New Jersey Supreme Court rejects assessment of penalties
Abatement allowed for non-abatable penalties
TAX ALERT |
On Dec. 4, 2014, the New Jersey Supreme Court issued an unpublished decision without written opinion in United Parcel Service General Services, Co., et al v. Director, Division of Taxation, affirming the March 7, 2013, decision of the New Jersey Superior Court Appellate Division to affirm the June 5, 2009, decision of the New Jersey Tax Court that the Division of Taxation had abused its discretion in imposing late payment and non-abatable amnesty penalties on a taxpayer because the taxpayer had acted in good faith.
The issue in this case related to intercompany fund transfers incorporated into the taxpayer’s cash management system. Following an audit, the Division of Taxation (Division) determined that these transfers constituted loans and, as such, interest should be imputed. Late payment and statutory post-amnesty penalties were also assessed. The Tax Court upheld the Division’s determination regarding the transfers but reversed the imposition of the penalties. Both the Appellate Division and New Jersey Supreme Court affirmed the Tax Court’s decision.
At the heart of the matter for the taxpayer was a demonstration that the underpayment of tax was the result of an honest misunderstanding of the law and not an intentional act. Tax returns had been filed and tax liabilities paid in a timely manner and in good faith. The additional tax liability following the audit raised genuine questions of fact and law regarding the imputation of interest and constituted good cause in the eyes of the court for the underpayment. Given the above, the Supreme Court affirmed the lower court’s decision that the Division had improperly exercised its discretion by not waiving late payment penalties.
Despite the presence a statutory non-waivable and non-abatable amnesty penalty, the Supreme Court also upheld the lower court’s decision to overturn the Division’s assessment of the 5 percent amnesty penalty. The Tax Court relied primarily on a legislative committee statement which indicated that the amnesty penalty was not meant to apply to a situation where an otherwise compliant taxpayer was found to be deficient due to an undetermined question of law following a routine audit. The Supreme Court added that the statute did not expressly state whether a taxpayer who is found liable for additional tax following an audit for the aforementioned reason but is otherwise fully compliant and in good faith has “failed to pay New Jersey taxes…”. The lack of express language and the legislative intent of the amnesty penalty were sufficient for the court to determine that the assessment of the 5 percent penalty was improper.
It is notable, and a significant positive takeaway for taxpayers, that the absence of bad faith and the unintentional understating of tax obligations would now appear to provide a basis for taxpayers to seek abatement of non-abatable penalties.