Partnership Fee

 (TRENTON) –Governor James E. McGreevey signed the following
 bills into law on Wednesday, January 14:

SCS for S-1770/1773/ACS for A-2100/2666/2690
(Bark/Inverso/Singer/

Bodine/Chatzidakis/Cottrell/Malone/Roberts/Sires) – Exempts
certain investment clubs from certain partnership fee and
payment requirements.

ASSEMBLY APPROPRIATIONS COMMITTEE



STATEMENT TO



SENATE COMMITTEE SUBSTITUTE FOR

SENATE, Nos. 1770 and 1773



with Assembly committee amendments



STATE OF NEW JERSEY



DATED: JANUARY 8, 2004



      The Assembly Appropriations Committee reports
      favorably Senate Bill Nos. 1770 and 1773 (SCS), with
      committee amendments.

      Senate Bill No. 1770 and 1773 (SCS), as amended,
      exempts certain investment clubs from the withholding
      and fee requirements recently imposed on partnerships.

      P.L.2002, c.40 made extensive revisions to business
      taxes, mainly to the corporation business tax
      (N.J.S.A.54:10A-1 et seq.), but also to the duties of
      partnerships and other entities that are not
      themselves taxable, but "pass through" their income to
      their owners. These revisions included new
      requirements that partnerships pay a filing fee and
      make certain payments on behalf of the owners. More
      specifically, for taxable year 2002 and thereafter:

* a partnership that has income from New Jersey sources
     and more than two owners must pay an annual filing fee
     of $150 per owner, but not more than $250,000; and

* a partnership must make a payment on the share of the
     partnership income of each of its nonresident owners at
     a rate of 6.37% for individual owners and 9% for
     corporate owners; in a manner similar to withholding,
     the payments are credited to a separate account for
     each owner and may be credited against the owner's
     income tax liability for the owner's share of
     partnership income.

      This substitute exempts "investment clubs" from the
      $150 per owner annual partnership filing fee and from
      the "withholding" requirement that a partnership make
      payments on behalf of its nonresident owners. (1) is
      classified as a partnership for federal tax purposes;

      (2) has an ownership comprised only of individuals;

      (3) has all of its assets in securities, cash, or cash
      equivalents;

      (4) has assets, the total market value of which
      (measured on the last day of its tax period) does not
      exceed the lesser of $250,000 or $35,000 times the
      number of its owners; and

      (5) is not required to register itself or its
      membership interests with the federal Securities and
      Exchange Commission (SEC). Generally, a club is exempt
      from any requirement to register itself with the SEC
      as an "investment company" if it has exempt status as,
      for instance, a "private investment company" (i.e., it
      has no more than 100 members and makes no public
      offering of securities). A club need not register its
      offer and sale of membership interests with the SEC if
      ownership interests in the club portfolio are not
      considered "securities." (Such ownership interests are
      usually not considered "securities" if all club
      members actively participate in deciding what
      investments the club will make.)

      The substitute provides an inflation adjustment for
      the cap on the total and average assets of the owners.

      As reported by the committee, this substitute is
      identical to Senate Bill Nos. 1770/1773 (SCS), as
      amended and reported by the committee.



FISCAL IMPACT:

      Executive branch estimates using national data for
      2001 that indicated that investment clubs had 400,000
      individual members, and the assumption that 4% of the
      members are in New Jersey based clubs, conclude that
      16,000 members of investment clubs at most are subject
      to the $150 filing fee and that $2.4 million in filing
      fees should be forthcoming from these investment
      clubs.

      The executive branch estimates note that New Jersey
      regulations exempt investment clubs with total asset
      values less than $60,000 from filing fee payments. The
      executive estimates that this exemption results in a
      loss of approximately $1.4 million of the $2.4 million
      total, so that this bill would cause a maximum further
      revenue loss of $1 million annually to the Property
      Tax Relief Fund or the General Fund.

      Using more recent data, the Office of Legislative
      Services (OLS) concludes that the revenue impact of
      this bill would be somewhat less than executive
      estimate. The national data from 2003 indicate that
      there are 298,000 investment clubs members nationwide
      (a 25 percent decline from two years earlier).
      Applying the same 4 percent allocation to New Jersey
      as was applied by the executive branch, OLS estimates
      that New Jersey has 11,920 investment club members and
      that the maximum possible liability for investment
      clubs would be $1.8 million. After consideration of
      the impact of the November 26, 2002 announcement by
      the State Treasurer that the filing fee would be
      waived for all investment clubs with assets below
      $60,000, that the executive branch analysis that this
      regulatory change reduced the liability by $1.4
      million, the additional Maximum revenue reduction that
      could result from this bill would be the remaining
      $400,000.

      However, absent an explanation of the executive $1.4
      million estimated cost for the waiver, OLS doubts that
      such a large proportion (more than 75%) of the members
      would have been in clubs with assets were less than
      $60,000, when the national average for club assets is
      more than $86,000. Alternatively, if half the members
      were excluded by the $60,000 limit, the maximum impact
      of this bill would be $900,000. This cost would be
      reduced further because some clubs - although probably
      not a large percentage - have assets above the bill's
      $250,000 per club/$35,000 per member level and would
      still be subject to the fee. An additional factor
      which would reduce the bill's fiscal impact is the
      opportunity for clubs to restructure or reorganize in
      order to avoid the fee. Accordingly, OLS estimates
      that maximum cost from the bill at about $800,000.

      There will be no fiscal impact from the exemption for
      the "withholding" payment, because nonresident members
      of New Jersey investment clubs derive no income from
      the investment clubs that would be subject to New
      Jersey taxation.



COMMITTEE AMENDMENTS:

      The amendments provide for the alternative $250,000
      total asset value cap for exemption qualification and
      make technical changes to tax period references.