34 NEW JERSEY LAWYER | APRIL 2017
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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
liability triggered by the sale may con-
s
ist of several parties several tiers up in
the ownership chain, completion of the
TTDs may be more cumbersome and
the number of ways to minimize the
escrow exposure may multiply.
Variety of Pass-Through Sellers and
Transactions
The structure of the sale of assets,
i
ncluding real estate, can take varied
forms. Multiple TTDs will need to be
submitted when multiple entities sell
their assets or their interests in multiple
entities in a single transaction. The seller
may be a partnership or limited liability
company with any number of partners
or members consisting of individuals or
entities. The seller could be an S corpora-
tion with several shareholders. In all of
these cases, each pass-through equity
holder is required, and normally will be
motivated, to complete a separate TTD.
In fact, the division’s Form TTD requires
that the filer submit a current member-
ship directory if a partner or member is
not an individual, and the division will
calculate the allocation of gain on the
sale among the partners or members.
These partners, members and S corpo-
ration shareholders could be New Jersey
tax residents or nonresidents for New Jer-
sey income tax purposes. If nonresidents,
the pass-through entity itself is normally
required to ‘withhold’ any income tax
liabilities of such nonresidents related to
income allocations of the entity, entirely
separate from the bulk sale escrow
requirements.
2
The instructions to Form
TTD state that once a pass-through entity
possesses more than five nonresident
Schedule K-1 recipients, the filer is
required to submit a current membership
directory, and the division will calculate
the allocation of gain on the sale and
determine the withholding tax.
In addition, a seller that is a property
owner could be a disregarded entity
(DRE) for income tax purposes, or the
transaction might involve the sale of
membership interests in a DRE. In that
e
vent, the parent of the DRE must fill out
the TTD. Alternatively, an upper-tier
pass-through entity may sell the interests
of a lower-tier entity that owns real
estate, such as a single purpose entity
(SPE), and each of the partners or mem-
bers of that upper-tier entity, each a
Schedule K-1 recipient, will need to com-
plete a separate TTD. Furthermore, the
s
ale of real estate by tenants-in-common
(each a TIC), which not only may
include individuals but also entities
holding title as TICs, will require the fil-
ing of multiple TTDs.
Completing Form TTD
As noted above, sellers and their
counsel should diligently attend to the
preparation and submission of TTDs,
particularly when pass-through entities
are involved, because the monetary
impact can be substantial.
Form TTD acts as a practical bridge
between the information provided by
the buyer via the Form C-9600 and the
actual tax and escrow implications to
sellers on the sale of the subject property
or assets. The seller’s goal in the bulk
sales process implicitly is to minimize
the bulk sales escrow, and the TTD is
often the most effective tool to help the
seller accomplish that goal. Completion
of the TTD will often require the
involvement of the seller’s accountant
or chief financial officer. The process
should be started early, in particular
with regard to pass-through entities,
transactions involving a multitude of
selling entities or entities or properties
with a complex income tax history.
There are a number of factors that
may reduce, perhaps significantly, the
net income tax due to the state as a
result of any particular transaction,
including:
• Selling costs
• Adjusted tax basis of sold property
• Seller is engaging in an IRC Section
1031 transaction
•
Available net operating losses of seller
or seller’s partners or members
• Other current-year losses of seller
• Other current-year losses of selling
members or S corporation shareholders
Sellers and counsel alike should note
that pursuant to N.J.S.A. 54:50-8, TTDs
are not public documents when filed;
t
hey are confidential and privileged and
are, for the most part, legislatively
exempt from New Jersey’s Open Public
Records Act.
3
Thus, sellers that wish to
keep their submitted tax and financial
information confidential should submit
their TTDs directly to the division,
instead of through the purchaser, as is
often the practice.
Buyer Concerns on Buying Assets
from Flow-Through Structures
The sale of business assets by flow-
through entities can also raise some
unique questions under the Bulk Sales
Act, beginning with whether or not the
Bulk Sales Act applies. For example, just
because the owners of a pass-through
entity are New Jersey taxpayers, if the
property or business is entirely outside of
New Jersey, Form C-9600 should not need
to be submitted, although the authors are
aware of no guidance from the division
on this point. Another question is
whether a sale qualifies as being in the
ordinary course of business of a seller, and
thus not subject to the Bulk Sales Act.
Often when the seller is a DRE, the parties
need to look at whether the parent of the
DRE meets the ordinary course exemp-
tion. If it does, the single sale of the sub-
ject asset by the DRE should not require
compliance with the notification require-
ments of the Bulk Sales Act. For example,
a residential home developer may well
acquire various properties via separate
SPEs, each of which is a DRE. At the time
of the sale of individual units, the buyer
should be concerned with respect to both
the tax liabilities of the SPE and the par-
NJSBA.COM
NEW JERSEY LAWYER | APRIL 2017 35
ent of the SPE. If the parent is engaged in
the business of selling such properties in
the ordinary course of business, the sale
by the SPE of similarly held property
should be free of the bulk sale notification
requirements. A conservative buyer may
still wish to file Form C-9600, outline
those facts, and request tax clearance.
Escrow Amount Takes into Account All
Outstanding State Taxes
Much of the foregoing discussion
addressed the state income tax liabilities
triggered by a sale of assets. Consistent
with the Bulk Sales Act, the division will
analyze, and the required escrow will
need to take into account, all outstand-
ing deficiencies and return delinquen-
cies relating to all applicable state taxes,
including corporation business tax, sales
and use tax, gross income tax withhold-
ing obligations, litter tax, petroleum
taxes, plus any outstanding interest or
penalty assessments and any taxes
assessed against the seller under any
transferee liability provisions of law,
such as those applicable to the survivor
of a corporate merger or under a com-
mon law transferee liability theory.
Forgoing Filing the Bulk Sales
Notice—Considerations
In cases when the state tax liabilities
of a seller are slight, quantifiable, and
verifiable, the seller is a good credit risk,
or there is an ongoing relationship
between the buyer and seller that will
likely continue after the closing, the
buyer may decide to forgo filing the
Form C-9600 notification. By statute,
the division’s position is simply that the
buyer does so at the risk of bearing full
transferee liability for all of the seller’s
outstanding state tax liabilities and defi-
ciencies, including income tax triggered
by the sale, regardless of the extent to
which they exceed the purchase price,
and regardless of whether they are deter-
mined and assessed by an audit that
takes place after the subject sale.
4
Besides transferee liability for the
buyer, there is no monetary or other
penalty for failure to comply with the
Bulk Sales Act. If the buyer decides to
skip the Bulk Sales Act notification
process, after some due diligence and
analysis of the exposure, the prudent
buyer typically will want a broad indem-
nification for all the seller’s tax liabilities
owed to the state (not just on the gain
from the sale of the assets or property),
and probably the income tax liabilities
of the partners, members or S corpora-
tion shareholders triggered in a sale of
assets by a flow-through entity. Most
critically, the buyer will need to be care-
ful about who provides such indemnity.
An unsecured indemnity from an SPE
selling real estate to a buyer, for exam-
ple, will be of little value since the enti-
ty’s only asset is the real estate being
sold. Thus, the buyer should ask for
indemnification from a creditworthy
source with liquidity, such as, perhaps,
the SPE’s parent.
In conclusion, the relatively straight-
forward bulk sales process becomes
more complicated for parties on both
sides of the sale when the seller is a pass-
through entity, but careful considera-
tion of the facts, proper application of
the law and, where appropriate, correct
submission of bulk sales forms will assist
sellers and buyers in navigating the Bulk
Sales Act under such circumstances.
Russell Bershad is co-chair, and Ivette
P. Alvarado a director, in the real proper-
ty and environmental department of Gib-
bons P.C. Peter J. Ulrich is a director in
the Gibbons corporate department.
ENDNOTES
1. N.J.S.A. 54:50-38.
2. See N.J.S.A. 54:10A-15.6 – 15.8.
3. N.J.S.A. 47:1A-1 et seq.
4. See GABGEO v. Director, Div. of Taxation, 23
N.J. Tax 38 (2006).
36 NEW JERSEY LAWYER | APRIL 2017
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This article was originally published in the April 2017 issue of New Jersey Lawyer, a publication of the New Jersey State Bar
Association, and is reprinted here with permission.
