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Entities May Still Transfer Real Property to Related Entities for Nominal Consideration and Claim Benefit of Exemption Under Realty Transfer Fee Act

The Tax Court of New Jersey recently issued an unpublished opinion confirming that the exemption from the Realty Transfer Fee (“RTF”) allowed by New Jersey statute where the consideration is less than $100 is applicable to conveyances between related entities. 

In this particular case, Mack-Cali Realty LP conveyed certain property in Woodcliff Lake Borough and partly in Montvale Borough to 530 Chestnut Realty, LLC.  By separate deed of the same date Mack-Cali conveyed other property in Woodcliff Lake Borough to 470 Chestnut Realty, LLC. In each instance, the deed recited a consideration of “Ten Dollars ($10) and other good and valuable consideration.”  Mack-Cali was the sole member of each of the grantee LLCs.  Apart from the stated dollar sums, no other consideration passed from the grantees to Mack-Cali.

The deeds were promptly presented to the Bergen County Clerk for recording; however, the Clerk’s office kicked back the deeds for failure to pay the RTF calculated on consideration derived from the assessed valuation of the properties. An inquiry with the Division of Taxation ensued and the Division ultimately advised that payment of the RTF was properly required. In doing so, the Division relied on its interpretation of a particular regulation that no transfer between commonly owned legal entities could be taken for nominal consideration and that indirect benefits to the transferor may be taken into account in determining value. When this value was indeterminable, the regulation upon which the Division relied provides that the RTF is then calculated on the assessed value of the property being conveyed on the date of the transfer adjusted to reflect the true value as determined by the Director’s Ratio for that municipality for the current year.

The Tax Court disagreed with the Division’s interpretation of its regulation as being at odds with the statute specifically authorizing the RTF exemption, which does not take into account the indirect benefit to the transferor argued for by the Division. In addition, the Tax Court determined that the Division did not enforce its regulation consistently in accordance with its own terms.

Thus, the court looked to the deeds and found that the consideration stated in the deeds of less than $100 made the transactions exempt from the RTF. The court also ruled as ineffective the blanket exclusion contained in the Division’s regulation that no transfer between commonly owned legal entities will be taken to be for nominal consideration.

In these lean times, the State of New Jersey is becoming more aggressive in attempting to collect tax revenues.  This case is but one example of the State’s efforts in this regard.