FIRPTA Regulations Revised I

The IRS has issued revised regulations concerning the Foreign Investment in Real Property Tax Act ["FIRPTA"], 26 U.S.C. §§ 897,1445 & 1446. FIRPTA creates a mechanism whereby foreign individuals and corporations may be taxed on the profits they realize from the sale of real property in the United States. To ensure that the tax is collected, FIRPTA imposes a withholding requirement from the proceeds of transactions which are subject to the tax. Thus, where a foreign person owns a United States Real Property Interest ["USRPI"] and transfers title thereto after January 1, 1985, the transferee is obligated to withhold an amount equivalent to 10% of the gross sales price and remit same to the IRS. A transferee who fails to report properly may be liable for the amount of the tax and penalties. The term USRPI includes fee simple estates, leaseholds, condominiums, co-operatives, etc. On the other hand, a security interest (such as a mortgage) is not considered a USRPI. The phrase foreign person refers to natural persons as well as other entities. There are, however, a number of exceptions to the general rule requiring withholding of the tax, such as: (1) the transferor is a resident of the United States; or (2) the real property interest is an interest held solely as a creditor (such as a mortgage); or (3) the transferee plans to use the property as a residence and the sales price does not exceed $300,000. See Reg. §§ 1.897-1 et seq.

Recently the IRS amended the FIRPTA regulations to require each foreign person to provide a taxpayer identification number ["TIN"] at the time of filing of FIRPTA-related returns or other documents, including IRS Forms Nos. 8288 ("U.S. Withholding Tax Return for Dispositions by Foreign Persons of USPRIs") and 8288-A ("Statement of Withholding on Dispositions by Foreign Persons of USPRIs"). if the transferor's TIN is unknown or if the transferor has not obtained one, the transferee must still file and remit the withheld amount in a timely fashion, but the IRS will deem the application incomplete. The amended regulations apply to all transactions involving the disposition of a USPRI after November 3, 2003. It is the IRS's position that the amended regulations do not impose a new requirement on foreign persons; rather, the requirement to obtain a TIN is accelerated. Reg. §§ 1.897-1 et seq. (amended Aug. 6,2003).

As the tax imposed by FIRPTA does not constitute a lien on real estate, title insurers do not set up title requirements as to the necessity or desirability of payment of the tax, or except the consequences of the failure to pay it in the policy. Likewise, it is inappropriate (and arguably unlawful) for title insurers provide affirmative insurance to the effect that the parties have complied with FIRPTA, or that FIPPIA is inapplicable to a given transaction.

In instances where the purchaser is represented by counsel, the responsibility for ensuring FIRPTA compliance usually falls upon him or her. Nevertheless, in cases where the title company is conducting the closing or settlement and disbursing funds, it may assume responsibility for compliance with FIRPTA, especially if the sellers and buyers are not represented by counsel. When the title company or purchaser's attorney is unable to obtain a certification of nonforeign status is from the seller, it may be necessary to comply with the FIRPTA withholding requirements.

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Tax Sale Certificates: Who May Redeem?

Recent decisions have discussed the right to redeem arising under the Tax Sale Law, N.J.S.A. 54:5-1 et seq. In order to understand the issues in these cases, a brief review of the statute may be helpful. Real estate taxes become a lien on the realty against which they are assessed for the entire year as of January 111, but they are payable in quarterly installments. N.J.S.A. 54:6-6. When a property owner has become delinquent in the payment of taxes or other municipal liens (such as water or sewer charges), the municipality may sell, at auction, a tax sale certificate ["TSC"] representing the amount due. The purchaser may be the municipality itself or an individual or business entity. N.J.S.A. 54:5-19 et seq. TSCs are recorded in mortgage books in the county clerk's or register's office. They accrue interest at a rate fixed by statute. In addition, the non-municipal holder of a TSC may pay subsequentlyaccruing taxes or other municipal charges left unpaid by the property owner. N.J.S.A. 54:5-46 et seq.

Under the statutory scheme, one seeking to redeem (i.e., pay off) a TSC must contact the tax collector. This is true even where the TSC is not held by the municipality. N.J.S.A. 54:5-54 et seq. The tax collector is required to calculate the amount due, and, upon receiving payment from the party redeeming, to pay the TSC holder. N.J.S.A. 54:5-57. The amount required to redeem includes interest and certain expenses, N.J.S.A. 54:5-58, as well as subsequent municipal liens paid by the TSC holder. ld.; N.J.S.A. 54:5-60. Upon redemption, the party redeeming is entitled to receive a certificate of redemption from the tax collector (in recordable form), or the original TSC may be endorsed by the holder for cancellation (in the same fashion that a mortgage is cancelled). N.J.S.A. 54:5-55.

If the TSC remains unpaid, the holder may, after certain statutory criteria are met, commence an action to foreclose same. A municipality may proceed to foreclose in rem, N.J.S.A. 54:5-104.29 et seq., but a non-municipal TSC holder must foreclose in personam, N.J.S.A. 54:5-85 et seq. In any event, whether the foreclosure is in rem or in personam, a successful suit will result in a final judgment vesting title in the plaintiff. N.J.S.A. 54:5-104.64 & -104.65; 54:5-87. Because real estate taxes enjoy a super-priority lien, N.J.S.A. 54:5-9, and a TSC represents that lien, a TSC foreclosure enables the plaintiff to divest (generally speaking) other liens (such as mortgages or judgments), even if recorded prior to the TSC being foreclosed. Simon v. Cebrick, 53 F. 3d 17 (3d Cir. 1995). The suit (whether in rem or in personam) is in the nature of a strict foreclosure proceeding, in which the parties receiving notice are given a certain period of time to redeem, in default of which judgment is entered debarring and foreclosing their right, title and interest in the realty.

Who enjoys the right to redeem? It is clear that due process requires the holder of a TSC which files a foreclose suit to provide notice to all parties whose interests are sought to be divested. In the case of a foreclosure in rem, R. 4:64-7(c) requires the municipality to notify the assessed owner and "...all other persons having an ownership or lien interest recorded in the office of the Superior Court Clerk or the county recording officer...”. Where a foreclosure in personam occurs, it is understood that the necessary defendants are those persons or entities whose Interests appear of record and are subordinate to the TSC. Reading the foregoing, one may assume that anyone joined as a defendant in a suit to foreclose a TSC in personam (or entitled to notice in a suit in rem) is entitled to redeem. But the answer is not that simple.

N.J.S.A. 54:5-54 governs redemption from TSCs. In 1994, the statute was amended to delete the phrase "... or other person having an interest in the land..." from the class of persons enjoying the right of redemption. Thus the statute (as amended) apparently limits redemption to "... the owner, his heirs, holder of any prior outstanding tax lien certificate, mortgagee or occupant...". What happens if you attempt to redeem and the holder of the TSC takes the position that you are not entitled to do so?

In Malone v. Midlantic Bank, 334 N.J. Super. 238 (Ch. Div. 2000) aff'd per curiam, 334 N.J. Super. 236 (App. Div. 2000), the court held that "occupant" did not include a party allegedly in possession under a sham lease, and thus the "lessee" was denied the right to redeem. More significantly, in Savage v. Weissman, 355 N.J. Super. 429 (App. Div. 2002), the Appellate Division discussed, but declined to decide, Constitutional due process issues involving the 1994 amendment to N.J.S.A. 54:5-54. The judgment creditor which raised the argument had - in the interim - executed on its judgment and obtained title through a sheriff's sale. The panel thus found that the issue was moot. 355 N.J. Super. at 437 - 438.

The effect of the 1994 amendment to N.J.S.A. 54:5-54 is to create a paradox where certain parties are entitled to receive notice of a foreclosure suit so that their interests may be debarred and foreclosed by the entry of a final judgment. But yet they are deprived of the right to respond to the suit by exercising the right of redemption that the suit seeks to terminate. See Weinstein, "Redemption from Tax Sales: Is Due Process Lacking?", 174 N.J.L.J. 95 (Oct. 13, 2003). It is noteworthy that in New Brunswick Sav. Bank v. Markouski, 123 N.J. 402 (1991), a case involving notice of judgment execution sales, it was held that due process required that such notice be given to all persons whose lien or interest in the realty is to be divested by the sale. The Supreme Court directed that R. 4:65-2 be amended accordingly, so that the affected persons would have the opportunity to protect their interests in the realty.

Is it meaningful to give notice to persons who do not enjoy a statutory right of redemption? The answer appears to be that Constitutional due process mandates that notice be given to all persons whose interest in the realty is sought to be divested by the suit, while the statute discusses only those who may redeem from the underlying certificate prior to foreclosure. Furthermore, it is likely that those who are joined as defendants enjoy an equitable right of redemption. Otherwise, there would seem to be little value in providing notice of the suit to one who could take steps to protect his interest in the property. A different conclusion is impossible to reconcile with the holdings in such cases as New Brunswick Sav. Bank v. Markouski, supra. To the extent that N.J.S.A. 54-.5-54 (as amended) seemingly requires a different result, our courts may determine at some future date that it is unconstitutional.

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Power of Attorney Act Amended

Powers of attorney are frequently employed in real estate transactions. It is not uncommon for deeds, mortgages and other instruments affecting real property to be executed under the authority of such documents. The use of powers of attorney in real estate transactions is regulated in part by the Revised Durable Power of Attorney Act ["RDP/AA"], N.J.S.A. 46:2B-8.1 et seq., which was originally enacted as P.L. 2000, c. 109, eff. ca. November 7, 2000. The Act revises certain statutes dealing with powers of attorney and codifies several common-law principles regarding same. It is intended to complement N.J.S.A. 46:2B-10 et seq., the Banking Power of Attorney Act. The terms "power of attorney", "durable power of attorney" and "disability" are defined in N.J.S.A. 46:2B-8.2. It is noteworthy that the principal (ie., the grantor of a power of attorney) is "under a disability if [he or she] is unable to manage his property and affairs effectively".

N.J.S.A. 46:2B-8.3 provides that a durable power of attorney is not affected by lapse of time, unless the instrument itself otherwise provides. N.J.S.A. 46:2B-8.4 makes a an attorney-in fact accountable to a court-appointed fiduciary as well as to the principal. N.J.S.A. 46:2B-8.5 preserves the existing statutory practice which permits the attorney-in -fact to execute an affidavit as to the continued validity of the power of attorney. Such an affidavit creates a presumption of validity of the acts done by the attorney-in-fact. Consistent with the foregoing, one who relies on actions taken by the attorney-in fact without actual knowledge the death of the principal will not be adversely affected thereby. N.J.S.A. 46:2B-8.6 similarly permits a third party, acting in good faith, to rely upon the authority granted to the attorney-in-fact.

Helpful language is found in N.J.S.A. 46:2B-8.7 ("Multiple Attorneys-in-Fact") and 46:2B-8.8 ("Delegation by Attorneysin-Fact"). The former section requires multiple attorneys-in -fact to act jointly, while the latter prohibits delegation, unless, in each case, the instrument provides otherwise. Multiple attorneys-in-fact are treated similarly to co-trustees, in that the death, resignation or disability of one or more allows the remaining attorneys to act. N.J.S.A. 46:2B-8.9 requires a power of attorney to be in writing, duly signed and acknowledged in the manner set forth in N.J.S.A. 46:14-2.1; ie., it must be in recordable form. N.J.S.A. 46:2B-8.10 discusses the formalities of revocation. The remaining sections are entitled "Certified Copies and Photocopies", N.J.S.A. 46:213-8.111; "Compensation of Attorney- in -Fact", N.J.S.A. 46:2B-8.12; "Fiduciary Status and Duty to Account", N.J.S.A. 46:2B-8.13; and "Application of Act", N.J.S.A. 46:2B-8.14.

RDP/AA was recently amended by P.L. 2003, c. 138, which enacts N.J.S.A. 46:8.13a, prohibiting gifts by the attorney-in fact of the principal's property. This section provides that an attorney-in-fact may not "... gratuitously transfer property of the principal to the attorney-in-fact or to others..." unless the ability to do so is specifically set forth in the power-of-attorney. In other words, the attorney- in -fact may not transfer the principal's property to himself or to others for no or nominal consideration. The amendment, which was approved on August 1, 2003, applies to powers of attorneys executed on or about January 28, 2004 and thereafter. Because an attorneyin-fact stands in a fiduciary relationship to the principal, the common law took a dim view of both self-dealing transactions (in which the attorney-in-fact conveys the principal's property to himself) and those in which the transferee does not pay adequate consideration. Lieberman on Abstracts & Titles, §§ 152 & 267 (3d Ed. 1966).

Unfortunately, self-dealing and inadequate consideration transactions are frequently encountered. For example, powers-of-aftorney are often used as a crude estate planning tool. An elderly, infirm person may give a power-of-attorney to a relative, who may then use the power to convey title to him- or herself, so as to avoid the complexities and expense of estate administration. Usually no fraud on the principal is intended, because the attorney-in-fact is the grantor's heir or devisee. However, a transaction of this nature presents several problems for the title insurer, including (but not limited to) questions of marketability and the possibility of conflicts with other heirs or devisees upon the death of the principal. In any event, the amendment to RDP/AA, N.J.S.A. 46:8.13a, will prohibit such transfers, unless the power of attorney specifically permits it.

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Construction Lien Law Analyzed

Two recent decisions have analyzed different aspects of the Construction Lien Law, N.J.S.A. 2A:44A-1 et seq. The first, West Virginia Steel v. Sparta Steel Co., 356 N.J. Super. 398 (App. Div. 2003), discusses the effect of the claimant's failure to file suit in the proper county. The second, D.D.B Interior Contracting v. Trends, 176 N.J. 164 (2003), decides if a lien claim executed by an attorney-in-fact fulfills the statutory requirements.

In West Virginia the plaintiff had supplied materials to defendant in connection with projects located in Middlesex and Morris Counties, and filed construction lien claims ["CLCs"] in those counties to protect its rights. When it did not receive payment, it filed suit to enforce the lien claims in Bergen County. The trial court dismissed the suit, on the grounds that plaintiff failed to comply with the statutory scheme. The Appellate Division affirmed, pointing out that under N.J.S.A. 2A:44A-14a:

A claimant filing a lien claim shall forfeit all rights to enforce the lien, ... if the claimant fails to bring an action in the Superior Court, in the county in which the real property is situated, to establish the lien claim... [Emphases added.]

The panel noted that the language of the statute is "clear and unambiguous", and that there is "no provision ...authorizing relaxation of venue for a plaintiff's convenience". 356 N.J. Super. at 403-404. Furthermore, contrary to the provisions of N.J.S.A. 2A:44A-2, plaintiff did not meet the ... requirement that it have "an agreement ... in writing" with the party against whom it was filing the lien. ... The clear and unambiguous language of the statute requires a written agreement between the parties in order to enforce a construction lien.

Id. at 404-405.

In contrast to the strict statutory construction applied in West Virginia Steel, the Supreme Court adopted a more relaxed approach in D.D.B Interior Contracting. In that case, the court was forced to construe N.J.S.A. 2A:44A-6, which states:

A lien claim shall be signed, acknowledged and verified by oath of the claimant, or, in the case of a ... corporation, a ... duly authorized officer thereof, and filed with the county clerk ...[Emphasis added.]

The lien claimant, a corporation, filed a CLC which was executed by a person acting as the claimant's attorney-in-fact (who was the corporation's legal counsel), pursuant to a written power of attorney. The court noted that the statute does not define the phrase "duly authorized officer'. It concluded that ... because the Legislature has not addressed whether a power of attorney may vest an individual with the authority of a "duly authorized officer", and because [the corporate officer] reasonably relied on [counsel's] representations that the power of attorney was effective under the statute, we find [the CLC] valid under N.J.S.A. 2A:44A-6. 176 N.J. at 168 - 169.

The court based its decision in part on the fact that the claimant corporation was a closely-held corporation with only one corporate officer. It also noted that, under the circumstances, upholding the validity of the CLC did not result in prejudice to the defendant. However, the court limited its holding to the facts of the case. It held that ... "in the future when a corporation intends to appoint an attorney to sign, acknowledge and verify a lien claim, that corporation must comply with its certificate of incorporation and bylaws to ensure that the attorney executing those duties is a corporate officer. Execution of a power of attorney will be deemed inadequate to vest an attorney-in-fact with the authority of a "duly authorized officer" pursuant to N.J.S.A. 2A:44A-6." Id. at 170.

The court seems to be saying that, in the future, there can be no delegation of corporate authority to execute CLCs to non-officers, Of course, if one is already an officer of a corporation, a power of attorney is presumably unnecessary, although a resolution of the board of directors may be needed. In this regard, the court's admonition is somewhat confusing.
The issue decided by the Supreme Court in D.D.B Interior Contracting touches on a problem frequently encountered in real estate conveyancing: the use of attorneys -in -fact by corporations executing deeds and mortgages. Since (by statute)

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