Opinion ID: 1909481
Heading Depth: 1
Heading Rank: 4

Heading: The Challenge to the Taxation of Post-Act Transfers.

Text: Thus far we have been in agreement with the Appellate Division with respect to the constitutionality of the Cooperative Recording Act. We depart from the Appellate Division's conclusions, however, with respect to the constitutionality of the realty transfer tax imposed under the Act. The Appellate Division concluded that there was no rational basis for distinguishing between pre-Act and post-Act cooperatives with respect to the transfer tax. We disagree and begin by restating the applicable principles of equal-protection analysis: In the field of taxation states are given large leeway in making classifications and drawing lines which in their judgment produce reasonable systems of taxation. Lehnhausen v. Lakeshore Auto Parts Co., 410 U.S. 356, 359, 93 S.Ct. 1001, 1003, 35 L.Ed. 2d 351 (1973). Indeed, a strong presumption of constitutionality attends the legislative classification and the party challenging it must negate every conceivable basis for the statute, since the statute must be upheld if any state of facts can be reasonably conceived to sustain it. [ Mueller Estate v. Transfer Inheritance Tax Bureau, 5 N.J. Tax 642, 650-51 (Tax Ct. 1983) (other citations omitted).] Absent the presence of an invidious discrimination or suspect classification that would raise the standard of review, all that the Constitution requires is that the statute be rationally related to the achievement of a legitimate state objective. Barone v. Department of Human Servs., 107 N.J. 355, 365, 526 A. 2d 1055 (1987) (citing Dandridge v. Williams, 397 U.S. 471, 90 S.Ct. 1153, 25 L.Ed. 2d 491 (1970)). Under the rational-basis standard the scope of review of legislative classification is extremely limited. In New Jersey Restaurant Association, Inc. v. Holderman, 24 N.J. 295, 300, 131 A. 2d 773 (1957), this Court said: The burden of demonstrating that a statute contravenes the equal protection clause is extremely formidable, as is attested by the long trail of failure. In addition to the strong presumption of constitutionality with which all organic challenges are approached, one who assails a statute on this ground must contend with principles of unusual elasticity. It is easily stated that the classification (1) must not be palpably arbitrary or capricious, and (2) must have a rational basis in relation to the specific objective of the legislation. But the second proposition is qualified by limitations which compound the difficulties of one who assails the legislative decision. Thus it is not enough to demonstrate that the legislative objective might be more fully achieved by another, more expansive classification, for the Legislature may recognize degrees of harm and hit the evil where it is most felt. (citations omitted). The Legislature may thus limit its action upon a decision to proceed cautiously, step by step, or because of practical exigencies, including administrative convenience and expense, (citations omitted) or because of some substantial consideration of public policy or convenience or the service of the general welfare. De Monaco v. Renton, 18 N.J. 352, 360 [113 A. 2d 782] (1955). Hence, it may stop short of those cases in which the harm to the few concerned is thought less important than the harm to the public that would ensue if the rule laid down were made mathematically exact. Dominion Hotel, Inc. v. State of Arizona, supra, (249 U.S. [265] at page 268, 39 S.Ct. [273] at page 274 [63 L.Ed. 597 (1919)]). We have recently restated those same principles in the context of differentiated tax treatment afforded to counties based on population statistics within the counties. Township of Mahwah v. Bergen County Bd. of Taxation, 98 N.J. 268, 486 A. 2d 818, cert. denied sub nom. Borough of Demarest v. Mahwah Township, 471 U.S. 1136, 105 S.Ct. 2677, 86 L.Ed. 2d 696 (1985). Although there were many logical arguments in favor of equal application of the legislative scheme to all counties regardless of population, the Court nonetheless concluded: [W]here the question of reasonableness is fairly debatable, courts will uphold the classification. The burden of showing that the classification is not reasonable is upon the party attacking the statute. If we can conceive of any reason to justify the classification, the statute will be upheld. [ Id. at 290, 486 A. 2d 818 (quoting Newark Superior Officers Ass'n v. City of Newark, 98 N.J. 212, 227, 486 A. 2d 305 (1985)).] Given this high threshold that a challenge to a tax classification must meet, we are simply unable to say that considerations of administrative convenience and expense in adapting the program to pre-Act cooperatives would not justify this step by step approach to the regulation of taxation of housing cooperatives. As has been noted, the Appellate Division concluded that the administrative difficulties attendant on the establishment of a reliable recording system for pre-Act cooperatives and the understandable inconvenience to pre-Act cooperative owners that would be engendered by the retroactive effects of the law warranted the Legislature's conclusion that only transfers of cooperatives created in accordance with the Act should be subject to its requirements. Given that distinction, administrative difficulties would inevitably arise in attempting to impose the realty transfer tax on the transfer of cooperatives not subject to the Act. As the Attorney General's petition points out: No system exists for the recording of such transfers. In fact, no requirement exists that such transfers even be recorded. As a consequence, the county clerks responsible for collecting realty transfer fees would have no practical means of assessing and collecting realty transfer fees upon the transfer of such cooperatives. In addition to the matters of administrative convenience that could rationally justify this form of differential tax treatment, post-Act cooperatives are genuinely different from pre-Act cooperatives due to the benefits they receive from the Act. These distinguishing benefits, which are set forth in the Appellate Division opinion, are real and significant. They include security of the title against the claims of predecessors; security that the unit has not been pledged for a loan or attached by execution or levy; security that there are no unpaid taxes or municipal violations; an effective method of municipal assessment; the elimination of title gaps on the resale of cooperative units, making it possible to obtain title insurance; greater availability of purchase money loans because of the increased security of the cooperative title; and greater availability of information about the cooperative. Two cooperative buildings, one organized a month before the effective date of the Act and the other a month after the effective date, standing side-by-side, may appear from the outside to be identical. But, they are not; the Act makes them different. The ownership interest that is transferred under the new Act is not identical with one transferred before the Act. When transactions are different, a different tax may be imposed. Cf. Alaska v. Arctic Maid, 366 U.S. 199, 205, 81 S.Ct. 929, 932, 6 L.Ed. 2d 227, 231 (1961) (No `iron rule of equality' between taxes laid by a State on different types of business is necessary under commerce-clause analysis). Because, then, these rational bases for distinguishing between transfers of pre- and post-Act cooperative shares exist, the Legislature's determination to subject the transfers of cooperative units created pursuant to the Cooperative Recording Act of 1982 to the realty transfer tax does not offend equal-protection requirements. Drew makes a final challenge to the taxation of transfers of interest in post-Act cooperatives, arguing that it constitutes a form of double taxation. Drew envisions the situation in which the cooperative corporation's purchase of the underlying real estate and the transfer of shares to each individual unit holder occurs practically simultaneous[ly]. According to Drew, the cooperative corporation acquires title to the underlying real estate for no purpose other than to divide immediately the interest in the cooperative among the tenant-shareholders. Drew contends that this unitary transaction is subject to a prohibitive double tax because both events, the corporation's acquisition of the real estate and the distribution of shares to the tenant-shareholders, are subject to the realty transfer tax. Drew also argues that because only post-Act cooperatives are subject to the double tax while condominium owners and pre-Act cooperatives are not, post-Act cooperatives are unconstitutionally discriminated against. Further, Drew questions the State's method of assessing consideration under which the realty transfer tax is imposed on post-Act cooperatives. For post-Act cooperatives, consideration is equal to the total price paid for the ownership interest held in conjunction with a cooperative unit, including the pro rata amount of any underlying mortgage or other obligation of the cooperative. N.J.S.A. 46:15-5(c). Drew contends that this method simply makes no sense because the tenant-shareholders are not individually responsible for the blanket mortgage and that the calculations involved are so complex that it would be virtually impossible to determine the amount of the tax. Without attempting to validate the intricacies of cooperative conversions or cooperative marketing, it does appear to us that there is at least a rational basis for the legislative regime for taxing cooperative transfers. That, in some cases, it may be more costly to use the cooperative plan of ownership does not make it unconstitutional. The fact that one property owner chooses to use the cooperative plan of ownership, while another chooses to use the condominium plan of ownership does constitute a difference in the two forms of ownership that warrants different treatment for the purposes of the imposition of the realty transfer tax. And on the question of the inclusion of mortgage amounts in determining sale price, the tax appears to reflect the reality that the tenant-shareholders will be paying a share of the mortgage through their monthly carrying charge. It would appear that any double taxation is a result of the marketing choice or marketing opportunity. If the reality is that cooperative interests are transfers in separate transactions, there is no double taxation because, as the Appellate Division found, the transfer tax is imposed pursuant to the Act upon separate owners on distinct transfers at different times. 235 N.J. Super. at 206, 561 A. 2d 1177. If the reality is that cooperative interests are transferred in a unitary transaction, then it has been suggested that the double tax can be avoided. Flowers, Recording of Co-ops: The New Requirements, 121 N.J.L.J. 640, 657 (1988). Again, we have no way of evaluating those development regimes, but they do suggest that there may be no intrinsic double taxation present. The judgment of the Appellate Division is affirmed in part and reversed in part. The judgment of the Chancery Division upholding the imposition of the realty transfer tax on post-Act cooperatives is reinstated. For affirmance in part; reversal in part; and reinstatement  Chief Justice WILENTZ, and Justices CLIFFORD, HANDLER, POLLOCK, O'HERN, GARIBALDI and STEIN  7. Opposed  None.