The Supreme Court of New Jersey recently affirmed a decision that amnesty and late-filing penalties did not apply to the taxpayers in United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, No. 072421 (N.J. Dec. 4, 2014). In all, approximately $2 million in penalties and related interest were abated.
The primary substantive issue was imputation of interest related to United Parcel Service’s (UPS’s) cash management system, which hinged on whether the intercompany cash transfers were loans or dividends. After an audit of the taxpayers’ Corporation Business Tax Returns for the years at issue, the New Jersey Division of Taxation assessed additional tax primarily resulting from the imputation of interest on the intercompany cash transfers, amnesty penalties related to the 1996 and 2002 amnesties, late-filing penalties and interest. Following a trial, the Tax Court held against the taxpayer on the cash management issue, but noted that “[t]he case law discussed . . . could be interpreted to suggest that the cash management system utilized by the UPS Group may not have” resulted in the tax consequences advanced by the Division of Taxation. The Tax Court found reasonable cause for the abatement of late-filing penalties and held that amnesty penalties did not apply to the taxpayers. The Appellate Division affirmed the Tax Court’s decision.
With respect to the amnesty penalties related to the 1996 and 2002 tax amnesties, the statute imposed the amnesty penalties when taxpayers failed to pay liabilities “eligible to be satisfied” through the amnesty programs. The Tax Court and Appellate Division found that the meaning of the phrase “eligible to be satisfied” was unclear. Therefore, the lower courts looked to the legislative history for the amnesty programs, which included a statement by the New Jersey Treasurer that “the bill’s penalties will not be applied to deficiencies assessed pursuant to a question of law or fact uncovered through routine audits of taxpayers otherwise in compliance with filing and payment requirements of State taxes.” The New Jersey Supreme Court looked to that same legislative history. Noting that the taxpayers had timely filed returns and paid the tax shown as due on those returns, and that the Division of Taxation had uncovered issues of fact and law on audit of the tax returns, the court upheld the decision that the amnesty penalties did not apply.
With respect to the late-filing penalties, the taxpayers argued that reasonable cause existed for the abatement of penalties because the taxpayer had taken a good faith filing position with respect to the cash management system, and the imputation of interest on the cash transfers was an issue of first impression in New Jersey. The New Jersey Supreme Court noted that the case involved genuine issues of fact and law, and there was “no directly pertinent legal authority then in existence” regarding the cash management system. The court “therefore agree[d] with the Appellate Division and affirm[ed] the Tax Court’s finding that the Division did not exercise properly the discretion that the Legislature afforded to it . . . when it declined to waive late payment penalties imposed on plaintiffs.”
Many taxpayers should benefit from the amnesty victory. Based on the statutory language, the Division of Taxation’s position has been that it has no authority to waive or abate amnesty penalties and that amnesty penalties automatically apply to all assessments for taxes related to tax periods covered by amnesty. It should be noted that the taxpayers did not argue and the courts did not hold that the amnesty penalties were waived or abated. Rather, the question was whether the penalties applied in the first instance. Although several facts, including the nature of the substantive issues and the timing of the audit and of the issuance of the assessment, may have played a role in the decision that the taxes due were not liabilities to which the amnesty penalty applied, other taxpayers who have taken good faith filing positions that were adjusted on audit now have ammunition to challenge the Division of Taxation’s imposition of amnesty penalties.
Importantly, this decision may also affect taxpayers currently facing the 2009 amnesty penalty. Because the statutory language implementing the 2009 amnesty is similar to that which was used in the 1996 and 2002 amnesties, the application of the amnesty penalties should be the same.
As far as late-payment penalties are concerned, taxpayers may look to this case to support penalty abatement or waiver arguments in states with a reasonable cause abatement or waiver standard. This case supports that a revenue department’s discretion to waive or abate late-filing penalties is not unfettered. We would argue that reasonable cause exists to waive or abate penalties imposed on tax assessments arising from good faith or genuine issues of fact or law.