Inter-company transfers of real estate have always been subject to the NJ Realty Transfer Fee. However, in an October 2009 decision of the Tax Court, such transfers between commonly-owned entities were held to be exempt when the transfer is a sale of unencumbered property for less than $100 (as compared to a capital contribution of property by the grantor to the grantee with a simultaneous delivery to the grantor of equity in the grantee).
In Mack-Cali Realty, L.P. v Clerk of Bergen County, the Division of Taxation argued that the transfer between commonly owned entities always results in a benefit to the grantor, and absent an ability to quantify that benefit, the tax would be imposed based on the property value. The Tax Court rejected this position, relying on the statutory definition of “consideration.” In discussing consideration, the court noted that it:
- comprises only elements that are directly given by the grantee, with the exception of the mortgage balance
- does not include an indirect benefit of the kind imputed by the Division
The statutory definition of "consideration" has not been amended in the aftermath of Mack-Cali Realty, however, the Division, in what certainly appears to be a direct attempt to avoid the holding of this case, has modified Form RTF-1 (the required transfer tax form delivered by a seller).
RTF-1 now includes a new instruction 14 that modifies the definition of “consideration” in transfers between related legal entities. For such transfers, consideration includes "…the monetary value of any…thing of value…such as…any enhancement to …the capital of either legal entity…" (emphasis added). Although the term "enhancement to capital" is (we believe) less than clear, it presumably includes the increase in value of that capital based on the value of the newly acquired property. If that is the case, the NJ Realty Transfer Fee (based on the change to the form) would be applicable to the precise transactions Mack-Cali Realty exempts.
In the right circumstances, a legal challenge might be worthy of consideration.
Shepard A. Federgreen is a Director in the Gibbons Real Property & Environmental Department.