The New Jersey Tax Appeal Filing Deadline is April 3rd.

In the upcoming weeks property owners will be receiving their annual property tax assessment notices (postcards) from the municipal assessor’s office. Receipt of these assessment notices indicates that the time has arrived to determine whether a tax appeal is warranted for the 2017 tax year.  Despite what can best be described as uneven improvement in the real estate market across various commercial segments, the need to carefully evaluate property tax relief opportunities continues as commercial property taxes remain the largest single expense component affecting a property owner’s bottom line. The 2017 tax appeal filing deadline is April 3, 2017, unless a town-wide reassessment or revaluation is in place, in which case the deadline is May 1, 2017.

Consequently, it behooves commercial property owners to review their property tax assessments with experienced professionals now in order to ensure that these assessments are in line with the property’s true value.  Because New Jersey law “freezes” assessments for a period of two (2) years, at levels agreed to between property owners and municipalities in resolution of appeals filed with the County Tax Boards or State Tax Court, or alternatively as a result of judgments reached by these bodies on the merits, the tax appeal vehicle can be an effective means of fixing assessments while the market is trending in an upward direction. In addition, because assessments are generally not disturbed until a town-wide revaluation or reassessment program is implemented (usually every 5-10 years) there is a real prospect that a lower assessment achieved as a result of a successful appeal this year could have real lasting value and actually provide savings to taxpayers for many additional years beyond the two (2) freeze years guaranteed by law.

As a result, there continues to be real opportunities for property owners to realize significant tax savings and lock in present values for the foreseeable future.  Commercial property owners are therefore encouraged to consult with their real property tax professionals to determine if a tax appeal would be warranted in their particular case in 2017.

Please feel free to contact Carl A. Rizzo at crizzo@coleschotz.com or by telephone at (201) 525-6350 with any questions.

 

On October 14, 2016, Governor Christie signed into law a transportation funding bill that also included the repeal of the New Jersey Estate Tax. Here is what you need to know:

  • The New Jersey Estate Tax repeal will be effective as of January 1, 2018. The current $675,000 exemption will increase to a $2 million exemption on January 1, 2017. The Estate Tax will be eliminated as of January 1, 2018.
  • The New Jersey Inheritance Tax is still in effect. This is a tax imposed on transfers to beneficiaries who are not spouses, parents, children or grandchildren (i.e., nieces, nephews, siblings, friends, etc.) New Jersey Inheritance Tax rates start at 11% and go as high as 16%.
  • As part of the new law, there is a tax break for retirees. There will be an increase in the New Jersey gross income tax exclusion on pension or retirement income over four years (in 2020) to $100,000 for couples, $75,000 for individuals, and $50,000 for married taxpayers who file separately.
  • On January 1, 2017, the sales tax will be reduced from 7% to 6.875% and will be further reduced to 6.625% on January 1, 2018.

Now that the repeal has been enacted, is New Jersey an attractive state to die in? We have counseled many clients over the years that moving to Florida could save significant estate taxes. With the New Jersey Estate Tax repeal (effective in 2018), some of the advantages enjoyed by Floridians can now also be enjoyed by New Jersey taxpayers (namely, no estate tax in either state).

However, moving to Florida also saves income tax, as Florida does not impose state income tax. New Jersey still does, so this remains a major advantage when moving to Florida. All income from sources outside New Jersey will not be taxed in New Jersey if you reside in Florida. If you reside in New Jersey, you will still pay state income tax on all income.

Also, if you bequeath assets to beneficiaries who are not descendants and you reside in New Jersey, you still will trigger a New Jersey Inheritance Tax, as this tax was not repealed.

Despite the New Jersey Estate Tax repeal, it is still very important to make sure your estate is in order if you reside in New Jersey. There are significant federal estate tax issues to plan for, and many non-tax issues which need to be considered and properly addressed.

The fall is upon us: is your new or soon-to-be adult (child) going off to college?  Besides taking with him or her the extra long sheets and a new credit card, should your child be leaving you with something too: the right to control his or her finances and medical decisions?

When a child reaches the long-awaited age of 18, everything changes and nothing changes at the same time.  Suddenly, your child is a legal adult, yet the child still depends on you for financial and emotional support.  Legally, the rules have changed.  The former legal minor is an adult, who is expected to make financial and medical decisions on his or her own behalf and you, as the parent for the last 18 years, can no longer make those decisions for him or her.

In fact, you are now not even legally required, or allowed, to be notified if your child is in the hospital emergency room, without the child’s consent.  You cannot generally make medical decisions for your child even if your child is not able to make those decisions for himself or herself, without the child’s consent.  And, what if the child suddenly becomes incapacitated and cannot give consent for you to assist in making those decisions?  You still cannot make decisions for your child without a legal document giving you this permission (even if you will ultimately pick up the bill).  Your child needs a health care directive, which authorizes parents to obtain medical information and make medical decisions for the child if the child is unable to make such decisions for himself or herself.

What about his or her finances?  The same is true.  Now the child has the right to sign a contract, such as for a credit card, but you have no right to file for disability benefits on his or her behalf in case of an accident, to file a legal complaint or complete more mundane tasks, such as renew a car registration on his or her behalf.

While in some states the closest living relatives—parents if the child is unmarried—will be allowed to make medical and financial decisions on behalf of a child over 18 without official papers, this is not guaranteed and instead the parents may have to seek guardianship in court.  A health care directive and/or a power of attorney grants and delineates the parent’s authority to act on behalf of the adult child, and obviates the need to resort to extreme measures, such as guardianship proceedings.

The health care designation should also include a living will.  A living will outlines an individual’s advance care directive about life-sustaining medical treatment, and can also cover organ donations.  Since parents and children may disagree on this topic, and parents understandably struggle to make the decision in such a dire situation, it should be discussed in advance and memorialized in a living will.  The health care directive will also include a Health Insurance Portability and Accountability Act (HIPAA) release allowing disclosure of sensitive medical information to parents in the event of a medical emergency.

Both the power of attorney and the health care directive can be tailored to each family’s particular situation.  For example, parents can be granted access to private medical records while the child is competent as well as in an emergency, or full financial power at all times (in a “durable” power of attorney) or only in the event of the child’s incapacity, or, while the child is competent, only over certain types and sizes of accounts and contracts.

This fall, as your children leave for college and become adults, power of attorney and health care directive/ living will documents should be on their college packing lists, ensuring their well-being and your peace of mind.

 

 

The IRS has at last issued long-anticipated proposed regulations under Code §2704.  We perceive the proposed regulations as an attempt by the IRS to curtail the use of discounts – such as minority interest and lack of marketability discounts – in valuing transfers of interests in family-controlled entities for gift and estate tax purposes.

“Family limited partnerships” – that is, family investment entities usually structured as LLCs or limited partnerships – have been a popular estate planning technique for years.  Generally speaking, a client can transfer non-voting, non-marketable interests in these types of entities to children or a trust, and claim a valuation discount due to the restrictions that apply to the interest transferred.

Code §2704 provides that certain “applicable restrictions” on ownership interests in family entities, ie, entities where the transferor and family members control the entity, should be disregarded for valuation purposes.  The statute also permits the IRS to issue regulations providing for other restrictions (as determined by the IRS) to be disregarded in determining the value of a transfer to a family member, if a restriction has the effect of reducing the value of the transferred interest but does not ultimately reduce the value of such interest to the transferee.

The proposed regulations make two overarching changes.  First, changes under Code §2704(a) create new rules relating to a lapse of a liquidating right.  These changes are less relevant, at least in our practice, as we generally do not structure entities to include liquidation or other rights that lapse.

Second, changes under Code §2704(b) create a new concept of “Disregarded Restrictions.”  Under the proposed regulations, a restriction that will lapse at any time after the transfer, or a restriction that may be removed or overridden by the transferor (or the transferor and family members acting together) will be disregarded for gift and estate tax valuation purposes.  This is the case even if the restriction on the interest is pursuant to state law rather than a governing business agreement.  There are certain exceptions – for example, an owner’s right to liquidate or “put” his or her interest to the entity and receive cash within six months is not considered a “disregarded restriction.”

The effect of this rule appears to be that it would eliminate minority interest discounts, because the holder of any interest would be deemed to be able to liquidate his or her interest in the entity without restrictions.  The effect of the proposed regulations on lack of marketability discounts is unclear, although it seems the IRS similarly could argue for a small or zero lack of marketability discount on the theory that the holder of the interest is deemed to be able to liquidate the interest.

Thus, if the proposed regulations are adopted in their current form, they likely will increase the value for gift and estate tax purposes of transfers of interests in family-controlled entities.

The proposed regulations are controversial.  Commentators already have questioned whether the Treasury has exceeded its statutory authority in issuing the proposed regulations.  The proposed regulations are (at least in this author’s opinion) complicated and ambiguous, and perhaps unfair.  For example, if a client creates an LLC to purchase and manage a commercial property, and the client transfers an interest in the LLC to his or her child, and the interest is subject to typical restrictions on sale of the interest or the ability of a member to liquidate (largely because the asset owned by the LLC is illiquid and perhaps leveraged), then it seems that the true value of the interest transferred to the child would be reduced due to these restrictions (think about what a willing buyer would really pay the child for the LLC interest); however, under the proposed regulations, the value of the LLC interest transferred would be artificially inflated for gift tax purposes.

The proposed regulations are not effective until they are finalized.  Treasury has requested written comments by November 2, 2016 and a public hearing on the regulations is scheduled for December 1, 2016.

We are seeing an uptick in audit activity by state tax authorities of closely held businesses, particularly in the area of sales and use tax, to generate much needed revenue for meeting budget shortfalls and funding services and entitlement programs.  A go-to audit technique is to examine whether a company has “nexus” with its state.

The question of whether your company has “nexus” with other states can lurk in the background of its normal multi-state activities, until all of a sudden it explodes in an audit.  A company that has failed to file returns and pay tax where there is nexus may face an audit for the past six to eight years generating substantial tax liability.  In the case of a trust fund tax (such as sales tax) there is also personal liability to a company’s owners and officers that is not a dischargeable debt in bankruptcy.

Definition of Nexus

An out-of-state (“foreign” or “nonresident”) business with significant physical presence in another state will have nexus with this other state.  The reason is that such business will be considered to avail itself of the state’s benefits and privileges (this assumption is automatic for resident businesses) and, in turn, the state will have jurisdiction to impose “privilege” taxes, of whatever specific kind, on the nonresident business.

Physical contacts in the state, beyond outright ownership or leasing of property, may include in-state deliveries (other than by common carrier) and banking activities in the state.  For sales tax purposes, such contacts also include solicitation of sales, whether by employees, independent contractors or other agents.  In addition, states have become increasingly aggressive and have asserted “economic nexus” based on non-physical contacts with the state, such as “click-through” nexus / internet referrals, licensing a trademark, and banking and financial services.

The two most common types of tax imposed by states on out-of-state businesses through nexus are income tax and the obligation to collect sales and use tax from customers.

Income Tax

State income tax is generally imposed on a nonresident business on income sourced within the state.  However, income derived from solicitation activities is protected by federal statute, 15 USC § 381 (commonly known by its 1959 enacting legislation, “P.L. 86-272”).  Under P.L. 86-272, a state cannot impose corporate tax on a foreign business, even when there is nexus, if the tax is based on, or measured by, the business’ gross or net income if: (1) all such income is derived from solicitation of sales of tangible personal property, and (2) orders are approved and shipped from out of state.

Note that P.L. 86-272 does not protect: (a) income derived from solicitations of sales of services, real estate or intangibles, and (b) non-income franchise tax calculated based on gross receipts, apportioned capital, net worth and other non-income measures.  For example, Washington State is notorious for targeting out-of-state companies with tenuous business activities in the state for failure to pay its Business and Occupancy Tax.  Other types of such non-income taxes that have been known to reach companies “doing business” out of state include Michigan Business Tax, Texas Margin Tax, and Ohio Commercial Activities Tax.

Sales and Use Tax

P.L.86-272 only protects solicitation activities from income tax.  For sales tax purposes, solicitation of sales by subsidiaries, agents or affiliates, who are residents of a state, on behalf of a foreign business will create nexus.

In fact, many states have made nexus automatic (and also not purely based on physical nexus), through a rebuttable presumption that a foreign company’s in-state referral sources are soliciting sales, by internet or otherwise, to generate their commissions.  The burden of proof shifts to a company having to prove the opposite: that a referral arrangement with a resident does not cause such resident to solicit sales, by internet or otherwise, generating a sales tax collection obligation.  New York’s highest court has upheld this type of statutory presumption (referred to variously as “click-through nexus,” “commission-agreement provision” or “Amazon law”) against constitutional challenge by online retailers Amazon.com and Overstock.com.

Nexus Study / Diagnostic Check

In light of the potential tax pitfalls facing a business with regular ties to various states—direct or indirect, physical or economic—every multi-state business should periodically perform a state-by-state diagnostic check, or nexus study, of its activities, such as:

  • Ownership or leasing of real property (store, warehouse, office) or personal property (machinery or equipment).
  • Inventory maintained in a warehouse or by sales representatives.
  • In-state deliveries to customers in company-owned vehicles.
  • Local media advertising (e.g., phone directory or telemarketing service).
  • Employees attending trade shows, or conducting training or seminars.
  • Active solicitation of orders for sales (for sales and use tax purposes).
  • Solicitation activities beyond the protection of P.L.86-272, such as solicitation of sale of services, real estate or intangibles (for income tax purposes).
  • Installation, repair, or maintenance services.
  • In-state order approval, receipt of payment, merchandise returns and customer complaint resolution.
  • Affiliate referral programs, internet-based or otherwise.
  • License, royalty or other fee arrangements.

Once a company completes a nexus study questionnaire, and personnel interviews, regarding its specific activities in various states, this information is analyzed in light of current law by state and area of tax.  A confidential attorney-client privileged memo summarizing the nexus study results is then provided to the business.  The company can then make informed decisions with its tax counsel on how to minimize its multi-state tax exposure.  The business may choose to alter its business practices to eliminate nexus in one or more states.  If that is not possible, it may choose to make voluntary disclosures through available state programs to potentially obtain a limited look back period and waiver of penalties.

Conclusion

In the wake of dramatic budget shortfalls and deficits, states are eager to wage nexus audits on out-of-state businesses, generating significant payments of income tax, sales and use tax, interest and penalties.  If your company operates in a multi-state market, is not registered to do business in other states and is not paying income tax or collecting sales tax, it is critical that you engage a tax attorney—that has the benefit of a confidential-attorney client relationship—to conduct a state-by-state nexus study.  Failing to do so may cause your company to be blindsided by what could be substantial (in some cases multimillion dollar) tax liability that may also be a personal debt for its owners and officers.