New Jersey, in advance of examining the facts and the issues, has said it refuses to do its job of auditing and resolving tax disputes involving transfer pricing without imposing penalties unless you do the job for them, do it fast, and do it their way—and all appeal rights are waived. This creates clear violations of State and Federal Due Process, the Manifest Injustice doctrine, and the mandate that government turn “Square Corners” when dealing with taxpayers. 

The Audit Branch is opening a transfer pricing initiative in which it will welcome applications to disclose and resolve state transfer pricing issues. For taxpayers that come forward, New Jersey agrees to:

• use principles of IRC Section 482 and its related-party adjustment authority (a big win because the author sat in a Trenton meeting during which the Division of Taxation (“Taxation”) said New Jersey was not bound by Section 482!);
• waive penalties; and
• close settled years.

This sounds a lot like the job Taxation is charged with doing, regardless of conducting a focused initiative on transfer pricing issues.

Further, if you do not come forward or you come forward and think you are getting a raw deal (or just don’t want to waive appeal rights), Taxation says, without regard to your facts or circumstances, it will:

• apply penalties;
• not waive penalties; and
• “will not agree to a methodology or settlement for any unaudited open tax years.” 

If you settle, all payments are final and appeal rights are waived. Therefore, you cannot pay to protect under the program to avoid penalties and continue your dispute. If New Jersey wants to continue the dispute, you do not get to add penalties to them when you win.

Due Process requires that taxpayers have an opportunity to be heard (the requirements are found in the Federal and New Jersey State Constitutions). The New Jersey Supreme Court said in my Amnesty Penalty win in 2014 that the penalty for not paying up in advance cannot stand when you paid the good faith correct amount initially with your return. The imposition of a penalty for not playing New Jersey’s way violates Due Process and cannot be correct.

Taxpayers in New Jersey have two more defenses—the Manifest Injustice doctrine and the Square Corners requirement. That is, even if actions do not violate Due Process, they can still be manifestly unjust (i.e., inequitable) especially when the harm is retroactive. New Jersey’s penalty and non-waiver will be applied retroactively to years in dispute long after the window to participate in the transfer pricing program has closed.

It is inequitable and it is wrong.

The Square Corners Doctrine requires that government turn square corners when dealing with taxpayers. It may not conduct itself to achieve or preserve a bargaining or litigation advantage even if it means that the government may have to forego the freedom of action that private litigants may employ in dealing with one another. New Jersey’s imposition of a penalty for not coming forward is a bargaining or litigation advantage that is prohibited by the Square Corners Doctrine.

The transfer pricing “invitation” expires on September 15, 2022, information must be provided by October 31, 2022, then Taxation will make a proposal for payment for which Taxation gives you “30 days to accept our proposal.” If you counter New Jersey’s proposal, you still have only 30 days to get agreement (extensions are at New Jersey’s discretion). 

My mentor Paul Frankel’s words ring ever more loudly: “Don’t Pay, Don’t Pay, Don’t Pay!”