Important Changes in the New Jersey Corporation Business Tax Act as Tax Season Approaches

P.L. 2018, c. 48, signed into law on July 1, 2018, and P.L. 2018, c. 131, signed into law on October 4, 2018, significantly changed the New Jersey Corporation Business Tax Act.

TB-84 summarizes the major changes listed by the effective dates.

Effective for tax years beginning on and after January 1, 2017:

Repatriation of Accumulated Foreign Earnings. A taxpayer is not allowed to use any deduction, exemption, or credit taken for federal purposes when reporting repatriation income (IRC §965(a) deemed dividends) on its New Jersey Corporation Business Tax return.

Dividend Exclusion Changes. Taxpayers who own 80% or more of the stock of a subsidiary will only be able to exclude 95% of the dividends received from those subsidiaries for tax years beginning after December 31, 2016.

Factor Relief. A special allocation was created to provide factor relief. Taxpayers can use a special allocation formula that is the lesser of the three-year average 2014 through 2016 allocation factor or 3.5% for calculating the tax on dividends received (or deemed received) by a taxpayer from a subsidiary for tax years beginning on and after January 1, 2017, and beginning before January 1, 2019.

Tiered Dividend Exclusion. The law provides an allocated tiered subsidiary dividend exclusion for dividends paid to a taxpayer by certain subsidiaries. The exclusion is intended to avoid multiple layers of tax on dividends that are included in entire net income.

Penalties and Interest. The law provides that penalties and interest are not imposed on the underpayment of tax resulting from the retroactive changes for the 2017 tax year. This provision only applies if the payments are made by the second estimated payment due date subsequent to the enactment of the law (e.g., for a calendar year taxpayer, by December 31, 2018, for tax years beginning on or after January 1, 2017)

Effective for tax years beginning on and after January 1, 2018:

Surtax. For tax years beginning on or after January 1, 2018, through December 31, 2021, there is a surtax imposed on every business entity that is subject to the Corporation Business Tax based on the taxpayer’s allocated taxable net income to New Jersey. The surtax is not imposed on New Jersey S corporation or partnership tax returns. The surtax is imposed only if the taxpayer’s allocated taxable net income is in excess of $1,000,000. The rate varies depending on the tax year (2.5% for tax years beginning on or after January 1, 2018, through December 31, 2019, and 1.5% for tax years beginning on or after January 1, 2020, through December 31, 2021). Allocated taxable net income is defined as being either the allocated net income for tax years ending before July 31, 2019, or taxable net income for tax years ending on and after July 31, 2019. The definition of allocated taxable net income was included to account for the change in net operating loss subtraction methods from a pre-allocation method to a post-allocation method. The surtax does not apply to New Jersey S corporations and partnerships. A corporate partner’s share of partnership income is subject to the surtax if the corporate partner’s allocated taxable net income meets the threshold for the surtax. However, if a New Jersey S corporation is included in a unitary combined return, then its portion of income is subject to the surtax.

GILTI and FDII. The law permits the taxpayer to use the amount of its federal IRC §250(a) deduction against its Global Intangible Low Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII) if the income was included in the taxpayer’s entire net income for New Jersey Corporation Business Tax purposes. Additionally, GILTI and FDII income is treated the same as for federal purposes. For federal income tax purposes, GILTI and FDII are their own types of business income and are not dividends. Therefore, for New Jersey Corporation Business Tax purposes, GILTI and FDII are not dividends or deemed dividends. Additional information will be posted to the Division’s website as soon as it becomes available.

Treaty Exceptions. The treaty exceptions for the related party addbacks of interest and intangible expenses (set forth in N.J.S.A. 54:10A-4(k)(2)(I) and N.J.S.A. 54:10A-4.4) have been amended to add additional requirements. Previously, a taxpayer only needed to establish that the amounts were paid, accrued or incurred by or to related members domiciled in nations with a comprehensive tax treaty with the United States. The taxpayer must also now establish that: 1) the related member was subject to tax in the treaty nation on a tax base that included the amount paid, accrued or incurred, and 2) the related member’s income received from the transaction was taxed at an effective tax rate equal to or greater than 6 percent.

Qualified Business Income Deduction. No deduction under IRC §199A is allowed for either Corporation Business Tax or Gross Income Tax purposes for tax years beginning after December 31, 2017.

IRC §163(j) Limitation Method. For Corporation Business Tax purposes, the 30% business interest expense deduction limitation set forth under IRC §163(j), applies on a “pro-rata” basis as between the total categories of related party and unrelated party interest. Additional information will be posted to the Division’s website as soon as it becomes available.

Research and Development Credit. The New Jersey Research and Development Credit (R&D Credit) is recoupled to the current IRC §41. Previously, the New Jersey R&D Credit was coupled to IRC §41 in effect on June 30, 1992 and was not refundable. In recoupling to the current IRC §41, it was expressly made clear that the New Jersey R&D Credit continued to be non-refundable. In addition, to prevent any unintended consequences by acts of Congress, the law states that no act of Congress terminating the federal credit would terminate the New Jersey R&D Credit. Both of the methods used for calculating the federal corporate income tax credit are now allowable for purposes of calculating the New Jersey R&D Credit.

Miscellaneous Major Changes.

· Taxpayers must addback all income that is exempt under any law of the United States to their entire net income.

· The law adjusts the depreciable basis of assets for certain utility companies.

Penalties and Interest. The law provides that penalties and interest are not imposed on the underpayment of tax resulting from the retroactive changes applying to returns filed for tax year 2018. This provision only applies if the payments are made by the first estimated payment due after January 1, 2019.

Effective for tax years ending on and after July 31, 2019 (beginning on or after August 1, 2018 for full 12-month fiscal tax years)

Market Based Sourcing. Under the new market-based sourcing provisions, sourcing for services is based on where the benefit of the service is received, rather than where the service is performed (aka “cost of performance” method).

Alternative Minimum Assessment. The Alternative Minimum Assessment is repealed and a transition conversion credit for unused Alternative Minimum Assessment credits of taxpayers that are members of a combined group provides relief to combined return filers.

Mandatory Combined Reporting. The law mandates combined returns for unitary businesses.  

· The law provides a net deferred tax liability deduction for publicly

· The law provides a net deferred tax liability deduction for publicly traded corporations that are impacted by the switch to combined reporting, beginning five years after a combined group’s first combined return.

· The law designates the default managerial member, provides options for selecting an alternate manager, and details the various responsibilities of the managerial member.

· The law provides combined return exceptions to the related party addbacks.

· The law provides a method for calculating the entire net income of members of a combined group, and methods for using tax credits and net operating losses.

· New Jersey S corporations that do not elect to be included in a combined group are not considered “taxable members” included on the combined return.

· The minimum tax for each member of a combined group is $2,000. Taxpayers filing a separate return must continue to calculate the minimum tax as per the statutes and regulations. Minimum tax is never prorated.

Water’s-Edge Default Combined Return. The default combined return filing method is the water’s-edge method. Taxpayers in a unitary business must file a mandatory unitary tax return on a water’s-edge basis. The members included in the water’s-edge group are: 1) 80/20 property and payroll domestic corporations; 2) 80/20 property and payroll foreign corporations; 3) members that earn more than 20% of their income, directly or indirectly, from intangible property or related service activities that are deductible against the income of other members of the combined group; and 4) all members that have nexus with New Jersey pursuant to N.J.S.A. 54:10A-2.

Worldwide or Affiliated Group Combined Return Basis. The law allows taxpayers to elect to file either on a worldwide combined return basis or an affiliated group combined return basis, but not both at the same time.

Businesses Excluded from a Combined Group. Insurance companies that are not combinable captive insurance companies and certain regulated public utilities are excluded from the combined group. This includes gas, electric, water, waste water treatment, and other statutorily defined utilities.

Combinable Captive Insurance Companies. Combinable captive insurance companies are no longer exempt from the Corporation Business Tax, but are exempt from the Insurance Premiums Tax. Captive insurance companies that do not meet the definition of a combinable captive insurance company are still subject to Insurance Premiums Tax and the cap imposed under N.J.S.A. 17:47B-12. Combinable captive insurance companies are included in the combined group on a combined return.

Penalties, Interest, and Estimated Payments. In the first tax year that a mandatory combined return is due, penalties or interest will not be imposed on an underpayment that results from the change from separate return reporting to mandatory combined return reporting. Any overpayment by a member of the combined group from the prior tax year is credited as an overpayment of the tax owed by the combined group or credited toward future estimated payments by the combined group.

Net Operating Loss Changes. The law also transitions New Jersey net operating losses to a post-allocation method. Prior to the enactment of P.L. 2018, c. 48, New Jersey net operating losses were calculated on a pre-allocation method. The law includes a method for converting outstanding pre-allocation net operating loss carryovers to post-allocation net operating loss carryovers. Net Operating Losses and Changes in Ownership. The law clarifies that N.J.S.A. 54:10A4.5 does not apply to members of a combined group filing a New Jersey combined return. More Information. This document provides a general summary of the major changes.

Tax Court Finds That the IRS Could Assess Restitution against a Third Party Where His Tax Conviction Crime Was Aiding and Abetting His Father’s Evasion of Income Tax.

In Botrager 151 TC No. 12 (2018), the Tax Court concluded that IRC Sec. 6201(a)(4) authorizes IRS to assess restitution for a tax liability that a person had been ordered to pay, upon conviction of violating IRC Sec. 7201, when his wrongdoing consisted of aiding and abetting the evasion of payment of a third party's tax liability.

Facts. The IRS alleged that from 1998 through 2010, Bontrager had criminally aided and abetted his father in evading payment of the father’s 1994 Federal income tax liability. Bontrager was alleged to have done this by using his company and a related real estate company to help his father conceal assets, income, bank accounts, and business interests. The IRS alleged that Bontrager had, for example, issued corporate checks to his father's female acquaintance, had used corporate funds to purchase a Rolls Royce for his father's use, had allowed his father to charge personal expenditures to a corporate credit card, had titled various assets in the names of his father's nominees, and had used offshore accounts to conceal his father's income and assets.

Several months before his sentencing, on October 4, 2013, Bontrager filed a petition under Chapter 7 of the Bankruptcy Code. In 2014, the bankruptcy court closed the bankruptcy case by issuing an order of discharge. That order noted that certain types of debts are not discharged in a Chapter 7 case, including "[d]ebts for most fines, penalties, forfeitures, or criminal restitution obligations."

Relying on IRC Sec. 6201(a)(4), IRS assessed the $72,710 of restitution that Mr. Botrager had been ordered to pay and recorded this assessment as a liability for his 1994 tax year.

On June 3, 2015, after petitioner did not pay the balance of the liability on notice and demand, the IRS filed a Notice of Federal Tax Lien. Upon notification, petitioner timely requested a Collection Due Process hearing. In his hearing request, Bontrager contended that the restitution was not assessable because it was ordered for failure to pay a tax that title 26 imposed upon his father rather than upon him.

After the collection due process hearing, the settlement officer upheld the filing of the Notice of Federal Tax Lien, and Mr. Bontrager timely petitioned the Tax Court.

The Court’s Analysis:

The District Court's sentencing order stated that petitioner was adjudicated guilty of violating "26 U.S.C. § 7201.” IRC Sec. 7201 criminalizes any willful attempt “in any manner to evade or defeat any tax imposed by this title or the payment thereof.” The elements of a IRC Sec. 7201 offense are:

• willfulness;
• the existence of a tax deficiency; and
• an affirmative act constituting an evasion or attempted evasion of the tax.

The second element is equivalent to a failure to pay tax.

The sentencing order described the nature of petitioner's offense as “aiding and abetting the evasion of payment of income tax,” within the meaning of 18 U.S.C. sec. 2. which alone does not make “aiding and abetting” a distinct crime. Rather, it provides that a person who “aids, abets, counsels, commands, induces or procures” the commission of an offense against the United States “is punishable as a principal.” Restitution orders are therefore, based on the underlying crime, not on the aiding and abetting.

IRC Sec. 6201(a)(4) authorizes the Commissioner to assess and collect the amount of restitution under a sentencing order “for failure to pay any tax imposed under this title.” As Bontrager was convicted of violating IRC Sec. 7201, he was thus found guilty of attempting “to evade or defeat [a] tax imposed by this title or the payment thereof.” Because failure to pay a tax imposed by title 26 was an element of the offense with which Bontrager was charged, and because he was convicted of that offense, IRC Sec. 6201(a)(4) by its terms authorized the IRS to assess and collect the amount of restitution that Botrager was ordered to pay.

Bontrager argued that the tax, the payment of which he was convicted of evading, was not originally imposed upon him by title 26. The Court said that neither IRC Sec. 7201 nor IRC Sec. 6201(a)(4) requires that this be the case. IRC Sec. 7201 criminalizes any willful attempt to evade payment of “any tax imposed by this title.” IRC Sec. 6201(a)(4) authorizes the assessment of restitution “for failure to pay any tax imposed under this title.”

The Tax Court further held that Mr. Bontrager's restitution liability was not discharged in the bankruptcy proceeding. The Court rejected his contention that IRS waived the nondischargeability of the restitution obligation by filing a claim as a general unsecured creditor in his chapter 7 case. Contrary to the taxpayer's view, the Court found that nothing in the Bankruptcy Code prevents a creditor of a nondischargeable debt from filing a claim, and the taxpayer provided no legal authority for this proposition. Further, the Court determined that IRS properly filed its claim as a general unsecured creditor. Because IRS had not assessed the restitution obligation at the time of the taxpayer's bankruptcy, let alone filed an NFTL, it was required to file its claim as a general unsecured creditor.

Are You Concerned that if Substantial Gifts Were Made Which Exceed the Pre-TCJA Estate and Gift Tax Exemption That Your Estate would Be Adversely Impacted?

In REG-106706-18 the IRS has issued proposed regulations that provide that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025, as provided for by the Tax Cuts and Jobs Act (TCJA), will not be adversely impacted after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels. 

Background

In computing the amount of Federal gift tax to be paid on a gift or the amount of Federal estate tax to be paid at death, the gift and estate tax provisions of the Internal Revenue Code (Code) apply a unified rate schedule to the taxpayer’s cumulative taxable gifts and taxable estate on death to arrive at a net tentative tax. The net tentative tax then is reduced by a credit based on the applicable exclusion amount (AEA), which is the sum of the basic exclusion amount (BEA) within the meaning of section 2010(c)(3) of the Code and, if applicable, the deceased spousal unused exclusion (DSUE) amount within the meaning of section 2010(c)(4). In certain cases, the AEA also includes a restored exclusion amount.

Prior to January 1, 2018, for estates of decedents dying and gifts made beginning in 2011, section 2010(c)(3) provided a BEA of $5 million, indexed for inflation after 2011. The credit is applied first against the gift tax, on a cumulative basis, as taxable gifts are made. To the extent that any credit remains at death, it is applied against the estate tax.

Section 11061 of the TCJA amended section 2010(c)(3) to provide that, for decedents dying and gifts made after December 31, 2017, and before January 1, 2026, the BEA is increased by $5 million to $10 million as adjusted for inflation (increased BEA). On January 1, 2026, the BEA will revert to $5 million. Thus, an individual or the individual’s estate may utilize the increased BEA to shelter from gift and estate taxes an additional $5 million of transfers made during the eight-year period beginning on January 1, 2018, and ending on December 31, 2025 (increased BEA period).

Section 11061 of the TCJA also added section 2001(g)(2) to the Code, which, in addition to the necessary or appropriate regulatory authority granted in section 2010(c)(6) for purposes of section 2010(c), directs the Secretary to prescribe such regulations as may be necessary or appropriate to carry out section 2001 with respect to any difference between the BEA applicable at the time of the decedent’s death and the BEA applicable with respect to any gifts made by the decedent.

Given the cumulative nature of the gift and estate tax computations and the differing manner in which the credit is applied against these two taxes, there are several questions regarding a potential for inconsistent tax treatment or double taxation of transfers resulting from the temporary nature of the increased BEA.

Analysis

·       First, in cases in which a taxpayer exhausted his or her BEA and paid gift tax on a pre-2018 gift, and then either makes an additional gift or dies during the increased BEA period, will the increased BEA be absorbed by the pre-2018 gift on which gift tax was paid so as to deny the taxpayer the full benefit of the increased BEA during the increased BEA period?

§  The IRS’s response is that the gift tax determination appropriately reduces the increased BEA only by the amount of BEA allowable against prior period gifts, thereby ensuring that the increased BEA is not reduced by a prior gift on which gift tax in fact was paid.

·                Second, in cases in which a taxpayer made a gift during the increased BEA period that was fully sheltered from gift tax by the increased BEA but makes a gift or dies after the increased BEA period has ended, will the gift that was exempt from gift tax when made during the increased BEA period have the effect of increasing the gift or estate tax on the later transfer (in effect, subjecting the earlier gift to tax even though it was exempt from gift tax when made)?

§  The IRS responded by ruling the only time that the increased BEA enters into the computation of the estate tax is when the credit on the amount of BEA allowable in the year of the decedent’s death is netted against the tentative estate tax, which in turn already has been reduced by the hypothetical gift tax on the full amount of all post-1976 taxable gifts (whether or not gift tax was paid). Thus, the increased BEA is not reduced by the portion of any prior gift on which gift tax was paid, and the full amount of the increased BEA is available to compute the credit against the estate tax.

·                The third situation considered is whether the gift tax on a gift made after the increased BEA period is inflated by a theoretical gift tax on a gift made during the increased BEA period that was sheltered from gift tax when made. If so, this would effectively reverse the benefit of the increased BEA available for gifts made during the increased BEA period. This issue arises in the case of donors who both made one or more gifts during the increased BEA period that were sheltered from gift tax by the increased BEA in effect during those years, and made a post-2025 gift. The concern raised is whether the gift tax determination on the post-2025 gift will treat the gifts made during the increased BEA period as gifts not sheltered from gift tax by the credit on the BEA, given that the post-2025 gift tax determination is based on the BEA then in effect, rather than on the increased BEA.

§  The IRS responded by ruling the gift tax from prior periods includes the gift tax attributable to the gifts made during the increased BEA period. In this way, the full amount of the gift tax liability on the increased BEA period gifts is removed from the computation, regardless of whether that liability was sheltered from gift tax by the BEA or was satisfied by a gift tax payment. All that remains is the tentative gift tax on the donor’s current gift. Even if the sum of the credits allowable for prior periods exceeds the credit based on the BEA in the current (post-2025) year, the tax on the current gift cannot exceed the tentative tax on that gift and thus will not be improperly inflated. The gift tax determination anticipates and avoids this situation, but no credit will be available against the tentative tax on the post-2025 gift.

·                The fourth situation considered is whether, for estate tax purposes, a gift made during the increased BEA period that was sheltered from gift tax by the increased BEA inflates a post-2025 estate tax liability. This will be the case if the estate tax computation fails to treat such gifts as sheltered from gift tax, in effect reversing the benefit of the increased BEA available for those gifts. This issue arises in the case of estates of decedents who both made gifts during the increased BEA period that were sheltered from gift tax by the increased BEA in effect during those years, and die after 2025. The concern raised is whether the estate tax computation treats the gifts made during the increased BEA period as post-1976 taxable gifts not sheltered from gift tax by the credit on the BEA, given that the post-2025 estate tax computation is based on the BEA in effect at the decedent’s death rather than the BEA in effect on the date of the gifts. In this case, the statutory requirements for the computation of the estate tax, in effect, retroactively eliminate the benefit of the increased BEA that was available for gifts made during the increased BEA period.

§  The IRS responded by ruling to implement the TCJA changes to the BEA under section 2010(c)(3), the proposed regulations would amend §20.2010-1 to provide that, in the case of decedents dying or gifts made after December 31, 2017, and before January 1, 2026, the increased BEA is $10 million.

The proposed regulations also would amend §20.2010-1 to provide a special rule in cases where the portion of the credit as of the decedent’s date of death that is based on the BEA is less than the sum of the credit amounts attributable to the BEA allowable in computing gift tax payable within the meaning of section 2001(b)(2). In that case, the portion of the credit against the net tentative estate tax that is attributable to the BEA would be based upon the greater of those two credit amounts.

Can the Filing of an Amended Tax Return Result in the Waiver of the Attorney-client Privilege Between Taxpayer and Accountant?

U.S. v. Adams, 122 AFTR 2d ¶2018-5380, (DC MN 10/27/2018)

Under United States v. Kovel, 296 F.2d 918, 921–22, 9 AFTR 2d 366 (2nd Cir. 1961) the attorney-client privilege applies to an individual's communications with an accountant if the communications are “made in confidence for the purpose of obtaining legal advice from the lawyer” The party asserting that a communication is protected by the attorney-client privilege has the burden to establish that it applies. U.S. v. Horvath, 53 AFTR 2d 84-1138, (8th Cir 1984).

In Adams the district court concluded that communications between a taxpayer and his accountant was protected by the attorney-client privilege. However the court concluded that any such privilege could be waived by filing an amended tax returns, and that that even if they were protected, the crime-fraud exception vitiated the privilege.

Under the crime-fraud exception, the attorney-client privilege does not extend to communications made for the purpose of getting advice for the commission of a fraud or a crime. Though the attorney-client privilege protects an individual's consultation with a lawyer with respect to past wrongdoings, the privilege is lost if the communication is made to further a continuing or contemplated criminal fraud or scheme. Similarly, a client who has used his attorney's assistance to perpetrate a crime or fraud cannot assert the work product privilege as to any documents generated in furtherance of his misconduct. See, In re Green Grand Jury Proceedings, 492 F.3d 976 (8^th Cir. 2007); Zolin v. U.S., 63 AFTR 2d 89-1483 (S. Ct. 1989)

Before the crime-fraud exception may be applied, the government must make a threshold showing that legal advice was obtained to further an illegal or fraudulent scheme. It's required to demonstrate "a factual basis adequate to support a good faith belief by a reasonable person… that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies." In re Green Grand Jury Proceedings,  492 F.3d 976, 979 (8^th Cir. 2007); Zolin v. U.S., 63 AFTR 2d 89-1483, (S Ct 1989).

Notwithstanding, to make the ultimate showing that the crime-fraud exception applies, and that the purportedly privileged documents should be disclosed, a higher level of proof is required. In re Gen. Motors Corp., 153 F.3d 714 (8^th Cir. 1998) The Supreme Court in Zolin expressly declined to specify the quantum of proof required to establish the crime-fraud exception, but noted that the standard is higher than the threshold showing required for in camera review.

The taxpayer, Edward Adams, invoked the attorney-client privilege over numerous communications between himself and accountants at Murry LLC, who were retained by his tax counsel under a so-called "Kovel arrangement."

The government raised three challenges to the assertion of privilege with regard to the communication with the accountants:

·      that the protections provided under Kovel were not applicable to these individual communications;

·      that any such protection was waived by the taxpayer's subsequent filing of amended tax returns; and

·      that the crime-fraud exception invalidated any claim of privilege.

In addition to the communications with his accountants, the government sought, and Mr. Adams asserted privilege with regard to, communications that he had with his law and business partner and their paralegal, and with lawyers that represented several companies (including the Apollo corporation, noted below).

The district court conducted an in camera review of the various Murry LLC communications.

The district court rejected the government's argument that the protections of Kovel did not apply to the Murry LLC communications. The court found that the declaration and supplemental declaration by Mr. Adams' attorney sufficiently demonstrated that the attorney-client privilege extended to the documents at issue. In these declarations, the attorney thoroughly explained how communications with Murry LLC and the information Mr. Adams provided to the accountants assisted in his provision of legal advice to his client regarding tax-related matters. The court found that this was sufficient to invoke the attorney-client privilege. The court also stated that its in camera review of the communications did not contradict the attorney's explanation.

The Amended Tax returns. The district court also concluded that Mr. Adams' subsequent filing of amended tax returns for 2008, 2009, and 2010 did not result in a waiver of the privilege as to the Murry LLC communications submitted for in camera review. The district noted that in Cote, the Eighth Circuit stated that

"[n]otwithstanding our recognition that the attorney-client privilege attached to the information contained in the accountant's workpapers under the circumstances existing here, we find that by filing the amended returns the taxpayers communicated, at least in part, the substance of that information to the government, and they must now disclose the detail underlying the reported data."

Notably the Cote court distinguished between "workpapers [that] contain detail of unpublished expressions which are not part of the data revealed on the tax returns," and other workpapers to which the rule of waiver would apply. Mr. Adam's attorney explained in his supplemental declaration that, in responding to a subpoena from the government, he provided copies of files that contain data and information that that was included on the amended returns for 2008-2010. However, the attorney did not disclose information communicated by Mr. Adams in connection with requests for legal advice. The district court found that the explanation of Mr. Adam's attorney distinguished this case from Cote, where the accountant "testified that the information on his workpapers was later transcribed onto the amended returns which were filed by the taxpayers with the government," thereby waiving the privilege.

The district court said that it could not conclude on the record before it (including its in camera review) that Mr. Adams was claiming privilege over the underlying details for the data that was ultimately transmitted to IRS when he filed the amended returns. Instead, the record suggested that the information conveyed to the accountants at Murry LLC comprised the type of unpublished expressions that were not later revealed on the amended tax returns.

As to the government's contention with regard to the crime-fraud exception, the district court found that while the government met the initial threshold requirement, it failed to make the ultimate showing that the crime-fraud exception applied.

Conclusion. While amended tax returns have the potential to unravel the Koval privilege, if communications are maintained properly the waiver of the attorney-client can be maintained.

Can you audit my online Tax Accounting Class-online starting August 27th?

 

As I mentioned a few days ago we are starting the online Tax Accounting class August 27th.

 

Someone asked –“can I audit the class?”

Here is the rules:

 

Cost for outsiders non-FDU alum to audit is charge for 1 credit-$1334; For an FDU alumni the cost of 1/2 credit-$667.

 

Generally, we want them to have an MST and the MST can be from any school, or a JD or MBA.

 

For online version- CPAs without MST (since it has no effect on those taking if for credit for an FDU MST) with some years of experience.

 

Here is a link to my introductory video-take a look!  https://www.dropbox.com/s/7vty9ie9cgy24qt/Course%20Introduction.mp4?dl=0

 

If you would like to enroll contact me (brunettii@fdu.edu) and/or Ron West (west@fdu.edu)

Federal Tax Accounting -online @ Fairleigh Dickinson University

Once again I am offering my federal tax accounting course online at FAIRLEIGH DICKINSON UNIVERSITY starting August 27, 2018. I will be using my book, “Federal Tax Accounting“(CCH 2017).

 

The course is divided into four modules. In the first module we will study “the entities tax year.” In the second module we will study “changes of accounting methods.”  In the third module we will study “tax accounting methods.”  In the fourth module we will study “inventory and uniform capitalization.”

 

The course is designed to not only explore the principles of Federal Tax Accounting as well as learn to analyze and solve tax accounting problems. The course is activities-based, functional incrementally and cumulatively. The outcomes will be determined based on case studies, analysis of solving tax problems, and preparation of IRS forms such as 3115’s and 1128‘s, etc.

 

Each module will have a capstone project where, in some cases, there will be a group activity, and in some an individual activity.

 

Each week you will have specific assignments, access to online video lectures (over 50), a weekly WebEx meeting, and access to numerous cases, rulings, revenue procedures, etc.

The topics include:

•      The Entity’s Tax Year;
  •         Methods of Accounting;
  •         The Cash Receipts and Disbursements Method;
  •         The Accrual Method;
  •         Change in Accounting Method;
  •         Inventories;
  •         Uniform Capitalization Rules;
  •         Instalment Sales; and
  •         Long-Term Contracts.

I invite you to sign up for the course through the FAIRLEIGH DICKINSON UNIVERSITY MST website. You may contact Ron West at: West@fdu.edu or contact me at” brunetti@fdu.edu.

The IRS Recently Clarified Its Position on Willfulness in FBAR Penalty Cases and It Is Not Taxpayer-Friendly

“This article was originally posted on Scarinci Hollenbeck’s website – (http://scarincihollenbeck.com/law-firm-insights/tax/taxes/irs-fbar-penalty-case/) by Jeffrey R. Pittard 

 

Pursuant to 31 U.S.C. 5314(a) and 31 C.F.R. 1010.350, a United States person is required to annually report financial accounts in which it has a financial interest or signature authority over to the Internal Revenue Service on a Report of Foreign Bank and Financial Accounts Form (FBAR). If a taxpayer fails to timely submit its FBAR, 31 U.S.C. 5321(a)(5) allows the government to impose penalties on the taxpayer up to the greater of $100,000 or half the value of the account balance at the time of the violation when the failure to file is considered “willful”.


The IRS has recently released internal documentation in which it outlines its views on the standard for “willfulness” in assessing FBAR penalties against taxpayers. It also sets forth its belief in the burden of proof required to establish that a taxpayer acted willfully.


According to the IRS, willfulness is more than just ignoring a known obligation. The IRS has determined that for FBAR violation purposes, the term “willful” includes not only a knowing failure to file, but also when the taxpayer is “reckless” or “willfully blind” in its failure to file.
Courts have held that recklessness exists when a taxpayer “(1) ought to have known know that (2) there was a grave risk [in not complying with the law] and if (3) he was in a position to find out for certain very easily.” United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989).


Willful blindness exists when a taxpayer makes “a conscious effort to avoid learning about reporting requirements.” United States v. Williams, 489 Fed.Appx. 655, 659-660 (4^th Cir. 2012). The Internal Revenue Manual also indicates that “willful blindness may be present when a person admits knowledge of, and fails to answer questions concerning, his interest in or signature or other authority over financial accounts at foreign banks on Schedule B of his Federal income tax return.” I.R.M. 4.26.16.6.5.1.


Thus, the IRS could attempt to assess a willfulness penalty even if you were not aware of your FBAR filing obligation. Although the IRS initially believed in the internal guidance that the IRS would need to prove willfulness under the clear and convincing standard, case law has indicated that a lower burden – merely a preponderance of the evidence – is all that is required to assess an FBAR penalty against a taxpayer. Thus, the IRS needs only to prove that you were more likely than not willful in failing to file your FBAR.

IRS implies that payments made inn 2017 for 2018 real property taxes will not result in a property tax deduction for 2017

In Information Letter 2018-0009 the IRS has implied that actions taken in Dec. 2017 by  the New Jersey Department of Community Affairs, which ordered NJ municipalities to accept payments for 2018 property taxes in calendar year 2017, will not result in those payments generating 2017 federal income tax deductions.

One of the provisions of the Tax Cuts and Jobs Act (TCJA) limited post-2017 annual deductions for real property and other state and local taxes to a maximum of $10,000. Another TCJA provision increased the standard deduction for 2017 and thereafter. As a result of these two changes, many taxpayers will not get a full benefit for their 2018-and-later payments of nonbusiness real property taxes.

 Code Sec. 164(b)(6) , as amended by TCJA, provides that a taxpayer who, in 2017, pays an income tax that is imposed for a tax year after 2017, cannot claim an itemized deduction in 2017 for that prepaid income tax.

In December, 2017, IRS announced that a prepayment of real property taxes is deductible in the year of prepayment, e.g., 2017, only if the property tax is assessed in the year of prepayment. (IR 2017-120) State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed. In the pronouncement the IRS provided the following illustrations:

Illustration. Assume County A assesses property tax on Jul. 1, 2017 for the period Jul. 1, 2017 - Jun. 30, 2018. On Jul. 31, 2017, County A sends notices to residents notifying them of the assessment and billing of the property tax in two installments, with the first installment due Sept. 30, 2017 and the second installment due Jan. 31, 2018. Assuming taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on Dec. 31, 2017 and may claim a deduction for this prepayment on the taxpayer's 2017 return.

Illustration. County B also assesses and bills its residents for property taxes on Jul. 1, 2017, for the period Jul. 1, 2017 - Jun. 30, 2018. County B intends to make the usual assessment in Jul. 2018 for the period Jul. 1, 2018 - Jun. 30, 2019. However, because county residents wish to prepay their 2018-2019 property taxes in 2017, County B has revised its computer systems to accept prepayment of property taxes for the 2018-2019 property tax year. Taxpayers who prepay their 2018-2019 property taxes in 2017 will not be allowed to deduct the prepayment on their federal tax returns because the county will not assess the property tax for the 2018-2019 tax year until Jul. 1, 2018.

On December 27, 2017 then New Jersey Governor Chris Christie issued Executive Order 237 essentially requiring municipalities to accept payments for 2018 property taxes in calendar year 2017, and to credit payments postmarked on or before Dec. 31, 2017, as received in calendar year 2017 (NJ Order). The state agency charged with implementing the NJ Order, the New Jersey Department of Community Affairs, issued a similar requirement in Local Finance Notice 2017-28. The NJ Order cites existing New Jersey law that permit taxes to be received and credited prior to the dates otherwise fixed for payment. That law is N.J. Rev. Stat. §§ 54:4-66(e) and 54:4-66.1(f), which provide that taxes may be received and credited as payments at any time, even prior to the dates herein before fixed for payment, from the property owners, their agents, or lien holders.

In February, 2018, New Jersey Attorney General Gurbir Grewal wrote IRS, arguing that New Jersey taxpayers who paid 2018 property taxes on or before Dec. 31, 2017 should be eligible for deductions in 2017 and asking IRS to confirm that analysis. Pointing to the NJ Order and the Local Finance Notice, he said that "State statutes, executive orders, and agency notices are clear that residents may satisfy property tax assessments in advance and payments must be credited at that time. I see no basis for the IRS to refuse to do the same." He also noted, "...while the TCJA did establish that income tax prepayments should be credited in 2018, that law did not impose the same rule on property tax prepayments. And so, relying on the text of the law, thousands of New Jersey taxpayers rushed to pay their taxes in order to qualify for the SALT [state and local tax] deduction."

In a letter to the New Jersey attorney general, IRS has implied that it disagrees with his position. The IRS noted that, before the passage of the TCJA, IRS has consistently taken the position during examinations that the deduction for state and local real property taxes is allowable as long as the tax is both paid and imposed (or assessed) in the tax year. The IRS said that, on the rare occasions this position has been challenged, courts have upheld IRS's interpretation. See Estate of Hoffman, 87 AFTR 2d 2001-2119 (4^th Cir. 2001 where the Court of Appeals for the Fourth Circuit upheld a Tax Court decision disallowing the deduction for a prepayment of property taxes because the tax had not yet been assessed.

In the letter the IRS said that the TCJA did not change Code Sec. 164 relating to property tax prepayment. As such, IRS's longstanding position remains the same and is reflected in IR 2017-120. Thus, if a state or local taxing jurisdiction imposed tax on real property by the end of 2017, the amounts paid in 2017 are deductible on a taxpayer's 2017 tax return. If the tax was not imposed by a state or local taxing jurisdiction by the end of 2017, the requirements for the deduction under Code Sec. 164 are not satisfied in that year, and the deduction is therefore not allowable in 2017.

Ne Jersey Tax Amnesty

Tax Amnesty

• A-3438 provides for a 90-day tax amnesty period to run through no later than January 15, 2019.
• Under the new amnesty, any taxpayer with liabilities for returns due on or after February 1, 2009, can pay the tax, plus half the interest due as of November 1, 2018 and avoid any penalties with the exception of criminal and civil fraud penalties.
• An eligible taxpayer cannot be notified of or be under criminal action or investigation.
• The new law also imposes a 5 percent non-participation penalty for liabilities eligible for amnesty that are subsequently discovered by the Division of Taxation.

New York and New Jersey Workplace Harassment and Discrimination Laws

Recently, both New York and New Jersey have passed laws that address workplace harassment and other forms of discrimination

Employers should understand that the legal environment on federal, state and even city levels are rapidly changing and that there will be no tolerance for workplace harassment that is permitted or suffered with no effective response. Workplace harassment exposes the employer to strict liability. This simply means that, if it happens in your workplace, you will have the legal
responsibility for the damages (compensatory, punitive and legal fees). UNLESS:

you have an up-to-date policy (including any new requirements of recently passed laws),

the policy is periodically published and discussed with the rank and file,

supervisors are properly trained on what to do when they see or hear of improper conduct

and that it is made abundantly clear to all that there will be ZERO TOLERANCE for

unwanted sexual advances or other forms of discrimination or bullying in the workplace. 

NEW YORK LAWS

Effective immediately, New York State has expanded mandated protections against sexual harassment for even non-employees, including contractors, subcontractors, vendors and This change has the biggest potential impact because businesses now have a whole new category of possible plaintiffs that can sue a company for sexual harassment. The legislation amends the New York State Human Rights Law to ensure that regardless of their specific title or role, all individuals are protected against sexual harassment in the workplace. Another provision of the amended law, effective July 11, 2018, prohibits companies from using non-disclosure clauses in settlements or agreements relating to claims of sexual harassment unless they are agreed to by the complainant. Mandatory arbitration clauses applicable to claims of sexual harassment are also prohibited (other forms of discrimination are not exempted, however). Effective October 9, 2018, employers will be required to distribute written workplace harassment policies to all employees and provide annual anti-harassment training, based upon models to be developed and published by the New York State Department of Labor and Division of Human Rights.

THE ACT

Not to be outdone by the state, the New York City Council also very recently passed the Stop Sexual Harassment in NYC Act (the “Act”). The Act amends the New York City Human Rights Law (“NYCHRL”) and the New York City Charter. New York City employers must be familiar with both state and city requirements and, where such requirements may overlap, ensure they are meeting the requirements of both laws. A key requirement of the New York City law is that employers with 15 or more employees (including interns) conduct annual anti-sexual harassment training for all employees, including supervisory and managerial employees. This required training must cover a number of topics, including definitions and examples of sexual harassment, educate on bystander intervention, and explain how to bring complaints both internally and with applicable federal, state and city administrative agencies. The training must be conducted on an annual basis for incumbent employees, and new employees, who work 80 or more hours per year on a full or part-time basis in New York City, must receive the training within 90 days of initial hire. The law further requires employers to obtain from each employee a signed acknowledgment that he or she attended the training. The NYC Commission on Human Rights (“City Commission”) will be publishing online sexual harassment training modules for employers’ use, and these will satisfy the requirements of the Act so long as the employer supplements the module with information about the employer’s own internal complaint process to address sexual harassment claims. Required posters concerning the law will be provided by the City Commission.

INQUIRING ABOUT AN APPLICANT’S SALARY

As of October 31, 2017, New York City made it illegal for public and private employers of any size to inquire about an applicant’s salary history during the hiring process, including in advertisements for positions, on applications or in interviews. Rather than relying upon salary history, employers must base compensation offers on the applicant’s qualifications and the requirements for the job. The prohibition is based upon the assumption that salary history perpetuates a cycle of inequity and discrimination in the workplace, especially for women and people of color. While this prohibition only applies to New York City, it should be anticipated that policy is a trend and that the states will soon follow. Accordingly, it is recommended that job applications and pay policies be reviewed to anticipate this very predictable change.

NEW JERSEY – ALLEN ACT

As we have recently alerted our clients, New Jersey passed the Diane B. Allen Equal Pay Act which becomes effective July 1, 2018. This Act amends New Jersey’s powerful Law Against Discrimination (NJLAD) to forcefully ban pay disparities based on any characteristic relating to an employee’s membership in one of the many classes protected by the NJLAD. Thus, under the Allen Act, it is an unlawful employment practice to pay less to any member of a protected employee category for “substantially similar work.” Compliance failures will now expose employers to six years of damages, mandatorily trebled plus attorneys’ fees. Employers must not sit on their hands, and are urged to immediately engage in critical reviews of present pay practices to ensure that compensation is tied to legitimate factors such as training, education, past experience, quality of work or measurable factors of productivity. Job titles and responsibilities should be reviewed to ensure that they properly tie into objective wage standards, although subjective factors cannot be eliminated altogether. It is recommended, among other things, that formal Job Descriptions be adopted and pay practices, after review, be formalized, subject to continuing periodic, critical review.

NJ MANDATORY PAID SICK LEAVE

On May 2nd, New Jersey became the tenth state to enact a statewide mandatory paid-sick-leave The New Jersey Paid Sick Leave Act will go into effect on October 29, 2018. Once effective, New Jersey employers of all sizes, including temporary help services firms, will be required to provide up to 40 hours of paid sick leave per year to covered employees. Consequently, every affected employer must start to prepare policies and practices to comply with the Act. The Act expressly excludes employees in the construction industry employed under a collective bargaining agreement, per diem healthcare employees, and public employees who already have sick leave benefits. The Act requires employers to designate any period of 12 consecutive months as a “benefit year”, and the established benefit year cannot be changed without first notifying the New Jersey Department of Labor and Workforce Development. In each benefit year, an employee will accrue up to 40 hours of sick time at a rate of one hour for every 30 hours worked. Alternatively, employers may opt to “frontload” the full 40 hours at the beginning of the benefit year in order to avoid the record-keeping requirements. Employers with existing paid time off (PTO), personal days, vacation days and sick-day policies may utilize those policies to satisfy the requirements of the act as long as employees can use the time off as required by the act. In the case of a temporary help service firm placing an employee with client firms, paid sick leave will accrue on the basis of the total time worked on assignment with the firm, not separately for each client firm to which the employee is assigned.

As should be clear from the above, the time to act is NOW. Delay or inaction can and will lead to potentially painful consequences.  Please contact Gary Young or the Scarinci Hollenbeck attorney with whom you work with to schedule an appointment to review the law, your employment practices and next steps towards effective compliance.