New Jersey Bulk Sales Act — Applicable to Deeds in Lieu?
Does the NJ Bulk Sales Act Apply to Deeds in Lieu?
The Bulk Sales Act, NJSA 54:50-38, was expanded a couple years ago to cover transactions in which any seller makes a bulk sale, not just sellers who collect and remit sales tax. It provides:
- A buyer who does not comply by requesting a clearance letter and holding an escrow as directed by the Division of Taxation becomes liable for seller’s tax liability to the State, now including income taxes arising from the bulk sale itself in addition to past due taxes.
- Bulk sale means any sale, transfer or assignment, in whole or in part, of a persons business assets, not made in the ordinary course of business.
- Business assets is defined to mean realty if the primary use of the realty is to support a business on the premises.
By virtue of this expansive definition, all realty transfers other than non-rental residential real estate and inventory sales (e.g., condo units sold by a developer) are covered.
For an in-depth analysis of the expanded Act, see the article Peter Ulrich and I wrote for the New Jersey Law Journal, “Broad View of the Expansion of the Tax Bulk Sales Notification Requirements.”
In the normal course, 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, a conveyance by deed in lieu of foreclosure is not a typical real estate transaction between a willing seller and buyer paying a fair market price for the property in question. Therefore, the question arises: does the Bulk Sales Act apply when a borrower conveys title to realty to a lender by deed in lieu of foreclosure? Instinct suggests not, but don’t trust instinct in this case.
Prior to the expansion of the Bulk Sales tax provisions, there was a case that held that a conveyance of real estate from a borrower to a lender by deed in lieu of foreclosure constituted a covered transaction. New Jersey Hotel Holdings v. Director, Division of Taxation, 15 NJ Tax 428 (NJ Tax Ct. 1996). The Tax Court held that this was so even though an actual foreclosure would have extinguished the state’s sales tax lien. The Tax Court found that the lender in fact gave up value in exchange for the deed in lieu and because the lender failed to file the required notice of transfer, it became liable for the borrower’s outstanding state tax liability.
So, following New Jersey Hotel Holdings, it can be expected that a deed in lieu is a transaction covered by the Bulk Sales Act, as expanded a few years ago.
Using a deed in lieu in a transaction raises two questions:
- What does the transferee/lender state as the consideration on form C-9600 that must be filed when there is a covered transaction?
- If the Division of Taxation requires the transferee/lender to hold money in escrow to cover the transferor/borrower’s tax liability, including by way of example past due taxes, where will money come from to be held in escrow?
Because a transferor/borrower that is giving up its realty by deed in lieu will rarely if ever be in a position to post money in escrow to cover any tax liability as required by the Division of Taxation in reply to the filing of a C-9600, the net effect if the Division insists on escrows may be to compel lenders to complete foreclosures rather than taking deeds in lieu.