) ( McKinney 1989) and N.Y. Pub. Auth. Law § 2402(5) (McKinney Supp. 2006) (mortgage for cooperative interest); N.Y. Real Prop. Tax Law § 467(3-a) (McKinney Supp. 2006) (real property tax for senior citizens); N.Y. Tax Law § 1402-a(a) (McKinney 2004) (“mansion tax”); and N.Y. Real Prop. Law § 254-b(1) ( McKinney 1989) (limit on mortgage late charges).

(2) See State Tax Commission v. Shor, 371 N.E.2d 523 (N.Y. App. Term., 1977).

(3) See New York Advisory Opinion No. TSB-A-88(6)I (May 25, 1988) and New York State Department of Taxation and Finance, Nonresident allocation 313 ( May 4, 1998).

(4) See TSB-M-81(1) ( Feb. 20, 1981).

(5) In re Estate of Verna S. Jack , 484 NYS2d 489 (N.Y. Surr. Ct. 1985), holding that a NY resident decedent’s ownership of a cooperative unit in Florida is tangible personal property and therefore includable for New York State estate tax purposes.

(6) See also §6-2.2 of the New York Estates, Powers and Trusts Law (the “EPTL”), which creates default rules that govern the way in which multiple owners take title to real and personal property when a transferor does not specify how title is to be held. In 1995, the New York legislature added a new subsection (c) to EPTL §6-2.2, creating a special rule applicable to transfers of interests in cooperative apartments. EPTL §6-2.2(c) provides that a transfer of interests in a cooperative apartment to a husband and wife creates a tenancy by the entirety, unless the transferor specifies that the property is to be held by the couple as joint tenants or as tenants in common. Prior to the addition of EPTL §6-2.2(c), a husband and wife receiving interests in a cooperative apartment took their interests as tenants in common, under the general rule applicable to transfers of personal property. See e.g., Matter of Schultz, N.Y.L.J., October 19, 1992, at 30, col. 2 (Surrogate’s Court, New York County) and Estate of Menon v. Menon, 303 A.D.2d 622 (March 24, 2003) (applying pre-1995 EPTL §6.2-2).

(7) Former Code §2515 was repealed in its entirety in 1981.