Reporting of "Deemed Sale" Election on Capital Gains
A tax practitioner recently inquired about the proper New Jersey Gross Income Tax reporting of a federal deemed sale election of capital assets acquired in the tax years beginning before January 1, 2001. This question was prompted by the amendment to Section 311 of the Internal Revenue Code under the Taxpayer Relief Act of 1997 allowing taxpayers to make an election to report a gain on their federal 2001 income tax return as if an actual sale of assets had been made and then reacquired on the same date.
For New Jersey purposes, the Gross Income Tax Act states in part that "a taxpayer's accounting method under the act shall be the same as his accounting method for Federal Income Tax purposes." N.J.S.A. 54A:8-3(c).
Accordingly, if a taxpayer makes the election for a deemed sale of capital assets for federal purposes, the taxpayer must follow the same method of accounting for New Jersey tax purposes, and report the income from the deemed sale in the same period. The taxpayer's basis in the asset for New Jersey income tax purposes will then remain the same as for federal purposes.
This position is consistent with the Division's long standing policy on the issue of timing and the reporting of income as previously reported in the State Tax News in the May/June 1982 issue, page 73; the Winter 1998 issue, page 11; and the Winter 2000 issue, page 4.