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Wells Reit II-80 Park Plaza, LLC v. Director, Division of Taxation

414 N.J. Super. 453, 999 A.2d 489 (App. Div. 2010)

TAXATION; MANSION TAX — Properties conveyed by deed recorded by November 15, 2006 are exempt from the Mansion Tax if they were subject to a binding contract that was fully executed before July 1, 2006, and that means the real estate contract was signed and binding upon the parties before that date, even if there were subsequent amendments.

New Jersey’s realty transfer fee on certain property purchases over $1,000,000, also known as the Mansion Tax, provides for a refund to contracts for commercial properties that were “fully executed before July 1, 2006,” provided that the deed was transferred on or before November 15, 2006.

On June 13, 2006, a contract to purchase an affected commercial property was entered into for $155,000,000. Both parties executed the contract on that date. The parties subsequently agreed to seven contract amendments, each referring to the date the contract was executed. A July 25, 2006 amendment reduced the price to $147,500,000. Closing took place on September 21, 2006, the purchaser having assigned the contract. The assignee paid a $1,475,000 realty transfer fee and recorded the deed. The assignee then filed a refund claim with the New Jersey Division of Taxation. The Division denied the claim based upon the July 25, 2006 amendment which reduced the purchase price of the property. Its position was that the contract had not been fully executed by July 1, 2006. The assignee appealed, but the Tax Court held the refund provision was an exemption from the tax, and “exemptions” should be construed narrowly. The Court interpreted the phrase “fully executed before July 1, 2006” as referring to a contract signed on or before June 30, 2006 with none of its essential terms amended in a material respect on or after July 1, 2006. The assignee appealed this decision.

In another subsequent matter of similar relevant facts and time line, where an executed contract was amended to reduce the purchase price, the Tax Court disagreed with its earlier decision, and said the New Jersey Legislature had not intended to narrowly construe the refund provision. The court engaged in statutory interpretation and held that the phrase “fully executed” related to a contract for the sale of real estate to which all parties have signed. The Tax Court, in that case, held that the Legislature intended to refund the Mansion Tax on those sales of commercial properties that had been subject to the terms of a binding contract before July 1, 2006, if the sale closed and the deed was recorded by November 15, 2006. In this matter, the Tax Court found no clear and definite intention of the parties to effect a novation, which would have created a new contract and extinguished the old one. Rather, the contract amendment contained a provision expressly stating that all terms and conditions of the purchase agreement were to remain in full force and effect. Therefore, according to the Tax Court, the amendment was a modification and not a novation, and the purchase agreement was deemed to be fully executed before July 1, 2006.

Both Tax Court decisions were heard on appeal by the Appellate Division. The Court held that the section at issue was a “refund” provision and not an exemption from the Mansion Tax. Therefore, the section had to be construed in favor of the taxpayer. The Court also held that the plain meaning and common usage of the phrase “fully executed before July 1, 2006” meant a real estate contract that was signed and binding upon the parties before July 1, 2006, whether or not there were subsequent amendments. The Court found that under both contracts at issue, the amendments failed to provide a “clear and definite intention” by the parties to create a novation, observing that each amendment contained language ratifying the full force and effect of the original purchase agreement except where modified. It also examined the legislative history of the Mansion Tax and concluded the Legislature did not intend to create an exemption by use of this refund provision. That would have otherwise required construing its applicability narrowly as to a claiming taxpayer.

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