Conversion of Apartment Buildings May Be Subject to New York City Unincorporated Business Tax

By Thompson, John; Eichen, Mitchell | The CPA Journal, January 1999 | Go to article overview

Conversion of Apartment Buildings May Be Subject to New York City Unincorporated Business Tax


Thompson, John, Eichen, Mitchell, The CPA Journal


Generally, the income from holding, leasing, or managing real property is not subject to the New York City Unincorporated Business Tax (UBT). However, as noted in the following case, the original purpose of the use of real property can change upon the conversion of apartment buildings to condominiums and cooperative apartments.

In 85th Estates Company v. New York City Tax Appeals Tribunal, a partnership that converted several apartment houses into condominiums and cooperative houses was subject to UBT. It was considered a "dealer" and therefore not exempt from UBT. New York City regulations define a dealer in real or personal property as "an individual or unincorporated entity with an established place of business, regularly engaged in the purchase of property and its resale to customers; that is, one who (as a merchant) buys property and sells it to customers with a view to the gains and profits that may be derived therefrom."

The 85th Estates Company, a New York State general partnership, was the result of a merger of several entities that each owned and operated an apartment building. The partners that owned the buildings were experienced builders and operators of buildings. During 1981, the partners were experiencing problems with renewing leases and with the banks holding the mortgages. It was suggested that, if the apartment buildings were converted to condominiums or cooperatives, the partners would have less trouble with the banks and renewing leases. Prior to the conversion, sales agents were hired who reported to the partnership frequently throughout the process (which lasted approximately five years). Some of the partners had ownership interests in the sales agents. Although the sales agents were experienced in the conversion of buildings to cooperatives and condominiums, they worked with the partnership's counsel to propose the terms that needed final approval from the partnership. The sales agents maintained a sales office (renovated vacant apartments) at each of the buildings being converted. All advertising also needed approval from the partnership.

Subsequent to the partnership reporting the gain on the sale of the buildings as long-term capital gains on their Federal and New York State tax returns, the New York City Department of Finance issued a notice of determination, dated November 13, 1989, asserting a UBT deficiency for 1986 of $1,985,533 including penalties and interest. The explanation was that "a real estate developer who sells property as improved lots is considered to be a dealer for unincorporated business tax purposes." The partnership asserts that it did not hold the property primarily for sale to customers and that it did not regularly purchase and resell property under the definition of the UBT regulations. It claimed that since it held the properties for investment purposes and converted the buildings only to liquidate its investments, it should not be considered a dealer. The City of New York claimed that regardless of the original purpose for the use of the property, the buildings were being held primarily for sale at the time of the conversion. Who Is a Dealer?

The issue of whether a taxpayer is a dealer is determined by ascertaining whether or not the

property was held primarily for sale, taxpayer was engaged in the trade or business of selling its property, and sales were made in the ordinary course of that trade or business.

The factors to be considered in answering these questions, as set forth in United States g Winthrop, were as follows:

Time and effort the taxpayer devoted to the sales Extent and nature of the taxpayer's efforts to sell the property Number, extent, continuity, and substantiality of the sales Extent of subdividing, developing, and advertising to increase sales

Use of a business office for the sale of property and the character and degree of supervision or control exercised by the taxpayer over the representative selling the property

Nature and purpose of the acquisition of the property and duration of ownership. …

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