New NJ Tax on Purchase Commercial Real Estate

Tax Law and Planning

Starting August 1, purchasers of commercial real estate for more than $1,000,000 will have an additional tax, or "fee", to contend with. Chapter 33, Laws of 2006, calls for a 1% fee to buyers of commercial property purchased for over $1 million. This brings the fees for purchasing commercial real estate in line with the purchase of residential real estate, which for several years has been subject to a "mansion tax" of 1% to buyers of residential property valued at more than $1 million. Sellers of property will still need to contend with the Realty Transfer Tax, regardless of whether buyers are subject to the additional 1% fee.

There will be several exceptions to the 1% fee on transfer of commercial property:

* Where the real property transfer is incidental to a corporate merger or acquisition, if the real property value represents less than 20% of the total assets subject to the merger or acquisition.

* The purchaser is recognized by the IRS as exempt from income tax (ie: a public charity or private foundation).

The 1% fee also applies in certain non-deed transfers. For example, if a controlling interest in an entity that owns commercial real estate valued at more than $1 million is transferred, then the buyer will pay the 1% fee. This would apply, for example, if an LLC owned commercial real estate valued at more than $1 million, and the LLC itself was sold.

For more information, see the Division of Taxation Website.

Estate Tax Repeal Provisions NOT Included in Pension Reform Bill

Category: Estate and Inheritance Tax

From Dow Jones Market Watch, news that Estate Tax Repeal Provisions will not be slipped into the Pension Reform Bill.

Last week as reported here there was an unannouced Senate vote to permanently repeal the Estate Tax. It was defeated 57-41 (60 needed to break a filibuster). The Republican Majority then said they would add the Estate Tax Repeal provision to the Pension Reform Bill under debate. Now news from Washington that Estate Tax Repeal will NOT be added to the Pension Reform Bill, but be part of a new package later this year. Hopefully, this time the vote on the Estate Tax Repeal will be announced to the public so as to be open for public debate.

Tax provisions may be dropped from pension bill - MarketWatch: "Senate Republicans gave up Monday on efforts to add language that would reduce the estate tax to legislation designed to overhaul the nation's pension laws, Senate Majority Leader Bill Frist said Tuesday.

And Republican lawmakers may also remove a range of other less-controversial tax measures from the bill, including renewal of the already-expired research-and-development tax credit, in hopes that those measures can be combined with the estate-tax measure at a later date, congressional aides said.

Meanwhile, House and Senate negotiators continued to haggle over provisions of the pension bill, including easier funding terms for troubled airlines and whether to allow financial-services firms to provide investment advice to 401(k) and investment retirement account holders, in the hope of producing a final piece of legislation before Friday, when House members are scheduled to begin a five-week summer recess. "

IRS Eliminating Jobs of 50% of Estate Tax Auditor/Attorneys

It seems that estate tax repeal has gone even further underground - can't get it done out in the open, then backdoor your way into it - ahh, the American political machine.

Last week I wrote about a stealth estate tax repeal vote - that was again defeated.

This week, we learn that the IRS is eliminating the positions of about 50% of the attorneys who audit estate tax returns. So, if you can't use the political process to eliminate a tax which only effects the top 2% of the wealthiest Americans, you eliminate the jobs of the people who are trained to enforce the tax? One of the reasons I often just want to shake my head.

Courtesy of Charles Rubin, Esq. at Rubin on Tax:

Rubin on Tax: IRS TO SIGNIFICANTLY REDUCE TRANSFER TAX AUDIT STAFF:

"IRS TO SIGNIFICANTLY REDUCE TRANSFER TAX AUDIT STAFF

The IRS intends to eliminate the jobs of almost half of the lawyers who audit gift and estate taxes. The IRS presently has 345 estate tax lawyers. The jobs of 157 of them will be cut in less than 70 days.

Kevin Brown, an IRS Deputy Commissioner, indicated that the staff cuts are occurring because far fewer people are now subject to estate taxes under the legislation enacted a few years ago than was previously the case. Others however, believe that the cuts are an attempt to effect estate tax repeal through the back door - that is, to significantly reduce audit activity on wealthy Americans.

Whether the staff cuts will have any impact on transfer tax enforcement depends on which side you believe. If there has been a significant reduction in audit activity due to the estate tax changes, then perhaps the staff cuts will not have much of an impact on enforcement. However, if audit activity has not been substantially reduced by reason of the tax cuts, then one would expect the staff cuts to hamstring the IRS in its enforcement efforts. Of course, even if less returns are being filed, the IRS could still retain the audit personnel and then simply conduct more audits on a percentage basis of all returns filed. However, Brown indicated that the incremental benefit of auditing more estate tax returns would not produce enough revenue to be worth the cost."

Estate Tax Repeal Defeated Again (Who knew they were voting?)

Category: Estate and Inheritance Tax

Last night the US Senate again addressed the total repeal of the estate tax.

First question - why all the silence? Where was the press push and fanfare of the last vote attempt? Where was the opportunity for public debate and communication with representatives before the vote? I could not have been more surprised this morning that total repeal of the estate tax had been brouhght to a vote again.

Democrates in the Senate filibustered the vote to totally repeal the estate tax, in the Senate Republicans again fell shy of the 60 needed to break the filibuster. The vote was 57-41.

What's next? Putting Estate Tax Repeal/Reform into a revised Pensions Law. According to the Office of Senate Democratic Leader Harry Reid:

WASHINGTON, July 20 /U.S. Newswire/ -- With reports that Republicans are working to sneak billions of dollars in estate tax giveaways into the Pensions Conference Report, Senate Democratic Leader Harry Reid released the following statement:

"For over four months, American workers, retirees and businesses have been waiting patiently for the Republican Congress to deliver a pensions bill that will provide retirement security to millions of Americans. Now, instead of delivering those workers a clean bill, Republicans are desperately trying to satisfy a privileged few by providing them hundreds of billions in additional estate tax breaks. Fiscally irresponsible estate tax giveaways have been rejected by the Senate before and will be rejected again. We need a Congress that works for all Americans, not one that abuses the system to satisfy the special interests. I hope my Republican colleagues will move in a new direction by dropping the estate tax giveaway so we can quickly pass the pensions conference report. It is time to put American workers before special interests."

NJ 7% Sales Tax Effective 7.15.06

Category: Tax Law and Planning


As of 7.15.06, the New Jersey Sales Tax rate to be collected by local businesses is 7%. Sales tax violations have always been aggressively pursued by New Jersey, and claiming ignorance regarding the increase will likely not act to waive tax payment, penalties and fines. See the Department of Taxation Notice Here.

REMEMBER - SALES TAX LIABILITY IS A PERSONAL LIABILITY OF THE OWNER OF AN ENTITY. IN OTHER WORDS, YOUR CORPORATION OR LLC WILL NOT PROTECT YOU FROM PERSONAL LIABILITY IF YOU FAIL TO COLLECT AND REMIT THE PROPER TAX AMOUNT.

For more information, visit the NJ Department of Taxation. And keep going back, as new categories of goods and services that were previously exempt from sales tax will be subject to sales tax starting October 1, 2006.

Business Owners Need Business Plans (plural)

Category: Business Law and Planning

In the summer, the pace slows down, and it can be an excellent time for business owners to look at (1) where they are, (2) where they want to be, and (3) how to get there. In that vein, two relevant articles I just received from James Jimenez, CPA, of Fass and Associates, in Parsippany, New Jersey. The first "A Business Plan: Why you need one to run your business", and the second "Do you have a business survival plan?".

So instead of scooting home early one lazy day, why not sit down and try to see your business from an outsider's perspective, and map out where you want to be and how you want to get there. I raise business planning from time to time, because it is the kind of thing that we all know that we should do, but can't always make the time to do. So I hope this strikes you as an ideal moment to take stock.

A Business Plan: Why You Need One to Run Your Business

If you have an existing business and especially if you are starting a new venture, you need a business plan to guide and direct your future. Here are some tips for creating a plan that your business will actually find useful.

First, own your plan. It’s your plan, and you need to own it. It’s not something you can completely delegate to a consultant. You must be an active participant in its development even if you have assistance in the process.

It should communicate. Your plan should tell your story, and it should do so in a compelling way. Why does your business exist? What are your marketing, operational, and financial strategies? What are your goals, and how will you measure progress? What are the tasks to be performed, and who will do them?

It should bring focus and alignment. Your plan should spell out the responsibilities of your entire management team. Everyone should know his or her respective role and how it contributes to your plan for business success.

It should guide your business. Execution is the key. Your plan should be more than a means to obtain funding. It should be the tool to run your business. You might need a shorter and tighter version of your plan to make this happen.

It should be evolving. The “planning process” is as important as the plan itself. Things change quickly so your plan needs to be flexible and adaptive.

It should hold you accountable. Measure and track your progress, and use the plan to hold your management team accountable. Discipline and control need to be part of the process if you expect to achieve the objectives stated in your plan.

Wayne Gretzky, when asked for the reason for his success said, “Some people skate to where the puck is; I skate to where the puck is going to be.” A good plan should help you do the same for your business.

Do you have a business survival plan?

A business without a succession plan might be a business without a future. A succession plan allows your business to continue if you leave the business for any reason: your retirement, disability, death, or just your decision to move on. Here are some basic steps you should take to help ensure the survival of your business.

Determine who will succeed you. Will it be family members, your business partners, your employees, or an outside buyer? Each choice requires a different plan. For example, if you are not the sole business owner, a buy-sell agreement may allow a smooth transition when a co-owner leaves.

Prepare a timeline. Barring death or disability, when and how do you plan to exit the business? Well before your planned departure, equip your successors with the skills and experience necessary to take over.

Maintain complete and accurate financial records. Your company’s financial history is essential to preparing a fair business valuation. An accurate valuation is important for several reasons:

• You deserve a fair price for your business.
• A buyer and his backers will want evidence that the purchase price is fair.
• Your company’s valuation may have to withstand IRS scrutiny.

Create a financing plan. Your plan might include life and disability insurance, an employee stock ownership plan, or a stock redemption plan. Whatever your plan, it should take your future financial needs into account and provide a method for your successors to meet those needs.

Surround yourself with a team of advisors. Your accountant, your attorney, your banker, and your insurance agent can each have an important role to play in completing your plan.

Business succession is a process, not an event. Failure to plan for an orderly transition can result in financial losses or even the loss of your business. A well-designed plan, on the other hand, can protect your family, your employees, your co-owners, and your customers.

Ding Dong - RAP (Rule Against Perpetuities) is Dead in PA

Category: Estate Planning

This post will likely be of most interest to the lawyer readers - who recall with dread the interaction of the Socratic method and the Rule Against Perpetuities or RAP from law school.

In essence, the Rule Against Perpetuities (RAP) states that no trust can last longer than (1) the lives of all the then living beneficiaries at the date of the grantor's death (ie: the children and grandchildren and great-grandchildren living when the person who created the trust dies), plus (2) 21 years from the death of the last person identified in #1.

This creates a problem for estate planners, as many times a person's goal is to create a "dynasty trust", where the seed money for the trust can be used to benefit multiple generations indefinitely. The Rule Against Perpetuities can also have some unintended consequences of the timing of trust distributions. For estate planners and law students alike, the Death of RAP (Rule Against Perpetuities) is a good thing.

There has been a trend among the states to abolish RAP, as it is a carryover from old medieval English Law, where feudal lords and a serf system ruled the day. New Jersey abolished its RAP provision in 1997 (so long as you elect out of RAP in the trust document) and other states have moved so as a way to increase the trust business in those states (Delaware and Alaska come to mind).

Now, according to the PropertyProf Blog, PA is joining the trend.

Pennsylvania Abolishes Rule Against Perpetuities

Last week, Pennsylvania enacted legislation that among other things abolishes the rule against perpetuities for interests created after December 31, 2006 (the link is to the Senate bill; the Governor approved the bill on July 7).

Financial Tools targeting for Women

Category: Financial Planning

In much of my practice I am dealing with women as decision makers - women live longer than men so are more highly represented in my elder law practice; women are often the catalyst for estate planning as they want to deal with their concerns about their and their children's financial security in the event of death or disability; women are both business owners and key employees.

Apparently others are stepping up to the address the fact that women have different and unique needs in their financial planning and security, as MassMutual has launched a new section of its website focused on the financial needs of women http://www.massmutual.com/women.

From the press release: "While women share the same goal as men of achieving financial security, they typically have unique wants, needs and concerns that impact the way they build their financial strategy," says Susan Sweetser, second vice president, Specialized Markets, Massachusetts Mutual Life Insurance Company (MassMutual). "This new section has been designed with content, tools and online seminars that can help women prepare for life's events."

Attorney-In-Fact Under POA can make Gifts - If Gifts are as Contemplated in Will (NY)

Category: Estate Planning, Probate and Estate Administration

What happens when a person creates a Will and a Power of Attorney, and the person named under the Power of Attorney uses the Power of Attorney to make gifts to himself, and those gifts effectively change the testamentary scheme set out in the Will? In New York, a new ruling by the Appeals Court (the highest court in New York State) says that those gifts won't stand, regardless of a broad gifting power granted in the Power of Attorney, unless those gifts (1) are in the principal's best interest, and (2) conform to the principal's overall estate plan. In the Matter of Ferrara (N.Y., No. 92, June 29, 2006).

In New Jersey and New York, you need to specifically give your attorney-in-fact the ability to make gifts to himself or herself. This is commonly done by adding a paragraph the the Power of Attorney as the attorney-in-fact is usually a family member who gifts might be made to in any event (ie: a spouse or child). In my form of document, I have for years had language that the attorney-in-facts gifts must conform with the principal's estate plan precisely to avoid the mis-use of the power of attorney described in In the Matter of Ferrara. My thought is that the use of gifting powers within the Power of Attorney is necessary and desireable, as it is impossible to judge now how you may want to distribute your assets in the future (look at the DRA changes in the Medicaid law in 2006). However, it is also reasonable to limit the gifting of assets to be in the context of the the estate plan that you already have in place, so as not to allow a person's goals at death to be defeated merely by giving flexibility to use your assets as you would during life.

From elderlawanswers.com:

In 1999, George Ferrara executed a will bequeathing his entire estate to The Salvation Army. In 2000, Mr. Ferrara, who was single and had no children, signed a durable power of attorney called the "New York Statutory Short Form" appointing his brother, John, and a nephew, Dominick Ferrara, as his attorneys-in-fact. Mr. Ferrara initialed a typewritten addition to the form that enabled the attorneys-in-fact to make gifts to themselves without limitation. Dominick claims that this provision furthered his uncle's wishes that Dominick have all his assets. Mr. Ferrara died three weeks after executing the power of attorney. During those three weeks, Dominick transferred about $820,000 of Mr. Ferrara's assets to himself.

After learning of Mr. Ferrara's will, The Salvation Army began proceedings against Dominick to recover the assets. The trial court dismissed the petition, ruling that the presumption of impropriety when an attorney-in-fact makes self-gifts had been eliminated by changes to New York's laws in 1997. General Obligations Law § 5-1502 and 1503. The new law directs that an attorney-in-fact is authorized to make annual gifts of $10,000 or less to specified beneficiaries, but may do so only for purposes reasonably deemed to be in the principal's "best interest." The law also allows for additional language to be added permitting unlimited gifts. The trial court held that the best interest limitation does not apply to this additional language. The Appellate Division affirmed and The Salvation Army appealed.

The Court of Appeals of New York, the state's highest court, reverses. The court finds that nothing in the law suggests that the best interest requirement is waived when additional language increases the gift amount or expands the potential beneficiaries. "The Legislature intended [the relevant section] to function as a means to customize the statutory short form power of attorney, not as an escape-hatch from the statute's protections," the court writes. The court goes on to rule that "best interest" does not include the kind of unqualified generosity to the holder of a power of attorney practiced by Dominick, "especially where the gift virtually impoverishes a donor whose estate plan, shown by a recent will, contradicts any desire to benefit the recipient of the gift."

A Case for a Federal Inheritance Tax

Category: Estate and Inheritance Tax

In a different look on the estate tax repeal (or virtual repeal debate) Maya MacGuineas and Ian Davidoff in washingtonpost.com's Think Tank Town discuss the merits of repealing the estate tax and replacing it with an inheritance tax in "Tax Inheritance, Not 'Death'".

Under current law, the federal estate tax is a tax on the amount of assets you own at death. The estate pays the tax, and the net balance is distributed to the beneficiaries. A person does not pay any tax on his or her inheritance.

While I disagree with the article's summary of estate tax repeal opponents that "opponents of estate tax repeal have fallen back on a divisive class-warfare approach. The estate tax affects fewer than two percent of the richest Americans. Thus, they argue, the other ninety-eight percent of the population should oppose repeal." (see my prior posts of Truths about the Estate Tax - Debunking the Popular Myths, Effects of the Federal Estate Tax on Farms and Small Businesses - Congressional Budget Office Paper, and other similar posts at Estate Tax - You and Yours Blawg where I discuss the cost passthrough of a repeal of the estate tax to other taxpayers - most likely in the middle brackets), the authors' thoughts about the alternative of a federal inheritance tax are intriguing.

In "Tax Inheritance, Not 'Death'", the authors propose that any inheritance should be treated as income and taxed as income. This would be in keeping with the theoretical underpinning of our current system of progressive taxes (ie: lower tax rates for lowers earners and higher tax rates for higher earners) on earned income. As for the argument that this is "double taxation" the article says "so what", new money coming to you is income, and income should be taxed. Recall that the current estate tax tends to act to tax all theretofore untaxed capital gains at a person's death, and rewards the beneficiaries with a new "stepped up" basis.

The heart of the argument for an inheritance tax is excerpted below:

While it may seem perverse to tax one person's earnings twice, a key feature of inherited wealth is that upon transfer it goes from being one person's income to another's. There is nothing unreasonable then, about asking the person who receives an inheritance to pay their fair share on their new income -- particularly when all other earners, including minimum wage workers, pay taxes on the very first dollar they earn. To discuss whether to increase the size of estates exempted from taxation to $3 million, $10 million, or to make it unlimited is to move in the wrong direction in a society that values hard work. The current favorable treatment of inherited versus earned income is the opposite of what it should be.

A far better approach would be to tax people equivalently on all the income they receive, whether it be from earned or inherited income, by replacing the estate tax with an income tax on inheritances. Under such a tax, inheritances would be treated the same as other forms of earned income and taxed in the same manner.

Whereas under an estate tax, the tax owed is based on the size of the estate regardless of how it is distributed, under an inheritance tax, how much an individual inherits along with their economic circumstances would be considered. The result would be much fairer. The housekeeper and the wealthy niece who each receive a $50,000 windfall would pay taxes based on their own different tax rates. Likewise, two middle-class workers, one of whom inherits $10,000 and another who inherits $1,000,000, would be taxed at the rates that apply to their total income.

Changing from an estate tax to an inheritance tax would not only be fairer, it would be better tax policy. A general objective of tax policy is to create the broadest base with the lowest possible rates to minimize economic harm. Under the inheritance tax, the base would be significantly broadened by taxing all inheritances (except for, say, those less than $10,000) rather than narrowed as under the proposed estate tax compromises. At the same time, the estate tax rate, which ran as high as 55%, would be lowered significantly to current income tax rates, which range from 0% to 35%.

And creating an inheritance tax rather than eliminating the estate tax would save the Treasury hundreds of billions of dollars at a time when it desperately needs the money.

This argument does have an appeal to me in that it treats an inheritance as earnings - new money in your pocket, and new money means a new tax to you.