Tax rulings in the New Jersey courts were slow in the first half of the year, but in May the New Jersey Finance Court awarded an aircraft leasing company a major victory when it found the New Jersey Division of Taxation ineligible to make adjustments to NOL lectures a closed tax year.
ROP Aviation Inc. v New Jersey Div. of Taxation, No. 001323-2018 (May 27, 2021) is a major case as it opposes federal regulations that allow exam adjustments to NOLs from completed years. As a result, taxpayers currently being audited in New Jersey should consider procedural reasons to oppose audit adjustments related to items presented with a statute of limitations argument.
The issues described in ROP Aviation are fairly commonplace in corporate tax audits at both the federal and state levels. The taxpayer was in the business of leasing aircraft to an affiliate. The taxpayer reported over $ 18 million to NOLs on its corporate income tax (CBT) returns for 2007 through 2011 (closed years). The taxpayer used the NOLs to offset his earnings against his 2014 CBT return.
The department did not review the completed years within the four-year limitation period that applies to CBT audits. When auditing the taxpayer’s subsequent tax years 2012 to 2015, the department reduced the NOL carried over from the completed years to zero because the tax returns for the completed years did not reflect any transactions between the taxpayer and its related lessee.
Under New Jersey Statutes Section 54: 49-6 (b), the New Jersey statute of limitations for CBT assessments provides the general rule that “no additional tax may be assessed after more than four years from the date of filing.” a return. “The Chamber admitted that it was unable to provide an assessment of the completed years, but argued that a separate statutory provision, NJ Stat. Section 54: 10A-10, gave the department the authority to” make other adjustments in tax reports or Make tax returns necessary to make a fair and reasonable determination of the amount of tax payable ”.
The tax court dismissed the department’s reliance on its discretion under NJ Stat. Section 54: 10A-10 in favor of a strict definition of the limitation period. The tax court found that the adjustment of the NOL lecture from the closed years in the later open years was “an indirect additional tax assessment” for the closed years. According to the Finance Court, the split “cannot do indirectly what the law does not directly allow: bypassing the four-year limitation period”.
For tax practitioners who are familiar with federal procedural rules, the decision in ROP Aviation comes as a surprise. Regarding IRS audit adjustments, federal courts have long ruled that a tax item from a closed tax year can be adjusted in an open tax year. See Barenholtz v United States (“It is common knowledge that the IRS and courts can recalculate taxable income in a closed year to determine tax liability in an open year.”). However, the New Jersey Tax Court rejected the state interpretation, finding that it was not bound by the IRS to draft any federal income tax law for the purposes of the CBT. The court instead focused on reconciling two paragraphs in the New Jersey statute:
“The court determines that NJSA 54: 49-6 (a) and (b) must be read together. Subsection (a) requires Taxation to review a submitted declaration and provides the opportunity to “review or investigate” the submitted declaration. If the tax audit is carried out and a deficiency is found, taxation must determine the additional tax. However, although subsection (b) separately requires that additional tax assessment be made within four years of the filing date of the return, this does not mean that the review / investigation of the return can be done at any time and outside of the four-year period. The tax assessment results from the audit carried out in accordance with subsection (a), therefore the audit and the resulting tax assessment should be subject to the same four-year period.“(Emphasis added).
While ROP Aviation is good news for taxpayers in a similar situation who will benefit from not being the subject of an audit of year-end presentation items, the decision leaves open the question of whether the same reasoning applies if the taxpayer tries to get a to increase the claimed amount. For example, if ROP Aviation had filed a counterclaim that it had indeed under-reported its losses in the closed years, would the reasoning of the tax court apply to deny a taxable favorable adjustment in the open years?
Instead of examining the statute of limitations on reviews, the statute of limitations on reimbursements could come into play. Following the logic of ROP Aviation, it might be necessary to consider whether increasing a reported NOL from a closed year to generate a refund (or offset a taxation) in an open year will “indirectly do what the law does.” does not allow directly “. “By circumventing the four-year limitation period for CBT reimbursements.
Assuming that the stake in ROP Aviation survives an appeal, it could affect other tax positions than the NOL presentation, as the statement in the statement on “other permissible transfers” is broad. In dismissing the division’s arguments, the tax court stated that if accepted, the division’s position would “render the existence of this statute of limitations for any subject matter (NOL or other permitted presentations) under the CBT Act illusory”. (Emphasis added).
Aside from the carryovers, the impact of the tax court’s reasoning could be so far-reaching that there are no adjustments to historical positions reported based on a return from a closed year. For example, will the department and taxpayers be prohibited from adjusting a misrecognized cost base of capital assets just because four years have passed since the filing of the declaration on which the base was first reported?
While ROP Aviation should apply to other presentation items under the CBT, it is unclear whether this would affect the gross income tax (GIT) presentation items of individuals, such as: B. the alternative business accounting deduction. New Jersey laws include a separate, shorter statute of limitations for GIT ratings. NJ stat. Section 54A: 9-4 provides that “any tax under this Act must be assessed within 3 years of the filing of the return (regardless of whether such a return was filed on or after the prescribed date).”
Previously, the Finance Court ruled that the GIT statute of limitations and the federal statute of limitations for IRS assessments in the Federal Tax Code Section 6501 are “practically identical”, and for the purposes of the GIT, the Finance Court adopted the federal interpretation of the law of restrictions after they were “by the well-founded arguments and interpretations of federal case law ”. DiStefano v. New Jersey Div. taxation (provided that the limitation period for GIT notices of deficiency begins on the date of the original tax return and not on the date of the amended tax return).
The relevance and compelling value of federal interpretations has always been an issue in New Jersey tax law. For any tax decision that follows federal law, it’s possible to find one that disapproves of federal interpretations, as in the case of ROP Aviation and DiStefano. Ultimately, however, these two cases cannot be viewed as contradicting each other, as they are two different tax systems and interpretations of different laws that are formulated and structured differently. In addition, both decisions were based on the principle that the statute of limitations for tax assessments should be interpreted narrowly, which meant that adjustments that were considered to have occurred after the statute of limitations had expired were not taken into account.
While New Jersey is known for aggressive review positions, ROP Aviation is a good reminder that in New Jersey the statute of limitations on reviews is inflexible and the courts stick to their purpose of making the review process final. Conversely, this principle can also affect the taxpayer’s disadvantage when applying the statute of limitations for refunds.
Therefore, ROP Aviation will be a welcome decision for some taxpayers as it creates a procedural argument that prevents an unfavorable audit adjustment of a presentation item. But for those taxpayers who have a potentially favorable adjustment to an old year loss carryforward, it will be important to consider whether, given ROP Aviation’s rejection of state treatment of loss carryforwards, additional steps need to be taken to get the refund closed Years.
This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.
Information about the author
Chris Doyle is the Head of State & Local Tax Practice at Hodgson Russ LLP. His practice encompasses most tax matters, but mainly focuses on New York State and New York City taxes.
Open Weaver Banks is located in the Hodgson Russ LLP office in Hackensack, NJ and focuses on New Jersey, New York State and New York City taxes.
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