T he application of the New Jersey Bulk Sales Act 1 to transactions - PDF document

The New Jersey Bulk Sales Notification Process for Pass-Through Sellers by Russell Bershad, Peter J. Ulrich and Ivette P. Alvarado T he application of the New Jersey Bulk Sales Act 1 to transactions involving a seller that is a pass- through entity or a disregarded entity for income tax purposes raises a number of practi- cal complications and a few not entirely answered questions for sellers and their counsel. The Bulk Sales Act was adopted in 2007 as an expansion of a pre-existing New Jersey sales tax collection statutory provi- sion and applies broadly to the sales of business assets, includ- ing real property, other than in the ordinary course of busi- ness of the seller. It requires the purchaser of such assets to notify the state of New Jersey, Department of the Treasury, Division of Taxation of the impending asset sale via submis- sion of a notification of sale, transfer or assignment in bulk (Form C-9600). Generally, upon receipt of the Form C-9600, the division reviews the tax records of the seller and either issues a clearance letter to the buyer stating there are no out- standing taxes due or, if it determines there are outstanding tax liabilities, the division issues a letter requiring the buyer escrow a certain amount at closing to cover such liabilities. The public policy behind the Bulk Sales Act is to give the state one last chance to collect tax debts from a New Jersey taxpay- er, especially since the sale transaction may provide a one- time source of liquidity. While the Bulk Sales Act does not require any submissions from the seller, practitioners counseling sellers should be sure their clients complete an asset transfer tax declaration (Form TTD or TTD) and be sure to submit a TTD to the division suf- ficiently in advance of the closing. The TTD discloses informa- tion regarding the seller’s amount realized, adjusted tax basis, and estimated income tax liability on the pending sale, and is used by the division to better calculate (and often reduce) the required bulk sales escrow. As described, the bulk sales notification process is for the most part straightforward. In the case of a seller that is a pass- through entity, however, where the taxpayers bearing the tax 34 N EW J ERSEY L AWYER | A PRIL 2017 NJSBA . COM

liability triggered by the sale may con- membership interests in a DRE. In that 1031 transaction sist of several parties several tiers up in event, the parent of the DRE must fill out • Available net operating losses of seller the ownership chain, completion of the the TTD. Alternatively, an upper-tier or seller’s partners or members TTDs may be more cumbersome and pass-through entity may sell the interests • Other current-year losses of seller the number of ways to minimize the of a lower-tier entity that owns real • Other current-year losses of selling escrow exposure may multiply. estate, such as a single purpose entity members or S corporation shareholders (SPE), and each of the partners or mem- Variety of Pass-Through Sellers and bers of that upper-tier entity, each a Sellers and counsel alike should note Transactions Schedule K-1 recipient, will need to com- that pursuant to N.J.S.A. 54:50-8, TTDs The structure of the sale of assets, plete a separate TTD. Furthermore, the are not public documents when filed; including real estate, can take varied sale of real estate by tenants-in-common they are confidential and privileged and forms. Multiple TTDs will need to be (each a TIC), which not only may are, for the most part, legislatively submitted when multiple entities sell include individuals but also entities exempt from New Jersey’s Open Public Records Act. 3 Thus, sellers that wish to their assets or their interests in multiple holding title as TICs, will require the fil- entities in a single transaction. The seller ing of multiple TTDs. keep their submitted tax and financial may be a partnership or limited liability information confidential should submit Completing Form TTD company with any number of partners their TTDs directly to the division, or members consisting of individuals or As noted above, sellers and their instead of through the purchaser, as is entities. The seller could be an S corpora- counsel should diligently attend to the often the practice. tion with several shareholders. In all of preparation and submission of TTDs, Buyer Concerns on Buying Assets these cases, each pass-through equity particularly when pass-through entities from Flow-Through Structures holder is required, and normally will be are involved, because the monetary motivated, to complete a separate TTD. impact can be substantial. The sale of business assets by flow- In fact, the division’s Form TTD requires Form TTD acts as a practical bridge through entities can also raise some that the filer submit a current member- between the information provided by unique questions under the Bulk Sales ship directory if a partner or member is the buyer via the Form C-9600 and the Act, beginning with whether or not the not an individual, and the division will actual tax and escrow implications to Bulk Sales Act applies. For example, just calculate the allocation of gain on the sellers on the sale of the subject property because the owners of a pass-through sale among the partners or members. or assets. The seller’s goal in the bulk entity are New Jersey taxpayers, if the These partners, members and S corpo- sales process implicitly is to minimize property or business is entirely outside of ration shareholders could be New Jersey the bulk sales escrow, and the TTD is New Jersey, Form C-9600 should not need tax residents or nonresidents for New Jer- often the most effective tool to help the to be submitted, although the authors are sey income tax purposes. If nonresidents, seller accomplish that goal. Completion aware of no guidance from the division the pass-through entity itself is normally of the TTD will often require the on this point. Another question is required to ‘withhold’ any income tax involvement of the seller’s accountant whether a sale qualifies as being in the liabilities of such nonresidents related to or chief financial officer. The process ordinary course of business of a seller, and income allocations of the entity, entirely should be started early, in particular thus not subject to the Bulk Sales Act. separate from the bulk sale escrow with regard to pass-through entities, Often when the seller is a DRE, the parties requirements. 2 The instructions to Form transactions involving a multitude of need to look at whether the parent of the TTD state that once a pass-through entity selling entities or entities or properties DRE meets the ordinary course exemp- possesses more than five nonresident with a complex income tax history. tion. If it does, the single sale of the sub- Schedule K-1 recipients, the filer is There are a number of factors that ject asset by the DRE should not require required to submit a current membership may reduce, perhaps significantly, the compliance with the notification require- directory, and the division will calculate net income tax due to the state as a ments of the Bulk Sales Act. For example, the allocation of gain on the sale and result of any particular transaction, a residential home developer may well determine the withholding tax. including: acquire various properties via separate In addition, a seller that is a property SPEs, each of which is a DRE. At the time owner could be a disregarded entity • Selling costs of the sale of individual units, the buyer (DRE) for income tax purposes, or the • Adjusted tax basis of sold property should be concerned with respect to both transaction might involve the sale of • Seller is engaging in an IRC Section the tax liabilities of the SPE and the par- 35 N EW J ERSEY L AWYER | A PRIL 2017 NJSBA . COM