Guidance pursuant to the Superior Court of New Jersey Appellate Division decision, September 3, 2020, in Andrew J. Shechtel v. Director, Division of Taxation, 32 N.J. Tax 180 (App. Div. 2020).
The Shechtel decision determined that for New Jersey Gross Income Tax (NJ-GIT) purposes taxpayers should follow the IRC Section 465 "at-risk" limitations.
Taxation is considering proposal of a regulation on this subject. The decision applies to partners in partnerships and sole proprietors. However, the decision is not applicable to S corporation shareholders in view of N.J.S.A. 54A:5-12, which provides specific language limiting shareholders' losses. In addition, taxpayers may not use a loss following the "at-risk" rules if they have previously used the loss for NJ-GIT purposes.
Similarly situated taxpayers with facts and circumstances like those found in the opinion may amend their New Jersey Gross Income Tax returns. Amended returns may be subject to audit. Although a taxpayer may amend a return at any time, in order to claim a refund, the amended return must be filed within three years from the original due date of the return or two years from the time the tax was paid, whichever is later. Additionally, taxpayers may be required to provide documentation demonstrating that any loss disallowed pursuant to IRC 465 was not used in a previous tax year for NJ-GIT purposes. Taxpayers will need to keep track of any New Jersey and federal differences in basis.