In New Jersey, grantors must pay a RTF any time real estate is sold and a deed is recorded. N.J.S.A.46:15-7. There are a number of exemptions to the imposition of the RTF, including an exemption for transfers where the consideration is less than $100.00. N.J.S.A.46:14-10(a). This kind of transfer is common when owners desire to transfer title to a piece of real estate into a wholly-owned LLC, in connection with a proposed transaction.
The Statute clearly sets forth that the “consideration" for a transfer of real property of this type includes “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." N.J.S.A.46:15-5(c).
Prior to theMack-Calidecision, if a grantor which was a corporation filed a deed claiming the nominal consideration exemption for transfers of less than $100.00, and the transferee was another legal entity, the Clerk could disregard the stated consideration, deem the consideration for the transaction to be indeterminable in reliance on N.J.A.C.18:16-6.1, and require a substantial RTF to be paid on the full equalized assessed value of the property.
A recent New Jersey Tax Court decision, however, held that imposition of the RTF on real estate transfers “between commonly owned entities qualifying for the nominal consideration exemption" is unenforceable. Mack-Cali Realty, LP et al v. Clerk of Bergen County, Docket No. 000037-2008 (N.J. Super Tax 2009). The import of the Mack-Cali decision is that property owners can now transfer real estate between a parent and a wholly-owned subsidiary without incurring a RTF.
In Mack-Cali, a limited partnership transferred two properties to limited liability companies in which it was the sole member. At the direction of the Division of Taxation, the Bergen County Clerk refused to record these deeds, and took the position that there was a blanket exclusion from the nominal consideration exemption where commonly owned entities were involved. Specifically, the Clerk informed the taxpayer that, “there can be no conveyance … between legal entities for a consideration of less than $100.00."
For the past several years, some county clerks in New Jersey have taken this position and refused to file deeds that recited nominal consideration when the parties to the transaction were legal entities. Beginning in 2006, the Division of Taxation created a blanket exclusion for such transactions. The Division embodied this policy in N.J.A.C.18:16-6.1. Under the regulation, consideration would be measured by the full equalized assessed value of the property, and not the statutory consideration paid. The apparent, but specious rationale is that the value of the wholly-owned entity increased by the full equalized assessed value of the property transferred to it. InMack-Cali, Judge Pizzuto overruled the Division’s interpretation, finding the principle embodied in N.J.A.C.18:16-6.1 to be both “inconsistent with controlling statute" and “applied inconsistently" as between properties encumbered by mortgages and those owned outright.
The reason the Tax Court found this result to be inconsistent with the controlling statute, is because the RTF is imposed only on “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." N.J.SA.46:15-5(c). Thus, the Tax Court determined that the statutory definition, “does not therefore include an indirect benefit of the kind imputed by the Division."
The reason the Tax Court found that the regulation was applied inconsistently is easily demonstrated with an example. Two corporations, Corporation A and Corporation B, transfer real property to wholly-owned subsidiaries. In both cases the real property has a full equalized assessed value of $1,000,000. Corporation A transfers its property with an outstanding mortgage of $100,000 and the RTF is calculated with reference to the $100,000. Corporation B, who owns the property free and clear, transfers its property and the RTF is calculated with reference to the full equalized assessed value of $1,000,000. Clearly, this result would be inconsistent with a statutory scheme that focuses on the amount “paid" or the amount of value “exchanged".
Another way to look at the Tax Court’s decision, one utilized by other courts, is that beneficial ownership in the property has not changed in a related-entity or drop-down transaction. When the Florida Supreme Court was faced with the same factual scenario described above under a nearly identical statute, it concluded that “… the transfer of property between a grantor and its wholly owned grantee, absent any exchange of value, is without consideration or a purchaser and thus not subject to the [transfer tax]." Crescent Miami Center, LLC v. Dep’t of Revenue, 903 So.2d 913 (Fl. 2005).
It is important to carefully examine the applicable exemptions to the RTF in light of the Mack-Cali decision before filing a deed, particularly where the transfer is between legal entities and for nominal consideration. For property owners that believe they have erroneously paid a RTF, it also may be worthwhile to explore whether you have cognizable claim for a refund.