NEW JERSEY SUPREME COURT YEAR IN REVIEW TAX CASES

As of June 30, 2018, the New Jersey Supreme Court addressed one tax case that originated in the Tax Court during the 2017-2018 court year.

REAL PROPERTY TAX

In EQR-LPC Urban Renewal North Pier, LLC v. City of Jersey City, 231 N.J. 157 (2017), the New Jersey Supreme Court affirmed the judgment of the Appellate Division substantially for the reasons expressed in that Court’s per curiam opinion, and did not write a plenary opinion.

Plaintiffs had appealed from the Appellate Division’s reversal of the Tax Court’s grant of partial summary judgment to plaintiffs on their claim seeking a declaratory judgment that financial agreements that they had entered into with the defendant in 2000 and 2001 incorporated 2003 amendments to the Long Term Tax Exemption Law, N.J.S.A. 40A:20-1 to 22 (“LTTE”).

The underlying facts were as follows:  Plaintiffs qualified as urban renewal entities under the LTTE law.  To obtain property tax exemptions for their urban renewal projects involving the construction of an apartment building, plaintiffs entered into financial agreements with the defendant.  The agreements obligated plaintiffs to pay an annual service charge equal to 15 percent of the annual gross revenue, and to pay any excess net profits to defendant.

Plaintiffs submitted an excess net profits calculation for 2013, calculating their allowable profits using the profit calculator formula rate provided by the 2003 amendments to the LTTE law, rather than the formula rate contained in the version of the LTTE law in effect when the parties entered into their agreements with the defendant in 2000 and 2001.  Under the 2003 amendment rate, plaintiffs did not have any excess profits and consequently, didn’t owe any excess net profit payments to the defendant.

The defendant sent a default notice, contending that plaintiffs did have an excess profit because it should have used the profit calculation formula contained in the version of the LTTE law in effect at the time the subject agreements were executed.

The Tax Court granted summary judgment in favor of the plaintiffs and held that the phrase “as amended and supplemented” in the agreements demonstrated the parties’ intent to incorporate future amendments to the LTTE law in their agreements.

The Appellate Division reversed the Tax Court’s grant of summary judgment – it ruled instead that the word – for – word copying of the profit calculation formula contained is the version of the LTTE law in effect at the time the agreements were written (as it existed in 2000 before the 2003 amendments) evidenced the parties’ intent to specifically adopt that formula.  The Appellate Division further held that the phrase “as amended and supplemented” was intended to incorporate amendments to the LTTE law from its initial adoption in 1991, up to the date the agreements were executed, not future amendments.

In reaching its decision, the Appellate Division panel found support for its interpretation in noting that it is contrary to fundamental public financing concepts for the Legislature to adjust the terms of municipal tax abatement contracts after the fact.

NEW JERSEY’S 2018 TAX AMNESTY PROGRAM OFFERS RELIEF TO MANY TAXPAYERS

On July 1, Gov. Phil Murphy signed into law a tax amnesty measure that offers relief to many taxpayers in a variety of situations and will help bridge the revenue shortfall in the state budget.  It requires the Director of the Division of Taxation to establish a period not exceeding 90 days in duration which shall end no later than January 15, 2019.  Anyone behind on taxes owed for the time period between February 1, 2009 and September 1, 2017 would be eligible to participate, as long as they are not under criminal investigation.

Similar to New Jersey’s prior six amnesty initiatives, the new law provides for complete forgiveness of all penalties and one-half of the balance of accrued interest that is due as of November 1, 2018 in return for nonrefundable payment of the tax and remaining one-half of accrued interest due and a waiver of the right to appeal any liability paid under amnesty.

Additionally, a significant aspect of this amnesty law is that it not only applies to unassessed amounts, but also to amounts currently under audit or being contested with the Division of Taxation, either at its Conference Branch or in the New Jersey Tax Court.

The new law applies to all state taxes administered by the Division of Taxation (e.g., Gross Income, Sales and Use Tax, Corporate Business Tax, Motor Fuels and so on) but does not apply to unemployment-type taxes administered by the Department of Labor.

Specifically, it applies to state tax liabilities for tax returns due on and after February 1, 2009, and prior to September 1, 2017. Consequently, for example, it can be used to obtain relief for a taxpayer’s 2009 through 2016 Gross Income Tax, Corporate Business Tax returns, and for all sales and use tax quarters ending December 31, 2009 through June 30, 2017.

The Division of Taxation has not yet announced starting date for the amnesty period, which must end by January 15, 2019. Thus, the taxpayers will have to make an amnesty payment within the time period established by the Director to take advantage of amnesty relief.

In that regard, in order to be able to comply with the amnesty period tax payment deadline, it would be advisable in many situations for representatives to initiate contact with the Division of Taxation to obtain an agreed-to tax amount figure in time to mail a payment by the end of the amnesty period.

Exceptions and Pitfalls

An important exception to the tax amnesty bill is that it does not apply to any taxpayer who at the time of the amnesty payment is under criminal investigation or charge for any state tax matter, as certified by a county prosecutor or the attorney general to the director, Division of Taxation.

However, this exception is expected to be narrowly interpreted by the Division of Taxation which under the prior amnesty program took the position that this exception to amnesty relief did not apply to a taxpayer who was currently being investigated by its Office of Criminal Investigation, so long as the case had not been referred for prosecution to the Attorney General’s Office.

Consequently, it appears that this amnesty measure, as well, could be used to preclude a criminal tax prosecution in such a situation.

With respect to potential, federal tax collateral consequences, the Division of Taxation has represented in the past that it has no intention of affirmatively providing any information obtained through the amnesty program to the Internal Revenue Service.

In that connection, however, tax representatives must recognize that if the IRS makes a request for amnesty-related data pursuant to the general information-sharing agreement it has with the Division of Taxation, that the division will comply.

Therefore, the risk that an amnesty disclosure will result in a federal tax inquiry should be carefully considered in deciding whether, and how, to make an amnesty filing.

Furthermore, while the good news of the amnesty legislation is the complete forgiveness of penalties and hefty costs of collection fees and one-half of accrued interest, the bad news is that if a taxpayer is eligible for amnesty and fails to take advantage of it, an additional unwaivable 5 percent penalty will be automatically added to the already imposed statutory penalties and interest on any tax liability that would have been subject to the amnesty program.

Wide Range of Uses

Next, it is important for tax representatives to recognize that practically speaking, the amnesty program is not limited to being used to preclude a criminal tax prosecution in a failure-to-file-tax-return situation. It can also be used to resolve Nexus issues, and for example, to shut down ongoing tax audits, since the Division of Taxation is instructing its auditors to re-evaluate going forward with audits when amnesty payments are made.

In addition, the amnesty program can be useful in removing Certificates of Debt — the legal equivalent to money judgments — which have already been docketed by the Division of Taxation for unpaid penalty and interest, as well as saving clients’ money in situations where they have already entered into deferred payment agreements with the Division or its third-party collection representatives to liquidate outstanding tax liability.

Moreover, in some situations it could be used to settle tax disputes in the Tax Court or those pending at the administrative/appeal Conference Branch stage.

Finally, in areas like sales and use tax, it can be used for some tax quarters and not others, thereby reducing overall exposure in tax contests, and especially useful in Nexus situations after the U.S. Supreme Court’s recent rejection of Quill’s physical presence test in the South Dakota v. Wayfair, Inc. case.

Audit Concerns

Although an amnesty payment is nonrefundable, the Division of Taxation retains the right to conduct an audit of any amnesty payment situation, and any additional tax determined by the Division in such a situation would be subject to interest and penalties and, of course, subject to appeal by the taxpayer.

Because of the Division’s expressed policy of not targeting amnesty program situations and processing information obtained through the program through the normal system, however, a taxpayer’s chances of being audited will not be increased by an amnesty program filing.

In view of this amnesty program legislation’s usefulness, and the potential savings it offers, clients with outstanding or potential tax liabilities, as well as those currently contesting an assessment with the Division of Taxation, should be contacted to determine whether amnesty arrangements can be structured.

Reprinted with permission from the July 9, 2018 edition of www.LAW.com© 2018 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.com.

Offshore Tax Evasion – IRS to End Offshore Voluntary Disclosure Program

In Information Release – 2018-52, the Internal Revenue Service announced on March 13, 2018, that it will shut down and end its Offshore Voluntary Disclosure Program (“OVDP”) on September 28, 2018.  Thus, taxpayers with undisclosed foreign financial assets have time to utilize the OVDP before the program closes, but need to act ASAP and consult with experienced tax controversy counsel so that a complete filing submission is made by September 28, 2018.

Click Here to Read the Full Article

The Taxation of Crypto Virtual Currencies – IRS Enforcement Initiative

Data from CoinMarketCap.com shows that the market capitalization for all crypto virtual currencies is currently at approximately 300 billion dollars.  Of that amount Bitcoin’s market share represents about 158 billion dollars, and the second largest cryptocurrency, ethereum/ether has about a 50 billion dollars market share.  Furthermore, virtual currency (ex. Bitcoin, ethereum/ether) trading and the related block chain trading technology platforms have been dominated by retail investors which has played a significant role in pushing cryptocurrencies to record highs in 2017.  In that regard, Coinbase, the world’s largest on line crypto wallet, adds about 100,000 new users every week.

It is estimated that millions of U.S. taxpayer Bitcoin/transactions have occurred, yet the IRS has stated that only 800 to 900 taxpayers had reported their Bitcoin gains from 2013 through 2015 by electronically filing IRS Form 8949 – the IRS form used for reporting sales and other dispositions of capital assets. (https://www.thestreet.com/story/14257905/1/bitcoin-investors-must-report-gains-to-the-irs.html)

Taking notice of what appears to be widespread tax noncompliance, the IRS is pursuing enforcement actions, and the IRS Criminal Investigation Division believes that virtual currency has increasingly become a tax evasion issue.  Consequently, the tax defense community can expect more enforcement actions in the future.

In that regard, on November 29, 2017 the IRS in connection with its investigation of allegedly underreporting of income and failure to pay taxes on crypto currency transactions caused the U.S. District Court for the Northern District of California U.S. v. Coinbase 17-01431 to issue an order enforcing a “John Doe Summons” to the Coinbase virtual currency exchange.  Coinbase, as one of the world’s largest platforms for exchanging virtual currencies, has approximately 5.9 million customers and has facilitated approximately $6 billion exchanged to Bitcoin. The Coinbase summons seeks a wide variety of records including, for example, taxpayer identities for all of its customers who have bought, sold, sent or received crypto currency worth $20,000 or more in any tax year from 2013 to 2015, transaction logs, and correspondence.  Accordingly, taxpayers using virtual currency transactions involving Coinbase who are not in tax compliance should consult experienced criminal tax counsel as soon as possible for advice.

With respect to the substantive tax aspects of crypto virtual currency, the IRS addressed emerging issues of the growing digital economies and how existing fundamental U.S. federal income tax principles apply to transactions using virtual currency to pay for goods or services, or held for investment when it issued IRS Notice 2014-21.

IRS Notice 2014-21 begins by acknowledging that virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as convertible virtual currency.  Bitcoin is one example of a convertible virtual currency – Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

The Notice goes on to state that in general, the sale or exchange of convertible virtual currency or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction has tax consequences that may result in a tax liability.

Specifically, the IRS has taken the position for federal tax purposes, that virtual currency should be characterized as property, not as a foreign currency recognized by any government.

Accordingly, when using Bitcoins for example, to purchase products, if the Bitcoin appreciated in value since it was acquired, there may be tax owed on the gain if the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency.

The character of the gain or loss depends on whether the virtual currency is a capital asset in the hands of a taxpayer.  A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer.  For example, stocks, bonds, and other investment property are generally capital assets.  A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer.  Investors and other property held mainly for sale to customers in a trade or business are example of property that is not a capital asset.  Thus, since characterized as property, normal tax consequences flow.  Therefore, if an employer pays an employee in virtual currency the employee must report the fair market value of the virtual currency measured in U.S. Dollars as compensation income as of the date of the virtual currency payment and the employer must report that value on a Form W-2.  Moreover, the fair market value of virtual currency paid as wages is subject to federal employment taxes paid by the employer and income tax withholding (FICA) and FUTA.  Similarly, if virtual currency is received by a business in exchange for goods or services, then any such payments received are reportable as ordinary income.

When a taxpayer successfully “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain public Bitcoin transaction ledger), the fair market value of the virtual currency as of the date of receipt is includible in gross income.

Also, if a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment resulting from those activities constitute self-employment income and are subject to the self-employment tax.

As to crypto currency and information reporting requirements, payments made in virtual currency appear to be subject to the same information reporting requirements as payments made in property, real currency or instruments denominated in real currency.  For example, gains and losses attributable to virtual currency transactions may need to be reported on Form 8949 which is attached to Schedule D of Form 1040; payments made by a person engaged in a trade or business to an independent contractor using a virtual currency for the performance of services may require reporting of such payments to the IRS and to the payee on Form 1099 MISC.

Many questions though remain unanswered such as for example, whether virtual currencies need to be reported on FBARs foreign bank account reports – a U.S. taxpayer’s accounts at a foreign binary Bitcoin options exchange or a foreign Bitcoin options exchange could be reportable on an FBAR as a foreign financial account, and on IRS Form 8938, and whether the exchange of crypto currencies can qualify as Section 1031 like exchanges.

Unfortunately, the IRS has not issued any further guidance up to date beyond IRS Notice 2014-21, but instead is pursing enforcement actions.  Furthermore, State tax authorities will no doubt adopt the IRS’ characterization of crypto currency as property with resultant state tax consequences and concerns.

If you have invested in, traded, and/or spent convertible virtual currency, we encourage you to contact the Firm.