Appendix — 995 Fifth Avenue Associates, L.P. v. New York State Department of Taxation & Finance, James W. Wetzler, as Commissioner of Taxation and Finance and Edward V. Regan, as Comptroller of the State of New York 113 S. Ct. 395 (1992) (No. 92-363)
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UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
>
No. 416—August Term, 1991
(Argued October 28, 1991 Decided April 13, 1992)
(Amended Opinion Filed May 8, 1992)
Docket No. 91-5038
a
IN RE: 995 FIFTH AVENUE ASSOCIATES, L.P.,
Debtor.
995 FIFTH AVENUE ASSOCIATES, L.P.,
Plaintiff-Appellee,
—-V.—-
NEW YORK STATE DEPARTMENT OF TAXATION AND
FINANCE; JAMES W. WETZLER, as Commissioner of
Taxation and Finance; EDWARD VY. REGAN, as
Comptroller of the State of New York,
Defendants-Appellants.
Before:
OAKES, Chief Judge,
FEINBERG and ALTIMARI, Circuit Judges.
Fae
2a
The New York State Department of Taxation and
Finance, James W. Wetzler, as New York Commissioner
of Taxation and Finance, and Edward V. Regan, as
Comptroller of the State of New York, appeal from an
order of the United States District Court for the Southern
District of New York (Leonard B. Sand, Judge) affirming
the opinion and order of the Bankruptcy Court (Tina L.
Brozman, Bankruptcy Court Judge). The Bankruptcy
Court granted 995 Fifth Avenue Associates, L.P.’s motion
for summary judgment and ordered the New York State
Department of Taxation and Finance to refund New York
Gains Tax, N.Y. Tax Law § 144] (McKinney 1987) paid
by 995 Fifth Avenue Associates, L.P.
Affirmed in part and reversed in part.
s
DAVID S. COOK, Senior Attorney, Attorney
General’s Office, State of New York,
New York, NY (Robert Abrams, Attorney
General, Frederic L. Lieberman, Marcie
S. Mintz, Assistant Attorneys General, of
counsel), for Defendants-Appellants.
JOSHUA J. ANGEL, New York, NY (Leonard
H. Gerson, Ira R. Abel, Angel & Frankel,
P.C., of counsel), for Plaintiff-Appellee.
a
OAKES, Chief Judge:
This appeal requires us to decide whether the Eleventh
Amendment bars a debtor’s suit to recover taxes paid to
the State of New York, and whether 11 U.S.C. § 1146(c)
3a
(1988) exempts the debtor from payment of the New York
gains tax on the transfer of property, N.Y. Tax Law § 1441
(McKinney 1987). The United States Bankruptcy Court
for the Southern District of New York, Tina L. Brozman,
Bankruptcy Court Judge, found that the New York State
Department of Taxation and Finance, James W. Wetzler,
as New York Commissioner of Taxation and Finance, and
Edward V. Regan, as Comptroller of the State of New
York (collectively “State of New York,” “New York,” or
“appellant”) waived the State of New York’s immunity
from suit by filing a proof of claim in the bankruptcy pro-
ceeding, found that the debtor was exempt from the gains
tax, and accordingly ordered New York to refund the
gains tax paid by the debtor, 995 Fifth Avenue Associates,
L.P. (“Fifth Avenue”). New York appealed to the United
States District Court for the Southern District of New
York. Leonard B. Sand, District Judge, affirmed the opin-
ion and order of the bankruptcy court and the State of
New York now appeals.
For the reasons set forth below, we affirm in part and
reverse in part.
BACKGROUND
The relevant facts are not in dispute. The debtor, Fifth
Avenue, operated the Stanhope Hotel. It filed a
bankruptcy petition under Chapter 11 of the Bankruptcy
Code in February of 1988 and thereafter continued to
operate the hotel as debtor in possession. Pursuant to a
plan of reorganization, the bankruptcy court authorized
the sale of Fifth Avenue’s interest in the hotel at a price of
$76 million. The court’s order specifically declared that,
because the sale was part of a plan of reorganization,
§ 1146(c) rendered the sale exempt from all transfer taxes.
4a
On January 12, 1989, the day before the scheduled clos-
ing, in accordance with N. Y. Tax Law § 1447 (McKinney
1987), New York issued a Tentative Assessment and
Return imposing a gains tax of $2,608,603.80 on the sale
of the property. New York subsequently denied the
debtor’s request for an exemption from the tax under 11
U.S.C. § 1146(c). Because New York law prohibits recor-
dation of the deed without payment of tax due under a
Tentative Assessment and Return, Fifth Avenue could not
close the sale as scheduled without paying the gains tax.
Faced with this dilemma, the debtor paid the tax under
protest, enabling it to record the deed and close the sale.
In March 1989, the debtor brought an adversary pro-
ceeding in bankruptcy court agains: the State of New
York, seeking, inter alia, a declaration that § 1146(c)
exempted the debtor from the gains tax, and an order
directing that the payment made to New York be
refunded. Some months later, after the bankruptcy court
heard oral argument in the proceeding, the State of New
York filed an administrative expense claim for gains tax
liability of $2,137,496.76, an amount in addition to the
approximately $2.6 million already imposed by the state
and paid by the debtor.
The bankruptcy court found that the debtor’s sale was
exempt from the gains tax under § 1146(c). In response to
the State of New York’s Eleventh Amendment immunity
argument, the bankruptcy court held that pursuant to 11
U.S.C. § 106(a) (1988), New York had waived its
Eleventh Amendment immunity by filing the adminis-
trative expense Claim for additional gains tax. The district
court affirmed the decision and order of the bankruptcy
court.
Sa
DISCUSSION
I. Eleventh Amendment Immunity
Appellant argues that the Eleventh Amendment barred
both the bankruptcy court and the district court from con-
sidering whether the debtor was exempt from payment of
the New York gains tax. The Eleventh Amendment, where
applicable, deprives a federal court of jurisdiction. See
Edelman v. Jordan, 415 U.S. 651, 678 (1974). Thus, prior
to addressing the merits of this case we must first deter-
mine whether Eleventh Amendment immunity bars our
jurisdiction. We hold that it does not.
The Eleventh Amendment provides:
The Judicial power of the United States shall not be
construed to extend to any suit in law or equity, com-
menced or prosecuted against one of the United
States by Citizens of another State, or by Citizens or
Subjects of any Foreign State.
The reach of the amendment was judicially expanded
beyond its text in Hans v. Louisiana, 134 U.S. 1 (1890),
to bar citizens from suing their own states in federal
court. The Supreme Court has also consistently held that
federal suits by private citizens that seek damages to be
paid out of the state treasury are barred by the Eleventh
Amendment. See, e.g., Quern v. Jordan, 440 U.S. 332,
337 (1979).
Despite this general bar to suits against states created
by the Eleventh Amendment, there are two well-estab-
lished ways to provide judicial power over such cases:
abrogation of immunity by Congress and waiver of immu-
nity by a state. Pennhurst State School & Hosp. v.
Halderman, 465 U.S. 89, 99 (1984). A purported Con-
6a
gfessional abrogation of Eleventh Amendment immunity
is not effective, however, unless it meets a two-part test
set forth by the Court. First, Congress must make its
intent to abrogate Eleventh Amendment immunity
“unmistakably clear.” Pennsylvania v. Union Gas Co., 491
U.S. 1, 7 (1989) (quoting Atascadero State Hosp. v. Scan-
lon, 473 U.S. 234, 242 (1985)). Second, the constitutional
provision under which Congress legislates its purported
abrogation must grant Congress the power to override the
Eleventh Amendment. Union Gas, 491 U.S. at 13-23.
Abrogation of Eleventh Amendment immunity typically
occurs when Congress enacts a new federal statutory
cause of action. See, e.g. Fitzpatrick v. Bitzer, 427 U.S.
445, 456 (1976) (Eleventh Amendment immunity abro-
gated for suit to recover damages from the State for gen-
der-based employment discrimination under Title VII);
Union Gas Co., 491 U.S. at 23 (Eleventh Amendment
immunity abrogated for suit to recover costs from the
State for environmental clean-up under CERCLA).
Waiver of Eleventh Amendment immunity, in contrast
to abrogation, is not hinged to a specific federal statutory
cause of action. Instead, it is triggered by some affirma-
tive activity of a state, such as a state’s enactment of leg-
islation by which it consents to be sued in federal court,
see, e.g., Port Auth. Trans-Hudson Corp. v. Feeney, 495
U.S. 299, 307-09 (1990), and, as here, a state’s partici-
pation in litigation in federal court. In Clark v. Barnard,
108 U.S. 436, 447-48 (1883), for example, the State of
Rhode Island was deemed to have waived its Eleventh
Amendment immunity by intervening in a case as a
claimant of a fund. And the Court in Gardner v. New Jer-
sey, 329 U.S. 565, 574 (1947), held that where the State
of New Jersey filed a claim against a fund in bankruptcy
court, in a case where no judgment was sought against the
7a
State, the State waived its immunity. Thus, as the district
court noted, it is long-established that a state’s partici-
pation in a bankruptcy proceeding can trigger a waiver of
immunity.
The State of New York does not take issue with this
general principle. Rather, it argues that the provision of
the Bankruptcy Code under which the bankruptcy court
deemed the State to have waived its Eleventh Amendment
immunity—11 U.S.C. § 106(a)—represents an abrogation
provision, not a waiver scheme. As an abrogation provi-
sion, New York contends, § 106(a) is unconstitutional
because Congress lacks the authority to abrogate
sovereign immunity when enacting legislation under the
Bankruptcy Clause, U.S. Const. art. I, § 8, cl. 4. We dis-
agree with New York’s characterization of § 106(a).
Section 106(a) provides:
A governmental unit is deemed to have waived
sovereign immunity with respect to any claim against
such governmental unit that is property of the estate
and that arose out of the same transaction or occur-
rence out of which such governmental unit’s claim
arose.
The plain meaning of these words obviously reflects
Congress’s intent to provide a waiver of immunity where
“a governmental unit” files a claim in the bankruptcy
court. The scope of the waiver, of course, remains limited;
upon filing a claim the governmental unit subjects itself
only to claims that arose from the same transaction or
occurrence that formed the basis of the governmental
unit’s claim. Our conclusion derives further support from
two recent cases where the Supreme Court, albeit in dicta,
stated that § 106(a) provides for a limited waiver of
immunity. See Hoffman v. Connecticut Income Maint.
8a
Dept., 492 U.S. 96, 101-02 (1989); U.S. v. Nordic Village,
Inc., No. 90-1629, slip op. at 4-6 (U.S. Feb. 25, 1992).
In addition, Congress did not use the language of abro-
gation in §106(a). Compare, for example, the language
used by Congress in Union Gas, where the Court held that
Congress abrogated Eleventh Amendment immunity in
making states liable for cleanup costs under CERCLA.
Union Gas, 491 U.S. at 13. In the provisions there at
issue, Congress stated that any “person,” “owner[,] and
operator” shall be liable. 42 U.S.C. § 9607(a) (1988).
Congress went on to include states in the definition of a
“person,” 42 U.S.C. § 9601(21), and except in very lim-
ited situations Congress provided that states fall within
the meaning of the term “owner or operator.” See 42
U.S.C. § 9601(20)(D). Thus, CERCLA contains the lan-
guage of abrogation by clearly stating that states can be
liable for cleanup costs. Section 106(a) contains no sim-
ilar statement regarding the liability of states for a spe-
cific class of damages.
Not only is the wording of § 106(a) different from lan-
guage aimed at a general override of immunity, but this
provision provides for suits against states by a route that
differs markedly from the typical abrogation context. Typ-
ically, abrogation occurs when Congress has enacted a
cause of action generally and seeks to render states, in
particular, liable for damages “along with everyone else.”
Union Gas, 491 U.S. at 8. Section 106(a), however, ren-
ders a state liable to suit only when the state participates
in a bankruptcy proceeding by filing a claim.
Thus, § 106(a) creates a waiver scheme; it is not an
abrogation provision. Indeed, the section largely partakes
of the waiver by participation doctrine that received the
Supreme Court’s imprimatur in Gardner, 329 U.S. at 574.
———————
9a ‘
Because we find that § 106(a) specifies when a state has
waived its Eleventh Amendment immunity, we need not
address appellant’s contention that Congress lacks the
authority to abrogate sovereign immunity when enacting
legislation under the Bankruptcy Clause, U.S. Const. art.
I, § 8, cl. 4.
Next, we consider the validity of the purported waiver
of Eleventh Amendment immunity under § 106(a). We
note at the outset that, like the First Circuit, we see no
constitutional barrier to a waiver of Eleventh Amendment
immunity as provided in § 106(a). In WJM, Inc. v. Mas-
sachusetts Dept. of Public Welfare, 840 F.2d 996, 1002-
005 (1st Cir. 1988), the court held that Congress possesses
the authority to condition a state’s participation in a
bankruptcy proceeding on its waiver of Eleventh Amend-
ment immunity. The court in WJM relied in part on Atas-
cadero, where the Court considered whether states can be
sued for damages under a Congressionally-created cause
of action. In Atascadero, the Court determined that the
Congressional legislation in question fell “far short of
manifesting a clear intent to condition participation in the
programs funded under the Act on a State’s consent to
waive its constitutional immunity.” Atascadero, 473 U.S.
at 247. After citing this language, the WJM court rea-
soned:
The logical inference from this and other language in
Atascadero, however, is that Congress may effec-
tively condition a state’s participation in a federal
program on a state’s consent to federal jurisdiction,
so long as Congress manifests a clear intent to this
effect.
WJM, 840 F.2d at 1003. We agree with the First Circuit's
analysis.
10a
Our conclusion regarding Congressional authority,
however, does not end the inquiry, because we will only
give effect to Congressional legislation that purports to
condition state participation in litigation on a state’s
waiver of Eleventh Amendment immunity when Congress
“manifest[s] a clear intent” to do so. Atascadero, 473 U.S.
at 247. This requirement is analogous to the test the Court
applies to determine the validity of a state’s waiver of
Eleventh Amendment immunity by state legislation. In
that context, “[t]he Court will give effect to a State’s
waiver of Eleventh Amendment immunity ‘only where
stated by the most express language or by such over-
whelming implication from the text as [will] leave no
room for any other reasonable construction.’ ” Feeney,
495 U.S. at 299 (quoting Atascadero, 473 U.S. at 239-40
and Edelman, 415 U.S. at 673). We discern no substantive
difference between the test for a Congressional waiver
scheme, as set forth in Atascadero, and the test for a
waiver by state legislation, as applied in Feeney. Thus, we
must again turn to the language of § 106(a) to determine
whether it plainly requires a waiver of Eleventh Amend-
ment immunity and “leave[s}] no room for any other rea-
sonable construction.” Atascadero, 473 U.S. at 240.
Appellant argues that no such waiver of Eleventh
Amendment immunity is implicated by § 106(a) because,
by its terms, it fails to mention the Eleventh Amendment.
Explicit mention of the Eleventh Amendment, however,
has never been a requirement for waiver of immunity. For
example, in Feeney, the Court found that by statute the
states of New York and New Jersey had waived their
Eleventh Amendment immunity, but nowhere did the
Statutory provisions mention the Eleventh Amendment.
Feeney, 495 U.S. at 303, 306-09. See also Dellmuth v.
Muth, 491 U.S. 223, 233 (1989) (Scalia, J., concurring)
lla
(statutory text may override Eleventh Amendment immu-
nity without explicit reference to either state sovereign
immunity or the Eleventh Amendment). Similarly, the
text’s failure specifically to mention states is irrelevant:
§ 106(a) uses the term “governmental unit,” which the
Bankruptcy Code defines in 11 U.S.C. § 101(26) (1988)
as including a “State.” To hold otherwise would ignore
the fact that Congress routinely expresses its intent with
statutes drafted with definitional cross-references.’
Accordingly, we find that § 106(a) plainly expresses
Congress’s intent to provide for a limited waiver of
Eleventh Amendment immunity and “leave[s] no room for
any other reasonable construction.” Atascadero, 473 U.S.
at 240.
Applying § 106(a) to the facts of this case, we find that
the State of New York, by filing an administrative
expense claim for $2,137,496.76, waived its Eleventh
Amendment immunity with respect to the $2,608,603.80
million in gains tax paid by the debtor. As we have stated,
§ 106(a) provides for waiver of Eleventh Amendment
immunity from any claim against the state “that arose out
of the same transaction or occurrence out of which such
governmental unit’s claim arose.” Here, the State’s admin-
istrative expense claim arose from additional gains tax
levied on the sale of the Stanhope Hotel. Fifth Avenue’s
claim against the State for a refund also arose from gains
tax imposed on the sale of the Stanhope Hotel. Thus,
appellee’s claim for a tax refund arose from the same
transaction or occurrence—the sale of the Stanhope
Hotel—as the State’s claim for additional taxes. Accord-
1 The State of New York also argues that § 106(a) is insufficiently clear
because it does not mention the filing of a proof of claim. We do not
believe this fact renders Congress's intent unclear, because the only rea-
sonable construction of § 106(a) is that waiver will arise only if a claim
is actually filed.
OOO OE
12a
ingly, the Eleventh Amendment does not bar us from
reaching the merits of this case.
II. Whether the Gains Tax is a “Stamp Tax or Similar Tax”
We now consider whether the New York gains tax, N.Y.
Tax Law § 1441 (McKinney 1987), is a “stamp tax or sim-
ilar tax” within the meaning of 11 U.S.C. § 1146(c).
Because the New York gains tax is not a “stamp tax or
similar tax,’’ we hold that 995 Fifth Avenue is not entitled
to an exemption from the gains tax.
A.
We begin our discussion with an analysis of the type of
taxes from which Congress intended to exempt qualifying
debtors when it enacted 11 U.S.C. § 1146(c). Starting with
the text, section 1146(c) provides:
The issuance, transfer, or exchange of a security, or
the making or delivery of an instrument of transfer
under a plan confirmed under section 1129 of this
title, may not be taxed under any law imposing a
Stamp tax or similar tax.
The Bankruptcy Code supplies no definitions for the
terms “stamp tax” or “similar tax.” Thus, we must look to
the legislative history for assistance in determining what
Congress meant by the phrase “stamp tax or similar tax.”
This history, however, provides limited guidance.
Section 1146(c), enacted as part of Title 11 and the gen-
eral revision of the federal bankruptcy laws in 1978, was
derived from § 267 of the Bankruptcy Act of 1898, as
amended by the Chandler Act of 1938, ch. 575, § 267, 52
Stat. 840, 902-03 (1938) (repealed in 1979). In essence,
ee
13a
the new provision broadened the scope of the exemption
to include taxes “similar” to Stamp taxes: whereas § 267
exempted the debtor from “any Stamp taxes now or here-
after imposed,” § 1146(c) provides exemption from “any
law imposing a stamp tax or similar tax” (emphasis
added).? The legislative history surrounding the enactment
of § 1146(c) does not illuminate what Congress meant
when it added the words “or similar tax.”
Similarly, there is no relevant legislative history to shed
light on Congressional intent behind the enactment of the
earlier exemption provision, § 267, which was part of the
Chandler Act of 1938. Section 267 greatly changed the
wording of its precursor Provision, § 77B(f) of the
Bankruptcy Act, as amended by the Act of June 7, 1934,
ch. 424, § 77B(f), 48 Stat. 911, 919 (1934) (amended ih
1938). Section 267 used general language to expand an
exemption that had shielded qualified debtors from fed-
eral stamp taxes only into one that shielded such debtors
from state stamp taxes as well. See 1] Harold Remington,
A Treatise on the Bankruptcy Law of the United States
§ 4654 (Kenneth A. Hayes, ed., rev. 1961).
Section 77B(f), the Original source of the Stamp tax
exemption, was added to the Bankruptcy Act by the Act
of June 7, 1934, and represented Congress’s first effort to
provide for the reorganization of corporations in
bankruptcy. 1 Harold Remington & James A. Henderson,
2 The report of the House Judiciary Committee stated that “[sJection
1146(c) of title 11 broadens the exemption to any stamp or similar tax.”
H.R. Rep. No. 595, 95th Cong., 1st Sess. 281 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6238. We disagree with the district court to the
extent it concluded that this statement reflects Congress's intent that the
words “stamp or similar tax” be read broadly to accord greater tax relief
for debtors. Instead, we regerd this statement as a simple declaration that
the new provision, § 1146(c), enlarges the former exemption under § 267
to include taxes similar to stamp taxes.
14a
A Treatise on the Bankruptcy Law of the United States
§ 10 (Sth ed. 1950). By its terms, § 77B(f) provided
debtors with exemptions from only specific federal stamp
taxes on the issuance and transfer of stock and bonds and
on conveyances of realty. One of the purposes of § 77B(f)
was to exempt the debtor from the payment of federal
Stamp tax on new securities issued pursuant to a plan of
reorganization that required the debtor to modify the
terms of outstanding securities for which stamp tax had
already been paid.3 See S. Rep. No. 482, 73rd Cong., 2d
Sess. 4 (1934). In sum, although the legislative history
shows that the scope of the § 1146(c) tax exemption has
expanded since its original enactment in 1934, it fails to
indicate whether the New York gains tax qualifies as a
“stamp tax or similar tax.”
Absent more explicit guidance from either the text or
the legislative history, we must interpret the words used
by Congress in accordance with “their ordinary, contem-
porary, common meaning.” Perrin v. United States, 444
U.S. 37, 42 (1979). Dictionaries represent one source of
such common meaning. See, e.g., United States v.
Adames, 901 F.2d 11, 12 (2d Cir. 1990). Black’s Law Dic-
tionary 1259 (Sth ed. 1979) defines “stamp tax” as the
“cost of stamps which are required to be affixed to legal
documents such as deeds, certificates, and the like.” The
definition also contains a cross-reference to “[d]ocu-
mentary stamp,” which Black’s defines as “[s]tamp
required by federal (prior to 1968) and state law to be
affixed to deeds and other documents of transfer before
they may be recorded, the cost of which is generally gov-
erned by the consideration recited in the document.” This
3 These stamp taxes were repealed by the Excise Tax Reduction Act of
1965, Pub. L. No. 89-44, § 401(b), 79 Stat. 148 (1965), effective January
1, 1968.
CO
1Sa
definition indicates that there are at least two attributes to
a stamp tax, as that term is commonly understood: the tax
must be paid prior to recordation and the amount due is
generally governed by the consideration provided in the
instrument.
The common meaning of the term “stamp tax” can also
be ascertained by examining the attributes of typical
Stamp taxes. We therefore agree with the district court
insofar as it identified several of the essential attributes of
a stamp tax, in reliance on Lee v. Bickell, 292 U.S. 415,
417 (1934) and Texaco, Inc. v. United States, 624 F.2d 20,
21-22 (Sth Cir. 1980). According to the district court, all
stamp taxes (1) are imposed only at the time of transfer or
sale of the item at issue; (2) impose an amount due that is
‘determined by the consideration recited in the instrument
of transfer; and (3) must be paid as a prerequisite to
recording.
Based on the characteristics of several taxes that would
undoubtedly be considered a “stamp tax or similar tax”
within the meaning of § 1146(c), we believe there are sev-
eral additional essential elements of all such taxes. One
such element is that the tax rate, imposed by a stamp or
Similar tax, is a relatively small percentage of the con-
sideration for the underlying transfer. We first consider
the stamp taxes discussed in the federal cases relied upon
by the district court. The Florida documentary stamp tax
at issue in Lee v. Bickell, 292 U.S. 415 (1934), imposed a
tax on the sale and transfer of securities of 10 cents on
cach $100.00 of par or face value. See Lee at 418 n.*.
Effectively, this Florida tax imposed a tax rate of 1/10 of
one percent of par or face value. In Texaco, Inc. v. United
States, 624 F.2d 20, 21 (Sth Cir. 1980), the documentary
stamp tax that the taxpayers sought to avoid, section 436]
of the Internal Revenue Code of 1954, ch.736, § 4361,
16a
68A Stat. 3, 520 (1954) (repealed in 1968) imposed a tax
on the sale or transfer of realty of approximately 55 cents
per $500 of consideration or value of the property inter-
est. The resultant tax rate was slightly more than 1/10 of
one percent of the consideration or value.
Like the low rates imposed by these two stamp taxes,
several modern state documentary transfer taxes, which
we regard as simiiar to stamp taxes, also impose low tax
rates. Vermont has a property transfer tax, Vt. Stat. Ann.
tit. 32, § 9602 (1981), imposed on the transfer of real
property by deed, at a rate of 5/10 of one percent of the
value of the property. The tax is imposed when the deed
is delivered to the town clerk for recording, Vt. Stat. Ann.
tit. 32, § 9605 (1981), and compliance with the provisions
of the property transfer tax is a prerequisite to recording.
Vt. Stat. Ann. tit. 32, § 9608 (Supp. 1991). Connecticut
terms its property transfer tax the Real Estate Conveyance
Tax. Conn. Gen. Stat. Ann. § 12-494 (West Supp. 1991).
The tax rate ranges from 55/100 of one percent up to 1
percent of the consideration depending on whether the
property is residential and whether its value exceeds
$800,000. Jd. The transferor is liable for the tax, Conn.
Gen. Stat. Ann. § 12-495 (West 1983), and deeds subject
to the tax can not be recorded unless the tax is paid. Conn.
Gen. Stat. Ann. § 12-497 (West Supp. 1991). New York
has a similar tax, the Real Estate Transfer Tax, N.Y. Tax
Law § 1402 & 1402-a (McKinney Supp. 1992). It imposes
a tax on deeds of $2 for every $500 of consideration or
4 Note that this tax provision, § 4361, contains a cross-reference to sec-
tion 4382 of the Internal Revenue Code of 1954. Section 4382, an
exemption provision, refers to the Bankruptcy Act, largely tracks the lan-
guage of § 267, and exempts debtors from this stamp tax on transactions
undertaken pursuant to a plan of reorganization. Thus, the stamp tax
imposed by § 4361 certainly was a stamp tax from which Congress
intended qualified debtors to be exempt.
-_= |
17a
value, yielding a tax rate of 4/10 of one percem. N.Y. Tax
Law § 1402 (McKinney Supp. 1992). Like the other doc-
umentary transfer taxes, the transfer tax must be paid
prior to recordation. N.Y. Tax Law § 1410(b) (McKinney
Supp. 1992). The grantor is liable for payment of the tax,
but if he fails to pay it the grantee becomes liable. MN. ¥.
Tax Law § 1404(a) (McKinney Supp. 1992). The New
York scheme also imposes an additional tax on the con-
veyance of residential property when the consideration is
$1 million or more at one percent of the consideration: the
grantee is generally liable for this additional tax. N.Y. Tax
Law § 1402-a (McKinney Supp. 1992). The foregoing
examples of stamp and documentary transfer taxes show
that an essential characteristic of these taxes is that they
are calculated using a low tax rate—typically about one
percent or less—multiplied by either the par value of the
security, the consideration in the deed, or the value of the
property that is the subject of the transaction.®
Finally, we add one more essential characteristic of
stamp taxes to those identified by the district court. As
Stated in Jn re Jacoby-Bender, Inc., 40 B.R. 10, 15 (Bankr.
E.D.N.Y. 1984), where the bankruptcy court held that the
New York gains tax is not a Stamp or similar tax within
the meaning of 11 U.S.C. 1146(c), stamp taxes are
imposed irrespective of whether the transfer resulted in a
gain or loss to the transferor. All of the stamp taxes and
real estate transfer taxes discussed above never even
touch on whether the underlying transaction resulted in a
gain or loss to the transferor.
S We note that this analysis is consistent with our decision in /n re
Jacoby-Bender, Inc., 758 F.2d 840 (2d Cir. 1985), in which we found that
11 U.S.C. § 1146(c) (1982) exempted the debtor from payment of the
New York City Real Property Transfer Tax, New York, N.Y. Admin.
Code § I146-2.0 (1984); at that time the New York City tax imposed a
maximum tax rate of two percent.
18a
In sum, we believe that all stamp or similar taxes as
stated in 11 U.S.C. § 1146(c) share the following common
elements: (1) they are imposed only at the time cf trans-
fer or sale of the item at issue; (2) the amount due is
determined by the consideration for, par value of, or value
of the item being transferred; (3) the tax rate is a rela-
tively small percentage of the consideration, par value or
value of the property; (4) the tax is imposed irrespective
of whether the transferor enjoyed a gain or suffered a loss
on the underlying sale or transfer; and (5) in the case of
state documentary transfer taxes, the tax must be paid as
a prerequisite to recording. We next turn to the New York
gains tax to determine whether it shares those attributes
common to all stamp or similar taxes.
B.
Section 1441, contained in Article 31-B of New York
Tax Law provides:
A tax is hereby imposed on gains derived from the
transfer of real property within the state. The tax
shall be at the rate of ten percent of the gain.
N.Y. Tax Law § 1441 (McKinney 1987). Gain is defined
for the purposes of Article 31-B as:
the difference between the consideration for the
transfer of real property and the original purchase
price of such property, where the consideration
exceeds the original purchase price.
N.Y. Tax Law § 1440.3 (McKinney 1987). Under the ver-
sion of the statute in force at the time of the sale of the
Stanhope Hotel, the transferor was required to pay the tax
19a
on the date of transfer.6 N.Y. Tax Law § 1442 (McKinney
1987). Transactions that are exempt from the tax include
those for which the consideration is less than one million
dollars and those in which the real property that is the
Subject of the transfer is the residence of the transferor.
N.Y. Tax Law § 1443 (McKinney 1987 & Supp. 1992).
Under N.Y. Tax Law § 1447.1(f)(1) (McKinney 1987),
recording is prohibited unless the ministerial requirements
of the act have been complied with and any tax due has
been paid. See also N.Y. Real Property Law § 333.1-f
(McKinney 1987) (prohibiting recording officer from
recording unless the provisions of § 1447.1(f) are satis-
fied).
Our analysis of the essential characteristics of stamp or
similar taxes indicates that although the New York gains
tax bears some resemblance to a Stamp tax, it is not a
Stamp or similar tax within the meaning of 11 U.S.C
§ 1146(a). As Fifth Avenue correctly points out, like a
Stamp tax, the gains tax is imposed at the time of transfer
and payment, if due, must be made prior to recordation.
But there the resemblance ends.
First, and most important, New York gains tax liability
is always contingent on the profitability of the underlying
transaction. If the transaction yields no gain, there is no
tax due. The fact that “gain,” as calculated under the gains
tax, does not take into account certain development costs
in no way alters this core attribute of the gains tax. Stamp
taxes and documentary transfer taxes, by contrast, are
always imposed irrespective of the existence of gain or
profit; the tax liability arises solely from the act of trans-
ferring property or securities.
6 The specifics regarding payment of and liability for the tax have since
been somewhat modified. See N.Y. Tax Law $§ 1440.9, 1442(a) &
1447.3(a) (McKinney 1987 & Supp. 1992).
20a
Second, under the gains tax, the consideration for the
sale (or some proxy thereof as set forth in N.Y. Tax Law
ys 1440 (McKinney 1987 & Supp. 1992)) is not determi-
native of the amount due under the gains tax. Instead, the
consideration is used only as a means to measure the gain
accruing to the transferor as a result of the transfer. It is
the gain, albeit as defined by the provisions of the gains
tax, that provides the key figure for determination of the
amount owed under the tax. The amount due under a
stamp or similar tax hinges on the consideration for the
transferred item.
Third, the tax rate provided in the New York gains tax,
at 10 percent of the gain, greatly exceeds the tax rate used
in any stamp tax or documentary transfer tax. Stamp and
documentary transfer taxes impose a low tax rate, typi-
cally about one percent or less of the consideration for the
underlying transfer. These three important differences
between the New York gains tax and stamp and docu-
mentary transfer taxes lead us to conclude that the New
York gains tax is not a “stamp tax or similar tax” within
the meaning of 11 U.S.C § 1146(c).
Finally, we note that Fifth Avenue provides several
rationales in support of its contention that the gains tax
cannot be characterized as an income tax. For example,
Fifth Avenue reasons that the gains tax is not a form of
income tax because it does not allow a taxpayer to offset
losses against gains in calculating net income generated
by transactions completed over a specific period of time.
This contention, however, misses the point: the relevant
issue is not whether the gains tax can be pigeonholed as
an income tax, but whether it represents a stamp or sim-
ilar tax within the meaning of § 1146(c). For the reasons
set forth above, we believe it does not and thus Fifth
Avenue is not entitled to an exemption from the New York
2la
gains tax. Thus, we reverse the order of the
insofar as it directed Ne
by Fifth Avenue.
district court
w York to refund gains tax paid
Affirmed in part and reversed in part.
22a
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
—
No. 416—August Term, 1991
(Argued October 28, 1991 Decided April 13, 1992)
Docket No. 91-5038
>
IN RE: 995 FIFTH AVENUE ASSOCIATES, L.P.,
Debtor.
995 FIFTH AVENUE ASSOCIATES, L.P.,
Plaintiff-Appellee,
—VvV.—-
NEW YORK STATE DEPARTMENT OF TAXATION AND
FINANCE; JAMES W. WETZLER, as Commissioner of
Taxation and Finance; EDWARD V. REGAN, as
Comptroller of the State of New York,
Defendants-Appellants.
Before:
OAKES, Chief Judge,
FEINBERG and ALTIMARI, Circuit Judges.
+
EEE—
23a
The New York State Department of Taxation and
Finance, James W. Wetzler, as New York Commissioner
of Taxation and Finance, and Edward V. Regan, as
Comptroller of the State of New York, appeal from an
order of the United States District Court for the Southern
District of New York (Leonard B. Sand, Judge) affirming
the opinion and order of the Bankruptcy Court (Tina L.
Brozman, Bankruptcy Court Judge). The Bankruptcy
Court granted 995 Fifth Avenue Associates, L.P.’s motion
for summary judgment and ordered the New York State
Department of Taxation and Finance to refund New York
Gains Tax, N.Y. Tax Law § 144] (McKinney 1987) paid
by 995 Fifth Avenue Associates, L.P.
Affirmed in part and reversed in part.
— - <i> —
DAVID S. COOK, Senior Attorney, Attorney
General’s Office, State of New York,
New York, NY (Robert Abrams, Attorney
General, Frederic L. Lieberman, Marcie
S. Mintz, Assistant Attorneys General, of
counsel), for Defendants-Appellants.
JOSHUA J. ANGEL, New York, NY (Leonard
H. Gerson, Ira R. Abel, Angel & Frankel,
P.C., of counsel), for Plaintiff-Appellee.
>
OAKES, Chief Judge:
~ This appeal requires us to decide whether the Eleventh
Amendment bars a debtor’s suit to recover taxes paid to
the State of New York, and whether 11 U.S.C. § 1146(c)
24a
(1988) exempts the debtor from payment of the New York
gains tax on the transfer of property, N.Y. Tax Law § 1441
(McKinney 1987). The United States Bankruptcy Court
for the Southern District of New York, Tina L. Brozman,
Bankruptcy Court Judge, found that the New York State
Department of Taxation and Finance, James W. Wetzler,
as New York Commissioner of Taxation and Finance, and
Edward V. Regan, as Comptroller of the State of New
York (collectively “State of New York,” “New York,” or
“appellant”) waived the State of New York’s immunity
from suit by filing a proot of claim in the bankruptcy pro-
ceeding, found that the debtor was exempt from the gains
tax, and accordingly ordered New York to refund the
gains tax paid by the debtor, 995 Fifth Avenue Associates,
L.P. (“Fifth Avenue”). New York appealed to the United
States District Court for the Southern District of New
York. Leonard B. Sand, District Judge, affirmed the opin-
ion and order of the bankruptcy court and the State of
New York now appeals.
For the reasons set forth below, we affirm in part and
reverse in part.
BACKGROUND
The relevant facts are not in dispute. The debtor, Fifth
Avenue, operated the Stanhope Hotel. It filed a bank-
ruptcy petition under Chapter 11 of the Bankruptcy Code
in February of 1988 and thereafter continued to operate
the hotel as debtor in possession. Pursuant to a plan of
reorganization, the bankruptcy court authorized the sale
of Fifth Avenue’s interest in the hotel at a price of $76
million. The court’s order specifically declared that,
because the sale was part of a plan of reorganization,
§ 1146(c) rendered the sale exempt from all transfer taxes.
25a
On January 12, 1989, the day before the scheduled clos-
ing, in accordance with N. Y. Tax Law § 1447 (McKinney
1987), New York issued a Tentative Assessment and
Return imposing a gains tax of $2,608,603.80 on the sale
of the property. New York subsequently denied the
debtor’s request for an exemption from the tax under 11
U.S.C. § 1146(c). Because New York law prohibits recor-
dation of the deed without payment of tax due under a
Tentative Assessment and Return, Fifth Avenue could not
Close the sale as scheduled without paying the gains tax.
Faced with this dilemma, the debtor paid the tax under
protest, enabling it to record the deed and close the sale.
In March 1989, the debtor brought an adversary pro-
ceeding in bankruptcy court against the State of New
York, seeking, inter alia, a declaration that § 1146(c)
exempted the debtor from the gains tax, and an order
directing that the payment made to New York be
refunded. Some months later, after the bankruptcy court
heard oral argument in the proceeding, the State of New
York filed an administrative expense claim for gains tax
liability of $2,137,496.76, an amount in addition to the
approximately $2.6 million already imposed by the state
and paid by the debtor.
The bankruptcy court found that the debtor’s sale was
exempt from the gains tax under § 1146(c). In response to
the State of New York’s Eleventh Amendment immunity
argument, the bankruptcy court held that pursuant to 11
U.S.C. § 106(a) (1988), New York had waived its
Eleventh Amendment immunity by filing the adminis-
trative expense claim for additional gains tax. The district
court affirmed the decision and order of the bankruptcy
court.
26a
DISCUSSION
I. Eleventh Amendment Immunity
Appellant argues that the Eleventh Amendment barred
both the bankruptcy court and the district court from con-
sidering whether the debtor was exempt from payment of
the New York gains tax. The Eleventh Amendment, where
applicable, deprives a federal court of jurisdiction. See
Edelman v. Jordan, 415 U.S. 651, 678 (1974). Thus, prior
to addressing the merits of this case we must first deter-
mine whether Eleventh Amendment immunity bars our
jurisdiction. We hold that it does not.
The Eleventh Amendment provides:
The Judicial power of the United States shall not be
construed to extend to any suit in law or equity, com-
menced or prosecuted against one of the United
States by Citizens of another State, or by Citizens or
Subjects of any Foreign State.
The reach of the amendment was judicially expanded
beyond its text in Hans v. Louisiana, 134 U.S. 1 (1890),
to bar citizens from suing their own states in federal
court. The Supreme Court has also consistently held that
federal suits by private citizens that seek damages to be
paid out of the state treasury are barred by the Eleventh
Amendment. See, e.g., Quern v. Jordan, 440 U.S. 332,
337 (1979).
Despite this general bar to suits against states created
by the Eleventh Amendment, there are two well-estab-
lished ways to provide judicial power over such cases:
abrogation of immunity by Congress and waiver of immu-
nity by a state. Pennhurst State School & Hosp. v. Hal-
derman, 465 U.S. 89, 99 (1984). A purported Con-
27a
gressional abrogation of Eleventh Amendment immunity
is not effective, however, unless it meets a two-part test
set forth by the Court. First, Congress must make its
intent to abrogate Eleventh Amendment immunity
“unmistakably clear.” Pennsylvania v. Union Gas Co., 491
U.S. 1, 7 (1989) (quoting Atascadero State Hosp. v. Scan-
lon, 473 U.S. 234, 242 (1985)). Second, the constitutional
provision under which Congress legislates its purported
abrogation must grant Congress the power to Override the
Eleventh Amendment. Union Gas, 491 U.S. at 13-23.
Abrogation of Eleventh Amendment immunity typically
occurs when Congress enacts a new federal Statutory
cause of action. See, e.g. Fitzpatrick y. Bitzer, 427 U.S.
445, 456 (1976) (Eleventh Amendment immunity abro-
gated for suit to recover damages from the State for gen-
der-based employment discrimination under Title VII);
Union Gas Co., 491 U.S. at 23 (Eleventh Amendment
immunity abrogated for suit to recover costs from the
State for environmental clean-up under CERCLA).
Waiver of Eleventh Amendment immunity, in contrast
to abrogation, is not hinged to a specific federal statutory
Cause of action. Instead, it is triggered by some affirma-
tive activity of a state, such as a state’s enactment of leg-
islation by which it consents to be sued in federal court,
see, €.g., Port Auth. Trans-Hudson Corp. v. Feeney, 495
U.S. 299, 307-09 (1990), and, as here, a state’s Partici-
pation in litigation in federal court. In Clark v. Barnard,
108 U.S. 436, 447-48 (1883), for example, the State of
Rhode Island was deemed to have waived its Eleventh
Amendment immunity by intervening in a case as a
claimant of a fund. And the Court in Gardner v. New Jer-
sey, 329 U.S. 565, 574 (1947), held that where the State
of New Jersey filed a claim against a fund in bankruptcy
court, in a case where no judgment was sought against the
28a
State, the State waived its immunity. Thus, as the district
court noted, it is long-established that a state’s partici-
pation in a bankruptcy proceeding can trigger a waiver of
immunity.
The State of New York does not take issue with this
general principle. Rather, it argues that the provision of
the Bankruptcy Code under which the bankruptcy court
deemed the State to have waived its Eleventh Amendment
immunity—11 U.S.C. § 106(a)—represents an abrogation
provision, not a waiver scheme. As an abrogation previ-
sion, New York contends, § 106(a) is unconstitutional
because Congress lacks the authority to abrogate
sovereign immunity when enacting legislation under the
Bankruptcy Clause, U.S. Const. art. I, § 8, cl. 4. We dis-
agree with New York’s characterization of § 106(a).
Section 106(a) provides:
A governmental unit is deemed to have waived
sovereign immunity with respect to any claim against
such governmental unit that is property of the estate
and that arose out of the same transaction or occur-
rence out of which such governmental unit’s claim
arose.
The plain meaning of these words obviously reflects
Congress’s intent to provide a waiver of immunity where
“a governmental unit” files a claim in the bankruptcy
court. The scope of the waiver, of course, remains limited;
upon filing a claim the governmental unit subjects itself
only to claims that arose from the same transaction or
occurrence that formed the basis of the governmental
unit’s Claim. Our conclusion derives further support from
two recent cases where the Supreme Court, albeit in dicta,
stated that § 106(a) provides for a limited waiver of
immunity. See Hoffman v. Connecticut Income Maint.
29a
Dept., 492 U.S. 96, 101-02 (1989); U.S. v. Nordic Village,
Inc., No. 90-1629, slip op. at 4-6 (U.S. Feb. 25, 1992).
In addition, Congress did not use the language of abro-
gation in § 106(a). Compare, for example, the language
used by Congress in Union Gas, where the Court held that
Congress abrogated Eleventh Amendment immunity in
making states liable for cleanup costs under CERCLA.
Union Gas, 491 U.S. at 13. In the provisions there at
issue, Congress stated that any “person,” “owner[,] and
operator” shall be liable. 42 U.S.C. § 9607(a) (1988).
Congress went on to include states in the definition of a
“person,” 42 U.S.C. § 9601(21), and except in very lim-
ited situations Congress provided -that states fall within
the meaning of the term “owner or operator.” See 42
V.oc. § 9601(20)(D). Thus, CERCLA contains the lan-
guage of abrogation by clearly stating that states can be
liable for cleanup costs. Section 106(a) contains no sim-
ilar statement regarding the liability of states for a spe- —
cific class of damages.
Not only is the wording of § 106(a) different from lan-
guage aimed at a general override of immunity, but this
Provision provides for suits against states by a route that
differs markedly from the typical abrogation context. Typ-
ically, abrogation occurs when Congress has enacted a
Cause of action generally and seeks to render States, in
Particular, liable for damages “along with everyone else.”
Union Gas, 491 U.S. at 8. Section 106(a), however, ren-
ders a state liable to suit only when the state Participates
in a bankruptcy proceeding by filing a claim.
Thus, § 106(a) creates a waiver scheme; it is not an
abrogation provision. Indeed, the section largely partakes
of the waiver by Participation doctrine that received the
Supreme Court’s imprimatur in Gardner, 329 U.S. at 574.
' :
30a
Because we find that § 106(a) specifies when a state has
waived its Eleventh Amendment immunity, we need not
address appellant’s contention that Congress lacks the
authority to abrogate sovereign immunity when enacting
legislation under the Bankruptcy Clause, U.S. Const. art.
I, § 8, cl. 4.
Next, we consider the validity of the purported waiver
of Eleventh Amendment immunity under § 106(a). We
note at the outset that, like the First Circuit, we see no
constitutional barrier to a waiver of Eleventh Amendment
immunity as provided in § 106(a). In WJM, Inc. v. Mas-
sachusetts Dept. of Public Welfare, 840 F.2d 996, 1002-
005 (1st Cir. 1988), the court held that Congress possesses
the authority to condition a state’s participation in a
bankruptcy proceeding on its waiver of Eleventh Amend-
ment immunity. The court in WJM relied in part on Atas-
cadero, where the Court considered whether states can be
sued for damages under a Congressionally-created cause
of action. In Atascadero, the Court determined that the
Congressional legislation in question fell “far short of
manifesting a clear intent to condition participation in the
programs funded under the Act on a State’s consent to
waive its constitutional immunity.” Atascadero, 473 U.S.
at 247. After citing this language, the WJM court rea-
soned:
The logical inference from this and other language in
Atascadero, however, is that Congress may effec-
tively condition a state’s participation in a federal
program on a state’s consent to federal jurisdiction,
so long as Congress manifests a clear intent to this
effect.
WJM, 840 F.2d at 1003. We agree with the First Circuit’s
analysis.
3la
Our conclusion regarding Congressional authority,
however, does not end the inquiry, because we will only
give effect to Congressional legislation that purports to
condition state Participation in litigation on a state’s
waiver of Eleventh Amendment immunity when Congress
“manifest[s] a clear intent” to do so. Atascadero, 473 U.S.
at 247. This requirement is analogous to the test the Court
applies to determine the validity of a state’s waiver of
Eleventh Amendment immunity by state legislation. In
that context, “{t]he Court will give effect to a State’s
waiver of Eleventh Amendment immunity ‘only where
Stated by the most express language or by such over-
whelming implication from the text as [will] leave no
room for any other reasonable construction.’ ” Feeney,
495 U.S. at 299 (quoting Atascadero, 473 U.S. at 239-40
and Edelman, 415 U.S. at 673). We discern no substantive
difference between the test for a Congressional waiver
scheme, as set forth in Atascadero, and the test for a
waiver by state legislation, as applied in Feeney. Thus, we
must again turn to the language of § 106(a) to determine
whether it plainly requires a waiver of Eleventh Amend-
ment immunity and “leave[s] no room for any other rea-
sonable construction.” Atascadero, 473 U.S. at 240.
Appellant argues that no such waiver of Eleventh
Amendment immunity is implicated by § 106(a) because,
by its terms, it fails to mention the Eleventh Amendment.
Explicit mention of the Eleventh Amendment, however,
has never been a requirement for waiver of immunity. For
example, in Feeney, the Court found that by statute the
States of New York and New Jersey had waived their
Eleventh Amendment immunity, but nowhere did the
Statutory provisions mention the Eleventh Amendment.
Feeney, 495 U.S. at 303, 306-09. See also Dellmuth v.
Muth, 491 U.S. 223, 233 (1989) (Scalia, J., concurring)
32a
(statutory text may override Eleventh Amendment immu-
nity without explicit reference to either state sovereign
immunity or the Eleventh Amendment). Similarly, the
text’s failure specifically to mention states is irrelevant:
§ 106(a) uses the term “governmental unit,” which the
Bankruptcy Code defines in 11 U.S.C. § 101(26) (1988)
as including a “State.” To hold otherwise would ignore
the fact that Congress routinely expresses its intent with
Statutes drafted with definitional cross-references.!
Accordingly, we find that § 106(a) plainly expresses
Congress’s intent to provide for a limited waiver of
Eleventh Amendment immunity and “leave[s] no room for
any other reasonable construction.” Atascadero, 473 U.S.
at 240.
Applying § 106(a) to the facts of this case, we find that
the State of New York, by filing an administrative
expense claim for $2,137,496.76, waived its Eleventh
Amendment immunity with respect to the $2,608,603.80
million in gains tax paid by the debtor. As we have stated,
§ 106(a) provides for waiver of Eleventh Amendment
immunity from any claim against the state “that arose out
of the same transaction or occurrence out of which such
governmental unit’s claim arose.” Here, the State’s admin-
istrative expense claim arose from additional gains tax
levied on the sale of the Stanhope Hotel. Fifth Avenue’s
claim against the State for a refund also arose from gains
tax imposed on the sale of the Stanhope Hotel. Thus,
appellee’s claim for a tax refund arose from the same
transaction or occurrence—the sale of the Stanhope
Hotel—as the State’s claim fnr additional taxes. Accord-
1 The State of New York also argues that § 106(a) is insufficiently clear
because it does not mention the filing of a proof of claim. We do not
believe this fact renders Congress's intent unclear, because the only rea-
sonable construction of § 106(a) is that waiver will arise only if a claim
is actually filed.
33a
ingly, the Eleventh Amendment does not bar us from
reaching the merits of this case.
II. Whether the Gains Tax is a “Stamp Tax
or Similar Tax”
We now consider whether the New York gains tax, N.Y.
Tax Law § 1441 (McKinney 1987), is a “stamp tax or sim-
ilar tax” within the meaning of 11 U.S.C. § 1146(c).
Because the New York gains tax is not a “stamp tax or
similar tax,” we hold that 995 Fifth Avenue is not entitled
to an exemption from the gains tax.
A.
We begin our discussion with an analysis of the type of
taxes from which Congress intended to exempt qualifying
debtors when it enacted 11 U.S.C. § 1146(c). Starting with
the text, section 1146(c) provides:
The issuance, transfer, or exchange of a security, or
the making or delivery of an instrument of transfer
under a plan confirmed under section 1129 of this
title, may not be taxed under any law imposing a
Stamp tax or similar tax.
The Bankruptcy Code Supplies no definitions for the
terms “stamp tax” or “similar tax.” Thus, we must look to
the legislative history for assistance in determining what
Congress meant by the phrase “stamp tax or similar tax.”
This history, however, provides limited guidance.
Section 1146(c), enacted as part of Title 11 and the gen-
eral revision of the federal bankruptcy laws in 1978, was
derived from § 267 of the Bankruptcy Act of 1898, as
amended by the Chandler Act of 1938, ch. 575, § 267, 52
34a
Stat. 840, 902-03 (1938) (repealed in 1979). In essence,
the new provision broadened the scope of the exemption
to include taxes “similar” to stamp taxes: whereas § 267
exempted the debtor from “any stamp taxes now or here-
after imposed,” § 1146(c) provides exemption from “any
law imposing a stamp tax or similar tax” (emphasis
added).* The legislative history surrounding the enactment
of § 1146(c) does not illuminate what Congress meant
when it added the words “or similar tax.”
Similarly, there is no relevant legislative history to shed
light on Congressional intent behind the enactment of the
earlier exemption provision, § 267, which was part of the
Chandler Act of 1938. Section 267 greatly changed the
wording of its precursor provision, § 77B(f) of the
Bankruptcy Act, as amended by the Act of June 7, 1934,
ch. 424, § 77B(f), 48 Stat. 911, 919 (1934) (amended in
1938). Section 267 used general language to expand an
exemption that had shielded qualified debtors from fed-
eral stamp taxes only into one that shielded such debtors
from state stamp taxes as well. See 11 Harold Remington,
A Treatise on the Bankruptcy Law of the United States
§ 4654 (Kenneth A. Hayes, ed., rev. 1961).
Section 77B(f), the original source of the stamp tax
exemption, was added to the Bankruptcy Act by the Act
of June 7, 1934, and represented Congress’s first effort to
provide for the reorganization of corporations in
2 The report of the House Judiciary Committee stated that “[s]ection
1146(c) of title 11 broadens the exemption to any stamp or similar tax.”
H.R. Rep. No. 595, 95th Cong., Ist Sess. 281 (1977), reprinted in 1978
U.S.C.C.A.N. 5963, 6238. We disagree with the district court to the
extent it concluded that this statement reflects Congress's intent that the
words “stamp or similar tax" be read broadly to accord greater tax relief
for debtors. Instead, we regard this statement as a simple declaration that
the new provision, § 1146(c), enlarges the former exemption under § 267
to include taxes similar to stamp taxes. -
35a
bankruptcy. 1 Harold Remington & James A. Henderson,
A Treatise on the Bankruptcy Law of the United States
§ 10 (Sth ed. 1950). By its terms, § 77B(f) provided
debtors with exemptions from only specific federal stamp
taxes On the issuance and transfer of stock and bonds and
on conveyances of realty. One of the purposes of § 77B(f)
was to exempt the debtor from the payment of federal
stamp tax On new securities issued pursuant to a plan of
reorganization that required the debtor to modify the
terms of outstanding securities for which stamp tax had
already been paid.3 See S. Rep. No. 482, 73rd Cong., 2d
Sess. 4 (1934). In sum, although the legislative history
shows that the scope of the § 1146(c) tax exemption has
expanded since its original enactment in 1934, it fails to
indicate whether the New York gains tax qualifies as a
“stamp tax or similar tax.”
Absent more explicit guidance from either the text or
the legislative history, we must interpret the words used
- by Congress in accordance with “their ordinary, contem-
porary, Common meaning.” Perrin v. United States, 444
U.S. 37, 42 (1979). Dictionaries represent one source of
such common meaning. See, e.g., United States v.
Adames, 901 F.2d 11, 12 (2d Cir. 1990). Black’s Law Dic-
tionary 1259 (Sth ed. 1979) defines “stamp tax” as the
“cost of stamps which are required to be affixed to legal
documents such as deeds, certificates, and the like.” The
definition also contains a cross-reference to “[d]Jocu-
mentary stamp,” which Black’s defines as “[s]tamp
required by federal (prior to 1968) and state law to be
affixed to deeds and other documents of transfer before
they may be recorded, the cost of which is generally gov-
3 These stamp taxes were repealed by the Excise Tax Reduction Act of
1965, Pub. L. No. 89-44, § 401(b), 79 Stat. 148 (1965), effective January
1, 1968.
36a
erned by the consideration recited in the document.” This
definition indicates that there are at least two attributes to
a stamp tax, as that term is commonly understood: the tax
must be paid prior to recordation and the amount due is
generally governed by the consideration provided in the
instrument.
The common meaning of the term “stamp tax” can also
be ascertained by examining the attributes of typical
Stamp taxes. We therefore agree with the district court
insofar as it identified several of the essential attributes of
a stamp tax, in reliance on Lee v. Bickell, 292 U.S. 415,
417 (1934) and Texaco, Inc. v. United States, 624 F.2d 20,
21-22 (Sth Cir. 1980). According to the district court, all
stamp taxes (1) are imposed only at the time of transfer or
sale of the item at issue; (2) impose an amount due that is
determined by the consideration recited in the instrument
of transfer; and (3) must be paid as a prerequisite to
recording.
Based on the characteristics of several taxes that would
undoubtedly be considered a “stamp tax or similar tax”
within the meaning of § 1146(c), we believe there are sev-
eral additional essential elements of all such taxes. One
such element is that the tax rate, imposed by a stamp or
similar tax, is one percent or even less of the considera-
tion for the underlying transfer. We first consider the
stamp taxes discussed in the federal cases relied upon by
the district court. The Florida documentary stamp tax at
issue in Lee v. Bickel, 292 U.S. 415 (1934), imposed a tax
on the sale and transfer of securities of 10 cents on each
$100.00 of par or face value. See Lee at 418 n. *. Effec-
tively, this Florida tax imposed a tax rate of 1/10 of one
percent of par or face value. In Texaco, Inc. v. United
States, 624 F.2d 20, 21 (Sth Cir. 1980), the documentary
Stamp tax that the taxpayers sought to avoid, section 4361
37a
of the Internal Revenue Code of 1954, ch.736, § 4361,
68A Stat. 3, 520 (1954) (repealed in 1968) imposed a tax
on the sale or transfer of realty of approximately 55 cents
per $500 of consideration or value of the property inter-
est. The resultant tax rate was slightly more than 1/10 of
one percent of the consideration or value.‘
Like the low rates imposed by these two stamp taxes,
several modern state documentary transfer taxes, which
we regard as similar to stamp taxes, also impose low tax
rates. Vermont has a property transfer tax, Vt. Stat. Ann.
tit. 32, § 9602 (1981), imposed on the transfer of real
property by deed, at a rate of 5/10 of one percent of the
value of the property. The tax is imposed when the deed
is delivered to the town clerk for recording, Vt. Stat. Ann.
tit. 32, § 9605 (1981), and compliance with the provisions
of the property transfer tax is a prerequisite to recording.
Vt. Stat. Ann. tit. 32, § 9608 (Supp. 1991). Connecticut
terms its property transfer tax the Real Estate Conveyance
Tax. Conn. Gen. Stat. Ann. § 12-494 (West Supp. 1991).
The tax rate ranges from 55/100 of one percent up to 1
percent of the consideration depending on whether the
property is residential and whether its value exceeds
$800,000. /d. The transferor is liable for the tax, Conn.
Gen. Stat. Ann. § 12-495 (West 1983), and deeds subject
to the tax can not be recorded unless the tax is paid. Conn.
Gen. Stat. Ann. § 12-497 (West Supp. 1991). New York
has a similar tax, the Real Estate Transfer Tax, N.Y. Tax
Law § 1402 & 1402-a (McKinney Supp. 1992). It imposes
4 Note that this tax provision, § 4361, contains a cross-reference to sec-
tion 4382 of the Internal Revenue Code of 1954. Section 4382, an
exemption provision, refers to the Bankruptcy Act, largely tracks the lan-
guage of § 267, and exempts debtors from this Stamp tax on transactions
undertaken pursuant to a plan of reorganization. Thus, the stamp tax
imposed by § 4361 certainly was a stamp tax from which Congress
intended qualified debtors to be exempt.
38a
a tax on deeds of $2 for every $500 of consideration or
value, yielding a tax rate of 4/10 of one percent. N.Y. Tax
Law § 1402 (McKinney Supp. 1992). Like the other doc-
umentary transfer taxes, the transfer tax must be paid
prior to recordation. N.Y. Tax Law § 1410(b) (McKinney
Supp. 1992). The grantor is liable for payment of the tax,
but if he fails to pay it the grantee becomes liable. N-Y.
Tax Law § 1404(a) (McKinney Supp. 1992). The New
York scheme also imposes an additional tax on the con-
veyance of residential property when the consideration is
$1 million or more at one percent of the consideration; the
grantee is generally liable for this additional tax. N.Y. Tax
Law § 1402-a (McKinney Supp. 1992). The foregoing
examples of stamp and documentary transfer taxes show
that an essential characteristic of these taxes is that they
are calculated using a iow tax rate of about one percent or
less, multiplied by either the par value of the security, the
consideration in the deed, or the value of the property that
is the subject of the transaction.
Finally, we add one more essential characteristic of
Stamp taxes to those identified by the district court. As
stated in /n re Jacoby-Bender, Inc., 40 B.R. 10; 15 (Bankr.
E.D.N.Y. 1984), where the bankruptcy court held that the
New York gains tax is not a stamp or similar tax within
the meaning of 11 U.S.C. 1146(c), stamp taxes are
imposed irrespective of whether the transfer resulted in a
gain or loss to the transferor. All of the stamp taxes and
real estate transfer taxes discussed above never even
touch on whether the underlying transaction resulted in a
gain or loss to the transferor.
In sum, we believe that all stamp or similar taxes as
stated in 11 U.S.C. § 1146(c) share the following common
elements: (1) they are imposed only at the time of trans-
fer or sale of the item at issue; (2) the amount due is
39a
determined by the consideration for, par value of, or value
of the item being transferred; (3) the tax rate is relatively
low—about one percent or less of the consideration, par
value or value of the property; (4) the tax is imposed irre-
spective of whether the transferor enjoyed a gain or suf-
fered a loss on the underlying sale or transfer: and (5) in
the case of state documentary transfer taxes, the tax must
be paid as a prerequisite to recording. We next turn to the
New York gains tax to determine whether it shares those
attributes common to all Stamp or similar taxes.
B.
Section 1441, contained in Article 31-B of New York
Tax Law provides:
A tax is hereby imposed on gains derived from the
transfer of real property within the state. The tax
Shall be at the rate of ten percent of the gain.
N.Y. Tax Law § 144] (McKinney 1987). Gain is defined
for the purposes of Article 31-B as:
the difference between the consideration for the
transfer of real property and the original purchase
price of such property, where the consideration
exceeds the original purchase price.
N.Y. Tax Law § 1440.3 (McKinney 1987). Under the ver-
sion of the statute in force at the time of the sale of the
Stanhope Hotel, the transferor was required to pay the tax
On the date of transfer.5 N.Y. Tax Law § 1442 (McKinney
1987). Transactions that are exempt from the tax include
those for which the consideration is less than one million
5 The specifics regarding payment of and liability for the tax have since
been somewhat modified. See N.Y. Tax Law §§ 1440.9, 1442(a) &
1447.3(a) (McKinney 1987 & Supp. 1992).
40a
dollars and those in which the real property that is the
subject of the transfer is the residence of the transferor.
N.Y. Tax Law § 1443 (McKinney 1987 & Supp. 1992).
Under N.Y. Tax Law § 1447.1(f)(1) (McKinney 1987),
recording is prohibited unless the ministerial requirements
of the act have been complied with and any tax due has
been paid. See also N.Y. Real Property Law § 333.1-f
(McKinney 1987) (prohibiting recording officer from
recording unless the provisions of § 1447.1(f) are satis-
fied).
Our analysis of the essential characteristics of stamp or
similar taxes indicates that although the New York gains
tax bears some resemblance to a stamp tax, it is not a
stamp or similar tax within the meaning of 11 U.S.C
§ 1146(a). As Fifth Avenue correctly points out, like a
Stamp tax, the gains tax is imposed at the time of transfer
and payment, if due, must be made prior to recordation.
But there the resemblance ends.
First, and most important, New York gains tax liability
is always contingent on the profitability of the underlying
transaction. If the transaction yields no gain, there is no
tax due. The fact that “gain,” as calculated under the gains
tax, does not take into account certain development costs
in no way alters this core attribute of the gains tax. Stamp
taxes and documentary transfer taxes, by contrast, are
always imposed irrespective of the existence of gain or
profit; the tax liability arises solely from the act of trans-
ferring property or securities.
Second, under the gains tax, the consideration for the
sale (or some proxy thereof as set forth in N.Y. Tax Law-
§ 1440 (McKinney 1987 & Supp. 1992)) is not determi-
native of the amount due under the gains tax. Instead, the
consideration is used only as a means to measure the gain
accruing to the transferor as a result of the t:ansfer. It is
the gain, albeit as defined by the provisions of the gains
tax, that provides the key figure for determination of the
amount owed under the tax. The amount due under a
Stamp or similar tax hinges on the consideration for the
transferred item.
4la
Third, the tax rate provided in the New York gains tax,
at 10 percent of the gain, greatly exceeds the tax rate used
in any stamp tax or documentary transfer tax. Stamp and
documentary transfer taxes impose a tax rate of about one
percent or less of the consideration for the underlying
transfer. These three important differences between the
New York gains tax and stamp and documentary transfer
taxes lead us to conclude that the New York gains tax is
not a “stamp tax or similar tax” within the meaning of 11
U.S.C § 1146(c).
Finally, we note that Fifth Avenue provides several
rationales in support of its contention that the gains tax
cannot be characterized as an income tax. For example,
Fifth Avenue reasons that the gains tax is not a form of
income tax because it does not allow a taxpayer to offset —
losses against gains in calculating net income generated
by transactions completed over a specific period of time.
This contention, however, misses the point: the relevant
issue is not whether the gains tax can be pigeonholed as
an income tax, but whether it represents a stamp or sim-
ilar tax within the meaning of § 1146(c). For the reasons
set forth above, we believe it does not and thus Fifth
Avenue is not entitled to an exemption from the New York
gains tax. Thus, we reverse the order of the district court
insofar as it directed New York to refund gains tax paid
by Fifth Avenue.
Affirmed in part and reversed in part.
42a
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Docket No: 91-5038
FILED APRIL 13, 1992
>
At a Stated term of the United States Court of Appeals for the
Second Circuit, held at the United States Courthouse in the
City of New York, on the 13th day of April, one thousand nine
hundred and ninety-two.
7
IN RE: 995 FIFTH AVENUE ASSOCIATES, L.P.,
Debtor.
995 FIFTH AVENUE ASSOCIATES, L.P.,
Plaintiff-Appellee,
—--V.—
NEW YORK STATE DEPARTMENT OF TAXATION AND
FINANCE; JAMES W. WETZLER, as Commissioner of Tax-
ation and Finance; EDWARD V. REGAN, as Comptroller of
the Siate of New York,
Defendants-Appellants.
Appeal from the United States District Court for the South-
ern District of New York.
43a
This cause came on to be heard on the transcript of record
from the United States District Court for the Southern District
of New York and was argued by counsel.
ON CONSIDERATION WHEREOF, it is now hereby ordered,
adjudged and decreed that the order of said district court be and
it hereby is affirmed in part, reversed in part in accordance
with the opinion of this court.
ELAINE B. GOLDSMITH, Clerk
By:
/s/ EDWARD J, GUARDARO
Edward J. Guardaro
Staff Attorney
44a
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
90 Civ. 5744 (LBS)
May 16, 1991
7
IN RE: 995 FIFTH AVENUE ASSOCIATES, L.P.,
Debtor.
995 FIFTH AVENUE ASSOCIATES, L.P.,
Plaintiffs-Appellees,
—against—
NEW YORK STATE DEPARTMENT OF TAXATION AND
FINANCE, JAMES W. WETZLER as Commissioner of Tax-
ation and Finance, and EDWARD V. REGAN as Comptroller
of the State of New York,
Defendants-Appellants.
Angel & Frankel, P.C., New York City (Joshua J. Angel,
Leonard H. Gerson, Ira R. Abel, of counsel), for plaintiffs-
appellees.
Robert Abrams, Attorney General of the State of New York,
New York City (Frederic L. Lieberman, David S. Cook, of
counsel), for defendants-appeliants.
45a
OPINION
SAND, District Judge.
This case comes to this Court on appeal from an order of the
United States Bankruptcy Court for the Southern District of
New York, Hon. Tina L. Brozman. The New York State Depart-
ment of Taxation and Finance, James W. Wetzler, New York
Commissioner of Taxation and Finance and Edward W. Regan,
Comptroller of the State of New York (collectively “Appel-
lants”) appeal from a decision and order granting the motion
for summary judgment made by 995 Fifth Avenue Associates,
L.P.’s (“Appellees”). Two issues are presented. First, as a juris-
dictional matter, Appellants suggest that the Bankruptcy Court
acted Outside its powers since the relief granted was barred by
the Eleventh Amendment and the doctrine of sovereign immu-
nity. Second, AppelJants claim that the Bankruptcy Court deci-
sion and order should be reversed as a matter of law for
exempting Appellees, under provisions of the Bankruptcy
Code, from the payment of certain New York State taxes.
The Bankruptcy Court held that the sale by Appellees of its
interest in the Stanhope Hotel (“Stanhope”) pursuant to a Chap-
ter 11 plan is exempt, under section 1146(c) of Title 11 of the
United States Code, 11 U.S.C. § 1146(c) (1988) (“Bankruptcy
Code”), from a ten percent tax imposed on gains derived from
the transfer of real property by Article 31-B § 1441 et seq. of
the New York tax law (“Gains Tax”). The Bankruptcy Court
directed Appellants to refund to Appellees the Gains Tax col-
lected in the amount of $2,608,603.80 together with interest.
The Bankruptcy Court further held that Appellants had waived
their sovereign immunity and Eleventh Amendment rights with
respect to all aspects of the Gains Tax through the filing of a
proof of claim by the Commissioner of Taxation and Finance of
the State of New York, which asserted a tax liability. For the
reasons stated below, the decision and order of the Bankruptcy
Court are affirmed.
46a
I. FACTS
There is little disagreement on the facts in this case. The
Appellees were in the business of operating a hotel and related
restaurant and catering facilities known as the Stanhope. The
Appellees filed a Chapter 11 petition on February 4, 1988 and
continued operating the business as debtors-in-possession.
Over the course of the bankruptcy case, the Appellees filed an
Original and three subsequent amended plans of reorganization
(collectively, “the Plan”), all of which contemplated the sale of
the Appellees’ interest in the Stanhope. On July 20, 1989, the
Bankruptcy Court approved the Plan. Shortly thereafter the
Stanhope was sold and there was a distribution of funds to the
creditors.'
Prior to approving the Plan, the Bankruptcy Court issued an
order dated November 29, 1988 (“Sale Order”), authorizing the
Appellees to sell or assign its interest in the Stanhope for the
amount of $76,000,000. The Sale Order declared that the Sale
was being made under a plan of reorganization and, pursuant to
section 1146(c) of the Bankruptcy Code, would be exempt from
any federal, state, or local transfer taxes. The closing of the sale
was scheduled for January 13, 1989. On January 12, 1989, pur-
suant to the pre-transfer audit procedures provided by the New
York Tax Law, Appellants issued a Tentative Assessment and
Return (“first assessment”) imposing a Gains Tax of
$2,608,603.80 on the proposed sale and transfer. The Appellees
immediately objected to, and were denied by Appellants a
reprieve from, the proposed Gains Tax based on section 1146(c)
of the Bankruptcy Code. Because state law prohibits recordation
of title and transfer in local land records without payment of
any tax due, the Appellees paid the Gain Tax under protest to
allow the closing to go forward and the deed to be recorded. See
N.Y. Tax Law § 1447(f) (McKinney 1987).?
| There are still some creditors who have yet to be paid under the Plan
and any money deposited in Appellee's account as a result of this action will
be distributed according to the Plan. See transcript of oral argument, dated
February 21, 1991 (“tr”) at p. 3.
2 In conformance with the Plan where a claim is objected to, as in the
case of Appellant's claim, the monies at issue are placed in an escrow account
maintained by the Appellees. See tr. at 3.
47a
Since Appeliees paid the exact amount of Gains Tax charged
in the first assessment, Appellants did not file a proof of claim
as to that amount. However, Appellants did file two other
proofs of claim in the Bankruptcy Court. Appellants first filed
a proof of claim on January 29, 1989 for approximately $3 mil-
lion to recover sales and withholding taxes. None of these taxes
are Challenged in this action and are not relevant to the Gains
Tax question. The second proof of claim, filed on October 23,
1989, which is the only claim at issue in this action, was des-
ignated the “Third Amended Administrative Expense Claim”
(“Claim 300”).* This claim is based in part on what the Appel-
lants concluded is an additional Gains Tax liability of
$2,137,496.76 over and above the $2,608,603.80 already
imposed. Claim 300 was filed after the Bankruptcy Court heard
oral argument on the summary judgment motion but before it
issued an opinion.
II. DISCUSSION
A. Eleventh Amendment and Sovereign Immunity
Appellants allege as a threshold matter that the Eleventh
Amendment and the doctrine of sovereign immunity bar the
Bankruptcy Court, and this Court, from considering any portion
of this case. Since these immunity defenses are jurisdictional
in nature, the Court must first consider their validity. The
Eleventh Amendment provides: “The Judicial power of the
United States shall not be construed to extend to any suit in law
Or equity, commenced or prosecuted against one of the United
States by Citizens of another State, or by Citizens or Subjects
of any Foreign State.” At its core, this Amendment stands for
j __ the fundamental principle that “sovereign immunity limits the
grant of judicial authority in Article III” of the Constitution.
Pennhurst State School & Hospital v. Halderman, 465 U.S. 89,
98 (1984). Although not explicitly stated by the language in the
3 An Administrative Expense Claim is a type of proof of claim which
allows a creditor to move ahead of unsecured creditors to a first or second
priority.
48a
Amendment, it is a long standing rule that sovereign immunity
also bars a citizen from bringing a suit against his or her own
State in federal court. See Hans v. Louisiana, 134 U.S. 1
(1890).
There are, however, well established exceptions to the reach
of the Eleventh Amendment and the doctrine of sovereign
immunity. For example, the Supreme Court has held that if a
State waives its immunity and consents to suit in a federal
court, the Eleventh Amendment does not bar such an action.
See Clark v. Barnard, 108 U.S. 436, 447 (1883).* A State may
effectuate a waiver of its constitutional immunity by enacting
a State statute or constitutional provision, “or by otherwise
waiving its immunity to suit in the context of a particular fed-
eral program.” Atascadero State Hospital v. Scanlon, 473 U.S.
234, 238 n. 1 (1985). Waiver by participation occurs when a
State engages in a federally sponsored activity in which
Congress has made waiver of immunity a pre-condition of state
participation. /d. at 237. Still, any consent by the state to waive
its Eleventh Amendment rights by participating in a federal
program requires an unequivocal and clear indication of such
an intention. See Edelman v. Jordon, 415 U.S. 651, 673 (1974).
The waiver of a State’s immunity rights by participation in
a bankruptcy proceeding has long been recognized, not only
under the Bankruptcy Code, but also under the former
Bankruptcy Act. See Clark v. Barnard, 108 U.S. 436, 447-48
4 Another exception is waiver by abrogation. Congress may override
Eleventh Amendment immunity by enacting a statute pursuant to its plenary
powers granted by the Constitution. For example, Congress has the authority
to abrogate a State's immunity pursuant to Section 5 of the Fourteenth Amend-
ment. See Fitzpatrick v. Bitzer, 427 U.S. 445 (1976). Legislative power to abro-
gate is also available pursuant to Article I under the Commerce Clause. See
Pennsylvania v. Union Gas Co.,__ U.S. ____, 109 S. Ct. 2273, 2277 (1989).
It is unclear whether Congress has the power under the Bankruptcy Clause of
Article I to abrogate a State's immunity. In Hoffman v. Connecticut Dep't of
Income Maintenance, __ U.S. __, 109 S. Ct. 2818, 2824 (1989), the Supreme
Court declined to address the question since the case was resolved on other
grounds. /d. at 2824. See also Union Gas Co., 109 S. Ct. at 2277 (if statutory
language does not contain clear expression of intent, constitutional questions
of Congress's authority to abrogate immunity need not be considered).
ae
49a
(1883). As the Supreme Court has held, “[w]hen the State
becomes the actor and files a claim against the fund, it waives
any immunity which it otherwise might have had respecting the
adjudication of the claim.” Gardner v. New Jersey, 329 U.S.
565, 574 (1946). In essence, if a State desires to participate in
obtaining remaining assets from a bankrupt estate it is subject,
as are all the interested parties, to the requirements imposed by
the Bankruptcy Court such as bar dates for filing claims and
sale orders. ‘
This exception to the Eleventh Amendment and the doctrine
of sovereign immunity was codified in section 106(a) of the
Bankruptcy Code. Section 106 provides, in pertinent part:
Waiver of sovereign immunity
(a) A governmental unit is deemed to have waived
sovereign immunity with respect to any claim against such
governmental unit that is property of the estate and that
arose out of the same transaction or occupance out of
which such governmental unit's claim arose.
11 U.S.C. § 106(a) (1988).5 In clear, concise language, Con-
gress conditioned a state’s participation in a specific federal
program on the state’s consent to federal jurisdiction. If a state
chooses to enter the federal government's exclusive bankruptcy
preserve—to assert a Claim against a debtor's estate—it must
file a proof of claim, as required of all parties.* See Atascadero
State Hospital v. Scanlon, 473 U.S. 234 (1985). Section 106(a)
puts_the state on notice that the quid pro quo for filing a proof
of claim is a partial waiver of its sovereign immunity. This
forced partial waiver requires only that a state come into the
proceeding on equal terms with others.’
5 A governmental unit is defined to include the “United States; state;
{or] [clommonwealth” or any “department, agency or instrumentality” thereof.”
11 U.S.C. § 101(26) (1988). No party questions that Appellants fall within this
definition.
6 The language in Section 106(a) refers to a “claim” which is effected
in the context of a bankruptcy proceeding by the filing of a “proof of claim.”
7 This case is not unique in that the filing of a proof of claim may effect
the waiver of an otherwise secure constitutional right. Most recently in Grand-
50a
Once immunity has been waived, the state has subjected
itself to any liability it has to the estate relating to the claim
and transaction at issue. Section 106(a) “conditions the state’s
receiv(ing] a distribution from the estate upon waiver of immu-
nity against any compulsory counterclaims asserted against it
without limit in a bankruptcy proceeding.” /n re Willington
Convalescent Home, Inc., 850 F.2d 50, 54 (2d Cir.1988). See
also H. R. Rep. No. 595, 95th Cong., Ist Sess. 317 (1977). As
the Second Circuit concluded, “[A]ccordingly, § 106(a) pro-
vides for affirmative recovery, including money judgments.”
Id. See also In re Prudential Lines, Inc. vy. United States Mar-
itime Administration, 79 B.R. 167, 180 (Bankr. S.D.N.Y. 1987);
In re Inslaw, Inc., 76 B.R. 224, 234 (Bankr. D.D.C. 1987).
Here, there is no disagreement that pursuant to section
106(a) Appellants have waived their immunity defenses as to
certain claims involving approximately $3 million of sales and
withholding taxes by filing a proof of claim on January 29,
1989. The dispute is over the scope of the immunity waived by
Appellants upon the later filing of Claim 300, which charges in
part that Appellees’ estate owes approximately $2.1 million in
additional gains taxes relating to the original Stanhope trans-
action over and above the approximately $2.6 million already
paid. This Court concludes, based on the language in section
106(a), which states in pertinent part that “any claim against
such governmental unit. . . that arose out of the same trans-
action or occurrence out of which such government unit’s claim
arose,” that Appellants have waived their immunity defense as
to counterclaims involving all gains tax liability related to the
Stanhope transaction. All gains tax liability includes both
the original 2.6 million Gains Tax and the $2.1 million of addi-
tional tax liability outlined in Claim 300 since they are both
part of the same claim, arising from the same transaction.
The Appellants advance a three-tiered argument in support
of their appeal on this issue. First, they argue that there was no
financiera, S.A. v. Nordberg, __. U.S. ___, 109 S. Ct. 2782 (1989), the
Supreme Court held that filing a proof of claim with a bankruptcy court alters
a party's Seventh Amendment right to a jury trial. See also Katchen v. Landy,
382 U.S. 323 (1966).
Sla
intentional waiver of the State's immunity rights and that fil-
ing a proof of claim is not per se a waiver. Appellants suggest
that since they “vigorously asserted” the immunity defense
while filing the proof of claim, i.e. Claim 300, and that such
filing was a “routine administrative act performed by a mid-
level official,” that waiver could not have been intended and is
inequitable. Appellant’s memorandum of law at 35. In essence
Appellants suggest that a filing of a proof of claim by an offi-
cial is not “the same as a declaration of waiver by an attomey
in court” because, in the latter case, “the court may remind the
attorney of his client’s previous assertions of the defense and
inquire [about]. . . the actual intent of the client.” /d.*
The statutory language does not support Appellants’ con-
tention. Under section 106(a), a court is not required to eval-
uate a governmental unit’s intention in asserting a claim against
the debtor’s estate. Any requirement as to intent is satisfied
where the State acts in a way which-conforms to the terms
of the statute. A court is asked simply to determine whether
a claim has been made which arises from the same trans-
action. See Jn re Lile, 96 Bankr. 81, 84 (Bankr. S.D. Tex.1989).
The reasoning in Hoffman, 109 S. Ct. at 2822, and Gardner,
329 U.S. at 574, likewise, suggest that by filing a proof of
claim, a state has offered concrete evidence of its intent to
waive any immunity defenses.
Second, Appellants suggest that even if the Court concludes,
as it has, that the filing of a proof of claim waives immunity,
8 In further resisting the conclusion that the State waived any immunity
defenses, Appellants suggest that an intentional waiver of sovereign immunity
in this instance would have been meaningless since the Gains Tax “had already
been paid.” Appellants memorandum of law at 8. Yet, this assertion fails
to account for the provisional nature of the tax paid. The amount of the Gains
Tax was determined by a Tentative Assessment and Return, issued by the Tax
Department. /d. at 5. Under New York law, the State has three years from the
date of transfer to make an additional Gains Tax assessment on a sale. New
York Tax Law § 1444.3(a) (Law. Co-op. 1990). Further, Appellants argument
does not account for the significant additional revenue the State stood to gain
by filing a proof of claim. Claim 300 asserts additional tax liabilities of
$2.1 million of Gains Tax based on the same transaction—the sale of the Stan-
hope.
52a
the statutory language in section 106(a) subjects the State to a
very limited waiver of immunity, allowing counterclaims only
as to the specific proof of claim filed, which in this case is the
approximately $2.1 million of taxes at issue in Claim 300. The
problem with this interpretation is that it ignores the language
in the statute referring to “any claim. . . that arose out of the
same transaction.” The additional $2.1 million of tax liability
arises out of the same Stanhope transaction and is based on a
provision of the Gains Tax Law which allows the Appellants to
re-evaluate whether the first assessment imposed in the pre-sale
audit is sufficient. In order to assert a right against the debtor’s
estate for additional taxes, involving the same transaction,
Appellants must file a proof of claim to effectuate their request
for funds under the control of the Bankruptcy Court. As dis-
cussed above, this, in essence, requires waiving any immunity
defenses as to the claim at issue.
A final argument advanced by Appellants is that a waiver of
immunity cannot be applied retroactively to affect the Gains
Tax paid prior to the sale of the Stanhope. While the Second
Circuit has not directly addressed this question, the issue is not
one of first impression. In WJM, Inc. v. Massachusetts Depart-
ment of Public Welfare, 840 F.2d 996, 1002-04 (1st Cir.1988),
the First Circuit held that a waiver by a state entity was bind-
ing, although the filing of a proof of claim occurred some
months after the adversary proceedings were concluded, but
before the opinion was issued. Factually, WJM is on all fours
with this action, if not a more difficult case. As the First Cir-
cuit recognized, federal medicaid reimbursement law required
the State of Massachusetts to file a proof of claim to recover
any potential overpayment it made. In concluding, nonetheless,
that the State had waived any immunity defenses, the court
wrote, “we think the waiver should be viewed as having
retroactively validated the bankruptcy court’s earlier, as well
as its subsequent, actions” on the claims. /d at 1004.
This Court concludes that the reasoning in WJM is sound and
should be followed in this instance. Since the Appellants
derived certain benefits from the Bankruptcy Court by poten-
tially retrieving assets that might otherwise have been lost, it
53a
would be inequitabie to permit the debtors’ claims as to the
transaction at issue to be frustrated by allowing the State to
establish immunity as to a portion of the claim merely by wait-
ing a certain period to file a proof of claim. If this Court were
to accept Appellants’ arguments, the State would gain all the
advantages of the Bankruptcy Court without being subject to its
jurisdiction. For this reason, the Court concludes that the sig-
nificant fact for immunity purposes is that the State filed a
proof of claim—not the date that such a filing occurred. As
such, Appellants voluntarily waived any immunity defenses on
claims involving the Gains Tax liability.
B. Transfer or Income Tax?
Turning to the merits we note as a preliminary matter that
this Court has jurisdiction over this matter pursuant to 28
U.S.C. § 158(a) (1988), since this is an appeal from a final
judgment of the Bankruptcy Court rendered in an adversary
proceeding. The controversy in this case is whether the Gains
Tax paid by Appellees to Appellants, under the New York Tax
Law’, in order to transfer their interest in the Stanhope pur-
suant to a Bankruptcy Court Plan, is correctly characterized as
an income tax or a transfer tax. The Bankruptcy Code exempts
debtors, such as Appellees, pursuant to a plan of reorganiza-
tion, from all transfer, stamp and similar taxes upon the sale of
real property. No such exemption applies for income taxes.
Based on the statutory language in the Bankruptcy Code, fed-
eral case law, and state and federal tax opinion letters, this
Court concludes that the Gains Tax imposed on the income
received from the sale of the Stanhope was similar to a trans-
fer or stamp tax. Appellees were therefore entitled to an
exemption under the Bankruptcy Code from the New York
Gains Tax.
Section 1146(c) of the Bankruptcy Code states, in pertinent
part:
9 The New York Tax Law states, “A tax is hereby imposed on gains
derived fom the transfer of real property within the state. The tax shall be at
the rate of ten percent of the gain.”
54a
The issuance, transfer, or exchange, of a security, or the
making or delivery of an instrument of transfer under a
plan confirmed under section 1129 of this title, may not be
taxed under any law imposing a stamp or similar tax.
11 U.S.C. § 1146(c) (1988). Congress’s apparent purpose in
enacting section 1146 was to facilitate reorganizations through
the granting of tax relief. According to the legislative history,
congressional intent was to give greater relief to debtors than
that which was available under section 267 of the Bankruptcy
Act. The Report of the House Judiciary Committee stated,
“Section 1146(c) of title 11 broadens the exemption to any
stamp or similar tax on a security or transfer instrument dealt
with under the consolidated chapter 11. No opposition has been
voiced with respect to this section.” H.R. Rep. No. 595, 95th
Cong., Ist Sess. 281 (1977), reprinted in 1978 U.S. Code Cong.
- & Ad. News 5787, 5963, 6238.
The controversy in this action concerns that portion of sec-
tion 1146(c) which limits exemptions under the Bankruptcy
Code to a “stamp or similar tax.” At issue is the definition and
parameter of a “stamp or similar tax.”'® While the Second Cir-
cuit has considered the statutory meaning of certain portions of
section 1146(c) of the Bankruptcy Code, including the legal
effect of a “transfer under a plan,” it has never reached the
question of whether the Gains Tax is a “stamp or similar tax.”
See City of New York v. Jacoby-Bender, Inc., 758 F.2d 840,
841-42 (2d Cir. 1985). The only relevant appellate guidance
to this case is the Second Circuit Court’s rejection in Jacoby-
Bender of a constricted view of section 1146(c) of the
Bankruptcy Code. Focusing upon the practical workings of the
exemption, the Court adopted a mode of analysis which sug-
gests a broad reading of this portion of the Bankruptcy Code.
Id.
10 There is no disagreement in the application of other aspects of sec-
tion 1146(c). Certainly Appellees have “transferred” a parcel of real property,
the Stanhope, and that the sale of the property was in connection with a con-
firmed bankruptcy “plan.”
55a
The only prior case which specifically addresses whether the
Gains Tax constitutes a “stamp or similar tax” is the
bankruptcy court decision in Jn re Jacoby-Bender, Inc., 40
Bankr. 10 (Bankr. E.D.N.Y. 1984), aff'd mem., No. 84-1564
(E.D.N.Y. Sept. 18, 1984), aff'd, 758 F.2d 840 (2d Cir.1985).
There the Bankruptcy Court held that the Gains Tax was akin
to an income tax and not exempt under section 1146(c) because
it was levied upon only the gain realized by the debtor and not
upon the instrument of transfer.'' In the instant case, the
Bankruptcy Court held that the tax was a transfer tax, which is
similar to a stamp tax, since it is imposed on a transaction by
transaction basis without regard to whether taxpayers realized
a gain or suffered a loss from all of its transactions during the
relevant period.
While there is little guidance available in determining
whether the Gains Tax at issue is a “stamp or similar tax”
within the meaning of the Bankruptcy Code, the Court is not
without some guideposts. In other contexts, federal courts have
identified the characteristics relevant to determining whether
a particular levy by the state is a stamp tax. There are three
common elements present in all stamp taxes. First, the tax is
imposed only upon a transfer or sale of the item at issue. Sec-
ond, the amount of tax due is determined by the consideration
recited in the deed of the transfer. Finally, the taxes must have
been paid as a prerequisite to recording. See Lee v. Bickell, 292
U.S. 415, 417 (1934) (stamp tax placed on original issue and
transfer or sale of stocks and bonds); Texaco, Inc. v. United
States, 624 F.2d 20, 21 (Sth Cir. 1980) (federal stamp tax on
deeds by which realty is transferred). '*
Applying these general criteria, the Second Circuit analysis
of section 1146(c) outlined in Jacoby, and congressional intent
11 This portion of the Bankruptcy Court's decision was not addressed by
the Second Circuit in Jacoby-Bender since New York State had stipulated to
return the Gains Tax payment, thereby mooting appellate review. 768 F.2d at
840-43.
12 Stamp taxes may have characteristics such as actual stamps on the
written instrument to show that a tax has been paid. The absence of an actual
stamp, however, is not necessarily determinative that the tax paid is not a stamp
tax or similar type tax. See Jacoby-Bender, Inc., 40 Bankr. at 10.
S$6a
to give greater tax relief to debtors, we conclude that the essen-
tial stamp tax characteristics are present in the Gains Tax. First,
the tax is imposed on a transaction by transaction basis,
payable on transfer, without regard for other transfers made
over a given time. Second, the consideration paid to the trans-
feror and recited in the instrument, ij.e., the deed, plays an
essential role in assessing the amount of Gains Tax due. In fact,
the primary considerations are the acquisition cost and the sale
cost.'* Finally, the Gains Tax must be paid at the time of trans-
fer, as state law prohibits recording of the conveyance until this
act is done. See N.Y. Tax Law § 1447(f) (McKinney 1987).
Failure to record makes null and void the conveyance of real
property to a subsequent purchaser who acquires the property
in good faith and for valuable consideration. See N.Y. Real
Property Law § 291 (McKinney 1989). It was for precisely this
reason that Appellees paid the Gain Tax assessed, rather than
awaiting an outcome of the matter in the Bankruptcy Court.
There are other factors that indicate that the New York Tax
Law is a transfer or stamp tax based on the transfer of real
property rather than on the income generated thereby. First, the
Original purchase price is not adjusted to reflect depreciation
cost deductions allowed in the operation of commercial real
estate. Without this adjustment for depreciation, the Gains Tax
is not based on a true measure of accrued wealth, as would be
the case for calculating gain for income tax purposes. Second,
the Gains Tax is not assessed against all profitable transactions.
Only those transfers in which the consideration exceeds
$1,000,000 are subject to this tax. There is no Gains Tax
imposed until this amount is exceeded, at which point the
entire gain is taxed at ten percent, not merely that portion of
the gain exceeding $1,000,000. Third, unlike income tax lia-
bility, the transferee is secondarily liable for the amount owed
if the transferor does not pay the Gains Tax. In toto, the result
13 Certain statutorily permitted adjustments (including certain capital
improvements and fees paid to brokers, surveyors, engineers and attorneys) are
added io the transferor’s original purchase price and then subtracted from the
consideration received for the transfer. See generally N.Y. Tax Law § 1440(5)
(McKinney 1987); 20 N.Y. Comp. Codes R. & Regs. § 590.14-17 (1988).
57a
is the taxation of a certain class of transfers and not the taxa-
tion of a certain class of income.
This interpretation is also consistent with both federal and
State revenue rulings. The State of New York has made certain
revenue rulings with respect to the Gains Tax concluding that
it is a transfer tax rather than an income tax. On September 21,
1983, the Tax Department found:
The State gains tax is a transfer tax rather than a property
or income tax since the triggering mechanism of the tax is
the transfer of real property. Whereas the gains tax is a tax
upon the transfer of real property, a property tax is a levy
on the property itself. Income taxes are generally applied
to net gain. Under the gains tax, the loss from one trans-
fer of real property does not effect the applicability of the
gains tax as to another transfer of real property in the
same tax year. For these reasons, it is our opinion the
State gains tax should be classified as a State transfer tax
and should be treated as such for purposes of deductibil-
ity.
See Appendix A. A few months later, in another letter describ-
ing the Gains Tax and reiterating their prior position, the State
wrote, “the tax is classified by New York as atransfertax. . .
because it is triggered by the transfer of the property, not by
other incidents of ownership.” See Appendix B.
In both of these rulings, the State was influenced by Internal
Revenue Service (“IRS”) ruling 80-121 which held that a gains
tax in Vermont, similar to the Gains Tax, was a transfer and not
an income tax for federal tax purposes. The IRS took this posi-
tion primarily because the Vermont State tax was not structured
to account only for net gain. Under the Vermont tax, as under
the Gains Tax, a taxpayer could make two transfers on the same
day, one earning $1,000,000 and the other losing $1,000,000 so
that at the end of the day there has been no net increase in
wealth. Nonetheless, the taxpayer would be liable for the gains
tax on the profitable transaction and could not offset losses.
Furthermore, the Vermont gains tax did not allow for depre-
ciation or other types of costs usually associated with arriving
58a
at the economic net gain. In order for IRS to characterize a tax
as an income tax under section 164(a)(3) of the Internal Rev-
enue Code, a taxpayer must be allowed to reduce taxable gains
by any losses experienced during the same tax year and to
deduct depreciation costs.
Appellants suggest that these tax opinions are merely advi-
sory and are not binding on New York with respect to this
debtor. The only estoppel effect these opinions have, accord-
ing to Appellants, is with respect to the parties who made the
requests for the advice. See 20 N.Y. Comp. Codes R. & Regs.
§ 901.4 (1988). Moreover, the Appellants argue that these rul-
ings do not suggest that the Gains Tax is a stamp tax. Rather,
Appellants urge that a stamp tax is an excise tax which is
imposed on such events as the drawing of a will, deed or mort-
gage recordings and taxes on such goods as Cigarettes and
liquor. According to the Appellants the transfer of the Stanhope
is not akin to the types of events and goods upon which a stamp
is affixed.
Appellants’ arguments are unavailing. First, while the state
tax rulings are not binding on this court, they are persuasive
evidence that the Gains Tax is not an income tax. Moreover,
Appellants’ suggestion that the stamp tax should be narrowly
understood as applying only to a few events is equally unper-
suasive. This argument fails to account for the statutory lan-
guage of section 1146(c) which does not limit the tax exclusion
only to a stamp tax. Section 1146(c) exempts “a stamp or sim-
ilar tax” (emphasis added). Since the Gains Tax has many of
the characteristics of a stamp tax and few of the qualities of an
income tax, this Court concludes that Appellees were entitled
to an exemption under section 1146(c) of the Bankruptcy Code
since the Gains Tax is a “stamp or similar tax.”
The Opinion and Order of the Bankruptcy Court are
affirmed.
SO ORDERED.
Dated: May 16, 1991
New York, New York
59a
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
90 Civ. 5744 (LBS)
as
IN RE: 995 FIFTH AVENUE ASSOCIATES, L.P.,
Debtor.
995 FIFTH AVENUE ASSOCIATES, L.P.,
Plaintiffs-Appellees,
—against—
NEW YORK STATE DEPARTMENT OF TAXATION AND
FINANCE, JAMES W. WETZLER as Commissioner of Tax-
ation and Finance, and EDWARD V. REGAN as Comptroller
of the State of New York,
Defendants-Appellants.
-
’
ORDER AMENDING OPINION
SAND, J.
The Opinion rendered in this matter dated May 16, 1991 is
hereby amended to include Appendix A and Appendix B
referred to on page 18 of the Opinion.
SO ORDERED.
Dated: May 17, 1991
New York, New York
U.S.D.J.
60a
APPENDIX A
STATE OF NEW YORK
Department of
Taxation and Finance
Albany, New York 12227
Law Bureau
State Campus,
Albany, New York 12227
September 21, 1983
Dear
This letter is in reply to your inquiries of June 9 and June 27,
1983 concerning Article 31-B of the Tax Law, the New York
Real Property Transfer Gains Tax. You had questions as to the
treatment of the tax for State corporate franchise and personal
income tax purposes, and as to how the “acquisition of con-
troliing interest” provisions of the tax are to be applied.
In order to determine the deductibility of the gains tax for
corporate franchise and personal income tax purposes, the tax
must first be classified. The New York State Real Property
Transfer Gains Tax is a levy on gains derived from the transfer
by any method of an interest in real property located in New
York where the consideration is one million dollars or more.
The State gains tax is a transfer tax rather than a property or
income tax since the triggering mechanism of the tax is the
transfer of real property. Whereas the gains tax is a tax upon
the transfer of real property, a property tax is a levy on the
property itself. Income taxes are generally applied to net gain.
Under the gains tax, the loss from one transfer of real property
does not effect the applicability of the gains tax to another
transfer of real property in the same tax year. For these reasons,
it is Our opinion that the State gains tax should be classified as
a State transfer tax and should be treated as such for purposes
of deductibility.
It should be noted, however, that though the Department’s
views are expressed herein, the Internal Revenue Service will
ultimately determine the deductibility of the gains tax for Fed-
6la
eral tax purposes, and that State tax policy is usually formu-
lated in accordance with the Federal treatment of the tax. It is
our opinion, in light of Revenue Ruling 80-121, that the Inter-
nal Revenue Service will classify the gains tax as being a trans-
fer tax. In that ruling, Vermont's land gains tax, as imposed by
sections 10001 through 10010, Title 32, of the Vermont
Statutes Annotated, was deemed to be a transfer tax. The Ver-
mont land gains tax is conceptually similar to New York’s
gains tax in that the Vermont statute levies a tax on gain from
the sale or exchange of land. Under their statute, a sale or
exchange of land is any transfer of title to land for a consid-
eration, and taxable gain is the amount realized from a sale or
exchange of land, less the transferor’s basis in the land.
Section 164(a) of the Internal Revenue Code describes var-
ious types of taxes that are allowed as a deduction for the tax-
able year within which paid or accrued. Specifically allowed
are: (1) State and local real property taxes; (2) State and local
personal property taxes; (3) State and local income taxes; and
(4) State and local general sales taxes. Section 164(a) of the
Code also allows, as a deduction, State and local taxes not
specifically described that are paid or accrued within the tax-
able year in carrying on a trade or business or an activity
described in section 212 (relating to expenses for the produc-
tion of income).
In determining that the Vermont land gains tax is a transfer
tax, Revenue Ruling 80-121 first distinguished other forms of
taxes as not being applicable. The Ruling provides, in pertinent
part, as follows:
“The Vermont land gains tax is not imposed or triggered
by the ownership of real property, but rather, by the exer-
cise of one of the incidents of property ownership, the
transfer of real property at a gain. The land gains tax
is not measured by the value of the real property, but
rather, by the gain derived from the transfer of that prop-
erty . . . . Thus, the land gains tax is not a real property
tax within the meaning of section 164(a)(1) of the Code.”
With respect to the Vermont land gains tax qualifying as a
State income tax within the meaning of section 164(a)(3) of the
62a
Code, the Revenue Ruling distinguishes the land gains tax from
Federal income taxes, stating that the State tax, unlike the Fed-
eral income tax, iS not structured to fall on net gain. The tax-
payer, as a result of the gains tax, cannot reduce taxable gain
from sales or exchanges of land during the taxable year by any
losses from other sales or exchanges of land during that year.
Under Federal income tax law, taxpayers are allowed to reduce
gains from sales or exchanges of land by losses from sales or
exchanges of land. Noting that a taxpayer could be required to
pay the land gains tax even though under Federal income tax
laws that same taxpayer may have a net loss from sales or
exchanges of land, the ruling concluded that the tax is not an
income tax under section !164(a)(3) of the Code.
In light of Revenue Ruling 80-121, it is the Department's
opinion that the New York Siate Real Property Transfer Gains
Tax is a transfer tax, and for purposes of Federal deductibility,
the tax is deductible for purposes of computing adjusted gross
income under section 164(a) of the Internal Revenue Code only
to the exient that it is paid or accrued within the taxable year in
Carrying On a trade or business, or in connection with an activ-
ity described in section 212 of the Internal Revenue Code relat-
ing to expenses for the production of income.
For State income tax purposes, section 612 of the Tax Law
provides that the New York adjusted gross income of a resident
individual means his Federal adjusted gross income, with cer-
tain modifications. Since the State gains tax will be deductible
for purposes of computing Federal adjusted gross income, it
will automatically be excluded from the computation of New
York adjusted gross income, since there is no provision in the
Tax Law adding back such amounts for purposes of such com-
putation. A similar provision is found in Article 9-A of the Tax
Law, the corporate franchise tax. Section 208 defines “entire
net income” to mean total net income from all sources, which
shall be presumably the same as the entire taxable income
which the taxpayer is required to report to the United States
Treasury Department. Since the State gains tax will be
deducted from the taxable income the taxpayer is required to
report to the United States Treasury Department, the tax will
automatically be excluded from the computation of the state
63a
franchise tax since there is no provision adding it back for pur-
poses of computing entire net income.
With regard to your inquiry as to how the acquisition of con-
trolling interest provisions of the tax are to be applied, one
must look to what is acquired, not to what is maintained. The
tax is imposed on gains from the transfer of any interest in real
property, which is defined to include “acquisition of a con-
trolling interest” in any entity with an interest in real property.
(Tax Law, § 1440.7) The term “controlling interest” is defined
in section 1440.2 of the Tax law to mean:
“(i) in the case of a corporation, either fifty percent or
more of the total combined voting power of all classes of
stock of such corporation, or fifty percent or more of the
capital, profits or beneficial interest in such voting stock
of such corporation, and
(ii) in the case of a partnership, association, trust or other
entity, fifty percent or more of the capital, profits or ben-
eficial interest in such partnership, association, trust or
other entity.”
The key term in these provisions is “acquisition”. For pur-
poses of the gairts tax, if no partner acquires a controlling inter-
est in the partnership, there is no transfer subject to the tax. In
the case of a corporation which has an interest in real property,
the acquisition of a controlling interest in the corporation
occurs when an individual, group of individuals acting in con-
cert to avoid the tax, or another entity becomes the owner of
50% or more of the voting stock in such corporation. Because
the statute looks to the acquisition of the controlling interest,
it is the act of the transferee which triggers the tax.
For your further information, I am enclosing a copy of Pub-
lication 588 containing questions and answers on the gains tax
or real property transfers.
Very truly yours,
JOHN P. DUGAN
Deputy Commissioner and Counsel
TWS/cjm
Enclosure
64a
APPENDIX B
STATE OF NEW YORK
Department of
Taxation and Finance
Albany, New York 12227
Law Bureau
State Campus,
Albany, New York 12227
November 14, 1983
Dear
This letter is in response to your inquiry of September 23,
1983 regarding Article 31-B of the Tax Law, The New York
Real Property Transfer Gains Tax. You asked whether the pay-
ment of tax pursuant thereto would avail the taxpayer of a
credit or deduction for partnership or individual income tax
purposes. It is our opinion that, if anything, a deduction would
be allowed.
The treatment of taxes for such purposes largely depends
upon the classification of the tax. Comparably classified taxes
generally receive similar deduction treatment. The New York
State Real Property Transfer Gains Tax is a levy on gains
derived from the transfer by any method of an interest in real
property located in New York where the consideration is one
million dollars or more.
The tax is classified by New York as a transfer tax rather
than a property tax because it is triggered by the transfer of the
property, not by other incidents of ownership, and not ievied on
the land itself.
It should be noted, however, that though the Department's
views are expressed herein, the Internal Revenue Service will
ultimately determine the deductibility of the gains tax for Fed-
eral tax purposes, and that State tax policy is usually formu-
lated in accordance with the Federal treatment of the tax. It is
our opinion, in light of Revenue Ruling 80-121, that the Inter-
nal Revenue Service will clarsify the gains tax as being a trans-
fer tax. In that ruling, Vermont's land gains tax, as imposed by
. 65a
sections 10001 through 10010, Title 32, of the Vermont
Statutes Annotated, was deemed to be a transfer tax. The Ver-
mont land gains tax is conceptually similar to New York's
gains tax in that the Vermont statute levies a tax on gain from
the sale or exchange of land. Under their statute, a sale or
exchange of land is any transfer of title to land for a consid-
eration, and taxable gain is the amount realized from a sale or
exchange of land, less the transferor’s basis in the land.
Section 164(a) of the Internal Revenue Code describes var-
ious types of taxes that are allowed as a deduction for the tax-
able year within which paid or accrued. Specifically allowed
are: (1) State and local real property taxes; (2) State and local
personal property taxes; (3) State and local income taxes; and
(4) State and local general sales taxes. Section 164(a) of the
Code also allows, as a deduction, State and local taxes not
specifically described that are paid or accrued within the tax-
able year in carrying on a trade or business or an activity
described in section 212 (relating to expenses for the produc-
tion of income).
In determining that the Vermont land gains tax is a transfer
tax, Revenue Ruling 80-121 first distinguished other forms of
taxes as not being applicable. The Ruling provides, in pertinent
part, as follows:
“The Vermont land gains tax is not imposed or triggered
by the ownership of real property, but rather, by the exer-
cise of one of the incidents of property ownership, the
transfer of real property at a gain. The land gains tax
is not measured by the value of the real property, but
rather, by the gain derived from the transfer of that prop-
erty . . . . Thus, the land gains tax is not a real property
tax within the meaning of section 164(a)(1) of the Code.”
With respect to the Vermont land gains tax qualifying as a
State income tax within the meaning of section 164(a)(3) of the
Code, the Revenue Ruling distinguishes that land gains tax
from Federal income taxes, stating that the State tax, unlike the
Federal income tax, is not structured to fall on net gain. The
taxpayer, as a result of the gains tax, cannot reduce taxable
gain from sales or exchanges of land during the taxable year by
66a
any losses from other sales or exchanges of land during that
year. Under Federal income tax law, taxpayers are allowed to
reduce gains from sales or exchanges of land by losses from
sales or exchanges of land. Noting that a taxpayer could be
required to pay the land gains tax even though under Federal
income tax laws that same taxpayer may have a net loss from
sales or exchanges of land, the ruling concluded that the tax is
not an income tax under section 164(a)(3) of the Code.
In light of Revenue Ruling 80-121, it is the Department's
opinion that the New York State Real Property Transfer Gains
Tax is a transfer tax, and for purposes of Federal deductibility,
the tax is deductible for purposes of computing adjusted gross
income under section 164(a) of the Internal Revenue Code only
to the extent that it is paid or accrued within the taxable year in
Carrying on a trade or business, or in connection with an activ-
ity described in section 212 of the Internal Revenue Code relat-
ing to expenses for the production of income.
For State income tax purposes, section 612 of the Tax Law
provides that the New York adjusted gross income of a resident
individual means his Federal adjusted gross income, with cer-
tain modifications. Since the State gains tax will be deductible
for purposes of computing Federal adjusted gross income, it
will automatically be excluded from the computation of New
York adjusted gross income, since there is no provision in the
Tax Law adding back such amounts for purposes of such com-
putation. A similar provision is found in Article 9-A of the Tax
Law, the corporate franchise tax. Section 208 defines “entire
net income” to mean total net income from all sources, which
shall be presumably the same as the entire taxable income
which the taxpayer is required to report to the United States
Treasury Department. Since the State gains tax will be
deducted from the taxable income the taxpayer is required to
report to the United States Treasury Department, the tax will
automatically be excluded from the computation of the state
franchise tax since there is no provision adding it back for pur-
poses of computing entire net income.
6/a
For your further information, I am enclosing a copy of Pub
lication 588 containing questions and answers on the gains tax
or real property transfers.
Very truly yours,
JOHN P. DUGAN
Deputy Commissioner and Counsel
LMP:pbc
Enclosure
68a
UNITED STATES BANKR’JPTCY CtOURT
SOUTHERN DISTRICT OF NEW Y‘ORK
Case No. 88 B 10237 (TLB)
Chapter 11
Adv. Pro. No. 89-5449A
August 2, 1990
>
IN RE: 995 FIFTH AVENUE ASSOCIATES, L.P.,
Debtor.
995 FIFTH AVENUE ASSOCIATES, L.P..,
Plaintiff,
—againsi—
NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE,
JAMES W. WETZLER AS COMMISSIONER OF TAXATION AND
FINANCE, AND EDWARD V. REGAN AS COMPTROLLER OF
THE STATE OF NEW YORK,
Defendants.
JUDGMENT AND ORDER GRANTING PLAINTIFF'S
MOTION FOR SUMMARY JUDGMENT
(A&F #303)
Upon the amended complaint dated March 6, 1989 by 995
Fifth Avenue Associates, L.P. (“Plaintiff”); and upon the order
of the Court dated November 29, 1988 authorizing, inter alia,
the Plaintiff to sell its interest in a hotel and related restaurant
and catering facilities together with the assignment of a lease
for non-residential real property (the “Stanhope Hotel’); and
69a
upon the amended proof of claim of New York State dated
October 23, 1989; and upon Plaintiff’s motion (“Motion”) for
summary judgment dated May 1, 1989, seeking a judgment by
the Court that: (a) the sale (“Sale”) by the Plaintiff of its inter-
est in the Stanhope Hotel pursuant to a Chapter 11 plan of reor-
ganization under Title 11 of the United States Bankruptcy Code
(“Bankruptcy Code”) was exempt under Section 1146(c) of the
Bankruptcy Code from the imposition of the tax imposed on
the gains derived from the transfer of real property within the
State of New York pursuant to N.Y. Tax Law § 1441 (“Gains
Tax”); and (b) the payment made under protest by the Plaintiff
in the amount of $2,608,603.80 (“Gains Tax Payment”) in sat-
isfaction of its alleged Gains Tax liability be refunded to the
Plaintiff; and upon the papers filed by the Plaintiff in support
of the Motion; and upon the papers filed by the Defendants in
Opposition to the-Motion; and a hearing having been held
before me on May 23, 1989; and the Plaintiff having appeared
by Joshua J. Angel, Esq. and Leonard H. Gerson, Esq. of Angel
& Frankel, P.C.; and the Defendants having appeared by David
S. Cook, Esq., Assistant Attorney Geiieral of the State of New
York; and upon the record of said hearing held before me; and
upon the written decision of this Court, dated July 13, 1990; it
is
Now, upon motion of Angel & Frankel, P.C.. attorneys for
the Plaintiff,
ORDERED, ADJUDGED AND DECREED that:
1. The Sale was and is exempt from payment of the Gains
Tax pursuant to Section 1146(c) of the Bankruptcy Code.
2. New York State has waived its sovereign immunity with
respect to the Gains Tax for which it has filed a proof of claim
in this case.
3. Defendants be, and they hereby are authorized and
directed to refund to the Plaintiff, within eleven (11) days after
the date of entry of this order, the Gains Tax Payment plus
interest at the legal rate from the date on which the Gains Tax
70a
Payment was made through and including the date on which the
refund directed by this order is delivered to the Plaintiff.
4. Defendants’ cross-motion for summary judgment for fail-
ure to state a Claim be, and the same hereby is denied.
Dated: New York, New York
August 1, 1990
/s/ TINA L, BROZMAN ae
United States Bankruptcy Judge
Tla
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
Case No. 88 B 10237(TLB)
Chapter 11
Adv. Pro. No. 89-5449A
ae
“IN RE: 995 FIFTH AVENUE ASSOCIATES, L.P.,
Debtor.
995 FIFTH AVENUE ASSOCIATES, L.P.
Plaintiff,
—against—
NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE,
JAMES W. WETZLER as Commissioner of Taxation and
Finance, and EDWARD V. REGAN as Comptroller of the
State of New York,
Defendants.
i>
DECISION GRANTING MOTION FOR
SUMMARY JUDGMENT
ANGEL & FRANKEL, P.C. by Joshua J. Angel, Leonard H.
Gerson, Ira R. Abel, New York City, for debtor.
ROBERT ABRAMS, Atty. Gen. of the State of New York by -
David Cook, Marcie Mintz, New York City, for defendants.
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TINA L. BROZMAN, United States Bankruptcy Judge.
At issue in this adversary proceeding is whether section
1146(c) of the Bankruptcy Code, 11 U.S.C.A. § 1146(c) (West
Supp. 1990) (Section 1146(c)) exempts a debtor in possession
from payment of the tax imposed on the gains derived from the
transfer of real property within the State of New York pursuant
to N.Y. Tax Law § 1441 (McKinney 1987) (the Gains Tax). 995
Fifth Avenue Associates, L.P. (the Debtor), the debtor in this
chapter 11 case, moves for summary judgment arguing that
Section 1146(c) does apply and that the $2,608 ,603.80 Gains
Tax payment it made under protest should be returned. The
New York State Department of Taxation and Finance (the Tax
Department), James W. Wetzler as Commissioner of Taxation
and Finance, and Edward V. Regan as Comptroller of the State
of New York (collectively, New York) have cross-moved for
summary judgment to dismiss for failure to state a claim, argu-
ing that the Section 1146(c) exemption does not apply and that
the Eleventh Amendment and the doctrine of sovereign immu-
nity are complete defenses to the adversary proceeding. For the
reasons set forth below, I conclude that Section 1146(c) does
exempt the Debtor from liability for the Gains Tax and that nei-
ther the Eleventh Amendment nor the doctrine of sovereign
immunity precludes entry of judgment against New York
because it filed a proof of claim relating to the Gains Tax after
it interposed its claim of immunity.
I. Background
The salient facts are largely undisputed. The Debtor filed its
Chapter 11 petition on February 4, 1988. Its business was the
operation of a hotel and related restaurant and catering facili-
ties known as the Stanhope Hotel (the Stanhope), a business
which the Debtor continued to operate as debtor in possession.
Over the course of the bankruptcy case, the Debtor filed an
Original and three subsequent amended plans of reorganization
(collectively, the Plan), all of which contemplated the sale of
a Ms, ee el 5 i li
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the Debtor’s interest in the Stanhope. On July 20, 1989, the
Plan was confirmed.
Prior to confirmation and by order dated November 29, 1988
(the Sale Order), I authorized the Debtor to sell and/or assume
and assign its interest in the Stanhope for $76,000,000. The
Sale Order declared that the sale was being made under a plan
of reorganization and, pursuant to Section 1146(c), would be
exempt from any federal, state, or local transfer taxes. The
closing of the sale was scheduled for January 13, 1989. On Jan-
uary 12, pursuant to the pre-transfer audit procedures provided
by N.Y. Tax Law § 1447 (McKinney 1987), New York issued a
Tentative Assessment and Return imposing a Gains Tax of
$2,608 ,603.80 on the proposed sale and transfer. Citing the rel-
evant provisions of the Sale Order and Section 1146(c), the
Debtor requested but was denied an exemption from the Gains
Tax. Because state law prohibits recordation in the local land
records without payment of any tax due under the Tentative
Assessment and Return, the Debtor paid the Gains Tax under
protest to allow the deed to be recorded and the sale to close
. the following day. N.Y. Tax § 1447(f) (McKinney 1987). Since
the filing of the petition, New York has filed claims against the
Debtor’s estate based on both pre and post-petition tax obli-
gations, with the most recent amended claim including a lia-
bility for the Gains Tax.!
l New York filed an amended claim dated October 23, 1989 which it
designated as “3rd Amended Administrative Expense” (claim number 300 on
the Clerk of the Court’s claims docket). The cover sheet attached to claim num-
ber 300 indicates that the amendment is based in part “on the addition of Gains
Tax Liability” with the text of the claim referencing the statutory provision
imposing the tax. Claim number 300 was filed after I heard oral argument on
the summary judgment motions and after the parties submitted post-trial mem-
oranda in support of their respective positions. In light of New York's vol-
untary submission to my jurisdiction, most of its Challenges to my ability to
grant the relief sought by the Debtor have evaporated.
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Il. The 1146(c) Exemption
Section 1146(c) provides:
The issuance, transfer, or exchange of a security or the
making or delivery of an instrument of transfer under a
plan confirmed under section 1129 of this title, may not be
taxed under any law imposing a stamp tax or similar tax.
For the exemption from tax liability to apply, a three pronged
test must be fulfilled: 1) the tax must be a stamp or similar tax;
2) imposed upon the making or delivery of an instrument trans-
ferring an interest in real property; and 3) in connection with
a confirmed bankruptcy plan. /n re The Baldwin League of
Independent Schools, case No. 88 B 10401(CB) (June 21,
1988) (oral op.), aff'd, 110 Bankr. 125 (S.D.N.Y. 1990). The
major challenge in this case is the satisfaction of the first
prong, that is, whether the Gains Tax qualifies as a stamp
Or similar tax. New York relies almost exclusively on
the bankrupicy court’s decision in /n re Jacoby-Bender, Inc.,
40 Bankr. 10 (Bankr. E.D.N.Y. 1984), aff’d mem., No. 84-1564
(E.D.N.Y. Sept. 18, 1984), aff’d, 758 F.2d 840 (2d Cir.1985),
which held that the Gains Tax was not exempt under Section
1146(c). So much of the bankruptcy court’s decision as dealt
wiih the Gains Tax was never appealed.
In Jacoby, the debtor sought an order exempting it from pay-
ment of the New York City Real Estate Transfer Tax, the New
York State Real Estate Transfer Tax (collectively the Transfer
Taxes) and the New York State Capital Gains Tax, the same
Gains Tax presently in issue. The Jacoby court inquired into
the meaning of the phrase “stamp or similar tax” but found no
legislative history or court decisions directly construing Sec-
tion 1146(c) or its precursors. It reasoned that two essential
characteristics of stamp taxes are that the amount of the tax is
usually determined by the consideration recited in the deed of
transfer and that the taxes must be paid as a prerequisite to
recording. Other characteristics of lesser importance to the
Court’s analysis included the use of stamps as visible evidence
that the tax had been paid (deemed not “crucial” to the purpose
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served by the statutory exemption) and the “technical” feature
that stamp taxes are charged on written instruments recognized
in law as evidence of the enforcement of legal rights. Jacoby,
40 Bankr. at 13; see also In re Amsterdam Ave. Dev. Assoc., 103
Bankr. 454, 456-57 (Bankr. S.D.N-Y. 1989) (citing Jacoby).
Further, the Jacoby court noted that Stamp taxes are similar to
excise taxes, which are generally imposed upon the sale or use
of certain articles and on certain transactions.
Carefully examining the characteristics of the Transfer
Taxes, the court held them to fall within the purview of Section
1146(c). It noted that the amount of the Transfer Taxes is deter-
mined by the consideration or value of the property conveyed;
that payment of the taxes is a precondition to recording; that
recordation of the deed is “clear and convenient evidence” of
payment of the Transfer Taxes so that affixing stamps to the
instrument of transfer is not necessary; and that the Transfer
Taxes are taxes upon deeds recognized in law as important evi-
dence of legal rights.
When considering the possible exemption from the Gains
Tax, the Jacoby court did not address any of the characteristics
it SO meticulously reviewed with regard to the Transfer Taxes.
Rather, the court found that the Only similarity between the
Gains Tax and taxes exempt under Section 1146(c) is that both
are imposed at the time of transfer. Without further ado, the
court held that the Gains Tax was an income tax rather than an
excise tax, because it was levied Only upon the gain realized by
the debtor and not upon the instrument of transfer. The court
Stated that unlike the Gains Tax, all of the stamp taxes it had
Previously discussed were imposed regardless of whether the
transferor gained or lost money on the transaction. With good
reason, New York relies on Jacoby, emphasizing that the
Jacoby holding has been codified in the New York State tax
regulations. See N.Y. Comp. Codes R. & Regs. tit. 20, § 590.65
(1988).
Although the Jacoby debtor appealed the unfavorable deter-
mination regarding the Gains Tax, New York State subse-
quently stipulated to return the Gains Tax payment,’ thereby
2 The parties here dispute the circumstances leading to the stipulation.
That dispute is wholly irrelevant.
76a
mooting appellate review. Accordingly, the decision is not
binding precedent as to the Gains Tax. Of lesser precedential
value is the incorporation of the Jacoby result in the tax reg-
ulations of the State of New York; the reach of Section 1146(c)
is a federal question to be resolved by defining the scope of
federal law. See Amsterdam, 103 Bankr. at 458 (citing United
States v. L.N. White & Co., 359 F.2d 703, 714 n.16 (2d Cir.
1966)). Moreover, where a state tax has an impact upon a fed-
eral right, federal courts are not only free to, but must, look
beyond the label affixed by the state to determine the nature of
the tax and its effect on the federal right. Amsterdam, 103
Bankr. at 458 (citing Carpenter v. Shaw, 280 U.S. 363, 367-68,
(1930)). It ts therefore entirely appropriate to analyze the Gains
Tax in light of Baldwin Leagues three pronged test for an
exemption under Section 1146(c).
The amount of the Gains Tax is determined by adding statu-
torily permitted adjustments (including certain capital improve-
ments and fees paid to brokers, surveyors, engineers and
attorneys) to the transferor’s original purchase price and then
subtracting that amount from the consideration received for the
transfer. See generally N.Y. Tax Law § 1440(S) (McKinney
1987); 20 N.Y. Comp. Codes R. & Regs., §§ 590.14-17 (1988).
When the consideration paid for the transfer exceeds the
adjusted original purchase price, a gain is realized upon which
a ten percent tax is levied. Thus, the consideration paid to the
transferor and recited in the instrument of transfer plays an
essential role in assessing the Gains Tax due. For all intents
and purposes, the Gains Tax must be paid at the time of trans-
fer, as state law prohibits the recording of the conveyance until
this act is done. See N.Y. Tax Law § 1447(f) (McKinney 1987).
Recording the instrument of transfer provides evidence that the
Gains Tax has been paid; without recordation, valuable legal
rights are forfeited. See N.Y. Real Property Law § 291 (Mc-
Kinney 1989) (any conveyance of real property not recorded is
void against a subsequent purchaser who acquires property in
good faith and for valuable consideration). Thus, the Gains
Tax, like the Transfer Taxes discussed in Jacoby, seemingly
shares both the essential and technical characteristics of a
stamp or Similar tax.
77a
New York urges that Jacoby correctly classified the Gains
Tax as an income tax rather than a transfer tax subject to
exemption under Section 1146(c). The word “income” when
used in relation to statutory provisions regarding income taxes
must be given its plain and Ordinary meaning. 71 Am.Jur.2d.
State and Local Taxation § 483 at 784 (2d ed. 1973).
In its ordinary and popular meaning, “income” is the
amount of actual wealth which comes to a person during
a given period of time. . . . The word in most if not all
connections involves time as an essential element in its
measurement or definition. It thus is differentiated from
Capital or investment, which commonly means the amount
of wealth which a person has on a fixed date.
ld. at 784, n.75 (emphasis added) (citation Omitted). See
also Blacks Law Dictionary 687 (Sth ed. 1979) (income is
“[t}he true increase in amount of wealth which comes to a
person during a stated period of time”). Compare Blacks
Law Dictionary 1343 (Sth ed. 1979) (transfer tax defined as a
“[t]ax upon passing of title to property”, implying an isolated
transaction rather than transactions over a period of time).
Indeed, New York's personal income tax provisions are based
on a period of time designated as each taxpayer's “taxable
year.” See N.Y. Tax Law § 601 et seq. (McKinney 1987). The
Gains Tax, however, is imposed on a transaction by transaction
basis, payable on the transfer, without regard for any other
transfers made over a given period of time. A taxpayer can
make two transfers on the same day, one earning $1,000,000
and the other losing $1,000,000 so that at the end of the day he
realizes no increase of wealth as Ordinarily contemplated under
an income tax scheme. Yet the taxpayer would be liable for the
Gains Tax on the isolated, profitable transaction and could not
offset his losses on the unprofitable transaction. This is cer-
tainly a result more in line with the imposition of a transfer tax
than an income tax.
The Tax Department has in other contexts expressly defined
the Gains Tax as a transfer tax and distinguished it from an
income tax.’ Specifically, the Tax Department issued two opin-
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ion letters addressing taxpayer inquiries into treatment of the
Gains tax for income tax purposes. The first of these letters,
dated September 21, 1983, unequivocally stated:
The State gains tax is a transfer tax rather than a property
or income tax since the triggering mechanism of the tax is
the transfer of real property. Whereas the gains tax is a tax
upon the transfer of real property, a property tax is a levy
on the property itself. Income taxes are generally applied |
to net gain. Under the gains tax, the loss from one trans- |
fer of real property does not effect the applicability of the |
gains tax to another transfer of real property in the same |
tax year. For these reasons, it is our opinion that the State
gains tax should be classified as a State transfer tax and
should be treated as such for purposes of deductibility.
_ -———__—_-
The letter made reference to a revenue ruling issued by the
Internal Revenue Service (the IRS) which held that a similar
gains tax imposed by the State of Vermont was a transfer tax
and not an income tax. In Revenue Ruling 80-121, the IRS
explained that for federal income tax purposes, taxpayers were
allowed to reduce gains from the sale of land by any losses
incurred on the sale of other land during the taxable year. Rev.
Rul. 80-121, 1980-1 C.B. 44. The Vermont tax, however, made
no provision to offset gains from profitable real estate trans-
actions against losses on unprofitable transactions and was
deemed to be a tax on a particular transfer rather than on
income. Noting that New York State tax policy is usually for-
mulated in accordance with federal treatment of a tax, the opin-
ion letter adopted this “net gain” analysis and determined that
the Gains Tax was a transfer tax and thus not fully deductible
against income. The second opinion letter, dated November 14,
1983, basically reiterated this position.‘ The Tax Department
incorporated the conclusions of the two opinion letters, includ-
ing their review of Rev. Rul. 80-121, into its official publica-
tion explaining the Gains Tax. See NYS Department of Tax-
3 Unremarkably, the contradictory constructions of the Gains Tax have
the effect of increasing the taxpayer's liability in each instance. .
———— <<<
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ation and Finance, Questions and Answers—Gains Tax on Real
Property Transfers, Publication 588 at 27 (November 1984).
Although such advisory opinions are not binding on New
York with respect to this debtor, see 20 N.Y. Comp. Codes R.
& Regs. § 901.4 (1988), the letters are no less instructive and
directly on point. Never has New York argu. ¢ that the opinion
letters were mistaken or that it has Subsequently changed its
treatment of the tax for allocability of deductions. When asked
at Oral argument to reconcile the transfer tax analysis found in
the opinion letters with its current position that the Gains Tax
is an income tax, New York responded simply that the tax
could be treated differently for different purposes. While that
is undoubtedly true, New York’s two positions are diametri-
cally opposed with no articulated basis for the differing treat-
ment of the same tax.
There are other factors which indicate that the Gains Tax is
assessed on the transfer of real property rather than on the
income generated thereby. First, the “original purchase price”
for Gains Tax purposes is not adjusted to reflect depreciation
of the real property transferred. Without an adjustment for
depreciation, the Gains Tax is not based on a true measure of
the transferor’s accrued wealth as it would be for calculating
the gain for income tax purposes. Second, the fact that the
Gains Tax is not assessed against all profitable transactions
undercuts the New York’s argument that it is an income tax.
Only transfers in which the consideration exceeds $1,000,000
are subject to the Gains Tax; once this Cap is met the entire
gain is taxed, not merely that portion exceeding $1,000,000.
Thus, the Gains Tax is levied upon a Certain class of transfers
and not on a certain class of income. Further support for this
theory is found in the fact that profitable transactions of less
than $1,000,000 within a taxable period are subject to income
tax but not the Gains Tax. Finally, in the event the transferor
does not pay the Gains Tax, the transferee becomes personally
4 The court in Jacoby did not discuss and may not have had the bene-
fit of these opinion letters at the time it rendered its decision. Copies of the let-
ters are attached as an appendix to this decision.
80a
liable for the tax. N.Y. Tax Law §§ 1447(3) (McKinney 1987);
20 N.Y. Comp. Codes R. and Regs., § 590.70 (1988). It is
abundantly clear that the ultimate goal of the Gains Tax is not
to tax the transferor’s income but rather to tax any transfers in
which he is involved.
The fact that Gains Tax is imposed only upon profitable
transfers does not dictate that it is unlike a stamp or similar tax.
The Jacoby court found this to be a distinguishing feature, not-
ing that all of the stamp taxes it had reviewed were imposed
“regardless of whether the transferor gained or lost money in
the transaction involved.” 40 Bankr. at 15. However, the
Supreme Court has held it constitutional to impose stamp taxes
on certain classes of transactions even though others are
exempt from tax. Brodnax v. Missouri, 219 U.S. 285 (1911);
accord, 71 Am.Jur.2d, State and Local Taxation § 638 at 894
(2d ed. 1973). For all these reasons, I am convinced that the
Gains Tax shares the most important characteristics of a stamp
or Similar tax and that it meets the first prong to qualify for an
exemption.
The Gains Tax also satisfies the second precondition for
exemption under Section 1146(c). The Gains Tax is due at the
time of conveyance and therefore is imposed upon the making
or delivery of an instrument of transfer. New York argues that
although the timing is identical, the Gains Tax is not imposed
on the deed or transfer but rather on the gain realized. See also
Jacoby, 40 Bankr. at 15. This is similar to the argument
rejected in Federal Land Bank v. Crossland, 261 U.S. 374
(1923), where the Supreme Court found that a tax on recording
a mortgage was equivalent to a tax on the mortgage itself. See
also Amsterdam, 103 Bankr. at 457-58 (rejecting the argument
that a mortgage tax was tax on the “privilege” of recording and
not on the mortgage itself). In essence, New York’s argument
is that the tax is upon the privilege of realizing a gain and not
on the transfer itself. However, as with the mortgage taxes dis-
cussed above, unless the Gains Tax is paid, the deed or instru-
ment will not be recorded and valuable legal rights will be
forfeited. Few purchasers of real property will commit them-
selves to transactions under these conditions, making recor-
8la
dation an integral component of the conveyance. Amsterdam,
103 Bankr. at 458. For our purposes, then, the Gains Tax is
analytically a tax on the transfer, and hence a tax on the instrv-
ment of transfer, notwithstanding New York’s characterization
of the prepayment requirement as merely a practical mode of
collecting an income tax.
That the final prong of the Baldwin League test has been sat-
isfied is undisputed here. The sale of the Stanhope was made
pursuant to a subsequently confirmed plan of reorganization
under chapter 11 of the Bankruptcy Code as required by Sec-
tion 1146(c). Accordingly, the Gains Tax which the Debtor paid
vtitder protest was not due.
11. Waiver of Sovereign Immunity
Having found the Section 1146(c) exemption to apply, I must
next determine whether the Eleventh Amendment or the
doctrine of sovereign immunity precludes the exercise of
jurisdiction over New York.* There are two well known excep-
tions to the doctrine of sovereign immunity and the Eleventh
Amendment which allow a plaintiff to assert a claim against
a State in federal court.® These exceptions, which can be
5 There is a technical distinction between common law sovereign
immunity and the constitutional protections of the Eleventh Amendment.
Sovereign immunity protects a state from a suit brought by one of its own cit-
izens; a waiver of sovereign immunity goes to “whether” or “when” a state may
be sued. The Eleventh Amendment prohibits suits against the several states in
federal court and thus speaks to “where” a state may be sued. See Lawson
Burich Assoc., Inc. v. Axelrod (In re Lawson) 59 Bankr. 681, 687 n.8 (Bankr.
S.D.N.Y. 1986). The distinction is not crucial to this decision, as the Second
Circuit has held that the waiver intended under section 106 encompasses both
sovereign immunity and the protections of the Eleventh Amendment. See Hoff-
man v. Connecticut Dep't of Income Maintenance, (In re Willington Conva-
lesence Homes, Inc.) 850 F.2d 50, 56 n.6 (2d Cir. 1988), aff'd, 109 S.Ct. 2818
(1989).
6 A state may also waive its immunity to private causes of action in
federal court by enacting its own state statute or constitutional provision,
provided the enactment does so in express and unmistakable language. See
Edelman v. Jordan, 415 U.S. 651, 673, reh'g denied 416 U.S. 1000 (1974);
Murray v. Wilson Distilling Co., 213 U.S. 151, 171 (1909). New York State has
enacted no such statute governing this adversary proceeding.
82a
labeled “waiver by participation” and “waiver by abrogation”
are both premised on Congressiomal legislation and are dis-
cussed below.
A. WAIVER BY PARTICIPATION
Waiver by participation occurs when a state engages in a fed-
erally sponsored activity in which Congress has made waiver
of immunity a necessary condition of state participation. See
Parden v. Terminai Railway of the Alabama State Docks Dep't,
377 U.S. 184 (1964), overruled in part, Welch v. Texas Dep’t of
Highways and Public Transp., 483 U.S. 468, 478 (1987).’
However, before this can occur, the language of the congres-
sional enactment must manifest “a clear intent to condition par-
ticipation. . . on a State’s consent to waive its constitutional
immunity.” Atascadero State Hosp. v. Scanlon, 473 U.S. 234,
237 (1985), reh’g denied 473 U.S. 926 (1985). Mere partici-
pation by a State is inadequate, as “[c]onstructive consent is not
a doctrine commonly associated with the surrender of consti-
tutional rights.. . .” Edelman, 415 U.S. at 673; accord WJM,
Inc. v. Massachusetts Dep't of Public Welfare, 840 F.2d 996,
1002 (1st Cir. 1988). By using unequivocal language, Congress
places a state on notice of the consequence of its participation.
Clear notice is required because, although bottomed on a con-
gressional enactment, “the loss of immunity ultimately is
grounded in waiver and consent by the State through conduct.”
Texaco, Inc., v. Louisiana Land and Exploration Co., 113
Bankr. 924, 933 (M.D. La.1990).
7 In Welch, a four justice plurality, joined by a fifth justice concurring
in part, overruled Parden v. Terminal Railway to the extent it held that
Congress could statutorily abrogate Eleventh Amendment immunity through
something less than unmistakably clear language. The Welch decision, how-
ever, did not upset Parden's holding that a state's participation in a federal
program could give rise to a waiver of immunity. In fact a plurality of the Court
has subsequently indicated its acceptance of this principle by stating “[a] State
may effectuate a waiver of its constitutional immunity by a state statute or con-
stitutional provision, or by otherwise waiving its immunity to suit in the con-
text of a particular federal program.” Atascadero State Hosp. v. Scanlon, 473
U.S. 234, 238 n.1 (1985) (emphasis added).
83a
The waiver of a state’s immunity by its Participation in a
bankruptcy proceeding has long been recognized, not only
under the Code, but under the former Bankruptcy Act as well.
In Clark v. Barnard, 108 U.S. 436, 447-48 (1883) the state was
deemed to have waived any Eleventh Amendment immunity
when it intervened and asserted a claim to the fund in contro-
versy. Similarly, in Gardner v. New Jersey, 329 U.S. 565, 574-
75 (1947), reh’ g denied 330 U.S. 853 (1947), the Court applied
the traditional rule that a state which invokes the aid of the
bankruptcy court subjects itself to and must abide by the pro-
cedures of that court. The Court went on to hold that by filing
a proof of claim and seeking its allowance, the “State becomes
the actor . . . [and] waives any immunity which it otherwise
might have had respecting the adjudication of the claim.” /d. at
574 (citations omitted). The Gardner Court held that in light of
the state’s participation, there was no collision between Section
77 of the former Bankruptcy Act and the constitutional pro-
tections of sovereign immunity. /d. More recently, this well
established exception to sovereign immunity has been codified
in Section 106(a) of the Bankruptcy Code, which was enacted
“to prevent a government unit from receiving a ‘distribution
from the estate without subjecting itself to any liability it
has to the estate’ arising from the same transaction or occur-
rence upon which its right to distribution is based.” Prudential
Lines, Inc. v. United States Maritime Admin. (In re Pruden-
tial Lines, Inc.), 79 Bankr. 167, 180 (Bankr. S.D.N.Y. 1987)
(quoting H.R. Rep. No. 595, 95th Cong., Ist Sess. 317 (1977);
S. Rep. No. 989, 95th Cong., 2d Sess. 29-30 (1978) reprinted
in 1978 U.S. Code Cong. & Ad. News 5787, 5815-16, 6274).
See also West Virginia v. Hassett (/n re O.P.M. Leasing Serv.,
Inc.), 21 Bankr. 993, 1001 (Bankr. S.D.N.Y. 1982); Texaco v.
Louisiana Land and Exploration Co., 113 Bankr. at 934; Saint
Josephs Hosp. v. Department of Public Welfare (In re Saint
Josephs Hospital), 103 Bankr. 643, 650 (Bankr. E.D. Pa. -
1989); In re Lile, 96 Bankr. 81, 83-84 (Bankr. S.D.Tex. 1989).
84a
B. WAIVER BY ABROGATION
Notwithstanding participation and consent by a state,
Congress can abrogate or override Eleventh Amendment immu-
nity by enacting a statute under certain of its plenary powers
granted by the Constitution. As with waiver by participation,
Congress may abrogate a state’s constitutionally secured immu-
nity “only by making its intention unmistakably clear in the
language of the statute.” Atascadero, 473 U.S. at 242; Dellmuth
v. Muth, ____ U.S. ___, 109 S.Ct. 2397 (1989) (citations
omitted). Thus, in Fitzpatrick v. Bitzer, 427 U.S. 445 (1976),
the Court found that Congress had the authority to abrogate a
state’s Eleventh Amendment immunity when iegislating pur-
suant to Section 5 of the Fourteenth Amendment. Congress can
also abrogate a state’s immunity when it enacts statutes pur-
suant to its Article I powers under the Commerce Clause. See
Pennsylvania v. Union Gas Co., U.S. __., 109 S.Ct. 2273,
2277 (1989). In Hoffman v. Connecticut Dep’t of Income Main-
tenance, U.S. ___, 109 S.Ct. 2818, 2824 (1989), the
Supreme Court had the opportunity, but expressly declined, to
decide whether Congress, under the Bankruptcy Clause of Arti-
cle I, had the authority to abrogate a state’s immunity by enact-
ing section 106 of the Bankruptcy Code.
In Hoffman, the State of Connecticut had not filed any claims
against the debtor’s estate, precluding waiver by participation.
The debtor, who sought to recover a money judgment against
Connecticut, relied on section 106(c) of the Bankruptcy Code
which “binds” governmental units to determinations made by
the court. The Supreme Court found, however, that the lan-
guage of section 106(c) did not make it unmistakably clear that
Congress intended to subject a state to monetary recovery (as
opposed to declaratory or injunctive relief) when it had not
filed a proof of claim. 109 S.Ct. at 2823. Because it found the
requisite language of waiver absent, the Court declined to
address whether Congress had the authority under the
Bankruptcy Clause to abrogate a state’s immunity. /d. at 2824;
see also Union Gas, 109 S.Ct. at 2277 (if statutory language
does not contain clear expression of intent, constitutional ques-
85a
tion of Congress’s authority to abrogate immunity need not be
considered).
C. WAIVER OF IMMUNITY IN THIS PROCEEDING
Before applying the concepts of waiver by Participation and
waiver by abrogation, I must note that the validity of any dis-
tinction between the two theories has been called into question.
In his dissent in Union Gas, Justice Scalia discussed the waiver
by participation theory espoused in Parden v. Terminal Railway
and stated:
to acknowledge that the Federal Government can make the
waiver of state sovereign immunity a condition to the
State’s action in a field that Congress has authority to reg-
ulate, is substantially the same as acknowledging that the
Federal Government can eliminate state sovereign immu-
nity in the exercise of its Article I powers. . .
Union Gas, 109 S.Ct. at 2303 (Scalia, J., dissenting) (footnote
omitted). To Justice Scalia, there was no more than a seman-
tical difference between saying that Congress abrogated
Eleventh Amendment immunity in suits based on certain activ-
ity or that the State’s participation in that activity constituted
a waiver of its privilege. Under either label, Justice Scalia
asserted, Congress was attempting to accomplish the same goal
of using its Article I powers to circumvent the bar imposed by
the Eleventh Amendment. Being of the opinion that Article I
does not grant Congress that authority, Justice Scalia main-
tained neither waiver by participation nor abrogation could be
relied on to subject a state to a private cause of action in fed-
eral court. See also Hoffman, 109 S.Ct. at 2824 (Scalia, J., dis-
senting) (Congress does not have the authority under the
Bankruptcy Clause to override a state’s sovereign immunity).
Although adopted by several other Justices, Justice Scalia’s
view did not command a majority of the Court in either Union
Gas or Hoffman, and thus does not disturb the authority relied
on in this decision. See also Texaco v. Louisiana Land, 113
Bankr. at 935. ,
86a
The federal statute which furnishes the grounds for waiver of
New York’s immunity is Section 106 of the Bankruptcy Code.
Section 106 provides in pertinent part:
Waiver of sovereign immunity
(a) A governmental unit is deemed to have waived
sovereign immunity with respect to any claim against such
governmental unit that is property of the estate and that
arose out of the same transaction or occurrence out of
which such governmenial unit’s claim arose.
(b) There shall be offset against an allowed claim or
interest of a governmental unit any claim against such
governmental unit that is property of the estate.
In their brief and oral argument, both parties focused on the
language of section 106(b) and its provisions for offsetting
unrelated claims, because New York had not as of that time
filed a claim for the Gains Tax. But New York subsequently
filed amended claim no. 300, which includes a request for
Gains Tax liability and penalties and interest accruing from
January 13, 1989 to September 23, 1989. The focus of the
waiver argument therefore shifts from section 106(b) to section
106(a), which deals with claims filed by a state arising out
of the same transaction for which a debtor seeks monetary
recovery.
Consideration of New York’s subsequently filed claim is
appropriate, as “[wJaivers. . . often control past events.” WJM
v. Massachusetts, 840 F.2d at 1004. In WJM, the circuit court
discovered that the State of Massachusetts filed related proofs
of claim three months after the bankruptcy court heard oral
argument but before judgment was entered in the debtor's
adversary proceeding seeking a money judgment from the state.
It was unclear from the record below whether either the
bankruptcy court or the district court on appeal was aware of
the related claims having been filed. The circuit court, in
response to Massachusetts’ Eleventh Amendment defense, held
that the subsequent filing of the proofs of claim was tanta-
mount to a declaration by the state that it had waived immunity
to suit in federal court. /d. at 1004. The WJM court further jus-
87a
tified consideration of claims not included in the record below
because the issue of sovereign immunity touched upon the
jurisdictional scope of appellate court review. Given the like-
lihood of appeal in a suit of this financial magnitude and the
precedent it will set, these same concerns warrant consideration
of New York’s subsequently filed claim for the Gains Tax.
In no more plain language than it used could Congress have
expressed its intention to condition New York’s Participation
and receipt of a distribution in the Debtor’s bankruptcy case on
a waiver of immunity. By Captioning the section “Waiver of
Sovereign Immunity”, Congress made a direct textual reference
to its intent. The Supreme Court, in dicta, acknowledged that
the language of section 106(a) is carefully crafted to waive
sovereign immunity when the state files a proof of claim
related to the transaction in controversy. Hoffman, 109 S.Ct. at
2822 (plurality opinion); accord, WJM, 840 F.2d at 1003 (Sec-
tion 106(a) gives notice that by choosing to file a claim and
enter the bankruptcy court’s exclusive domain, a state must pay
the price of waiving immunity).
Similarly, Congress's intent to abrogate immunity under its
Article I powers is beyond serious question, as section 106(a)
applies to a very narrow class of entities deemed “government
units,” which are defined essentially as the federal government,
a State or other foreign or domestic government and their agen-
cies. 11 U.S.C.A. § 101 (26) (West Supp.1990). The statute
does not authorize suit against any potential litigant but
addresses only three classes of sovereigns, thereby distin-
guishing section 106(a) from the Overly broad statutes which
have been found not to waive immunity. Compare Atascadero,
473 U.S. at 246, (no waiver of immunity in statute providing
monetary damages against “any recipient of Federal assis-
tance”); Employees of the Dep't of Public Health and Welfare
v. Missouri, 411 U.S. 279, 283 (1973) (statute allowing suit
against “any employer” did not Subject state to private cause of
action in federal court) with Union Gas, 109 S.Ct. at 2278
(Statute’s express inclusion of “States” within its definition of
“Persons” liable for environmental cleanup costs conveyed
88a
message of unmistakable clarity that immunity had been
waived).
New York cannot and has not contended that the wording of
section 106(a) provides inadequate notice of Congress's intent
to condition participation on waiver or to abrogate a state's
immunity when a related claim is filed, as no other plausible
reading exists. Indeed, New York has conceded that a state can
waive its immunity by participating in a bankruptcy proceed-
ing. In its supplemental memorandum of law in support of its
motion to dismiss, at p. 14, New York cites to Gardner v. New
Jersey, 329 U.S. 565, 573 (1947) for the proposition that sec-
tion 106(a) incorporates the traditional bankruptcy rule that
waiver by participation occurs when a state files a proof of
claim and demands its allowance. New York admitted, before
it filed its claim for the Gains Tax, that it had consented to the
adjudication of those t2xes for which it had already filed proofs
of claim. Supplemental memorandum at 15. This concession,
coupled with the subsequent filing of an amended proof of
claim for the Gains Tax, is enough 9 defeat New York’s immu-
nity defense. It is therefore unnecessary to reach the consti-
tutional questions which New York had propounded before it
filed its amended claims. Similarly, in light of the applicabil-
ity of section 106(a), I need not address the other statutory
grounds which the Debtor asserts as sufficient jurisdictional
underpinning
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