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.