Bamboozled: No gain but lots of pain

Gregg Peters Monsees has worked for the family business for 29 years.BB branding

Putnam Rolling Ladder Company opened its doors in New York City in 1905, back when Teddy Roosevelt was president.

The company’s founder sold the business to Monsees’ great-aunt in 1946. Blood relatives are the only stockholders: Monsees, his four children, his two nieces and two cousins, plus Monsees’ father, 86, who still comes to work every day.

After 20 years of profits from the business, a Subchapter S corporation, the company lost money in 2003. Monsees, an Upper Montclair resident, took the loss on his federal and state tax returns, which he prepares himself.

He was audited by the state of New Jersey, but not until four years later.

Monsees, 59, said in May 2007, his postal carrier left notice of a certified letter from the state Division of Taxation. Monsees said he signed the notice, requesting delivery, but the letter never arrived. In late June, the letter arrived via regular mail, explaining his 2003 return was under review.

61609The letter said there was a deficiency on his 2003 return for his deductibility of the business loss. Monsees thought there must be an error. Federal tax law allows deductions for Subchapter S corporation losses, so New Jersey must, too, he thought.

He sent an appeal, and in September 2007 received a letter that said all further action on the 2003 return was to cease, pending review. But it didn’t cease.

His 2006 tax refund was withheld to pay the 2003 deficiency. Then, his 2006 Homestead Rebate check was also withheld. He received several more letters about underpayments, interest charges and penalties.

In January 2008, he received notice that his appeal had failed, that he owed $3,795.06 in taxes, penalties and interest, and that his extension was denied.

Monsees never asked for an extension.

The letter also said he had 90 days to sue the state on the matter, so he did, even though he had to pay the 2003 deficiency before he could file. While he awaited his trial date, he was notified his tax returns from 2004, 2005 and 2007 would also be audited.

Monsees called it harassment. The state Attorney General’s Office would not comment on the case.

Monsees waited more than a year for his court date. On May 1, 2009, acting as his own attorney and certain he’d be vindicated, he lost every argument before the tax court.

“I was wrong,” he said.

Tax policy and the law

The law is clear. Federal tax law allows deductions for losses from a Subchapter S corporation, but New Jersey law does not. Monsees now fully understands the tax law, but to him, it makes no sense. He’s still fighting, on principle.

“The disallowed losses are totally unfair and inequitable,” he said. “How can the state, year after year, require a profit to be reported as income, but when a loss occurs, not allow it?” Monsees said.

New Jersey isn’t exactly friendly when it comes to taxes

The state ranked last in the Tax Foundation’s annual survey of overall business climate. That doesn’t mean New Jersey businesses pay the highest taxes, but rather, the state’s tax system is the least business-friendly based on features of the tax code, said Mark Robyn, a Tax Foundation analyst.

The Tax Foundation, in principle, agrees with Monsees’ argument. It says if one dollar of income generates a tax liability, one dollar of loss should reduce liability by the same amount.

“Losses should be deductible,” said Robyn.

Instead, New Jersey allows you to defer losses until the sale of an S corporation, said Ken Hydock, a certified public accountant with Sobel and Co. Livingston.

He offers this example: You’ve owned an S corporation for 20 years. The first 10 years yield $1 million of income per year. The second 10 years see $1 million of losses per year. You could take those losses annually on your federal return but not for New Jersey. If you then sell the business for $10 million, for federal tax purposes, you’d have a $10 million taxable gain. But for New Jersey, because you didn’t get your $10 million of losses over the years, you’d have a $10 million basis and therefore no taxable gain.

“It is unfair because it doesn’t give you a current benefit,” Hydock said.

If the family eventually sells the business, Monsees may be able to take certain losses on his New Jersey return. But for now, nothing.

Asking for change

Monsees wants a change.

“The law must be changed to allow the loss of a Subchapter S corporation on our personal income taxes,” he said. “Or, if the legislature would prefer, the profit of a Subchapter S corporation should not have to be reported.”

Monsees has written to Gov. Jon Corzine, who replied with a letter saying he’d forward Monsees’ concerns to Legislative Services, and to Senate President Richard Codey, (D-Essex,) who has not yet responded. He’s also mailed legislators in Trenton and just about anyone else who will listen.

If you agree with Monsees and want a change in the law, contact your state assemblymen and senators.

Visit the New Jersey Legislature website at njleg.state.nj.us for names and contact information. To find the members of the Senate Budget and Appropriations Committee, visit njleg.state.nj.us/committees/senate.asp, and for members of the Assembly’s Budget Committee, try njleg.state.nj.us/committees/assembly.asp.

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