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The Ridgewood Commons Group, LLC v. Director, Division of Taxation

25 N.J. Tax 188 (2009)

MANSION TAX — Where a deed conveys two properties, one subject to the Mansion Tax, and the other not subject to the Mansion Tax, an allocation of the consideration paid for the two properties may be made and the Mansion Tax will only be payable on the property that is subject to that tax.

A buyer purchased two parcels of real estate. Both were conveyed in a single deed which did not allocate the consideration between them. One of the properties was a Class 4A commercial property which was subject to the commercial “Mansion Tax.” The other property was a Class 4C apartment building which was not subject to the tax. At the time of the recording of the deed, the buyer submitted two affidavits of consideration, one for each property, listing the total consideration without allocation. The buyer paid the “Mansion Tax” on the entire consideration, even though one of the properties was not subject to taxation. The buyer then filed a claim for a partial refund, arguing that the consideration then should have been stated differently on the deed and that it should only have paid the tax on the Class 4A property. In its affidavit, its managing member stated that the purchase price was allocated based on the assessed values of the properties for that tax year. It argued that since the Class 4A property’s assessed value was 15.3% of the total assessed value for both properties, then the Mansion Tax should only have been for 15.3% of the total consideration paid for both properties. The Director of the Division of Taxation rejected the buyer’s refund request, holding that because both properties were transferred in the same deed, they were included in the same consideration requiring the 1% Mansion Tax.

The buyer sued to overturn the Director’s ruling. In the interim, it filed two corrective deeds allocating the purchase price for each parcel separately based on its percentage of the total assessed value for both properties. Both parties moved for summary judgment. The Tax Court rejected both motions. The Director argued that requiring payment of the tax on the total consideration paid was proper pursuant to N.J.A.C. 18:16-8.5. That regulation provides that when a deed includes more than one parcel and the consideration is separately shown for each parcel, the endorsement must show the total amount of the consideration on which the tax was based. The Director argued that the regulation supported her position that when more than one property is transferred in a single deed, the Mansion Tax is calculated on the total consideration paid and not on the consideration paid for each individual parcel. The Tax Court rejected this argument, finding that the regulation does not require the Mansion Tax to be calculated on both properties, only that the endorsement of the county recording officer must state the consideration upon which the tax was calculated. In fact, the Court held that the regulation did not require the tax to be calculated in a particular manner. Further, the Court held that the Director’s interpretation of the regulation would be inconsistent with the Mansion Tax statute which only applies to certain types of properties. A regulation cannot be used to expand the tax to properties that would not otherwise be subject to the Mansion Tax.

The Court noted that the New Jersey Supreme Court’s holding in General Trading Co. v. Director, Division of Taxation, 83 N.J. 122 (1980) stands for the proposition that taxes must be allocated based on what actually occurred, and not what might have occurred. In this instance, the buyer bought two properties at the same time, with one property subject to the Mansion Tax and the other not.

The Tax Court held that the buyer was entitled to offer evidence that it and its seller agreed to an allocation of the consideration between the two properties. The tax would be based on what actually occurred. Using the same logic, the Court rejected the buyer’s claim that the tax should be based on each property’s assessed value as a percentage of the total assessed value for both properties. The Court noted that while such an approach might be reasonable, to apply it would not be calculating the tax based on what actually occurred because the revised deeds would not contain an affidavit indicating that the seller and buyer agreed to allocate the purchase price in that manner. Therefore, the Court ordered a plenary hearing to give the buyer an opportunity to demonstrate how it and seller agreed to allocate the purchase price for the two properties.

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