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Publications
One Hand Giveth and The Other Hand Keepeth
Allen J. Popowitz and Chad D. Ehrenkranz
Court Srikes Blow Against Discretion of Tax Collector
The list of inevitable things in life grew a bit shorter last October in light of the unexpected defeat of the New Jersey Division of Taxation in Mack-Cali Realty, LP, et al. v. Clerk of Bergen County, et al., 25 N.J. Tax 243 (2009). As a result, tax and real estate attorneys may have a greater opportunity to challenge certain denials of realty transfer tax exemptions.
New Jersey charges a fee for recording conveyances, but has an exception when a transfer is for nominal consideration. Plaintiff Mack-Cali, a limited partnership, conveyed two pieces of real property to two limited liability companies which were wholly-owned by Mack-Cali, in exchange for “$10 and other good and valuable consideration.” Mack-Cali argued that the transaction between it and the LLCs fell within the statutory exemption from the realty transfer fee (RTF) for conveyances where consideration is less than $100. The Division of Taxation denied Mack-Cali’s request for an exemption on the grounds that “there can be no conveyance . . . between legal entities for a [sic] consideration of less that $100.” Instead, the division adopted a regulation which denied the use of the nominal consideration exemption for transfers between commonly owned entities, and based the RTF on the value of the property.
Judge Pizzuto rejected the division’s regulation as an unauthorized use of regulatory power. Ultimately, Pizzuto held that the division’s attempt to bar the use of the nominal consideration exemption, simply because the properties were commonly owned, went beyond the authority granted by the underlying statute.
“Consideration” is defined in the statute in a manner that differs slightly from classic common law. The statute defines consideration, in pertinent part, as:
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 to the lands, tenements or other realty, including the remaining amount of any prior mortgage to which the transfer is subject or which is to be assumed and agreed to be paid by the grantee and any other lien or encumbrance thereon not paid, satisfied or removed in connection with the transfer of title. N.J.S.A. 46:15-5(c)
Basically, the statute breaks up “consideration” into two components for calculation of the RTF. First, any actual sum of money paid by the purchaser to the seller is included. Second, assumption of any mortgage, unpaid lien, or encumbrance by the recipient of the land is included.
What is somewhat counterintuitive about this definition is that it does not factor in the equity being transferred. For example, if a seller transfers (or gifts) a piece of property worth $1 million with a $200,000 outstanding mortgage, the statutory consideration is $200,000 even though the recipient has, in effect, received an $800,000 gift. This demonstrates that it is the form, rather than the substance, that seems to be the primary factor in determination of the RTF. The relevant regulation makes it absolutely clear that unpaid mortgage balances, in addition to cash considerations, are part of the basis of the RTF. See N.J.A.C. 18:16-4.3; Zimmerer v. Clayton, 7 N.J. Tax 15, 19 (Tax 1984).
The division took the position that transfers between entities with common ownership could not qualify for the nominal transfer exemption. The division argued that a transfer between commonly owned entities always benefits the grantor (here, the limited partnership) in some way that is difficult to calculate. The division argued, therefore, that the assessed value (adjusted to reflect the true value of the property) was a more accurate basis of the RTF than the actual statutory consideration.
The tax court held that the division’s interpretation was invalid. By specifically including assumption of mortgages in the statutory definition of consideration, Judge Pizzuto reasoned that the legislature intended to exclude other forms of indirect consideration. By including actual value and mortgage balances, the judge opined that the legislature intended to exclude other indirect forms of value.
The judge also found that the division’s interpretation was not particularly consistent with other regulations. The court points out that N.J.A.C. 18:16-6.3 authorizes a transfer between related entities (individuals to their wholly-owned corporation or partnerships) for nominal consideration. There was no compelling reason to interpret the statute differently for transfers between other related parties.
Furthermore, the Division’s interpretation was inconsistent. At oral argument, the division conceded that, for encumbered properties, it “takes the amount of nominal consideration plus any outstanding mortgage balance on property transferred on such terms between commonly owned entities as the total consideration for transfer and does not utilize the property’s assessment in calculating the applicable RTF.” Therefore, if the Mack-Cali transaction had involved an outstanding mortgage balance, the RTF would have been assessed on the basis of that balance plus 10 dollars. Since there was no such balance, the division would have been unable to collect any fee unless it looked to an alternative calculation. As Mack-Cali’s counsel pointed out, however, the placement of a nominal mortgage on a piece of property would avoid the effect of the division’s new position. This illogical result also contributed to Judge Pizzuto’s decision to invalidate the regulation.
When an entity transfers property to a wholly owned related entity, the basis of the RTF is limited to any actual fee paid and the outstanding mortgage balance. A blanket exclusion of such transactions from the nominal transfer fee exemption is beyond the statutory authority of the Tax Division.
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© COPYRIGHT 2012 .
BRACH EICHLER L.L.C.
101 EISENHOWER PARKWAY,
ROSELAND, NJ 07068
(973) 228-5700
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