Tax rulings by the New Jersey courts were slow in the first half of the year, but in May the New Jersey Tax 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.
R.O.P. 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 under review in New Jersey should consider procedural reasons to defend themselves against review adjustments related to presentation items with a statute of limitations.
The in R.O.P. Aviation is widely used in corporate 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 failed to review the completed years within the four-year limitation period that applies to CBT audits. When reviewing the taxpayer's subsequent tax years 2012 through 2015, the department reduced the NOL carried over from the completed years to zero as 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 for more than four years from the date of filing." a return. "While admitting that it was unable to assess the number of years completed, the Chamber contended that a separate statutory provision, NJ Stat. Section 54: 10A-10, empowered the division to" make other adjustments in tax reports or 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 N.J. 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 presentation 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 familiar with federal procedural rules, the decision in R.O.P. 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 the 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 construct a 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 finds that N.J.S.A. 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. Although subsection (b) separately requires that additional tax assessment must 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 R.O.P. Aviation is good news for taxpayers in a similar situation who will benefit from not being subject to the audit of year-end carryforward items, the decision leaves open the question of whether the same reasoning applies if the taxpayer tries to claim one made lecture to increase. For example, if R.O.P. Aviation had filed a counterclaim that it had actually under-reported its losses in the closed years, would the arguments of the tax court apply in order to refuse 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. Under the logic of R.O.P. Aviation, it may be necessary to consider whether increasing a reported NOL from a closed year to generate a refund (or offset an assessment) in an open year results in "doing indirectly what the law does not directly allow" by bypassing the four-year statute of limitations for CBT reimbursements.
Assuming participation in R.O.P. Aviation survives any appeal and could affect tax items other than the NOL lecture, 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 transfers, 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 it has been four years since the filing of the declaration on which the base was first reported?
While R.O.P. Should aviation apply to other lecture positions under the CBT, it is unclear whether this would have an impact on the gross income tax (GIT) lectures of natural persons, such as B. the alternative business deduction. New Jersey laws provide a separate, shorter statute of limitations for GIT ratings. N. J. 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 has adopted the federal interpretation of the law of restrictions after they have been well-founded arguments and interpretations of federal case law ”. DiStefano versus 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 is possible to find one that opposes federal interpretations, as in the case of R.O.P. 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 limitation period had expired were not taken into account.
While New Jersey is known for aggressive exam positions, R.O.P. Aviation is a good reminder that in New Jersey the statute of limitations on appraisals is inflexible and the courts stick to their purpose of making the appraisal process final. On the other hand, this principle can also be detrimental to the taxpayer when applied to the statute of limitations on refunds.
Thus, for some taxpayers, R.O.P. Air travel will be a welcome decision as it creates a procedural argument that prevents an unfavorable exam adjustment of a lecture item. However, for those taxpayers who have a potentially favorable adjustment to an old year loss carryforward, it will be important to consider whether, with regard to R.O.P. additional steps must be taken to receive the reimbursement. Aviation rejects the federal treatment of lectures from completed 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, N.J. and focuses on New Jersey, New York State, and New York City taxes.
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