Upon presentation of the deeds and affidavit to the Bergen County clerk's office, the deeds were rejected with a reference to a newly enacted regulation from the Division of Taxation (N.J.A.C. 18:16-6.1), effective Aug. 1, 2006, asserting that no corporate to corporate transfer of real property, even though under common ownership, could occur without consideration.

Given that the property was unencumbered by a mortgage, the clerk advised that the realty transfer fee to be paid should be calculated upon the fully equalized assessed value of the property. The clerk also asserted that, because the property was a commercial office building and subject to the mansion tax, a total fee in excess of 2% of the equalized assessed value of the real property was required and made a fee demand of over $190,000.

In upholding the clerk's conduct, the Division of Taxation reasoned that since there was no mortgage, the value of the consideration was indeterminable and therefore, the only proper measure of the value of the transaction was the fully equalized assessed value.

Ruling N.J.S.A.46:15-5(C) specifically defines "consideration to include the balance of a mortgage encumbering real property." Earlier cases held that in a corporate to corporate transaction, where a mortgage is present, the tax is calculated only on the balance of the mortgage. The plaintiff's position urged that the lack of an open mortgage should not redound to a recording party's detriment.

Based on the earlier decisions, the tax court rejected the state's arguments and sided with the plaintiff, reasoning that the imposition of an exorbitant fee, on a transaction that involved no payment of money, specifically because there was no mortgage encumbering the property, created an inconsistency and anomaly not contemplated by the statute.

The ruling of the court has significant implications as it affects among other things commercial mortgage financing and proper estate planning.

In commercial financing, lenders frequently require that a property must be held in a single asset or single purpose entity. If a corporate entity holds two or more parcels and desires to finance only one, it will most typically create a new entity and transfer for no consideration the identified parcel into the newly created entity. The state's position would require payment of a fee in such nominal transactions.

Similarly, in the absence of this ruling, a parent-controlled entity that may decide to contribute for no payment the real estate owned by that entity to a newly created entity for purposes of a family limited partnership or other valid estate planning vehicle, would again be required to pay a full realty transfer fee as though an actual sale had occurred even though there were truly no consideration and no money changed hands. (Please note that in all of such instances, these illustrations contemplate there being no present mortgage encumbering the real property to be transferred.)

Accordingly, the ruling of Judge Pizzuto properly tracks the statute and the express intention of the legislature and clears the way for the recording of deeds without a realty transfer fee in nominal consideration corporate transactions.

Mark Follender is a partner with the law firm of Scarinci Hollenbeck. He may be contacted at [email protected]. The views expressed here are the author's own.