LEGISLATIVE FISCAL ESTIMATE TO

SENATE, No. 1735

STATE OF NEW JERSEY

DATED: OCTOBER 30, 1997

      Senate Bill No. 1735 of 1996 changes the method for determining the "adjusted basis" of a partnership interest used to calculate the gain or loss on the sale, exchange or other disposition of that partnership interest under the "New Jersey Gross Income Tax Act."

      "Adjusted basis" is an accounting tool used to keep track of investments and expenditures made over the history of the ownership of particular property to allow a determination of gain or loss when the property is sold. Additions and subtractions are made to the initial cost of property to keep a running account of increases in the value of the property due to investment or earnings and decreases in the value of the property due to it being used up or converted to other things. The difference between adjusted basis and sales price equals the gain or loss used for tax purposes. Partnership net losses decrease the federal taxable income of the partnership's owners, and also decrease the federal adjusted basis. The lower the adjusted basis, the greater the gain (or the less the loss) realized on a sale. Currently, the adjusted basis used for calculating the gain or loss on the sale of partnership interest for New Jersey gross income tax purposes must be the same as the adjusted basis used for federal income tax.

      The New Jersey gross income tax is not as generous as the federal income tax in allowing net losses from partnerships to offset other income for tax purposes. The bill allows a partner's basis in a partnership interest to be adjusted upwards for New Jersey gross income tax purposes by an amount equal to the partner's share of the net losses of the partnership allowed and deducted from income for federal income tax purposes but not allowed as a similar deduction under the New Jersey gross income tax. This statutory change will not affect the New Jersey gross income tax liability of a taxpayer while the taxpayer owns an interest in a partnership; however, because the adjustments allowed will increase the taxpayer's New Jersey tax basis, the gain recognized on the sale of the interest for New Jersey tax purposes will be less (or the loss will be greater). 

       No data are available to the Office of Legislative Services (OLS) on the amount of gains currently subject to gross income taxation which would cease to be recognized as New Jersey gross income taxable gains under the provisions of the bill. OLS notes that the bill will result in continuing annual gross income tax revenue loss for the State.

      This legislative fiscal estimate has been produced by the Office of Legislative Services due to the failure of the Executive Branch to respond to our request for a fiscal note.

This fiscal estimate has been prepared pursuant to P.L.1980, c.67.