New Jersey Administrative Code › Title 18 - TREASURY - TAXATION › Chapter 16A - CONTROLLING INTEREST TRANSFER TAX › Subchapter 1 - CONTROLLING INTEREST TRANSFER TAX › Section 18:16A-1.5 - Application of the tax; examples

Current through Register Vol. 56, No. 14, July 15, 2024
(a) The tax may apply to
				the transfer of control of an upper tier entity of a chain where a lower tier entity
				owns classified real property, as well as to a transfer of control of the direct
				owner of real property. N.J.S.A. 54:15C-1a(1) refers to possession "directly or
				indirectly" of a controlling interest. However, in the event that the transfer of
				control of a partnership, association, trust or other organization that directly
				owns classified real property by way of title interest, to another entity, and does
				not effectuate a change in more than 50 percent of the beneficial ownership of that
				partnership, association, trust or other organization, to the other entity, then the
				tax will not apply to such transfer of control.
(b) In a transaction where a corporation is going
				private, the value of the stock acquired may include assets not on books such as
				going concern value or intangible good will, for example, and not just the book
				value of the assets that are depreciable. If the value of the real property
				transferred is less than 20 percent of the total value of all assets exchanged in
				the acquisition, no tax would apply.
(c)
				The following examples illustrate the calculation and application of the tax.
Example 1: Individuals J and K each own 50 percent of the shares
				  in Corporation A. Corporation B is a 100 percent owned subsidiary of Corporation A.
				  Corporation B is the sole member of an LLC that owns classified property with an
				  equalized assessed value is $ 1.2 million and common stock worth $ 2 million.
If J sells his stock to L, for $ 2 million, no tax is due. He has
				  not sold a controlling interest since the percentage of shares sold is not greater
				  than 50 percent of the total combined voting power of all classes of stock of
				  A.
Example 2: J owns 60 percent and K owns 40 percent of the shares
				  in Corporation A. Corporation B is a 100 percent owned subsidiary of Corporation A.
				  Corporation B is the sole member of an LLC that owns classified property with an
				  equalized assessed value is $ 1.2 million and common stock worth $ 2 million.
If J sells his stock to L for $ 1.4 million, tax is due. He has
				  sold a controlling interest in the classified property because the percentage of
				  shares sold is greater than 50 percent of the total combined voting power of all
				  classes of stock of A. Since J transferred controlling interest of an entity owning
				  classified property and other property, the tax due is calculated using the second
				  method as follows: 1 percent x $ 1.2 million x 60 percent = or $ 7,200. The first
				  method is not used since the entity owning the classified property also owns other
				  property. Since the value of the consideration includes consideration for assets
				  other than the classified real property, the tax due is not $ 14,000 (calculated as
				  one percent of $ 1.4 million).
Example 3: Same facts as Example 2, except that the subject Class
				  4A commercial property is encumbered by a mortgage of $ 1.2 million.
If J sells his stock to L for $ 200,000, tax is due. Even though
				  the consideration paid by L is under $ 1 million, $ 7,200 tax is due since tax is
				  calculated using the same methodology as in Example 2. When controlling interest in
				  an entity is sold and the entity owns directly or indirectly classified property
				  whose equalized assessed value is greater than $ 1,000,000 and also other assets,
				  then the tax calculation is based upon the percentage of the ownership interest
				  transferred multiplied by one percent times the equalized assessed value of the
				  classified property.
Example 4: J owns 60 percent and K owns 40 percent of the shares
				  in Corporation A. Corporation B is a wholly owned subsidiary of A. Corporation B is
				  the sole member of an LLC whose only asset is classified property with an equalized
				  assessed value of $ 1.2 million. If J sells his stock to L for $ 200,000, no tax is
				  due. The consideration paid by L is under $ 1 million, therefore no tax is due. The
				  alternate methodology is not used because the entity owning the real estate does not
				  own an interest in any other assets.
Example 5: A binding agreement that fully executed before July 1,
				  2006, but the agreement is subject to regulatory approval by the Securities and
				  Exchange Commission after July 1, 2006. Since the contract was fully executed before
				  July 1, such transaction is considered to be not subject to tax if approval is given
				  after July 1 by the regulating agency. However, if there are aspects of the
				  agreement that are still subject to appraisal or if the amount of tax liability
				  cannot be calculated without appraisals being made after July 1, the contract is not
				  considered to be fully executed. If all terms and values are not known before July
				  1, tax would be applicable on the transaction.
Example 6: A limited partnership, which owns a 100 percent
				  interest in classified real property and is owned by partners G1, L1, L2 and L3, is
				  dissolved, and the ownership interest of the partners are collectively transferred
				  to one newly created LLC. The equalized assessed value of the property is $ 10
				  million. Each former partner's membership interest in the LLC is equal to his or her
				  share in the dissolved partnership. G1 owned 51 percent of the partnership and owns
				  a 51 percent interest in the LLC. Hence, the LLC is either acquiring by transfer the
				  100 percent interest in the classified real property formerly held by the limited
				  partnership, in which case, the transfer is occurring between two separate legal
				  entities; or the LLC is acquiring 100 percent interest in the classified real
				  property that had been held by four partners acting in concert. In either situation,
				  the LLC, as the transferee in both scenarios, did not have any beneficial ownership
				  of the classified real property before the transfer, and, therefore, the controlling
				  interest transfer tax may apply.
Example 7: Corporation B transfers a building to a single member
				  LLC (SMLLC) and pays the New Jersey realty transfer fee on the transfer. Corporation
				  B then transfers its membership interest in the SMLLC to Corporation C for $
				  2,000,000. The transfer of control of the membership interest to C is subject to the
				  controlling interest transfer tax because the consideration is in excess of $
				  1,000,000. If the consideration had been $ 1,000,000 or less, then no tax would be
				  due.
Example 8: Corporation A directly owns 100 percent of both
				  Corporation B and Corporation C. Corporation B is the member of SMLLC, which owns a
				  class 4A Commercial Property. Corporation B transfers the ownership interest in
				  SMLLC to Corporation C for $ 5,000,000. This transfer is subject to tax. Although
				  ultimate control (beneficial control) of the property remains in Corporation A,
				  direct control of the property has changed from Corporation B to Corporation C,
				  which are two separate legal entities. The purchaser, Corporation C, pays a one
				  percent tax on the consideration because it has acquired direct control of SMLLC and
				  its commercial classified property independent of any beneficial ownership that
				  Corporation A may have over the two separate legal entities.
Example 9: LLC 1 owns 51 percent of the fee simple interest in a
				  parcel of classified real property. LLC2 owns the remaining 49 percent of the fee
				  simple interest in the same parcel and no other property. H Inc. owns 100 percent of
				  LLC2 and sells this interest to a third party in an arms' length transaction for $ 2
				  million. The transfer of H Inc.'s controlling interest in LLC2 is not subject to the
				  tax because LLC2 does not possess a controlling interest in classified real
				  property.