The expired RTF regulations, the landmark realty transfer fee case of Mack-Cali Realty, LP, et al. v. Clerk of Bergen County, and the application of the Controlling Interest Transfer Tax, were just some of the topics covered at New Jersey Institute for Continuing Legal Education’s live panel discussion, Getting to Closing: Bulk Sales and Realty Transfer Taxes for Real Estate, Corporate and Tax Lawyers, in September. Gibbons attorneys, Ivette P. Alvarado, a Director in the Real Property & Environmental Department, and Peter J. Ulrich, a Director in the Corporate Department, were joined on the panel by representatives from the New Jersey Division of Taxation, Bulk Sales Section, County Tax Board Compliance/Realty Transfer Fee Section (“RTF Section”), and Regulatory Services Section, as well as attorney F. Bradford Batcha, Esq. More than 100 participants were provided with the statutory and regulatory history of the Bulk Sales Act (N.J.S.A. 54:50-38), Realty Transfer Fee Law (N.J.S.A. 46:15-5 et seq.), and Controlling Interest Transfer Tax (“CITT”; N.J.S.A. 54:15C-1), along with practical tips for navigating these laws, together with invaluable insight from the State representatives. Highlights of the panel discussion include:
NJ Realty Transfer Taxes
- The previously published realty transfer fee regulations (N.J.A.C. 18:16-1.1 et seq.), which became effective in 2006, sunset in 2013. Representatives from the RTF Section confirmed that replacement regulations have been drafted and are awaiting final approvals.
- One of the more important changes expected in the regulations is a shift to adhere to the Tax Court’s decision in Mack-Cali Realty, LP, et al. v. Clerk of Bergen County, et al., 25 N.J. Tax 243 (Tax Court 2009), dealing with conveyances between commonly owned entities. In the seminal case, the seller claimed an exemption from the realty transfer fee because the consideration was under $100, in part because no mortgage had been assumed. See N.J.S.A. 46:15-10(a). The RTF Section took the position that the transfer between commonly owned entities always conferred some benefit to the grantor, in the sense that the transferor’s interest in the entity (held or received) increased in value from the contribution. In turn, the RTF Section argued the consideration received should have been determined by using the equalized assessed value of the property conveyed. The Tax Court held in favor of the plaintiff, with Judge Pizzuto focused on the statutory definition of consideration in N.J.S.A. 46:15-5(c): “the actual amount of money and the monetary value of any other thing of value constituting the entire compensation paid or to be paid for the transfer of title.”
- Counsel and taxpayers need to keep in mind that depending on the mix of assets held by an entity, the amount of the Controlling Interest Transfer Tax is determined based on either the amount of the consideration or the equalized assessed value of real property held by the entity. Consideration is used when the entity only holds classified real property (Class 4A commercial property). But, if the entity holds property or assets other than classified real property, the CITT is determined based on the equalized assessed value of the classified real property and the percentage interest indirectly transferred in such property.
- Related to the prior point, CITT could apply to a transaction even when the consideration is less than $1 million. For example, CITT is due when there is a transfer of a controlling interest in an entity that holds assets or property other than classified real property and the equalized assessed value of all the classified real property exceeds $1 million.
- While the Bulk Sales Act requires purchasers of certain business assets to notify the Bulk Sales Section (using Form C9600) of an impending asset sale in order to protect such purchasers from transferee liability for the seller’s tax obligations to the State of New Jersey, there are certain situations where a purchaser may choose to not notify: (i) sign/close transactions, (ii) liability exposure slight and quantifiable, and (iii) indemnification risks are low because the seller is a good credit risk or the buyer and seller have an ongoing business relationship.
- Sellers should not be passive in the bulk sales notification process and should submit their Form TTD (Asset Transfer Tax Declarations) to the Bulk Sales Section as soon as possible. By identifying offsetting losses or tax basis of the assets being sold, TTDs can often help minimize an escrow required by the Bulk Sales Section.
- In determining the escrow amount with respect to certain partnerships or limited liability companies taxed as partnerships, it appears that the Bulk Sales Section focuses on the Gross Income Tax or Corporation Business Tax obligations related to the nonresident partners, perhaps consistent with obligation of a partnership to pay the GIT or CBT, as applicable, with respect to nonresident partners under N.J.S.A. 54:10A-15.6 et seq.
- Filing of the bulk sale notification and complying with the Bulk Sales Section’s instructions does not absolve the seller from the duty to collect any sales tax on the NJ asset sale. Conversely, addressing sales tax exposure on the transaction does not absolve the buyer’s need to comply with the Bulk Sales Act notification requirements.