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

(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.