This month, CBS Corp. lost a tax case against the state of New York when the government successfully proved that the media company’s shareholders lost control over corporate assets as part of a merger deal. The circumstances date back to March 2000, when CBS and Viacom Inc. completed a merger in which Viacom was the “issuing” corporation. (Since that time, a corporate separation has taken place with the result that CBS and Viacom are now, once again, independent entities.
As part of the merger, Viacom issued non-voting common stock to the CBS shareholders in exchange for their voting common stock in CBS. The former CBS shareholders, because of the relative sizes of the constituents, wound up owning more than 50 percent of the value — but none of the voting power — of the merged entity’s stock.
The merger, according to the New York State Department of Taxation and Finance (DOTF), effected a transfer of a controlling interest in CBS for purposes of New York’s real estate transfer tax. Nevertheless, CBS took the position that it was entitled to a substantial exemption from the full rigors of this dreaded real estate tax.
The value of CBS’s real estate in New York was worth over $200 million at the time of the merger. Apparently, this amount was not disputed. However, the real estate transfer tax returns that CBS filed claimed exemptions aggregating some 70.44 percent of the value. The claims comprised a 15.56 percent exemption based upon the fact that some CBS shareholders had also held Viacom stock before the merger, and a 54.88 percent exemption linked to the fact that holders of CBS voting common stock received non-voting common stock in Viacom as a result of the merger.
The dispute between CBS and DOTF centered on whether the claim related to the exchange of voting and non-voting stock falls within an exemption for conveyances (of real estate). That is, does the claim effect “a mere change of identity or form of ownership” where there is no accompanying change in beneficial ownership.
The DOTF disallowed the exemption because the CBS voting stock had been exchanged in the merger for non-voting stock. CBS, by contrast, argued that the exemption was available because such exemption applies where a transferor retains an ongoing economic interest in the transferred realty without regard to voting power, dominion, and control. Thus, the battle was joined. (See Matter of CBS Corp. v. Tax Appeals Tribunal of the State of New York, N.Y. Sup. Ct. No. 503163, November 13, 2008.)
Voting Power Prevails
In the November case, the court noted that Section 1402(a) of New York State’s tax law imposes the real estate transfer tax “on each conveyance of real property or interest therein where the consideration exceeds $500.” The conveyances subject to the real estate transfer tax are defined as, “transfers of any interest in real property … including … [the] transfer or acquisition of a controlling interest in any entity with an interest in real property.” The court went on to note that, in the case of a corporation, the term controlling interest is defined as either 50 percent or more of the total combined voting power of all classes of stock, or 50 percent or more of the capital, profits, or beneficial interest in such voting stock.