Robert S. Schwartz joins Herold Law, P.A.
We are very pleased to announce that ROBERT S. SCHWARTZ joined the firm as a Shareholder. Mr. Schwartz is a graduate of the University of Dayton, received his J.D. from Duquesne University School of Law, and his LL.M. in Taxation from Temple University. He was a longtime Partner of Lindabury, McCormick, Estabrook & Cooper. He began his career by serving five years in the Corporate Reorganization Branch of the Internal Revenue Service, Office of Chief Counsel, in Washington, D.C. He has served as the Chair of the New Jersey Bar Association Section on Taxation Law and as Chair of the Partnership Taxation Committee, and on the New Jersey Bar Association’s Supreme Court Committee on the Tax Court. Mr. Schwartz concentrates his practice in the areas of federal and state, income, excise, estate and gift and other tax matters in the international and domestic taxation planning and controversy contexts.
- What One Must Know About the $10,000 Limit on Deducting State and Local Taxes
If you are finalizing tax returns for 2018 or doing tax planning for 2019 and later years, you probably recall that the Internal Revenue Code (“Code”) provides for the itemized deduction from adjusted gross income of state and local real property, personal property, income, and in lieu of income taxes, sales taxes at the election of the taxpayer. Code Section 164, the deduction provision, has existed in a number of different forms dating back to the earliest days of the federal income tax. Unusually, since January 1, 2018, and until December 31, 2025, however, Section 164 has provided that the itemized deduction for all these kinds of taxes is limited to $10,000 per year. Recent media reports state that the result generally has been increased 2018 federal income taxation for wealthy families resident in high-tax states. One should expect the circumstance to continue. In 2026 et seq., the $10,000 limit sunsets, unless Congress extends the limit.
During 2018, and to employ a simplified but generally accurate fact pattern, some high-income tax states enacted tax laws allowing electing, resident taxpayers to make contributions to approved state or local governmental entities in lieu of paying state income taxes. In exchange for these contributions, electing taxpayers are allowed a credit reducing their state income taxes. For example, a state now allows a credit against its income tax of $.90 for every $1.00 of eligible contribution. The theory underlying the legislation is that a large enough number of enacting states’ taxpayers’ federal income taxes would be decreased to make the increased state or local administrative burdens accompanying the state legislation worthwhile. Why decreased? The fact is that state and local governmental entities of all kinds qualify as “charities” under Code Section 501(c)(3). Moreover, Code Section 170 charitable income tax deduction limitations long in place most often will not come into play.
The reader should know that during July, 2019, New York, New Jersey and Connecticut filed a joint lawsuit in the Federal District Court for the Southern District of New York (Docket No. 1:19 CV 6642) against Secretary of the Treasury Steven T. Mnuchin and other named defendants, asserting that Treasury Decision 9864 (June 13, 2019), effective for contributions made from and after August 27, 2018, is having the unlawful effect of rendering ineffective 2018 state tax legislation like that described above. The Village of Scarsdale, New York, did the same in the same court also during July, 2019 (Docket No. 7: 19 CV 6654). In a nutshell, both lawsuits ask the federal court to declare unlawful and enjoin the IRS from enforcing Treasury Regulations. We think that professional tax attorney general observations about the lawsuits’ federal tax reporting impact are worthwhile for the reader.
Under Code Section 6662(a), tax penalties include a penalty equal to 20% of unreported income taxes, not only on account of negligence, but also on account of a substantial underpayment of tax which is defined as the greater of $5,000 or 10% of the total tax that should have been reported on the return — a variety of “no fault” penalty. However, Congress also enacted Section 6664(c)(1), which provides that no penalty is imposable if a taxpayer filed a tax return “in good faith” and with a “reasonable basis” for the tax return position thereon, and Section 6662(d), which provides that there is not an underpayment of tax on which to impose the 20% penalty to the extent the tax return treatment of the tax item at issue reflects either (i) the “substantial authority” behind the tax treatment or (ii) the return provides “adequate disclosure” of the facts and circumstances for the tax treatment and the taxpayer has a reasonable basis for the position. The most legitimately aggressive action for any taxpayer is to file a tax return reflecting a position against Treasury Regulations. In light of the subject regulations, “substantial authority” appears lacking.
It also seems to us that the fact that several of the states enacting “work around” legislation are now in federal court seeking declaratory judgments against the Treasury Regulations provides a reasonable basis for claiming a charitable income tax deduction for contributions to state or local government entities made in accordance with the particular state’s legislation. Concerning “adequate disclosure”, Treasury Regulation 1.6662-4(f) provides as follows:
Disclosure is adequate with respect to any item…or a position on a return…in the case of a position contrary to a regulation, disclosure must be made on Form 8275-R (Regulation Disclosure Statement).
Although an unusual outcome, filing Form 8275-R appears to us as the most sensible thing to do if one is going to claim a federal income tax charitable deduction following a work around statute. These general observations are a guide to our readers, not the rendering of legal advice. No two situations are likely to be objectively the same, and no two clients have the same sensibilities. The experienced attorneys at Herold Law, P.A., can be of service to you in evaluating your particular federal, state and local tax posture. Please don’t hesitate to contact Robert S. Schwartz, Esq., at 908-647-1022, or contact him at [email protected] for further information or assistance.
- Income Taxes Deferred or Forever Saved With “Like-Kind” Exchanges of Real Estate Held for Productive Use in a Trade or Business or For Investment
Internal Revenue Code Section 1031 dates back to the 1920s, and shares its origins with the tax-free corporate merger and acquisition provisions. In general, Section 1031 allows for the exchange of business use or investment real estate (not personal residences or vacation homes) of the same or different kinds without income taxation, no matter how low is the depreciated tax basis of the relinquished real estate, so long as the sale proceeds are reinvested in replacement real estate in accordance with the particular rules of Section 1031, Treasury Regulations and case law. The Congressional intent behind Section 1031 has long been that if a taxpayer intends reinvestment in replacement business use or investment real estate at the time the taxpayer decides to cash in on currently owned business use or investment real estate, and if a taxpayer follows through on both these intentions within a relatively short time of each other, it is economically inappropriate to impose income taxation, since business or investment utilization is ongoing.
To preserve the potential for future income taxation, Congress has all along mandated that the lower depreciated tax basis of the relinquished real estate carries over and onto the replacement business use or investment real estate, rather than the replacement real estate having a typically much higher cost tax basis equal to its purchase price. Under current tax law, if the replacement real estate is owned directly by an individual or indirectly by an individual through a limited liability company or partnership, the fair market value of the replacement property as of the date of death becomes the new tax basis of the replacement real estate, in effect, converting income tax deferral into a permanent income tax savings to the estate and heirs of the decedent. An example reflecting some of the more familiar, particular rules illustrates the income tax savings power of Section 1031 taking into account a date of death value for replacement property.
An individual owns all of the member interests of a limited liability company, which in turn owns a mortgage-free office building worth fifty million dollars. The original cost, that had been thirty million, plus later added capital improvements costing ten million, have been the subject of years of MACRS straight line tax depreciation deductions such that the adjusted, depreciated tax basis is now eight million. One day an unrelated party makes an offer of fifty million dollars. The taxable gain on a sale would be forty-two million, and Federal and state income taxes roughly thirteen million plus in the metropolitan area. The (indirect) owner not only decides to sell, but also decides to diversify his holdings. The income tax deferral and savings of this strategy were no small part of the decision.
Consequently, the sales contract requires the buyer of the building to cooperate reasonably with the selling LLC’s effectuating a Section 1031 “deferred” like-kind exchange. Before closing, the LLC enters into an Exchange Agreement naming a bank’s trust department as a “qualified exchange intermediary”. The building is sold with the buyer wiring the purchase money to the qualified exchange intermediary acting for the benefit of the seller. Within forty-five days of sale closing, the LLC delivers to the exchange intermediary a list of three replacement warehouse properties located in different states. Within one hundred eighty days of closing, the LLC purchases all three of the properties for fifty-one million in total. The qualified exchange intermediary wires fifty million to the sellers and the LLC delivers a certified check for one million to one of the sellers to make up the shortfall to that seller. The eight million in adjusted tax basis of the relinquished property is spread over the three replacement properties in accordance with their relative purchase prices. Hence, remaining tax depreciation of the replacement properties is relatively low compared to their cost, but no income taxes are due on the sale.
Assuming that the owner dies four years later when the value of the replacement properties totals fifty-five million, the excess of fifty-five million over four million of the remaining depreciable basis is a new basis for tax depreciation spread over them in accordance with their then relative values. New depreciation lives begin with a fifty-one million starting basis, while four million of tax basis is depreciated as per prior practice. The deferral of income taxes has been replaced by a permanent income tax savings adjustment. Although the tax savings effects of a new date of death value tax basis has been part of Federal tax law for approximately ninety years, a good number of Federally elected officials now and in the future are determined to repeal the relevant Internal Revenue Code section.
Working as part of a team, the experienced attorneys at Herold Law, P.A., can be of service to you on both the commercial real estate and tax qualification sides of a Section 1031 like-kind exchange of real estate. Please don’t hesitate to contact Robert S. Schwartz, Esq., at 908-647-1022 or contact him at [email protected] for further information or assistance.
- If You Are Threatened with or Received Notice of Loss of Your U.S. Passport Because You Owe Federal Taxes Retain a Tax Lawyer
In the past history of the country, U.S. persons’ passports or their eligibility for new passports would only rarely have been impacted by Federal tax considerations and never in isolation. Not anymore. During 2018, pursuant to Congressional legislation entitled Fixing America’s Surface Transportation Act (December 4, 2015), the IRS got up and running a new administrative program whereby IRS Revenue or Collection Agents are now certifying to the U.S. State Department that a particular U.S. person owes at least $51,000.00 in taxes or tax-related penalties and interest (“IRS Certification”).
IRS Certification starts in motion a fairly fast administrative procedure the end result of which for an unrepresented person is State Department revocation of the person’s passport or its refusal to issue a new passport recently requested. With interest constantly running, even a $20,000.00 Federal tax liability can grow all too quickly to over $51,000.00 so one might not have imagined this would happen to them. Situations we are familiar with include a U.S. expatriate living abroad with an expired passport while in debt to the IRS or a business executive suddenly unable to timely travel to or from the U.S. for important business negotiations. The “shall not issue a U.S. passport” and “authorized to revoke a U.S. passport” powers are qualified by “emergency circumstances” and “humanitarian reasons” subject to governmental discretionary authority to determine whether either is applicable to the situation.
The technical predicates for IRS Certification to the State Department in turn leading to a notice to a U.S. person of passport denial or revocation are straight forward and are laid out in Internal Revenue Code Section 7345. These predicates, which should be set forth in the notice, should be viewed as necessary to be verified by legal counsel, because the IRS is not always correct: the IRS had in fact “assessed” the indicated taxes, penalties and interest outstanding, the amount owed presently is greater than $51,000.00; there is in fact no valid payment plan or other agreement in effect with the IRS; the taxpayer in fact had had an opportunity for a “Collection Due Process” appeal with respect to previous IRS notices of intention to impose tax liens and/or levy property; if the IRS presented a Collection Due Process opportunity, the taxpayer either failed to timely take up the opportunity or the appeal was unresolved with an amount of debt still owed in excess of $51,000.00 and no agreement is in effect with the IRS.
Upon receipt of a notice, one must act within the notice deadlines, if any. Besides that, if the facts warrant, a U.S. Person can plead for reversal of IRS Certification on the basis of the extant emergency circumstances or on the basis of humanitarian reasons. Sometimes, alternatively, it is possible to satisfy the liability in full or agree to an IRS payment plan or make an offer in compromise. In the worst cases, where the IRS refuses to reverse a flawed IRS Certification, a U.S. Person may file an action either in Federal District Court or in the U.S. Tax Court. A court case would involve contesting an erroneous IRS Certification or asserting the IRS erroneously failed to reverse IRS Certification.
The experienced attorneys at Herold Law, P.A. can be of service to you if you find yourself in a loss or non-renewal of U.S. passport predicament. Please don’t hesitate to contact Robert S. Schwartz, Esq. at 908-647-1022 or contact him at [email protected].
- Time to Update Partnership and Operating Agreements
The Internal Revenue Service Intends To Begin Partnership and Limited Liability Company Income Tax Audits Under 2019 Finalized Rules
The IRS intends to start auditing partnerships’ and limited liability companies’ income tax returns following brand-new Internal Revenue Code procedures, effective January 1, 2018, but delayed because the IRS needed to issue procedural regulations. To avoid being repetitive, we use the term “partnerships” to refer to both kinds of entities. The focus of the new procedures begins with the partnership as a tax-paying entity for all additional taxes found due upon audit. This focus is quite a departure from long-in-place procedures when the focus was auditing partnerships’ income tax returns, but not assessing additional taxes against partnerships, proceeding to audit partners’ tax returns mainly by grafting the partnership audit adjustments into those returns for the same audit years, and assessing additional taxes from each partner. After all, partnerships do not pay income taxes, their partners do. This is not being changed, except for additional taxes.
How? In a nutshell: assuming that an IRS revenue agent finds that a partnership’s Form 1065 understates gross income or overstates deductions and credits or both, the result is increased taxable income as an audit adjustment. For each of 2018 and 2019, the revenue agent applies a 37% rate to the increase to get the tax amount and adds on to this amount at least one non-compliance penalty, if any, and interest on both amounts. These three amounts will be reflected in a proposed notice of partnership adjustment.
The procedures grant sole and binding authority vis-à-vis the IRS and the partnership to a “partnership representative”. The person’s binding authority with the IRS extends to such important matters as being sole decision maker about the partnership’s prompt payment of the amounts in the notice, or invoking new procedures for “modifying” the notice amounts, or choosing instead to have the partners take the audit adjustments into account by each putting his share of adjustments on his own income tax return and paying the resulting tax due, if any. Except in rare and unusual cases, however, the sum of the taxes due by the group is not going to equal the 37% tax imputed to the partnership by the notice. Partnership representatives also control proceeding to the IRS Office of Appeals or Federal courts in order to contest any partnership adjustments that arguably do not follow the applicable tax law.
There are going to be plenty of legitimate controversies among a partnership’s treatment of a partnership tax item, the IRS revenue agent’s treatment and the consequences to partners as a group or individually. A given partnership representative might be in a conflicted position in making important decisions. Consequently, and for other reasons such as notice and opportunity to be heard, now is the time to update partnership agreements with tax and governance provisions taking into account both the new procedures and partnership representative’s preeminent position as far as the IRS is concerned. For example, a partnership agreement should address to what extent the partnership representative has unfettered powers over the decisions summarized here as compared to having to get prior approval from a consenting committee.
The tax and business law attorneys at Herold Law, P.A., have studied the new procedures in such depth so as to gain the necessary understanding of their workings to listen, discuss and implement changes to agreements’ tax and governance provisions to better ensure, among other things, that no partners or partnership representatives are going to have mutual misunderstandings and quarrels about making the key decisions, negotiating with the revenue agent and settling or proceeding to administrative or court appeals. If we can be of service to you, please don’t hesitate to contact Robert S. Schwartz, Esq., at 908-647-1022 or contact him at [email protected].
- Changing New Jersey Tax Residence: Gross Income Taxes to Rise Again?
By: Robert S. Schwartz, Esq.
As recently as April 17th, Governor Phil Murphy’s proposal to impose a 10.75% tax rate on the incomes of New Jersey families exceeding $1,000,000 continues on its way to becoming law. The proposal’s accompanying estimates reflect that approximately 18,000 New Jersey resident families and 19,000 New Jersey non-resident families, but who have substantial income from New Jersey sources, will be paying this higher tax rate. The tax increase, if any, will begin this year, or maybe next year, and is estimated by the Office of Legislative Services to be good for $477M per annum.
Governor Murphy made the same proposal not long after he was elected governor during 2017. The Senate and Assembly leadership, however, continue to be cool to the idea, because recent studies from independent, third-party institutions have revealed the fact that the same 10.75% on the incomes exceeding $1,000,000 in effect in New Jersey for 2009, on top of earlier tax increases during the terms of former Governor Jim McGreevy, led to a relatively large number of New Jersey high income earners establishing income tax residency in states such as Florida and Pennsylvania, among others. Recent polling data reflects a strong majority of those polled like the idea of a 10.75% tax rate on the incomes exceeding $1,000,000.
We at Herold Law appreciate that New Jersey has been among the highest, or the highest, taxing state over the course of at least the last ten (10) years as reported by the respected Tax Foundation. We further appreciate that so long as a family has New Jersey source income, present law gives New Jersey the right to tax that income by virtue of its being from a New Jersey source, except for retirement income from a limited number of qualifying pension plans connected with a New Jersey career. A non-resident’s income that is not from a New Jersey source, such as dividends and capital gains, is not New Jersey source income, however, and, hence, not taxable by New Jersey as to a former resident.
We regularly provide legal advice and counsel to clients in connection with shifting their state of tax residency from New Jersey or New York to lower tax jurisdictions. We have found that not all circumstances are black or white, but can and do present many shades of gray where sound legal judgment becomes imperative. This is most often so for the year during which a New Jersey resident family changes its place of abode from New Jersey to a lower tax jurisdiction for the first time.
If we can be of service to you, please don’t hesitate to contact Robert S. Schwartz, Esq. at 908-647-1022 or contact him at [email protected]
- Risk Management of Trust and Estates.
Executors of Estates and Trust Fiduciaries responsible for real estate, valuable personalty, art collections, and other investments or property under their control and management should regularly review insurance policies to ensure that no gaps or lapses in insurance exist to avoid risk and exposure in the event of a loss or a claim by a third party. Herold Law counsels clients in risk management, and conducts asset portfolio reviews collaboratively with insurance brokers and asset managers to ensure that appropriate insurance is in place to hedge against unforeseen or predictable risks of exposure. Frequent coverage disputes arise when the policy fails to identify the true owner of the property in circumstances where the original owner dies, an Executor has been named, or the ownership in the property has been transferred to a Trust or corporate vehicle such an LLC, and the insurance policy is not corrected to reflect the proper and actual insurable interest in the property. Have appraisals of the Estate or Trust been updated so that they are adequately insured for their true value? Has a claim to an insurance company or the broker been reported in a timely manner and in accordance with the terms and conditions of the policy? Insurance companies often look for loopholes, misrepresentations, or omissions in insurance applications to void coverage in the event of a claim. Is the Estate property vacant while it is listed for sale? A vacancy policy is required to avoid forfeiture of coverage if a loss occurs and the vacancy is not brought to the attention of the insurance company.
It is incumbent on fiduciaries to review their risk management oversight over portfolio assets to hedge against risks that could materially cause financial harm to the Estate or Trust. Michael J. Faul, Jr., heads the Insurance Recovery and Risk Management Group at Herold Law, P.A., and he can be contacted at 908-647-1022, extension 122.
- “Place to Worship Initiative” and Suits Against Municipalities on the Rise.
Michael J. Faul, Jr., a Shareholder at Herold Law and Special Insurance Counsel to governmental entities, warns of the prospect of future civil rights suits and insurance coverage implications for defense and indemnification. See details
- On October 13, 2018, Frank T. Araps was a Moderator and Speaker for the live Seminar “Construction Claims and Law: Preparation, Proof & Defense,” an ICLE-sponsored event, presented in cooperation with the NJSBA’s Construction Law Section.
- On June 19, 2018, Robert F. Simon was elected to the Board of Directors of the Land Use Law Section of the New Jersey State Bar Association.
- On January 17, 2018, Robert F. Simon was a presenter for the Lorman Education Live Webinar “Recent Trends in Billboard Law.” Mr. Simon was also a speaker on this topic at the November 21, 2017 ICLE-sponsored event – “The Legal Aspects of Electronic Billboards and Signs.” This webinar was presented in cooperation with the NJSBA’s Land Use Section and the NJSBA’s Local Government Law Section.
- Jurisdiction Dismissal Victory for Commercial Client represented by Michael J. Faul, Jr.
Herold Law secured a highly favorable result in a commercial dispute over a liquor distributorship involving sales in New York and New Jersey. Michael J. Faul, a Shareholder of Herold Law, successfully argued a motion to dismiss before a New Jersey Superior Court Judge on Friday, November 3, 2017. The complaint named 14 defendants, including two corporations, asserting causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, tortious interference, fraud, trade secret misappropriation, unfair competition, negligence, conversion, and interference with commerce. On behalf of the defendants, Mr. Faul moved to dismiss the complaint pursuant to New Jersey Court Rule 4:6-2 for failure to state a claim upon which relief can be granted and on grounds of lack of or ineffective service of process as to all defendants. Mr. Faul successfully argued that the court lacked personal jurisdiction over the defendants based on the lack of minimum contacts in the State of New Jersey and failure to effect service of process of the complaint in accordance with the Rules of Court. Mr. Faul was assisted by George W. Crimmins, of counsel to the Firm.Herold Law is well versed on the subject matter of jurisdictional defenses. When Herold Law is contacted by or on behalf of out-of-state defendants, jurisdictional defenses are explored with the client from the outset. Herold Law is strategically placed geographically to represent out-of-state companies and individuals who are sued in New Jersey in State and Federal Courts, both as principal litigation counsel or local counsel.
- On June 23, 2017, Craig Provorny was successful in having the Appellate Division of the Superior Court of New Jersey reverse a decision of the trial court. In Davanne Realty v. The Dial Corporation, the Appellate Division disagreed with the trial court and found that a lease entered into in 1958 that did not mention environmental liabilities obligated Dial Corporation as the tenant to defend and indemnify Davanne Realty, the landlord, for alleged discharges of hazardous substances by the Dial Corporation onto the property and into the sewer system, finding their way into the Lower Passaic River miles away, in a case in which Davanne and The Dial Corporation were two of approximately three hundred parties sued.
- Michael J. Faul, Jr. was recently appointed as Member of the Audit and Risk Management Committee of the Somerset County YMCA.
- Craig Provorny secured a judgment for an oppressed minority shareholder in a closely held corporation.
- Recent Developments in New Jersey’s Insurance Notice Law – How to Avoid and Effectively Challenge a Late Notice Defense by an Insurance Company, Clarion, Volume 8, Issue 1
- Joseph Lemond summarizes the recent legislative changes to the New Jersey Estate Tax and other highlights of the recent legislation.
- Michael J. Faul, Jr. Shareholder of Herold Law, was retained as special insurance counsel to the Township of Bernards in coverage dispute with QBE Specialty Insurance Company.
- Joseph M. Lemond spoke at “Hot Tips in Taxation” This was an ICLE-sponsored event.