Appeals Committee (Center) 39712-06-21 Maslawi Building Company Ltd. v. Central Real Estate Taxation Administration - part 5

At the end of the day, the decision on the question of cancellation or resale depends on the weight that must be given to each of those tests, when there is naturally a "parallelism of forces" between them.  Thus, for example, the longer a period has elapsed between the agreement and the alleged cancellation, the more a presumption or the scope of changes at a lower threshold will suffice, so that the cancellation will not be recognized and it will be determined that it is a resale.  It is only that the fact that in the case before us such a long period of 18 years passed between the conclusion of the combination agreement and the request of the parties to recognize its cancellation, in any case places a high hurdle before the appellants to prove their claim that this transaction was cancelled in the first place, and even without taking into account the additional tests relevant in the present case.

34. As I noted at the outset, I am of the opinion that the application of the tests set forth in the case law in this matter of cancellation of a transaction, while taking into account the relevant factual basis as it arose in the course of the evidentiary hearing, leads clearly to the conclusion that this is not a cancellation of a transaction but rather a resale, since the combination transaction was absorbed into the ground of reality. In this regard, consideration should be given to the following aspects: the period of time that has elapsed since the conclusion of the combination agreement until its cancellation; Registering a warning note; the actions taken on the land, including the demolition of the building, the promotion of the zoning plan and the rental of the land as a parking lot; the financial accounting and arrangement of the loans in accordance with the combination agreement; The deal with Zach.  In the meantime, consideration must also be given to the question of who bears the burden of proof and the burden of persuasion in the present proceeding, and whether he met them.
35. I will clarify that since I found that this is not a cancellation of a transaction, and in view of the existence of a cancellation agreement between the parties, and subsequently an agreement for the sale of the land between Lorenzi and Zach, it is in any case a "resale" and not a transfer of the right from Maslawi to Zach. It seems that this conclusion is also consistent with Lorenzi's claim, according to which Zach refrained from exercising the option granted to her by Maslawi, due to the fact that the combination agreement is old and has been amended four times (testimony of Lorenzi's CEO, Mr. Netanel Lorenzi (hereinafter: "Netanel"), inthe minutes of December 11, 2024 (hereinafter: the "Minutes"), p.  46, para.  6; See also Maslawi's summaries, section 21.4).

Amount of time elapsed

36. In our case, about 18 years passed from the date of the signing of the combination agreement (May 2, 2001) to the request to cancel it (July 22, 2019). Such a long period in which the transaction actually existed cannot usually be considered a period in which the transaction did not take root, but rather the opposite.  It is clear that the longer the period, the tendency is not to recognize the cancellation of the transaction, especially where the parties treated the transaction as valid and existing, even if due to one circumstance or another its execution was delayed and continued.
37. It should be added that during the same period, changes were made to the transferred parts, and various additions were signed to the combination agreement (the additions were attached as Appendix 7 to the Respondent's affidavit), while in the fourth addendum to the combination agreement of March 3, 2008, Lorenzi's share in the agreement was increased to 45%. This, too, should be testified that this is a valid and existing transaction between parties that manage a dynamic and active business system in which naturally, over time, changes of one kind or another are made.

Register a warning note

38. On December 13, 2001, a warning note was written in favor of Maslawi on Plot 380. This registration, even if it is not a transfer of full ownership, constitutes a significant and substantial step that attests to the parties' intention to advance the transaction and establish proprietary rights for Maslawi in the future.  It should be remembered that a cautionary note, even though it is not listed in section 161 of the Real Estate Law as a proprietary right, is a negative right that attests to the existence of an obligation to execute a real estate transaction.  Its registration establishes the status of the transaction and prevents conflicting transactions, thus strengthening the respondent's claim that the transaction took root.
39. Netanel claimed in his testimony that the warning note "was used to repay another loan that was on the lot. We simply exchanged loans" (Transcript, p.  20, s.  8), but I am of the opinion that the very fact that the warning note has been recorded for many years indicates the existence of a substantial and binding legal relationship between the parties, as well as one in which loans are "exchanged" for which the real estate, the subject of the combination transaction, serves as collateral.

Demolition of the building

40. During the period until the cancellation of the transaction, Maslawi actually took possession of the land and even made changes to it and treated it as an owner's custom, including demolishing the building and renting the land as a parking lot, as well as working for a planning change that improved the land.
41. The appellants argued that the demolition of the building was a breach of the agreement. In his testimony, Netanel described the building as an "asbestos shed" (Transcript, pp.  48, 13) and noted that the letter sent to Maslawi on this subject, in which Lorenzi resented the demolition of the building (letter dated July 22, 2017; Appendix 9 to the Respondent's affidavit), was part of an attempt to "create" claims against Maslawi in order to offset the debt against her (Protocol, pp.  48, paras.  27-31).  Beyond the fact that it has not been proven that that resentment on the part of Lorenzi led to any kind of sanction, in any case, even if this is the case, in the end of the day Maslawi acted in the land as its own, and it is therefore difficult not to see the transaction as one that was carried out.

Promoting the Zoning Plan

42. Maslawi acted to promote a new zoning plan (Appendix 12 to the Respondent's affidavit), which changed the designation of the land, increased the building rights, and in any case significantly improved the land. In his testimony, Netanel confirmed that Maslawi had hired the U serviceof Moshe Tzur Architects for the purpose of drafting the new plan and paid his salary, while Lorenzi only received updates on this matter and formally signed the plans, since Maslawi's interest in the zoning plan was greater than that of Lorenzi (Protocol, pp.  33, 16-26; pp.  34, 7-11).
43. Netanel also confirmed that the new zoning plan changed the designation of the land from an industrial zone for commerce, employment and tourism, and established building rights for two towers of 37 floors each (Protocol, pp. 32, 32, 32 - 33, 1).  The appellants themselves, in their summaries, admitted that the promotion of city building plans is a "more important change" that has been made (section 11.2).  This activity contributed to the increase in building rights and changed the designation of the land, in a way that reinforces the conclusion that the combination transaction was indeed absorbed into the real land.
44. Needless to say, I do not ignore the fact that the main undertaking that Maslawi undertook - to build the office tower - was not realized, and in the end, even after 18 years from the date of signing the agreement, the tower has not yet been built. However, there are other and real indications that the agreement took shape, and in any event, the actions that were actually carried out in connection with the land, and their results in the practical world, indicate that it "sent roots" and it cannot be said that it was canceled retroactively, as if it had not been signed in the first place.

Car park rental

45. The land was rented by Maslawi to the operator of a parking lot, Yair Hashahar, and the rent was divided between her and Lorenzi. Alfasi testified that Maslawi did not actually benefit from the rent for Plot 380, but he could not explain how the money was transferred to Lorenzi or present proof of this.  His testimony was based on a conversation with the company's controlling shareholder, Sami Maslawi.

In any event, it appears that the lease of the land and the collection of rent, even if some of them are intended to be paid toLorenzi, are inconsistent with the argument that the transaction was not absorbed into the ground of reality, since, at the very least, it indicates the existence of an active right in the hands of Maslawi and substantial business involvement in connection with the land that is the subject of the combination agreement.  It should also be remembered that Maslawi rented the two plots as a single plot, presented itself in the original lease agreement as the sole owner of the rights in the two plots, and collected the rent from the tenant.

46. Netanel claimed in his testimony that Yair Hashahar "went behind our back and signed with Maslawi" (Transcript, pp. 22, 16), and that Lorenzi filed a claim against Yair Hashahar for eviction of the tenant immediately after the signing of the original lease agreement in 2011, since Lorenzi was not presented as one of the tenants in the agreement and did not even receive the full amount of rent to which she was entitled (Transcript, pp.  23, 19-30).  However, Netanel did not even know how to answer what Maslawi had when she signed on her own, and without informing Lorenzi about the lease agreement with Yair Hashachar, and why she did so (Protocol, pp.  23, paras.  3-18).  Nor did he give an explanation as to why the parties' pleadings in the same proceeding were not presented (pp.  22, 31).
47. In any event, following that eviction lawsuit, a settlement agreement was signed, which was given the force of a judgment in which it was determined that Lorenzi would be added as a landlord and would receive the full rent for Plot 380, which constitutes about 26% of the total rent paid by the tenant (Minutes, pp. 22, 33 - 23, 23).  However, in my opinion, the fact that Lorenzi insisted on her rights in all matters relating to the rent does not negate Maslawi's actions up to that date, and does not detract from the manner in which Maslawi herself treated the land following the signing of the combination agreement.  Maslawi demolished the building, rented the land, apparently on her own initiative, as is evident from Netanel's testimony, and collected the full rent.  This is sufficient to indicate the connection that Maslawi has in connection with the land in question.
48. I will add that since Maslawi demolished the building, rented the land for the purpose of the parking lot, and even collected the full rent, as of May 2, 2011, her declaration of July 3, 2018, according to which she had not yet been given possession of the property, a declaration submitted as part of her request to postpone the payment of the purchase tax, raises, at the very least, significant inconvenience and perplexity.

Financial Accounting and Loan Arrangement

49. During the years of the existence of the agreement, there was a significant financial accounting between the parties, so that there is substance to the respondent's argument that even the payment paid in the framework of the cancellation agreement is only an additional layer relating to that calculation and should not be severed from it. As stated, according to the combination agreement, Maslawi undertook to cause Lorenzi to receive a loan from a commercial bank, in view of the connections that Maslawi had with the bank (testimony of Netanel, pp.  12, 25-28).
50. Subsequently, a third addendum was signed to the combination agreement (Appendix 7 to the Respondent's affidavit), in which Maslawi joined as an additional owner of the loan account at Bank Hapoalim. Netanel confirmed that Maslawi had repaid the loan to Bank Hapoalim, with no other choice, since the bank refused to renew the credit, and that Zach had paid Maslawi the sum of ILS 5.1 million for this debt (Transcript, pp.  15, 21-31).
51. The loan that Lorenzi received with the assistance of Maslawi from Bank Hapoalim in 2001 on the day of the cancellation of the transaction (June 30, 2019) amounted to approximately ILS 7 million, including interest, according to the respondent, or approximately ILS 6 million, according to the appellant. In any event, the payment paid by Lorenzi in the framework of the cancellation agreement was in the amount of ILS 5.1 million, which is about ILS 1 million to ILS 2 million less than the actual debt.  Netanel argued in this matter that the said difference was known to compensate Lorenzi for the damages caused to her as a result of Matzlawi's actions and omissions (Protocol, pp.  18, paras.  29-33), but it seems to me that the respondent is correct in claiming that even this sum, which was not clarified how and how he thinks, shows that the transaction took root in reality and was not canceled in the first place.

The deal with Zach

52. On November 30, 2016, an agreement was signed between Maslawi and Zach, in which Maslawi sold its rights in Plot 285 for approximately ILS 63,000,000. In addition, Maslawi granted Tzach an option to purchase its rights and obligations by virtue of the combination agreement in Plot 380, for ILS 1,000.
53. Subsequently, a very short time after the combination transaction was canceled, on July 2, 2019, Lorenzi signed an agreement with Zach for the sale of all of its rights in the plot in question, in exchange for a total of approximately ILS 41 million. According to clause 6.3.1 of the agreement between Lorenzi and Zach, Zach was required to pay the sum of ILS 5.1 million to cover Lorenzi's obligation to Maslawi in respect of the loan from Bank Hapoalim, out of the first payment of the consideration to the seller.  According to the appellant, the payment in the amount of ILS 5.1 million that Zach paid to Maslawi was intended to cover Lorenzi's debt to Maslawi, and should not be treated as the exercise of the option.  According to them, Zach did not purchase the land or the option embodied in the combination agreement from Maslawi, but purchased the land directly from Lorenzi, after and following the cancellation of the combination agreement between Lorenzi and Maslawi.
54. My approach is that all transactions should be seen as intertwined. However, it is clear, and this clearly emerges from the agreements themselves, that from the point of view of all the parties involved, the feasibility of the transaction, which is ultimately intended to bring about the construction of an office tower on the land, depends on the combination of the two plots, 285 and 380, both in terms of the plans that apply to them and in terms of the legal rights related to them.  Thus, the fact that Maslawi granted Tzach an option to purchase its rights and obligations by virtue of the combination agreement back in 2016, and afterwards, following the cancellation of the combination transaction, Lorenzi sold the land to Tzach indicates that even many years after the original agreement was signed, it is still considered valid and has legal and economic implications for the parties.

The move described above contradicts the claim that the deal "died" and did not take root.  The opposite is true; The transaction remained valid and existed for all those long years, although due to one circumstance or another, it changed its face, and gave rise to new rights and obligations by and by other parties.  In any event, it is not possible to claim the cancellation of the transaction retroactively, as if the combination transaction, from which the rights and obligations of the parties were ultimately derived, did not come into existence in the first place.  Needless to say, the proximity of the time between the cancellation of the combination agreement (June 30, 2019) and the sale of the land by Lorenzi Tzach (July 2, 2019) testifies in itself to the fact that this is not a real cancellation of the transaction.

55. In the end, it seems that the respondent is correct in claiming that in practice Maslawi sold back to Lorenzi its share (60% of the rights) on the day of the "cancellation", thus enabling Lorenzi to sell all of its rights in the land to Zach. Not only that, but in the meantime, from the time the combination agreement was signed and until its cancellation, the real estate has been improved and its value has even increased.

The Burden of Evidence and the Burden of Persuasion

56. As is well known, the one who takes out his friend has the proof. In tax matters, the taxpayer is the "one who takes out his friend", and therefore the burden of proof and the burden of persuasion is on him.  However, in addition to the testimony of Netanel, the appellant's representative Lorenzi, one other witness - Alfasi - was brought - but since it turned out during his testimony that all his knowledge was based on a conversation he had with the controlling shareholder of the company, implying - that this was a clear hearing testimony - counsel for Maslawi asked to withdraw his affidavit.  The result, therefore, is that one party's version of the cancellation agreement was not presented to the committee at all.  Moreover, the appeal did not bring to the testimony of other relevant witnesses with personal knowledge of the circumstances of the transaction, such as a representative of Zach or a representative of Yair Hashahar.  At the end of the day, it appears that the appellants did not present a sufficient evidentiary basis to support their position that this was a cancellation of a transaction and not a resale.  As is well known, the failure to bring a relevant witness naturally raises the concern that if he had been brought to testify, his testimony would have supported the opposing party's position.
57. I will add that I did not find any substance in the appellant's argument as to the fact that the respondent approved the request for tax deferral in the combination transaction. The respondent's representative, Ms. Leibowitz, explained in her testimony that the Real Estate Taxation Office receives declarations about combination transactions and imposes tax, but requests to freeze the payment of tax under section 51 of the Real Estate Taxation Law are hardly examined (Transcript, pp.  55, paras.  16-22).  Moreover, and as is well known, in accordance with the provisions of the law, the responsibility to report to the respondent the fulfillment of the conditions of section 51 rests with the taxpayer.
58. I also did not find any substance in the argument that B. 26/92 supports the appellant's position.  Indeed, an important condition for recognition of a request to cancel the transaction is that both parties declare that the transaction has been cancelled and that it is not a unilateral cancellation, which may drag the Real Estate Tax Administration into a dispute that is not his.  In addition, it is appropriate that, as a rule, the Respondent should assume that the cancellation of the transaction was done in good faith and not due to tax planning, and all the more so not due to illegitimate tax planning.  However, it is also clear that it is the duty of the manager to examine the circumstances related to the cancellation of the transaction, and to the extent that he finds that these require explanation and reasoning on the part of the taxpayer, it is his duty to clarify this to the fullest, and the burden is on the taxpayer, who is requesting a tax refund, to prove that it is indeed a real cancellation and not a disguise for another transaction, all the more so when it comes to the cancellation of a transaction 18 years after it was concluded.
59. In this last context, I will also comment that I have not found a basis for the appellant's argument that since the respondent believed that this was an artificial cancellation of a transaction and that the transaction should be classified as a "resale" transaction, the burden of proof was on him. On the face of it, this is not an argument that the transaction should be classified "reclassified" for tax purposes, but rather that it should be classified in a "different" manner from the way it was classified by the parties, since all the circumstances, legal and factual, show that this is not a cancellation, but rather a resale with all that this entails (see, regarding the distinction between "reclassification" and "different classification", Civil Appeal 550/22 Israel Daniel Amram v.  Jerusalem Tax Assessor (August 29, 2023) and Tax Appeal 52941-01-21 + Tax Appeal 52960-01-21 -   Empire Properties v.  Rehovot Tax Assessor (March 12, 2026)).

Conclusion

60. In light of all of the above, I have reached the conclusion that the respondent was right not to accept the appellant's request to recognize the cancellation of the transaction, since it has taken root in reality and cannot be cancelled retroactively. Therefore, the appeals should be dismissed, and I will suggest this to my colleagues as well.
61. In addition, I will suggest to my colleagues that the appellants will bear the respondent's expenses in the sum of ILS 20,000 each (and together ILS 40,000) to be paid within 30 days, otherwise linkage differences and interest will be added to them from today until the date of actual payment.

Ms. Geva Balter, Real Estate Appraiser: