Opinion
Docket No. 000057-2008
11-14-2013
Re: David E. and Janice Berliner v. Director, Division of Taxation
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
Patrick DeAlmeida
Presiding Judge
David E. Berliner
Janice L. Berliner
Self-Represented Parties
Richard D. Del Monaco
Deputy Attorney General
Counsel for Director, Division of Taxation
Dear Mr. and Mrs. Berliner and DAG Del Monaco:
This letter constitutes the court's opinion with respect to the Director, Division of Taxation's motion for summary judgment seeking to affirm a final determination assessing New Jersey gross income tax, penalties and interest against plaintiffs for tax years 2004 and 2005. The central question before the court is whether the Director correctly calculated plaintiffs' gross income tax resident credit for taxes paid to other jurisdictions on income also subject to tax by New Jersey. See N.J.S.A. 54A:4-1. For the reasons stated more fully below, the court concludes that the Director's final determination is correct and must be affirmed. *
I. Findings of Fact
Plaintiffs David E. Berliner and Janice Berliner are married and reside together in New Jersey. During 2004 and 2005, Mr. Berliner was a partner in BDO Seidman, LLP ("BDO"), a partnership located in New York City which generated income for Mr. Berliner in multiple states, including New Jersey, and municipalities which impose income tax on partnership earnings.
Plaintiffs filed a timely New Jersey resident gross income tax return for 2004 reporting $330,798 as Mr. Berliner's distributive share of partnership income from BDO. Of that amount $6,994 was attributable to New Jersey sources; the remainder was attributable to eighteen other States and two municipalities that imposed income tax on Mr. Berliner's partnership earnings. Thus, only $323,804 of Mr. Berliner's partnership income was foreign sourced ($330,798 -$6,994 = $323,804). Also reported on plaintiffs' 2004 return was $41,242 in wages earned by Mrs. Berliner in New Jersey, $39 in interest, $2,574 in dividends and $17,091 in net gains from the disposition of property. This resulted in New Jersey gross income of $391,744 ($330,798 + $41,242 + $39 + $2,574 + $17,091 = $391,744). From this amount plaintiffs deducted $6,500 in exemptions, resulting in New Jersey taxable income of $385,244 ($391,744 - $6,500 = $385,244). Plaintiffs reported a New Jersey gross income tax liability of $20,498 on this amount of taxable income.
After determining their New Jersey gross income tax, the Berliners calculated a credit for the income tax they paid to other jurisdictions for 2004. N.J.S.A. 54A:4-1 defines the parameters of the credit:
(a) A resident taxpayer shall be allowed a credit against the tax otherwise due under this act for the amount of any income tax or wage tax imposed for the taxable year by another state of theThe credit, therefore, is not a dollar for dollar credit but must be determined through application of a formal set forth in the Director's regulations interpreting the statute. The formula includes a fraction, the numerator of which is equal to the taxpayer's income subject to tax by the other jurisdiction before the allowance of deductions and exemptions and the denominator of which is equal to the taxpayer's entire New Jersey income. As the Director explained,
United States or political subdivision of such state, or by the District of Columbia, with respect to income which is also subject to tax under this act . . . .
(b) The credit provided under this section shall not exceed the proportion of the tax otherwise due under this act that the amount of the taxpayer's income subject to tax by the other jurisdiction bears to his entire New Jersey income.
N.J.S.A. 54A:4-1(b), (c) and (d) provide for a limitation on the credit for tax paid to another state or political subdivision. The amount of the resident taxpayer credit for tax paid to another state or political subdivision shall not exceed the percentage derived by dividing income subject to tax in the other jurisdiction by the taxpayer's entire New Jersey income multiplied by the tax otherwise due under the New Jersey Gross Income Tax Act.The Division's regulations define the elements of the formula thusly
[N.J.A.C. 18:35-4.1(a)3.]
For purposes of determining the percentage, as provided in (a)3 above, for limitation of the tax credit:The formula for determining the resident credit for taxes paid to other jurisdictions is correctly depicted as follows:
i. Income subject to tax by the other jurisdiction means those items of income, which are taxed by another jurisdiction before the allowance for personal exemptions and standard and/or other deductions and which are also subject to tax under the New Jersey Gross Income Tax Act. "Subject to tax" is defined as income actually taxed.
ii. Entire New Jersey income means the New Jersey gross income subject to tax before allowances for personal exemptions and deductions.
[N.J.A.C. 18:35-4.1(a)6(i) and (ii).]
Income subject to tax by other jurisdiction/before allowance for exemptions and deductions/Entire New Jersey income x New Jersey Tax = Credit
The dispute before the court arises from the fact that the Berliners, when applying the regulatory formula for tax year 2004, included in the numerator the $6,994 in partnership income identified by BDO as arising from New Jersey sources. As will be discussed in more detail below, this court and the Appellate Division have previously held that the resident credit applies only to foreign-source income on which New Jersey residents pay tax to other jurisdictions and that the Legislature did not intend to give to New Jersey residents a credit for taxes they pay to other jurisdictions on income earned in New Jersey.
In addition, when calculating the resident credit plaintiffs used as the numerator the amount of income taxed by each of the other jurisdictions for 2004. When added together the numerators from the various jurisdictions total $459,935. Because this number exceeds the amount of foreign income earned by Mr. Berliner, it is clear that some portion of his foreign sourced income was taxed by more than one jurisdiction. Because plaintiffs did not limit their credit to the $323,804 in foreign source income earned by plaintiffs in 2004, their calculation of the credit exceeded the limitations imposed by N.J.S.A. 54A:4-1.
Having included their New Jersey source partnership income in the numerator of the resident credit fraction and having overstated the amount of foreign-source income eligible for a credit, plaintiffs calculated a total resident credit of $21,948. Because this amount exceeded plaintiffs' reported New Jersey gross income tax liability of $20,498, plaintiffs' applied a credit that erased their New Jersey gross income tax obligation. Plaintiffs took a $50 property tax credit and noted $957 in New Jersey income withheld from Mrs. Berliner's wages. Their return, as a result, requested a refund of $1,007 ($957 + $50 = $1,007).
For tax year 2005, plaintiffs filed a timely New Jersey resident gross income tax return reporting $507,769 as Mr. Berliner's distributive share of partnership income from BDO. Of that amount $10,897 was attributable to New Jersey sources; the remainder was attributable to twenty-five States and two municipalities that imposed income tax on Mr. Berliner's partnership earnings for 2005. Thus, only $496,872 of Mr. Berliner's partnership income was foreign sourced ($507,769 - $10,897 = $496,872). Also reported on plaintiffs' 2005 return were $46,629 in wages earned by Mrs. Berliner in New Jersey, $699 in interest, $3,835 in dividends, and $2 in other income. This resulted in New Jersey gross income of $559,014 ($507,849 + $46,629 + $699 + $3,835 + $2 = $559,014). From this amount plaintiffs deducted $6,500 in exemptions and $1,217 in medical expenses, resulting in New Jersey taxable income of $551,297 ($559,014 - $6,500 - $1,217 = $551,297). Plaintiffs reported a New Jersey gross income tax liability of $32,409.
Although plaintiff's 2005 New Jersey resident gross income tax form reports $507,849 in distributive share of partnership income, the form K-1 filed with the return indicates that Mr. Berliner received $507,769 in distributive share of partnership income in 2005 from BDO. The $80 difference between the two figures is not explained in the record. The court will determine plaintiff's New Jersey gross income tax liability using the lower figure.
Plaintiffs calculated their resident gross income tax credit pursuant to N.J.S.A. 54:4-1 by including in the numerator of the resident credit fraction the $10,897 in partnership income identified by Mr. Berliner's partnership as arising from New Jersey sources. In addition, when calculating the resident credit plaintiffs used as the numerator the amount of income taxed by each of the other jurisdictions for 2005. When added together the numerators from the various jurisdictions total $683,512. Because this number exceeds the amount of foreign income earned by Mr. Berliner, it is clear that some portion of his foreign source income was taxed by more than one jurisdiction. Because plaintiffs did not limit their credit to the $496,872 in foreign source income earned by plaintiffs in 2005, their calculation of the credit exceeded the limitations imposed by N.J.S.A. 54A:4-1.
Having included their New Jersey source partnership income in the numerator of the resident credit fraction and having overstated the amount of foreign-source income eligible for a credit, plaintiffs calculated a total resident credit of $35,949. Because this amount exceeded plaintiffs' reported New Jersey gross income tax liability of $32,409, plaintiffs' applied a credit that erased their New Jersey gross income tax obligation. Plaintiffs took a $50 property tax credit and noted $1,053 in New Jersey income withheld from Mrs. Berliner's wages, and an excess of $64 in unemployment insurance withholdings from wages. Their return, as a result, requested a refund of $1,167 ($1,053 + $50 + $64 = $1,167).
After an audit, the Division determined that plaintiffs had miscalculated the resident credit for the two tax years. A Division auditor issued two May 4, 2007 notices of deficiency in which he made several adjustments to plaintiffs' gross income tax returns.
With respect to tax year 2004, the auditor first reduced plaintiffs' taxable income by $10,000 to account for a property tax deduction to which they were entitled but did not claim. This action reduced plaintiffs' New Jersey gross income tax liability by $637 to $19,861 ($20,498 - $637 = $19,861).
Second, the auditor recalculated plaintiffs' resident credit for 2004. Citing the holding in Jenkins v. Director, Div. of Taxation, 4 N.J. Tax 127 (Tax 1982), the auditor concluded that the resident credit does not apply to taxes paid to other jurisdictions on income derived from New Jersey sources. Because plaintiffs had included New Jersey source income in the numerator of the resident credit fraction when making their calculations, the auditor recalculated the credit to which plaintiffs are entitled. Because $6,994 of Mr. Berliner's distributive share of partnership income for 2004 was New Jersey source income, the auditor removed that amount from the total foreign source income for which a credit is available. The auditor determined that $323,804 of Mr. Berliner's distributive share of partnership income for 2004 is eligible for the credit ($330,798 - $6,994 = $323,804).
Noting that plaintiffs had effectively taken a credit on $459,935 in income (because at a portion of Mr. Berliner's distributive share of partnership income was taxed by more than one jurisdiction), the auditor recalculated plaintiffs' resident credit for 2004. The auditor began by calculating the credit for taxes paid to New York State. $284,347 of Mr. Berliner's distributive share of partnership income was taxed by New York. The credit fraction for this State, as determined by the auditor, is
Amount Taxed by New York/Entire New Jersey Income x New Jersey Tax = Credit
$284,347/$391,744 x $19,861 = $14,415
The auditor then calculated plaintiffs' credit for taxes paid to California. $41,341 of Mr. Berliner's distributive share of partnership income was taxed by California. However, only $39,457 of that income is allowable in the credit calculation because $284,347 of plaintiffs' income was already subject to the credit under the New York calculation ($323,804 - $284,347 = $39,457). The credit fraction for this State, as determined by the auditor, is
Amount Taxed by California Minus/Amount Subject to New York Credit/Entire New Jersey Income x New Jersey Tax = Credit
$39,457/$391,744 x $19,861 = $2,000
The auditor determined that no further credit was available for plaintiffs for 2004. This is so because the credits for New York and California encompassed the entire $323,804 of plaintiffs' foreign source income subject to tax by New Jersey. To permit any further credit would expend the credit beyond its statutory limit. The auditor determined that the total credit available for plaintiffs for 2004 is $16,416 ($14,415 + $2,000 = $16,415).
The original audit determination applied a credit of $16,416. A subsequently filed certification from a Division conferee set the credit at $16,415. The court attributes the $1 difference in the figures to rounding and considers the difference to be immaterial. The court will give plaintiffs the benefit of the higher credit.
After application of the credit to plaintiffs' recalculated tax liability of $19,861, the auditor determined that plaintiffs' 2004 New Jersey gross income tax obligation is $3,444 ($19,861 - $16,416 = $3,445). After consideration of the taxes withheld on behalf of plaintiffs ($957) and the refund issued to plaintiffs as a result of their original return ($1,007), the auditor determined that plaintiffs had an outstanding gross income tax liability of $3,494 ($3,444 - $957 + $1,007 = $3,494). With penalties and interest calculated to May 31, 2007, plaintiffs' outstanding New Jersey gross income tax obligation for 2004 was determined to be $4,444.
Although application of the $16,416 credit results in a tax liability of $3,445, the notice of deficiency reported an outstanding tax liability of $3,444. Again, the $1 difference is likely attributable to rounding. The court will give plaintiffs the benefit of the rounding difference and limit the Director to the $3,444 assessment.
With respect to tax year 2005, the auditor first reduced plaintiffs' taxable income by $10,000 to account for a property tax deduction to which they were entitled but did not claim. This action reduced plaintiffs' New Jersey gross income tax liability by $897 to $31,512 ($32,409 - $897 = $31,512).
Second, the auditor recalculated plaintiffs' resident credit for 2005. Again relying on the holding in Jenkins, supra, the auditor concluded that the resident credit does not apply to taxes paid to other jurisdictions on income derived from New Jersey sources. Because plaintiffs had included New Jersey source income in the numerator of the resident credit when making their calculations, the auditor recalculated the credit to which plaintiffs are entitled. Because $10,897 of Mr. Berliner's distributive share of partnership income for 2005 was New Jersey source income, the auditor removed that amount from the total foreign source income for which a credit is available. The auditor determined that $496,872 of Mr. Berliner's distributive share of partnership income for 2005 is eligible for the credit ($507,769 - $10,897 = $496,872).
Noting that plaintiffs had effectively taken a credit on $683,512 in income (because at a portion of Mr. Berliner's distributive share of partnership income was taxed by more than one jurisdiction), the auditor recalculated plaintiffs' resident credit for 2005. The auditor began by calculating the credit for taxes paid to New York State. $420,280 of Mr. Berliner's distributive share of partnership income was taxed by New York. The credit fraction for this State, as determined by the auditor, is
Amount Taxed by New York/Entire New Jersey Income x New Jersey Tax = Credit
$420,280/$559,014 x $31,512 = $23,691
The auditor then calculated plaintiffs' credit for taxes paid to California. $77,364 of Mr. Berliner's distributive share of partnership income was taxed by California. However, only $76,592 of that income is allowable in the credit calculation because $420,280 of plaintiffs' income was already subject to the credit under the New York calculation ($496,872 - $420,280 = $76,592). The credit fraction for this State, as determined by the auditor, is
Amount Taxed by California Minus/Amount Subject to New York Credit/Entire New Jersey Income x New Jersey Tax = Credit
$76,592/$559,014 x $31,512 = $4,317
The auditor determined that no further credit was available for plaintiffs for 2005. This is so because the credits for New York and California encompassed the entire $496,872 of plaintiffs' foreign source income subject to tax by New Jersey. To permit any further credit would expend the credit beyond its statutory limit. The auditor determined that the total credit available for plaintiffs for 2005 is $28,009 ($23,691 + $4,317 = $28,008).
The original audit determination applied a credit of $28,009. A subsequently filed certification from a Division conferee set the credit at $28,008. The court attributes the $1 difference in the figures to rounding and considers the difference to be immaterial. The court will give plaintiffs the benefit of the higher credit.
After application of the credit to plaintiffs' recalculated tax liability of $31,512, the auditor determined that plaintiffs' 2005 New Jersey gross income tax obligation is $3,503 ($31,512 - $28,009 = $3,503). After consideration of the taxes withheld on behalf of plaintiffs ($1,117) and the refund issued to plaintiffs as a result of their original return ($167), the auditor determined that plaintiffs had an outstanding gross income tax liability of $3,553 ($3,503 -$1,117 + $1,167 = $3,553). With penalties and interest calculated to May 31, 2007, plaintiffs' outstanding New Jersey gross income tax obligation for 2005 was determined to be $4,157.
Plaintiffs requested an administrative hearing to challenge the notices of deficiency. On January 3, 2008, the Director issued a final determination agreeing with the conclusions set forth in the notices of deficiency and upholding the assessments for both tax years. Updated penalties and interest brought plaintiffs' 2004 gross income tax liability to $4,818 and their 2005 gross income tax liability to $4,499, for a total outstanding liability of $9,317 ($4,818 + $4,499 = $9,317). Plaintiffs paid the full amount of the outstanding liability shortly after issuance of the final determination.
Notably, the final determination states that plaintiffs failed to respond to a request to schedule an administrative hearing and, as a result, the final determination is based on a review of the information revealed during the audit process. Plaintiffs dispute their failure to respond to an inquiry from the Division, alleging that they received no communications from the Division prior to their receipt of the final determination. This factual dispute is not germane to the legal issues raised in the Complaint. Additionally, the court notes that any harm that may have arisen from plaintiffs having not received notice of the administrative hearing is cured by the fact that plaintiffs had a full opportunity to presents factual and legal arguments in this court.
--------
On February 25, 2008, plaintiffs filed a Complaint in this court challenging the Director's final determination and seeking a refund of $9,317.
After the close of discovery, the Director moved for summary judgment. Plaintiffs opposed the motion. They concede that in the event the Director's interpretation of N.J.S.A. 54A:4-1 is upheld, the Director's mathematical computation of the credit and the taxes due for each tax year is correct. The parties presented oral argument to the court. At the court's direction, the parties submitted supplemental briefs following argument.
II. Conclusions of Law
"Summary judgment should be granted where 'the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact challenged and that the nonmoving party is entitled to a judgment or order as a matter of law.'" Alpha I, Inc. v. Director, Div. of Taxation, 19 N.J. Tax 53, 56 (Tax 2000)(citing R 4:46-2). In Brill v. Guardian Life Ins. Co., 142 N.J. 520, 523 (1995), our Supreme Court established the standard for summary judgment as follows:
[W]hen deciding a motion for summary judgment under Rule 4:46-2, the determination whether there exists a genuine issue with respect to a material fact challenged requires the motion judge to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party in consideration of the applicable evidentiary standard, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party.
The court finds that there are no disputed material facts at issue in this matter. The sole issue before the court is the correct calculation, in light of the undisputed facts, of plaintiffs' gross income tax resident credit under N.J.S.A. 54A:4-1 for tax years 2004 and 2005. Plaintiffs' claims, therefore, are ripe for resolution.
The court's analysis of the validity of the Director's final determination begins with the familiar principle that the Director's interpretation of tax statutes is entitled to a presumption of validity. "Courts have recognized the Director's expertise in the highly specialized and technical area of taxation." Aetna Burglar & Fire Alarm Co. v. Director, Div. of Taxation, 16 N.J. Tax 584, 589 (Tax 1997)(citing Metromedia, Inc v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984)). The scope of judicial review of the Director's decision with respect to the imposition of a tax "is limited." Quest Diagnostics, Inc. v. Director, Div. of Taxation, 387 N.J. Super. 104, 109 (App. Div.), certif. denied, 188 N.J. 577 (2006). The Supreme Court has directed courts to accord "great respect" to the Director's application of tax statutes, "so long as it is not plainly unreasonable." Metromedia, supra, 97 N.J. at 327. See also GE Solid State, Inc. v. Director, Div. of Taxation, 132 N.J. 298, 306 (1993)("Generally, courts accord substantial deference to the interpretation an agency gives to a statute that the agency is charged with enforcing.").
In addition, a regulation promulgated by the Director must be upheld unless the taxpayer can demonstrate that the regulation is "arbitrary, capricious, unduly onerous or otherwise unreasonable." Sorensen v. Director, Div. of Taxation, 2 N.J. Tax 470, 476 (Tax 1981)(citing New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544 (1978)). Only a regulation that is "out of harmony with the statute" will be invalidated by the court as exceeding delegated authority to interpret the law. Ibid. A regulation "within the fair contemplation of the delegation of the enabling legislation" will be upheld. Ibid.
N.J.S.A. 54A:4-1 defines the parameters of the credit for residents who pay income tax to New Jersey and other jurisdictions on the same earnings:
(a) A resident taxpayer shall be allowed a credit against the tax otherwise due under this act for the amount of any income tax or wage tax imposed for the taxable year by another state of the United States or political subdivision of such state, or by the District of Columbia, with respect to income which is also subject to tax under this act . . . .
(b) The credit provided under this section shall not exceed the proportion of the tax otherwise due under this act that the amount of the taxpayer's income subject to tax by the other jurisdiction bears to his entire New Jersey income.
The objective of N.J.S.A. 54A:4-1 is to avoid double taxation of income earned by New Jersey residents. As the Appellate Division explained, "if the same income is taxed in another state and in this state for the same tax year, the Legislature intends the New Jersey resident taxpayer to receive a credit for the tax paid in the other state." Sutkowski v. Director, Div. of Taxation, 312 N.J. Super. 465, 474-75 (App. Div. 1998). "The credit is available to New Jersey residents for any income tax or wage tax imposed by another state with respect to income which is also subject to tax by New Jersey." Sorensen v. Director, Div. of Taxation, supra, 2 N.J. Tax at 471.
There are two questions posed by plaintiffs' Complaint: (1) whether the Director was correct, when determining the portion of plaintiffs' income to which the resident credit is applicable, in excluding partnership income sourced in New Jersey; and (2) whether the Director was correct in determining that plaintiffs' income subject to the credit was capped at $323,804 for tax year 2004 and $496,872 for tax year 2005.
The first question is answered by the holding of Judge Lasser in Jenkins v. Director, Div. of Taxation, 4 N.J. Tax 127, 133 (Tax 1982). The court succinctly explained that the
objective of N.J.S.A. 54A:4-1 is to avoid double taxation of the same income by providing a credit against New Jersey gross income tax for tax paid to another jurisdiction on the same income. Sorenson v. Taxation Div. Director, 184 N.J. Super. 393, 2 N.J. Tax 470, 446 A2d 213 (Tax Ct. 1981). New Jersey seeks to protect from double taxation the non-New Jersey source income taxed by another jurisdiction. A formula is used to separate foreign income from New Jersey income. The New Jersey source income, which need not be shielded from double taxation, remains subject to New Jersey tax undiminished by foreign tax credit.
The Jenkins' income which is potentially subject to double taxation is that earned in New York. To the extent that New York income would be subject to New Jersey tax, New Jersey relinquishes this tax by means of the credit.
* * *
We conclude that the intent of the act is to avoid double taxation of foreign income by relinquishing all or part of the New Jersey tax on the foreign income, but not to relinquish New Jersey tax on income earned in New Jersey.
[Ibid.]
Judge Lasser's holding applies here. It is not disputed that Mr. Berliner's distributive share of partnership income in both tax years included New Jersey source income. For each tax year, the "State of New Jersey Partner's Share of Income" form filed by Mr. Berliner's partnership unequivocally states that a portion of the income distributed to Mr. Berliner is New Jersey sourced -- $6,994 in tax year 2004 and $10,897 in tax year 2005. Plaintiffs' failure to exclude that income from the numerator of the resident credit fraction afforded to plaintiffs a credit for taxes imposed by other jurisdictions on New Jersey source income. When enacting N.J.S.A. 54A:4-1, the Legislature did not intend to relinquish income tax on New Jersey source income. This has been the Director's interpretation of the statute for at least thirty years. This court agreed with that interpretation in Jenkins three decades ago. In 2001, the Appellate Division cited with approval the unequivocal holding in Jenkins limiting the credit to foreign source income. Regante v. Director, Div. of Taxation, 19 N.J. Tax 296, 300-01 (App. Div.), certif. denied, 168 N.J. 293 (2001). The Legislature has not disturbed the Director's interpretation of N.J.S.A. 54A:4-1 and plaintiffs have offered no persuasive reason to depart from the rule established in Jenkins.
The resident credit is a reflection of legislative grace. Where a New Jersey resident earns income in other States and municipalities and pays income tax on that income to those jurisdictions, New Jersey will yield its right to fully collect its income tax. However, where another State or jurisdiction extends the reach of its taxing authority to income earned in New Jersey by a New Jersey resident, the credit is not available. This is a perfectly reasonable legislative determination.
Plaintiffs argue that the Director's application of the resident credit statute is incorrect because the entire distributive share of partnership income received by Mr. Berliner in both tax years was subject to tax by New York, the location of the partnership. The Director does not dispute the fact that New York taxed all of plaintiffs' BDO partnership income. This fact, however, assists the Director's position, not plaintiffs'. It is New York's taxation of the New Jersey source BDO income that triggers the limitations inherent in N.J.S.A. 54A:4-1. Mr. Berliner, a New Jersey resident, pays tax to New York on income his partnership earned in New Jersey and distributed to him. The Legislature did not intend to relinquish to New York its authority to tax the New Jersey source income of New Jersey residents.
Nor is the court convinced by plaintiffs' attempt to characterize Mr. Berliner's entire distributive share of partnership income as New York sourced income because BDO is physically located in New York, where Mr. Berliner performs most of his work for the partnership. Mr. Berliner's partnership completed partner income forms expressly designating a portion of Mr. Berliner's distributive share of partnership income as New Jersey source income for each tax year. Absent amended forms from his partnership, Mr. Berliner is bound by BDO's designation of a portion of his income as New Jersey sourced for 2004 and 2005. See General Trading Co. v. Director, Div. of Taxation, 83 N.J. 122 (1980)(taxpayer is free to organize his financial affairs in any way he pleases, but is bound by the tax consequences of his decisions, even if unwise).
With respect to the second question, the court concludes that the Director correctly limited application of the credit to $323,804 of partnership income for tax year 2004 and $496,872 of partnership income for tax year 2005. When enacting N.J.S.A. 54A:4-1 the Legislature crafted a limited credit for taxes paid by New Jersey residents to other jurisdictions. Among the limitations is that the credit applies only to income actually taxed both by New Jersey and other jurisdictions. In this case it is clear that when combined the amount of plaintiffs' income taxed by other jurisdictions in each year exceeded the amount of plaintiffs' income taxed by New Jersey. This is so because some of the foreign jurisdictions taxed partnership income attributable to other States. For example, New York taxed all of Mr. Berliner's partnership income, as that State considered all of his income from a New York partnership to be subject to New York tax, even if sourced to other States. Some of the same income taxed by New York was also taxed by California and other States.
Under plaintiffs' application of the resident credit, in 2004 $459,935 in partnership income taxed by other jurisdictions was subject to the credit, even though New Jersey taxed only $323,804 in partnership income. Similarly, under plaintiffs' interpretation of the credit statute, in 2005 $683,512 in partnership income taxed by other jurisdictions was subject to the credit, even though New Jersey taxed only $496,873 in partnership income. Plaintiffs reached these incongruous results because plaintiffs effectively double counted partnership income taxed by multiple jurisdictions. Once New York and California taxed the amounts of partnership income taxed by New Jersey any additional taxes imposed by other jurisdictions on the same income exceeded the limited scope of the resident credit. See Jenkins, supra, 4 N.J. Tax at 133-134 (holding that where taxes imposed by one foreign jurisdiction exhausts credit, taxes imposed by another jurisdiction not subject to credit). The Director correctly limited the credit to the amount actually taxed by New Jersey in each of the tax years at issue here.
Finally, plaintiffs contend that the Director abused his discretion by not waiving penalties for plaintiffs' failure to pay their 2004 and 2005 gross income tax obligations in a timely fashion. N.J.S.A. 54:49-4(a) requires the Director to assess a penalty on any late payment of gross income tax. The statute provides:
Unless any part of any underpayment of tax required to be shown on a return or report is shown to be due to reasonable cause, there shall be added to the tax an amount equal to 5% of the underpayment.N.J.S.A. 54:49-11a vests the Director with authority to waive or remit a penalty in certain circumstances. That statute states:
[N.J.S.A. 54:49-4(a).]
If the failure to pay any such tax when due is explained to the satisfaction of the director, he may remit or waive the payment of the whole or any part of any penalty . . . .These provisions are included in the State Uniform Tax Procedure Law, N.J.S.A. 54:48-1 through 54:53-15, and are expressly made applicable to the gross income tax by N.J.S.A. 54A:9-5(a).
[N.J.S.A. 54:49-11a.]
"The jurisdiction of the Tax Court to examine the Director's exercise of authority to abate penalty and interest under N.J.S.A. 54:49-11 was first recognized in Media Graphics, Inc. v. Director, Div. of Taxation, 7 N.J. Tax 23, 32-33 (Tax 1984), aff'd, 8 N.J. Tax 321 (App. Div. 1986). The standard there articulated is that the Director's determination is to be respected, unless it is manifestly arbitrary or unreasonable." See Patel v. Director, Div. of Taxation, 13 N.J. Tax 509, 515 (Tax 1993). "The Director . . . retains considerable discretion in determining whether waiver or abatement of late payment penalties is appropriate." United Parcel Serv. General Servs. Co. v. Director, Div. of Taxation, 430 N.J. Super. 1, 10 (App. Div.), certif. granted, 216 N.J. 5 (2013).
Plaintiffs have offered no convincing argument that the Director acted arbitrarily or unreasonably in not abating the penalties imposed here. The Director's application of the resident credit statute is supported by long-standing legal precedents. Plaintiffs have introduced no evidence suggesting that they relied on written advice from the Director's staff or written instructions of the Division that caused them to apply the resident credit in the erroneous fashion reflected on their gross income tax returns for 2004 and 2005. This court cannot hold that the Director's imposition of penalties against plaintiffs is outside of his statutory authority.
Having determined that the Director is entitled to the award of summary judgment in his favor, the court will enter Judgment affirming the Director's final determination and dismissing the Complaint.
Very truly yours,
______________________
Patrick DeAlmeida, P.J.T.C.