February 26, 2018
This is a status report provided by the New Jersey State Bar Association on recently passed and pending legislation, regulations, gubernatorial nominations and/or appointments of interest to lawyers, as well as the involvement of the NJSBA as amicus in appellate court matters.
NJSBA’s Double Taxation Bill Faces Full Senate Vote; Testimony in Committee
The New Jersey State Bar Association’s bill seeking to end the double taxation of attorney’s fees awarded in unlawful discrimination and retaliation claims was voted out of the Senate Budget and Appropriations Committee earlier this month. S-784 (Sarlo) would end New Jersey’s practice of taxing attorney’s fees to the attorney who receives the fee and the plaintiff who never receives this portion of the award. NJSBA member Bruce P. McMoran, of McMoran, O’Connor, Bramley & Burns, P.C., testified in support of the bill.
“What we’re trying to do is bring this in line with what the federal government realized in 2004 when it allowed an above the line deduction to the individual who doesn’t receive a dime and who is now paying taxes,” said McMoran.
The bill’s posting comes on the heels of a recent unpublished Appellate Division decision in which the court upheld the Division of Taxation’s assessment of additional taxes, penalties and interest on a qui tam plaintiff, also known as the relator, who was awarded a share of the United States’ recovery of $7.5 million. Kite v. Division of Taxation, Docket No. A-3349-15T3, Feb. 8, 2018 (App. Div.).
Anthony Y. Kite retained a law firm to file a qui tam action on behalf of the United States to prosecute fraudulent practices by certain hospitals that were submitting false claims under the Medicare program. When the initial complaint was unsealed, Kite learned there were two other private parties who filed qui tam actions against many of the same hospitals as in his action. They entered into a joint prosecution agreement that resulted in all three being awarded $1,229,255 in total recovery. The attorney retained its fee and distributed to the other two relators $307,313.75. Kite retained the balance of the recovery and reported it on his federal taxes, but not on his New Jersey gross income tax return.
In his complaint to the tax court, Kite argued the amount he recovered was not subject to the New Jersey gross income tax, and alternatively argued he was entitled to deductions for attorney’s fees and the money paid to the other relators. Interpreting the current statute, the tax court ruled that under N.J.S.A. 54A:5-1(l), the entire amount constituted an “award” and was therefore considered taxable gross income. It also ruled that the amounts paid to his attorneys and the other relators was not tax deductible. The Appellate Division upheld this decision.
McMoran noted the inequity to Kite, “who saved the state and federal government millions of dollars based on hospital fraud,” by requiring Kite to pay income taxes on parts of the award to other individuals. “So he got to pay the taxes, but never got a dime.”
McMoran suggested that an amendment may be in order to address this inequity, which is being pursued by Senator Sarlo.
An Assembly sponsor is pending, and the association continues to monitor and support its movement in the Legislature.