Original WP 5.1 Version
This case can also be found at 15 N.J. Tax 428.
NOT FOR PUBLICATION WITHOUT THE APPROVAL
OF THE TAX COURT COMMITTEE ON OPINIONS
TAX COURT OF NEW JERSEY
DOCKET NO. 007836-94
NEW JERSEY HOTEL HOLDINGS, INC., :
DIRECTOR, DIVISION OF TAXATION, :
Decided: February 21, 1996
Avrom J. Gold for plaintiff
(Mandelbaum, Salsburg, Gold, Lazris,
Discenza & Steinberg, attorneys)
Paul Tannenbaum for defendant
(Deborah T. Poritz, Attorney
General of New Jersey, attorney)
In this case the court holds that a person acquiring assets by way of a deed in lieu of
foreclosure and a bill of sale who fails to give notice to the Director of the Division of Taxation
under N.J.S.A. 54:32B-22(c) is liable for the sales and use tax liability of the person from whom the
assets are acquired.
The plaintiff, New Jersey Hotel Holdings, Inc., challenges assessments by defendant,
Director, Division of Taxation, for Sales and Use Tax (N.J.S.A. 54:32B-1 to -29) in the total amount
of $56,787.97.See footnote 1
The matter has been submitted to the court on stipulated facts. R. 8:8-1(b). The
parties have each moved for judgment on those facts.
The amount of the tax liability is not in issue. Nor does the plaintiff dispute the liability of
the prior owners of the real and personal assets which it acquired on August 3, 1990, for the sales
and use tax assessments. The sole issue for determination by this court is whether the Director may
make an assessment against plaintiff under N.J.S.A. 54:32B-22(c) for the sales and use tax liabilities
of the entities from which it acquired the assets by way of deeds in lieu of foreclosure and bills of
On January 16, 1987, County Savings Bank made loans to several entities secured by three
mortgages, assignments of rents, and security agreements on three hotels in New Jersey. In January
and February 1988 the underlying properties were transferred to three separate partnerships; the
mortgages, assignments of rents, and security agreements were modified, and the new owners
assumed all of the liabilities of the original owners. In February 1989 the new owners defaulted on
their obligation to County Savings Bank. County Savings Bank initiated foreclosure proceedings.
In the foreclosure proceedings the Attorney General of the State of New Jersey received notice and
did not answer or appear.
The foreclosure proceedings were settled by an agreement which provided that on default of
that agreement County Savings Bank or an affiliate would take the three hotel properties by way of
deeds in lieu of foreclosure. On August 3, 1990, pursuant to that agreement on default of the owners
of the hotel properties, New Jersey Hotel Holdings, an affiliate of County Savings Bank and the
plaintiff in this action, acquired all of the hotel assets - the real property by way of deeds in lieu of
foreclosure and the personal property by way of bills of sale.
The mortgages, security agreements, and assignments of rents by which plaintiff first
acquired an interest in the hotel properties and eventually took those properties, were filed in January
1987. The sales and use tax liabilities, which are the basis of the Director's assessments, arose after
the date of those agreements and before August 3, 1990. Plaintiff did not give advance notice to the
Director of the Division of Taxation about the August 3, 1990 transfer. N.J.S.A. 54:32B-22(c) provides:
Whenever a person required to collect tax shall make a sale, transfer, or
assignment in bulk of any part or the whole of his business assets, otherwise than in
the ordinary course of business, the purchaser, transferee or assignee shall at least 10
days before taking possession of the subject of said sale, transfer or assignment, or
paying therefor, notify the director by registered mail of the proposed sale and of the
price, terms and conditions thereof whether or not the seller, transferrer or assignor,
has represented to, or informed the purchaser, transferee or assignee that he owes any
tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has
knowledge that such taxes are owning, and whether any such taxes are in fact owing.
Whenever the purchaser, transferee or assignee shall fail to give notice to the
director as required by the preceding paragraph, or whenever the director shall inform
the purchaser, transferee or assignee that a possible claim for such tax or taxes exists,
any sums of money, property or choses in action, or other consideration, which the
purchaser, transferee or assignee is required to transfer over to the seller, transferrer
or assignor shall be subject to a first priority right and lien for any such taxes
theretofore or thereafter determined to be due from the seller, transferrer or assignor
to the State, and the purchaser, transferee or assignee is forbidden to transfer to the
seller, transferrer or assignor any such sums of money, property or choses in action
to the extent of the amount of the State's claim. For failure to comply with the
provisions of this section the purchaser, transferee or assignee, in addition to being
subject to the liabilities and remedies imposed under the provisions of the uniform
commercial code, Title 12A of the Revised Statutes of New Jersey, shall be
personally liable for the payment to the State of any such taxes theretofore or
thereafter determined to be due to the State from the seller, transferrer or assignor,
and such liability may be assessed and enforced in the same manner as the liability
for tax under this act.
[N.J.S.A. 54:32B-22(c)(emphasis added).]
This statute has been construed once in a reported decision of this court. Bunting v. Director,
176 N.J. Super. 262 (Tax 1980) (holding that failure to give notice of a transfer under
N.J.S.A. 54:32B-22(c) subjects a purchaser to the seller's sales tax liability.)
The mechanics of the statute are described in Bunting, supra. Ten days before a sale,
transfer, or assignment in bulk of business assets other than in the ordinary course of business, a
purchaser, transferee, or assignee must notify the Director of the Division of Taxation. On receipt
of the notice the Director informs the purchaser how much of the consideration to escrow with regard
to the seller's sales tax liability. Following this procedure, the purchaser can effectively limit its
liability to the amount of the escrow specified by the Director. Failure to comply with the statute
subjects the purchaser to personal liability for any of the seller's sales tax liabilities. Bunting, supra
The Director argues that the failure to give the ten day notice under the statute is a "failure
to comply with the provisions of this section" which makes the purchaser "personally liable for the
payment to the State of any . . . taxes . . . due to the State from the seller, transferrer or assignor . .
. ." In support of this argument Director cites Bunting:
We recognize the serious implication of this decision. There is no apparent
limitation on the dollar amount of delinquent tax liability that may be assumed by the
purchaser of a business if he fails to properly notify the Director of an impending
closing. Indeed, a purchaser may assume personal liability for the seller's delinquent
taxes in excess of the price he pays for the business assets. Nonetheless, compliance
with the notification provisions of the tax statutes is uncomplicated. Counsel should
be alert to observe the notification procedure in appropriate circumstances.
[Bunting, supra at 197 (emphasis added).]
Plaintiff raises a series of arguments against this literal reading of the statute and the more
than fifteen year old interpretation by this court:
1. The granting of a deed in lieu of foreclosure is not a transfer within the meaning of
2. A foreclosure is not a transfer within the meaning of the statute. A deed in lieu of
foreclosure should be handled in the same manner.
3. Since the state would have received nothing if plaintiff had foreclosed, it should
receive nothing if it takes the property by way of a deed in lieu of foreclosure.
4. There is no notice requirement because of the impossibility of escrowing money on
5. There can be no liability where there is no escrow.
6. Nothing that the plaintiff transferred could be escrowed.
7. Liability is limited to the amount transferred for the properties - the forgiveness of
plaintiff's debt was not a transfer. Plaintiff transferred nothing for the properties it received.
It is clear that N.J.S.A. 54:32B-22(c) is meant to extend beyond the simple sale for cash as
was the case in Bunting, and beyond the restrictive definitions of the bulk sales act. Bunting, supra,
at 194-6. In its initial sentence it speaks of "sale, transfer, or assignment in bulk". In this case the
hotel assets were transferred to plaintiff in settlement of the foreclosure action and in satisfaction
of a mortgage or mortgages and security agreements whose principal value on the date of the transfer
was stated to be in excess of $20 million.
Plaintiff asserts persuasively that had it followed through on the foreclosure action and
actually foreclosed the properties, the state's sales tax lien would have been extinguished. Citing
N.J.S.A. 2A:45-4, plaintiff argues that when the state does not answer a foreclosure complaint and/or
when the lien being foreclosed is prior to the lien of the state, the general rule is that first in time is
first in right. Since it is unquestioned that plaintiff's lien based on monies lent and recorded
mortgages and security agreements arose prior in time to the tax lien of the state for sales taxes, the
state would have received nothing for its sales taxes had plaintiff actually foreclosed in this case.
Nevertheless, plaintiff did not foreclose but took a deed in lieu of foreclosure.
"[T]he principle that a business decision will be given its tax effect according to what
actually occurred promotes the public interest in tax certainty and thereby conforms
with general business expectations. Indeed planning by individuals and businesses
alike would be frustrated if courts failed to give predictable effect to formal legal
documents. . . simply because of an asserted ignorance of the law."
[General Trading v. Director,Div.of Taxation,
83 N.J. 122, 138 (1980).]
"A voluntary business decision is to be given its tax effect in accord with what actually occurred
and not in accord with what might have occurred." General Trading, supra, at 136 cited in Richard's
Auto City v. Director, Div. of Taxation,
12 N.J. Tax 619, 627 (Tax 1992) and
140 N.J. 523, 543
(1995). See footnote 2
"As a general proposition the answer must be that it is for the taxpayer to make its business
decisions in light of the tax statutes rather than the other way around." Household Finance v.
Director, Div. of Taxation,
36 N.J. 353, 362 (1962). In short, the fact that the state's sales tax lien
might have been extinguished had plaintiff proceeded to foreclose does not mandate the same result
if the taxpayer chooses to take a deed in lieu of foreclosure.
Foreclosure is a formal procedure defined by statute. N.J.S.A. 2A:50-1 to -52. The status
of state tax liens in a foreclosure procedure is governed by a statute which by its terms supersedes
the normal tax rules. N.J.S.A. 2A:45-4. A deed in lieu of foreclosure is a contractual undertaking
by the mortgagor and the mortgagee which avoids the formal foreclosure procedure and accordingly
is not governed by the foreclosure statutes. See 3 Powell on Real Property ¶469.1 (1995). The
state tax lien prescribed by N.J.S.A. 54:32B-22(c) is not affected by the foreclosure statutes when
a transfer is accomplished outside of the formal foreclosure procedures. Among the advantages to
the taxpayer of taking a deed in lieu of foreclosure rather than proceeding with a formal foreclosure
are savings in time and costs. Among the advantages of proceeding with a formal foreclosure rather
than taking a deed in lieu of foreclosure are the cancellation of liens subordinate to those of the
foreclosing creditor. It must be presumed that the taxpayer weighed the advantages and costs
(including tax savings and costs) when deciding to take a deed in lieu of foreclosure rather than
proceeding with the statutory foreclosure proceedings.
Much of plaintiff's argument with respect to the inapplicability of N.J.S.A. 54:32B-22(c) to
the exchange of property in return for forgiveness of indebtedness is based on its characterization
of what plaintiff gave up in order to acquire the assets of the sales tax debtor. Plaintiff did not give
up cash, and thus plaintiff argues since the purpose of notice is to inform the Director of the
transaction and in turn permit the Director to tell the purchaser or acquirer of assets how much to
escrow and since nothing could have been escrowed, there is no need for notice. The fact of the
matter is that plaintiff gave up its rights under the foreclosure action and its rights under the
mortgages and security agreements in return for the transfer of the physical assets. The plaintiff
could have, for example, released all of the debt of the defaulting borrower except for the borrower's
sales tax debt. If it wished to know how much that sales tax debt was, it could have found out by
giving notice to the Director under the statute. Plaintiff also argues that its liability should be limited
to the amount transferred for the properties and that it transferred nothing. It is true that it transferred
no cash, but it did transfer its rights under the foreclosure action, the mortgage, the security
agreements, and the agreement settling the foreclosure action. Although they may not have been
equal to the amounts owed under the mortgages, the fair market value of these choses in action, or
other consideration (N.J.S.A. 54:32B-22(c)) were certainly greater than the $56,787.97 sales tax
obligation of the defaulting hotels. Nevertheless, the language of Bunting makes clear that unlike
the law in New York, which specifically limits liability to the amount transferred, in New Jersey,
without notice to the Director, there is no limit to the liability of the transferee.
Plaintiff cites a number of cases from foreign jurisdictions in support of its argument that it
is not liable for the sales tax in this case.
I find that, in this case, I am in agreement with a conclusion reached by the Appellate
Division in Autotote Ltd v. New Jersey Sports, etc., Auth.,
171 N.J. Super 480,
410 A.2d 52 (App. Div. 1979), rev'd on other grounds,
85 N.J. 363,
427 A.2d 55 in which
the court remarked:
The interpretation of out-of-state statutes by the courts of the
jurisdictions are rarely helpful in providing an appropriate key to the
interpretation of a New Jersey statute because of differing public
policy concepts and objectives. [at 489]
[GE Solid State v. Director, Division of Taxation,
11 N.J. Tax 320, 341 (Tax 1990),
254 N.J.Super 653 (App. Div. 1992), rev'd on other grounds
132 N.J. 298 (1993).]
Nevertheless, because plaintiff has devoted much attention to out-of-state cases, their lack of
persuasiveness is briefly discussed. In each instance the case or the statute or both are distinguishable
from the matter before this court.
The states are not in agreement as to whether an acquisition of assets in lieu of foreclosure
should be treated the same way as a foreclosure for purposes of successor liability under their tax
statutes. Compare, State v. Standard Oil Co.,
313 N.E.2d 838 (Ohio 1974) with Bank of Commerce
585 S.W.2d 577 (Tenn. 1979). The Tennessee Court in Woods, supra, indicates that the
Ohio position holding that an action in lieu of foreclosure should be treated like a foreclosure is the
minority view. Like Tennessee, New Jersey has stated that in tax matters the form of the transaction
will govern its tax consequences. General Trading, supra; Richards Auto City, supra.
We understand that other states may wish to limit the successor's liability to "purchase
money" (Mountain Shadow Inn v. Colorado Dept. of Labor,
672 P.2d 522 (Colo. 1983)) or to the
amount of consideration. Velez v. Division of Taxation,
547 N.Y.S.2d 444 (N.Y. App. Div. 1989)
(construing the New York statute). SeealsoKnudsen Dairy Products Co. v. State Board of
12 Cal. App. 3d 47,
90 Cal. Rptr. 533 (Cal. Ct. App. 1970). But New Jersey's statute
and interpretive case law, is to the contrary. Bunting, supra.
In this case notice to the Attorney General in the foreclosure proceeding was not adequate
under N.J.S.A. 54:32B-22(c), which requires notice by registered mail to the Director of the Division
of Taxation. Plaintiff stipulated that notice was not given to the Director of the Division of Taxation.
Since the state's rights under a foreclosure action are different from those under a transfer in the
nature of a deed in lieu of foreclosure it is appropriate that the proper notice under N.J.S.A. 54:32B
22(c) be in strict compliance with the statute so that the appropriate individuals in state government,
who are in a position to identify the state's interests under different statutes, be alerted.
As this court indicated over fifteen years ago, we recognize the serious implication of this
decision. Bunting, supra,
1 N.J. Tax 189, 197. The failure to give notice is a fatal defect under
Bunting. No matter what the logical underpinnings of the statute, failure to give notice to the
Director makes a purchaser, transferee, or assignee of assets personally liable for the sales and use
tax liabilities of its predecessor. I trust that this opinion will further alert counsel to the need to
notify the Director under N.J.S.A. 54:32B-22(c) in those circumstances where the transferrer of
assets may have liability for New Jersey Sales and Use Tax. Bunting, supra, at 197.
Plaintiff's motion is denied; defendant's motion is granted. The Director's assessments are
affirmed. The court will enter an appropriate order and judgment.
The assessments were made against three separate entities in the total amount of
$56,787.97. The Director has obtained $24,030.75 by withholding refunds claimed by the plaintiff.
The balance of the assessment remains unpaid.Footnote: 2
The full citation is Richards Auto City v. Director, Division of Taxation,
2 N.J. Tax 619
(Tax 1992), rev'd and remanded
270 N.J. Super. 92,
14 N.J. Tax 436 (App. Div. 1994), rev'd
140 N.J. 523 (1995). The citation in the text refers only to the quoted language from General Trading,