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SCI ITC South Fund, LLC v. Director, Division of Taxation

24. N.J. Tax 205 (2008)

TAXATION; MANSION TAX — Where a contract for the purchase of commercial property was materially modified after July 1, 2006 such as by changing the purchase price or shifting the risk of payment of the commercial mansion tax, the mansion tax will be payable because those kinds of changes constitute material modifications of the contract.

In 2006, New Jersey’s realty transfer tax was amended to include a “mansion tax” equal to one percent of the purchase price, to be paid by purchasers of commercial property, effective as of July 1, 2006. The statute provided an exemption from the tax, and permitted a buyer to seek a refund of the tax paid, if the deed was recorded prior to November 15, 2006 and the property was conveyed pursuant to a contract that was fully executed before July 1, 2006. In this case, a buyer sought reimbursement of the mansion tax it paid at closing. The Director of the Division of Taxation argued that the buyer was not entitled to a reimbursement of the mansion tax paid because a contract amendment, dated after July 1, 2006, modified essential terms of the contract. The Director claimed that since the contract was materially modified after July 1, 2006, the contract was not “fully executed” before July 1, 2006 and the buyer was not entitled to a refund of the mansion tax previously paid. The Director argued that the July 1, 2006 amendment materially changed the original contract because it excluded, from the property being conveyed, wetland parcels, which comprised about fifty-four percent of the property originally to be conveyed. In addition, the amendment included a provision that shifted the risk of loss of a refund of the realty transfer tax from the buyer to the seller. The buyer argued that the elimination of the wetland parcels was not a material modification of the contract because the price allocated to those parcels under the amendment was merely $1. The Tax Court, however, rejected the buyer’s argument. It noted that, logically, the wetland parcels were worth more than $1; otherwise there would be no reason to exclude them from the sale. Further, the exclusion of the wetlands parcels from the contract increased the purchase price allocated to the other parcels being conveyed. The Tax Court also noted that the insertion of a provision shifting the risk for paying the commercial mansion tax was a material modification of the contract because it reduced the purchase price to be paid to the seller by the amount of the tax. The Tax Court found that the amendment, which shifted the risk of payment of the mansion tax to the seller, and, reduced the purchase to be paid with respect to the delayed closing of another parcel, and which reduced the purchase price by about $1,500,000, was a material change to the contract. The Tax Court also found that the purchase price for the lots to be conveyed may have been increased by the value of the wetlands parcels that were excluded as part of the third amendment. Therefore, the contract was not fully executed before July 1, the deadline for receiving a refund of the commercial mansion tax.

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