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Chicago Five Portfolio, LLC v. Director, Division of Taxation

24 N.J. Tax 342 (2008)

TAXATION; MANSION TAX — Real property contracts that were “fully executed” prior to July 1, 2006 are exempt from the Mansion Tax and only if an amendment to such a contract evidences a clear and definite intention of the parties to extinguish the original obligation, which can be implied from the facts and circumstances attending the transaction and conduct of the parties, will the transaction lose its exemption from the Mansion Tax.

On June 12, 2006, a purchase agreement was entered into to buy commercial property. On July 12, 2006, the contract was amended to reduce the purchase price, increase the deposit, and limit the grounds for termination. The purchase contract was validly assigned to the purchaser pursuant to the terms of the purchase contract. The property was sold to the purchaser on August 16, 2006. The purchaser paid a realty transfer fee known as the Mansion Tax at the closing. It sought a refund of this tax from the New Jersey Division of Taxation. The Director of the Division of Taxation denied the purchaser’s request. It claimed that the purchaser was not eligible for a refund because the intent and meaning of the applicable statute required that the contract had to be “fully executed before July 1, 2006.” The Director claimed that the contract was executed after such date. Both parties made application to the Tax Court of New Jersey for summary judgment.

The Tax Court granted the motion in favor of the purchaser and denied the Division of Taxation’s motion. The law relating to the Mansion Tax was amended in 2006 to expand its scope to include the transfer of the type of commercial property acquired by purchaser. At issue in this case, was whether the contract was considered “fully executed” prior to July 1, 2006. The Mansion Tax, as amended, provided for a refund of the Mansion Tax on sales of Class 4A commercial properties that were executed prior to that date. The Division of Taxation argued that the July 12, 2006 amendment constituted a novation rather than a modification of the purchase agreement. If such was the case, the amendment would have constituted a new contract executed after July 1, 2006 and the purchaser would not have been entitled to a tax refund. The Tax Court disagreed with the Division of Taxation’s determination. The Court held that an “[a]mendment or alteration, whether major or minor, connote survival and continuation … of the original subject matter.” A novation, on the other hand, was described as “the substitution of a new contract for an old one.” What distinguishes a novation from a modification, according to the Tax Court, is that a novation requires the intent to extinguish the original contractual obligation while a modification involves a continuation of a contractual obligation. The Court noted that there must be a clear and definite intention of the parties to a contract, which can “be implied from the facts and circumstances attending the transaction and the conduct of the parties.” The Tax Court could not find such a clear and definite intention to effect a novation. It held : (i) “the first and best place to determine the intent of the parties is from the written terms of the document at issue, and not, from the assertions of an interested non-party”; (ii) the amendment contained a provision providing that “[e]xcept as modified herein, all terms and conditions … shall remain in full force and effect,” which, “when combined with the attending circumstances of the amendment” evidences the parties’ intent to continue their original contractual obligations; and (iii) the amendment “simply introduces new elements into the details” of the original contract and does not “alter the general purpose’ of the contract [for the conveyance and purchase of the property].”

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