Buyers, sellers and their attorneys are faced with some tough issues when applying the New Jersey bulk sales law to particular real estate transactions, such as short sales, transfers by deeds in lieu of foreclosure, auction sales, sign and close deals and real estate joint ventures. Given the frequency of such real estate transactions in the current market, knowing how best to comply with the New Jersey bulk sales law with respect to these transactions can be critical to closing these deals.
Because the N.J. Division of Taxation has not provided regulations clarifying the application of the bulk sales law, buyers, sellers and attorneys often need to rely on the responses provided on the “Frequently Asked Questions” page on the Division’s web site (“FAQs”) and the N.J. Technical Bulletin TB-60R (“TB-60”).
For many years, the bulk sales law was limited to the collection and remittance of sales tax. In 2007, the Bulk Sales Act as codified at N.J.S.A. 54:50-38 was adopted, greatly expanding the law to apply to all transactions in which any seller of business assets makes a bulk sale, in whole or in part, other than in the ordinary course of business. Furthermore, the buyer was made liable for all state tax obligations of the seller, not just sales tax obligations, considerably increasing the consequences for noncompliance.
The 2007 Act was formulated to ensure that the state recouped all tax monies owed by a business undergoing a sale at the time of closing. Recognizing the closing to be the most opportune time to collect tax dollars from a taxpayer, the state’s bulk sales laws require an escrow to be established at closing for any and all N.J. state tax monies owed by the business. Although this process makes collecting tax more certain for the state, the process can make selling real estate assets much more complicated for buyers and sellers.
Admittedly, the application of the bulk sales law to residential real estate transactions was clarified by a 2011 amendment, which expressly exempts the transfer of “a simple dwelling house” or “certain seasonal rental units” if the transferor is an individual, estate or trust under the N.J. Gross Income Tax Act (P.L. 2011, Ch. 124, effective on September 14, 2011). However, for the exemption to apply, the transferor must not be a business entity.
In general, to satisfy the notice requirement of the Bulk Sales Act, at least ten (10) business days prior to the date of closing, the buyer submits a completed Form C-9600, which includes tax identification numbers, an estimated closing date, and a copy of the executed contract of sale stating the sales price and all terms and conditions of the transfer. Within ten business days of receiving the Form C-9600, the Division should notify the buyer of the amount of the seller’s state tax liability. If an escrow is required, the Division will issue a letter advising the buyer of the escrow amount and will provide a copy to the seller. If returns are delinquent, the Division will issue a letter stating which returns need to be filed and the amount owed in order to obtain clearance from the Division for the asset transfer. The purchaser or its escrow agent must escrow the amount stated in the Division’s letter from the purchase price. If not properly escrowed, the purchaser is liable for the seller’s N.J. state tax liabilities. N.J. Technical Bulletin TB-60 states that the Division will authorize the release of the remaining portion of escrow funds held by the attorney for the transferee only after “all final returns have been filed and all final payments of State tax debts are remitted.”
The seller can then submit a Form TTD in which it discloses information regarding its income tax liability arising from the sale. The Division uses the information submitted on Form TTD to adjust the amount of the escrow. Since the information can reduce the Division’s escrow requirement, sellers will want to quickly file a Form TTD or better yet, include it with the Form C-9600. For example, a seller will want to disclose its high tax basis in the property, the fact that the seller is tax-exempt or possesses substantial net operating losses, or that the transaction is tax-deferred under Internal Revenue Code Section 1031.
Gathering the information for the Form TTD is a cumbersome task in itself. All of the shareholders, partners or members of a selling entity must each complete a separate Form TTD. Critically, if the seller is a flow-through entity with numerous Schedule K-1 recipients, an escrow amount may be required for the income tax owed by each Schedule K-1 recipient even though the selling entity itself may not have a direct obligation to pay that tax. Further, the residency of each partner is not considered in the Form TTD, so that the buyer of assets from a partnership will likely need to take into account the income tax for both resident and nonresident partners alike.
With respect to certain real estate transactions, the bulk sales law can make the parties face a number of quandaries. For example, what are buyers and sellers to do if there are no proceeds, or the proceeds at closing are insufficient to meet the Division’s escrow requirement?
In the case of a deed in lieu of foreclosure, where a lender is taking back mortgaged property that is or was income producing from a delinquent borrower, a lender must comply with the bulk sales laws to protect itself from the transferor’s state tax liabilities even though, generally, the only consideration “paid” for the property is the release of indebtedness by the lender. With no cash proceeds at closing, most delinquent borrowers will have no or few assets to meet an escrow imposed by the Division. Compliance here raises the practical, but unanswered question, where will the escrow money come from? The Division’s escrow requirements, in practice and together with other considerations, may force lenders to complete foreclosures rather than take deeds in lieu. Similarly, with respect to short sales, which typically yield no or few proceeds to the seller, the Division’s FAQ’s simply state that “it will be between the purchaser and seller to decide who will provide the additional funds at the time of closing to satisfy the escrow.”
The FAQs distinguish between a transfer by deed in lieu of foreclosure from a property owner to its lender and a sheriff’s sale, which transfers title free and clear of liens. The FAQs state that a sheriff’s sale is not subject to the Bulk Sales Act, and one can infer that other court-ordered sales free and clear of liens, such as a sale under Section 363 of the Bankruptcy Code, do not require compliance. However, the Bulk Sales Act would apply in an auction sale that is not court-ordered. To comply, the winning bidder at the auction would have to enter into a contract, notify the Division with the filing of a C-9600, and retain the right to escrow proceeds to comply with the Division’s escrow requirements.
Another compliance problem arises with sign and close deals and quick closings since the law requires a buyer to submit a signed contract of sale with its C-9600 ten business days in advance of closing. There is no exception to the bulk sales law for transactions scheduled to close in fewer than ten business days from the date of signing, or for contracts that are signed at closing. The Division may be willing to expedite its review for a quick closing or review the case based on a draft contract for a sign and close deal; however, buyer beware, there are no rules requiring the Division to act in fewer than ten business days, and there is no protection afforded. Also, if the final contract materially deviates from a draft submitted for a sign and close deal, the buyer may not be protected, and the parties should notify the Division as soon as possible to advise of the changes to the transaction.
Contributions of property to joint ventures are also of particular concern when it comes to bulk sales compliance. In real estate joint ventures, the owner of the property will often convey the real estate to the venture entity. The Division has not advised as to whether compliance with the bulk sales laws is required for such a contribution of property nor has it defined procedures on how to protect the entity from liability. To be safe, the entity should file a C-9600, attaching the contribution agreement as the contract. If there is no contribution agreement, the parties should treat the signing of the venture agreement and simultaneous conveyance of the real estate as a sign and close transaction and provide the Division with a draft venture agreement at least ten business days prior to the property transfer.
In conclusion, in the typical real estate transaction, there will be little question about whether or not a given transaction is covered by the Bulk Sales Act, and how much consideration is being paid for the transfer. However, in our current market, many real estate transactions are not “plain vanilla” conveyances, and the Bulk Sales Act must be carefully applied on a case-by-case basis to get to closing.
Russell B. Bershad chairs the Real Property & Environmental Department at Gibbons P.C. Peter J. Ulrich is a Director in the Corporate Department at Gibbons and concentrates in federal and state taxation. Nicole E. Taplin is an Associate in the Real Property & Environmental Department at Gibbons.