Internal Revenue Service
Revenue Ruling
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smRev. Rul. 66-40
1966-1 C.B. 227
IRS Headnote
The interest held by a taxpayer in a New York cooperative apartment as a tenant-stockholder is not considered `real property' for the purposes of the exception provided in section 2515(a) of the Internal Revenue Code of 1954 to the general rules for taxing the creation of a tenancy by the entirety under the gift tax provisions.
Full Text
Rev. Rul. 66-40
Advice has been requested whether the transfer of a taxpayer's interest in a cooperative apartment to her husband and herself as joint tenants must be treated as a taxable gift under the circumstances described below.
Taxpayer was the tenant-owner of an interest in a cooperative apartment in New York City in which she and her husband reside. As such, she held a specified number of shares of the common stock of the corporation which owns the building and a 25-year lease of the dwelling unit. After several years of occupancy under the lease, she transferred the stock and lease to herself and her husband as joint tenants with right of survivorship so that, in accordance with New York law, her interest in the apartment would pass to her husband by operation of law in the event of her death.
Under the provisions of section 2515(a) of the Internal Revenue Code of 1954, the creation of a tenancy by the entirety in real property either by one spouse alone or by both spouses shall not be deemed a transfer for purposes of the gift tax unless the donor elects to have such creation of a tenancy by the entirety so treated. In section 2515(d) of the Code, the term `tenancy by the entirety' is defined to include a joint tenancy between husband and wife with right of survivorship.
During calendar years prior to 1955, the contribution made by a husband or wife in the creation of a tenancy by the entirety was a taxable gift to the extent that the consideration furnished by either spouse exceeded the value of the rights retained by that spouse, such retained rights depending upon the law of the State in which the property is located. As pointed out in House Report No. 1337, 83d Congress, 2d session, at page 480, many couples who elect this method of buying a home have no intention of making a gift, includible for Federal gift tax purposes, at the time of the creation of the tenancy by the entirety, or any knowledge that they are considered as having done so. In order to alleviate this situation, Congress created an exception to the general rules for taxing tenancies by the entirety and joint tenancies under the gift tax by enacting section 2515 of the Code. This exception, however, is limited to the creation of tenancies by the entirety in real estate between the spouses after 1954. It does not extend to the creation of joint estates between spouses in personal property at any time.
In the field of cooperative apartment dwellings, the form of organization most commonly employed is the corporate-proprietary lease form, as typified by the instant case. Under this plan, a corporation is organized and the land and buildings conveyed to it. The corporation then leases specific apartments to its shareholders. The ownership of corporate stock, in itself, confers no right of occupancy to an apartment although the execution and continuance of a lease is dependent upon the lessee being the owner of a specified quantity of shares of the owning corporation.
Under New York law, an interest in a cooperative apartment is Misc.(2d) 810 (N.Y. 1959) and In re Estate of Kurt Schlesinger , 22 Misc.(2d) 810 (N.Y.1959) and In re Miller's Estate , 205 Misc. 770, (N.Y. 1954). In the case of Miller's Estate , the Surrogate's Court for New York County held that incorporated cooperative apartment organization stock and proprietary apartment lease, for the procurement of which stock ownership was a prerequisite, constituted personalty and did not pass by devise of `all the real estate owned by me.' The court stated, `Considered separately the shares of stock and the lease each would be considered personalty for purposes of estate distribution * * *, and the fact that the stock ownership is prerequisite to the procurement of the lease would not seem to affect the legal classification of these assets.'
A long line of New York decisions has consistently held that the interest of a tenant of realty under a real estate lease is not realty but is a chattel real which is personal property and not subject to tax upon real property. Ampco Printing-Advertisers' Offset Corp., et al. v. City of New York , 14 N.Y.(2d) 11 (1964); In the Matter of Fort Hamilton Manor, Inc. v. Boyland, et al. , 4 N.Y.(2d) 192 (1958); Grumman Aircraft Engineering Corporation v. Board of Assessors of the Town of Riverhead, et al. , 2 N.Y.(2d) 500 (1957); First Trust & Deposit Co. v. Syrdelco, Inc., et al. , 249 App. Div. 238 (N.Y. 1936). In the Grumman Aircraft Engineering Corporation case, the New York Court of Appeals stated:
It is significant to note that nowhere in the Tax Law has the Legislature characterized a leasehold as taxable real property. Such omission is understandable, as a lease for years is deemed personalty.
In providing in section 2515(a) of the Code an exception from the gift tax provisions of the creation of tenancies by the entirety in `real property,' Congress indicated in no way a modification of the concept of that term as used at common law. No special meaning is shown by the context or the history of the enactment and the regulations have not undertaken to define that term. Furthermore, as pointed out above, the New York courts have consistently held that a lease or a chattel real, although considered an interest in real property, is personalty and not within the meaning of real property as used in the statutes. A leasehold interest in a cooperative apartment is no exception to this general rule.
Accordingly, it is held that the taxpayer's interest in a cooperative apartment does not qualify under New York law as real property for purposes of the exception created under section 2515(a) of the Code to the general rules for taxing tenancies by the entirety under the gift tax provisions.