Corporate CounselThe Metropo l i tan

Volume 20, No. 11 © 2012 The Metropolitan Corporate Counsel, Inc. November 2012

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Buyers, sellers and their attorneys arefaced with some tough issues whenapplying the New Jersey bulk sales law toparticular real estate transactions, such asshort sales, transfers by deeds in lieu offoreclosure, auction sales, sign and closedeals and real estate joint ventures. Given

the frequency of such real estate transac-tions in the current market, knowing howbest to comply with the New Jersey bulksales law with respect to these transac-tions can be critical to closing these deals.

Because the N.J. Division of Taxationhas not provided regulations clarifyingthe application of the bulk sales law, buy-ers, sellers and attorneys often need torely on the responses provided on the“Frequently Asked Questions” page onthe Division’s web site (“FAQs”) and theN.J. Technical Bulletin TB-60R (“TB-60”).

Recent Changes To The StatutoryStructure

For many years, the bulk sales lawwas limited to the collection and remit-tance of sales tax. In 2007, the Bulk SalesAct as codified at N.J.S.A. 54:50-38 wasadopted, greatly expanding the law toapply to all transactions in which anyseller of business assets makes a bulk

sale, in whole or in part, other than in theordinary course of business. Furthermore,the buyer was made liable for all state taxobligations of the seller, not just sales taxobligations, considerably increasing theconsequences for noncompliance.

The 2007 Act was formulated toensure that the state recouped all taxmonies owed by a business undergoing asale at the time of closing. Recognizingthe closing to be the most opportune timeto collect tax dollars from a taxpayer, thestate’s bulk sales laws require an escrowto be established at closing for any and allN.J. state tax monies owed by the busi-ness. Although this process makes col-lecting tax more certain for the state, theprocess can make selling real estate assetsmuch more complicated for buyers andsellers.

Admittedly, the application of the bulksales law to residential real estate transac-tions was clarified by a 2011 amendment,

Real Property Transfers: Dealing With The New JerseyBulk Sales Act

www.metrocorpcounsel.com

Please email the authors at pulrich@gibbonslaw.com, rbershad@gibbonslaw.com or ntaplin@gibbonslaw.comwith questions about this article.

Peter J. Ulrich, Russell B. Bershad and

Nicole E. Taplin

GIBBONS P.C.

Russell B. Bershad chairs the Real Prop-erty & Environmental Department atGibbons P.C. Peter J. Ulrich is a Direc-tor in the Corporate Department at Gib-bons and concentrates in federal andstate taxation. Nicole E. Taplin is anAssociate in the Real Property & Envi-ronmental Department at Gibbons.

Peter J. Ulrich Russell B. Bershad Nicole E. Taplin

Volume 20, No. 11 © 2012 The Metropolitan Corporate Counsel, Inc. November 2012

All of the shareholders, partners or mem-bers of a selling entity must each com-plete a separate Form TTD. Critically, ifthe seller is a flow-through entity withnumerous Schedule K-1 recipients, anescrow amount may be required for theincome tax owed by each Schedule K-1recipient even though the selling entityitself may not have a direct obligation topay that tax. Further, the residency ofeach partner is not considered in the FormTTD, so that the buyer of assets from apartnership will likely need to take intoaccount the income tax for both residentand nonresident partners alike.

Difficult Applications Of The BulkSale Law

With respect to certain real estatetransactions, the bulk sales law can makethe parties face a number of quandaries.For example, what are buyers and sellersto do if there are no proceeds, or the pro-ceeds at closing are insufficient to meetthe Division’s escrow requirement?

In the case of a deed in lieu of foreclo-sure, where a lender is taking back mort-gaged property that is or was incomeproducing from a delinquent borrower, alender must comply with the bulk saleslaws to protect itself from the transferor’sstate tax liabilities even though, gener-ally, the only consideration “paid” for theproperty is the release of indebtedness bythe lender. With no cash proceeds at clos-ing, most delinquent borrowers will haveno or few assets to meet an escrowimposed by the Division. Compliancehere raises the practical, but unansweredquestion, where will the escrow moneycome from? The Division’s escrowrequirements, in practice and togetherwith other considerations, may forcelenders to complete foreclosures ratherthan take deeds in lieu. Similarly, withrespect to short sales, which typicallyyield no or few proceeds to the seller, theDivision’s FAQ’s simply state that “it willbe between the purchaser and seller todecide who will provide the additionalfunds at the time of closing to satisfy theescrow.”

The FAQs distinguish between a trans-fer by deed in lieu of foreclosure from aproperty owner to its lender and a sher-iff’s sale, which transfers title free andclear of liens. The FAQs state that a sher-iff’s sale is not subject to the Bulk SalesAct, and one can infer that other court-ordered sales free and clear of liens, suchas a sale under Section 363 of the Bank-ruptcy Code, do not require compliance.

which expressly exempts the transfer of“a simple dwelling house” or “certainseasonal rental units” if the transferor isan individual, estate or trust under theN.J. Gross Income Tax Act (P.L. 2011,Ch. 124, effective on September 14,2011). However, for the exemption toapply, the transferor must not be a busi-ness entity.

The Bulk Sales Notice And EscrowRequirements

In general, to satisfy the noticerequirement of the Bulk Sales Act, atleast ten (10) business days prior to thedate of closing, the buyer submits a com-pleted Form C-9600, which includes taxidentification numbers, an estimated clos-ing date, and a copy of the executed con-tract of sale stating the sales price and allterms and conditions of the transfer.Within ten business days of receiving theForm C-9600, the Division should notifythe buyer of the amount of the seller’sstate tax liability. If an escrow is required,the Division will issue a letter advisingthe buyer of the escrow amount and willprovide a copy to the seller. If returns aredelinquent, the Division will issue a letterstating which returns need to be filed andthe amount owed in order to obtain clear-ance from the Division for the asset trans-fer. The purchaser or its escrow agentmust escrow the amount stated in theDivision’s letter from the purchase price.If not properly escrowed, the purchaser isliable for the seller’s N.J. state tax liabili-ties. N.J. Technical Bulletin TB-60 statesthat the Division will authorize therelease of the remaining portion ofescrow funds held by the attorney for thetransferee only after “all final returnshave been filed and all final payments ofState tax debts are remitted.”

The seller can then submit a FormTTD in which it discloses informationregarding its income tax liability arisingfrom the sale. The Division uses theinformation submitted on Form TTD toadjust the amount of the escrow. Sincethe information can reduce the Division’sescrow requirement, sellers will want toquickly file a Form TTD or better yet,include it with the Form C-9600. Forexample, a seller will want to disclose itshigh tax basis in the property, the fact thatthe seller is tax-exempt or possesses sub-stantial net operating losses, or that thetransaction is tax-deferred under InternalRevenue Code Section 1031.

Gathering the information for theForm TTD is a cumbersome task in itself.

However, the Bulk Sales Act would applyin an auction sale that is not court-ordered. To comply, the winning bidder atthe auction would have to enter into acontract, notify the Division with the fil-ing of a C-9600, and retain the right toescrow proceeds to comply with the Divi-sion’s escrow requirements.

Another compliance problem ariseswith sign and close deals and quick clos-ings since the law requires a buyer to sub-mit a signed contract of sale with itsC-9600 ten business days in advance ofclosing. There is no exception to the bulksales law for transactions scheduled toclose in fewer than ten business daysfrom the date of signing, or for contractsthat are signed at closing. The Divisionmay be willing to expedite its review fora quick closing or review the case basedon a draft contract for a sign and closedeal; however, buyer beware, there are norules requiring the Division to act infewer than ten business days, and there isno protection afforded. Also, if the finalcontract materially deviates from a draftsubmitted for a sign and close deal, thebuyer may not be protected, and the par-ties should notify the Division as soon aspossible to advise of the changes to thetransaction.

Contributions of property to joint ven-tures are also of particular concern whenit comes to bulk sales compliance. In realestate joint ventures, the owner of theproperty will often convey the real estateto the venture entity. The Division has notadvised as to whether compliance withthe bulk sales laws is required for such acontribution of property nor has it definedprocedures on how to protect the entityfrom liability. To be safe, the entityshould file a C-9600, attaching the contri-bution agreement as the contract. If thereis no contribution agreement, the partiesshould treat the signing of the ventureagreement and simultaneous conveyanceof the real estate as a sign and close trans-action and provide the Division with adraft venture agreement at least ten busi-ness days prior to the property transfer.

In conclusion, in the typical real estatetransaction, there will be little questionabout whether or not a given transactionis covered by the Bulk Sales Act, and howmuch consideration is being paid for thetransfer. However, in our current market,many real estate transactions are not“plain vanilla” conveyances, and the BulkSales Act must be carefully applied on acase-by-case basis to get to closing.