Opinion
Docket No. 003221-2012
01-28-2015
Re: Tianle Li v. Director, Division of Taxation
Tianle Li P.O. Box 4004 203931D Clinton, New Jersey 08809 Carl A. Wohlleben Deputy Attorney General Division of Law R.J. Hughes Justice Complex P.O. Box 106 25 Market Street Trenton, New Jersey 08625-0106
NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
Tianle Li
P.O. Box 4004
203931D
Clinton, New Jersey 08809
Carl A. Wohlleben
Deputy Attorney General
Division of Law
R.J. Hughes Justice Complex
P.O. Box 106
25 Market Street
Trenton, New Jersey 08625-0106
Dear Ms. Li and DAG Wohlleben:
This letter constitutes the court's opinion deciding the parties' cross-motions for summary judgment. At issue are two Final Determinations of the Director, Division of Taxation assessing gross income tax against plaintiff for, respectively, tax years 2007 and 2008. For the reasons explained more fully below, the Complaint is dismissed with respect to tax year 2007 and summary judgment is granted in favor of the Director with respect to tax year 2008. *
I. Procedural History and Findings of Fact
The court makes the following findings of fact based on the submissions of the parties in support of their cross-motions for summary judgment and the pleadings.
During 2007 and 2008 plaintiff Tianle Li was married to Xiaoye Wang. The couple resided together in Middlesex County. Ms. Li and her spouse filed timely joint New Jersey gross income tax returns for tax years 2007 and 2008. On both returns, when calculating their gross income tax liability, the couple applied a credit pursuant to N.J.S.A. 54A:4-1 for the income taxes they paid to other jurisdictions. According to the couple's calculation of the credit, the returns reported a refund due for each tax year. The Division of Taxation issued to plaintiff and her spouse the refunds reported on the returns.
On January 28, 2011, plaintiff was arrested and charged with the murder of her husband. Upon her arrest, plaintiff was lodged in the Middlesex County Adult Corrections Center to await trial.
During the initial months of her incarceration, plaintiff did not make arrangements for the retrieval or forwarding of mail sent to her home. On March 2, 2011, plaintiff's mother arrived from China to reside at plaintiff's home and assist with plaintiff's personal affairs during her pretrial incarceration.
On April 5, 2011, an auditor from the Division of Taxation issued a Notice of Deficiency addressed to plaintiff and her deceased husband at their home address. The Notice informed plaintiff that the couple miscalculated the resident credit authorized by N.J.S.A. 54A:4-1 for tax year 2007 and had an outstanding gross income tax liability of $2,837.51. With penalties and interest to May 15, 2011, the couple's outstanding obligation for tax year 2007 was $3,811. The Notice informed Ms. Li that a failure to file a request for a redetermination of the deficiency within 90 days would result in deficiency becoming an assessment of gross income tax.
On August 4, 2011, a Division auditor issued a second Notice of Deficiency to Ms. Li and her deceased spouse at their home address. The Notice informed the couple that they had miscalculated the resident credit authorized by N.J.S.A. 54A:4-1 for tax year 2008 and had an outstanding gross income tax liability of $5,102. With penalties and interest to September 15, 2011, the couple's outstanding obligation for tax year 2008 was $6,199. The Notice informed plaintiff that a failure to file a request for a redetermination would result in the deficiency becoming an assessment of income tax.
Plaintiff admits that her mother received the two Notices of Deficiency at plaintiff's home address. Signed return receipt cards with respect to the Notices of Deficiency were submitted by the Director in response to a request from the court. According to plaintiff's uncontested certification, her mother does not speak English and apparently did not realize the significance of the Notices of Deficiency. Plaintiff's repeated requests to her mother to forward plaintiff's mail to plaintiff at the county jail were ignored.
Plaintiff explains that in October 2011, "finally, a friend came to my Monroe home to forward a pile of mail to me. After receiving the Notice of Deficiency of 2007 & 2008 Taxes, I immediately responded to Division of Taxation on October 30, 2011."
On November 1, 2011, a Division auditor received a letter from plaintiff. The correspondence did not request an administrative hearing, identify the April 5, 2011 and August 4, 2011 Notices of Deficiency or state that plaintiff was protesting the conclusions stated in those Notices. The letter states, however that it "is about our NJ tax of 2007 & 2008." Among other things, the letter states "please check Mr. Wang's 2008 NY income and correct your audit" and "your audit of our NJ tax of 2007 is wrong because of your wrong input of Mr. Wang's NY income of 2007."
On November 2, 2011, a Division auditor responded in writing to plaintiff's October 30, 2011 correspondence. The letter addresses only plaintiff's 2008 gross income tax liability. It states that the "Deficiency Notice dated August 4, 2011 is still active and you are responsible for the balance due in accordance with New Jersey Statute 54A:8-3.1.C," which provides that the tax liabilities of married people are joint and several. No further action was taken by the Division at that time.
On March 30, 2012, the conference and appeals branch of the Division received written correspondence from plaintiff concerning an intended offset of a federal income tax refund to satisfy plaintiff's outstanding 2007 and 2008 gross income tax liabilities. The Division considered this letter to be a protest of the April 5, 2011 and August 4, 2011 Notices of Deficiency.
On May 14, 2012, the Division issued two Final Determinations to plaintiff. The first Final Determination was addressed to plaintiff's 2007 gross income tax liability and denied plaintiff's administrative challenge as untimely. According to the Final Determination, under the provisions of N.J.S.A. 54:49-18, a request for a redetermination of a Notice of Deficiency must be postmarked within 90 days from the date of the Notice. Because the tax year 2007 Notice was mailed on April 5, 2011, the 90-day period in which to file a request for a redetermination expired on July 6, 2011. Plaintiff's March 30, 2012 protest was filed well beyond that deadline. Based on these fact, the Director decided that "[s]ince you did not file a protest within 90 days of April 5, 2011 the request for a hearing cannot now be granted and the assessment is now fixed."
The second Final Determination was addressed to plaintiff's 2008 gross income tax liability. The Final Determination denied plaintiff's administrative challenge to the tax year 2008 assessment as untimely. According to the Final Determination, the 90-day period to seek a redetermination of the August 4, 2011 Notice of Delinquency expired on November 2, 2011. The Final Determination reported the Division's decision that "[s]ince you did not file a protest within 90 days of August 4, 2011 the request for a hearing cannot now be granted and the assessment is now fixed." The Final Determination did not mention the letter the Division received from plaintiff on November 1, 2011.
On May 24, 2012, plaintiff filed a Complaint in this court challenging the May 14, 2012 Final Determinations.
On March 27, 2014, plaintiff moved for summary judgment in her favor with respect to both tax years. Plaintiff argues that she was not required to file an administrative protest of the April 5, 2011 and August 4, 2011 Notices of Deficiency within 90 days because the Notices concerned only mathematical errors, not substantive decisions by the Director. In addition, plaintiff argues that the April 5, 2011 Notice of Deficiency was itself untimely, having been issued more than three years after the filing of her 2007 gross income tax return. Finally, plaintiff argues that the 2008 gross income tax liability should be waived because her deceased husband worked in New York, while plaintiff worked in New Jersey. According to plaintiff, the resident credit applies to her husband's New York income, which, along with her husband's alleged secrecy regarding the 2008 tax return, should absolve plaintiff of her 2008 gross income tax liability. Plaintiff also argues that the Director should abate or waive interest and penalties assessed with respect to plaintiff's 2008 income tax liability.
On March 28, 2014, the Director also moved for summary judgment in his favor with respect to the May 14, 2012 Final Determinations. The Director's moving papers did not address plaintiff's failure to file a timely administrative protest with respect to tax year 2007. Nor did the Director's moving papers address the question of whether plaintiff's October 30, 2011 correspondence could be considered a timely request for an administrative hearing with respect to tax year 2008. The Director's moving papers addressed only the substantive basis for the Director's assessment of tax, interest and penalties for both tax years.
On April 15, 2014, plaintiff filed what she described as a motion for leave to amend her motion for summary judgment. In effect, plaintiff submitted further argument in support of her motion for summary judgment. Her supplemental filing focused on the abatement or waiver of interest and penalties.
The Director's reply brief was received by the court on May 16, 2014. Plaintiff filed two additions supplemental briefs on May 29, 2014.
A further submission addressing plaintiff's May 29, 2014 supplemental briefs was filed by the Director on June 6, 2014.
On September 22, 2014, the court directed the parties to submit further evidence and briefing with respect to whether plaintiff filed timely requests for a redetermination of the April 5, 2011 and August 4, 2011 Notices of Deficiency. Further submissions were received from the parties on October 24, 2014.
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 moving party is entitled to a judgment or order as a matter of law." R. 4:46-2 (c). 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 express import of the Brill decision was to 'encourage trial courts not to refrain from granting summary judgment when the proper circumstances present themselves.'" Township of Howell v. Monmouth County Bd. of Taxation, 18 N.J. Tax 149, 153 (Tax 1999)(quoting Brill, supra, 142 N.J. at 541). The court concludes that this matter is ripe for decision by summary judgment. There are no material facts genuinely in dispute between the parties and the validity of the Director's Final Determinations can be decided by application of the law to the facts. A. Tax Year 2007.
The Director is statutorily authorized to issue a Notice of Deficiency with respect to a gross income tax liability. The relevant section of the Gross Income Tax Act provides:
If upon examination of a taxpayer's return under this act the director determines that there is a deficiency of income tax, he may mail a notice of deficiency to the taxpayer. . . . A notice of deficiency shall be mailed to the taxpayer at his last known address in or out of this State.
[N.J.S.A. 54A:9-2(a).]
A taxpayer who disagrees with a Notice of Deficiency may petition the Director for a redetermination of the alleged deficiency within the time allowed by statute:
Within 90 days, or 150 days if the notice is addressed to a person outside of the United States, after mailing of the notice of
deficiency authorized by section 54A:9-2, the taxpayer may file a petition with the director for a redetermination of the deficiency.
[N.J.S.A. 54A:9-9(b).]
If the taxpayer fails to file a request for a redetermination with the Director within the required time, the deficiency becomes an assessment of tax:
After 90 days from the mailing of a notice of deficiency, such notice shall be an assessment of the amount of tax specified in such notice, together with the interest, additions to tax and penalties stated in such notice, except only for any such amounts as to which the taxpayer has within such 90-day period filed with the director a petition under section 54A:9-9.
[N.J.S.A. 54A:9-2(b).]
An assessment by the Director can be challenged by a taxpayer only through the timely filing of a Complaint in this court:
(a) Appeal to tax court. Any aggrieved taxpayer may, within 90 days after any decision, order, finding, assessment or action of the Director of the Division of Taxation made pursuant to the provisions of this act, appeal therefrom to the tax court in accordance with the provisions of the State Tax Uniform Procedure Law., R.S. 54:48-1, et seq.
* * *
(c) Appeal exclusive remedy of taxpayer. The appeal provided by this section shall be the exclusive remedy available to any taxpayer for review of a decision of the director in respect of the determination of liability of the taxpayer for the taxes imposed by this act.
* * *
(e) Date of finality of director's decision. A decision of the director shall become final upon the expiration of the period specified in subsection (a) for filing a complaint with the tax court, if no such complaint has been filed within such time . . . .
[N.J.S.A. 54A:9-10.]
With respect to tax year 2007, it is undisputed that the Director issued a Notice of Deficiency addressed to plaintiff at her home address on April 5, 2011. At that time, plaintiff was incarcerated in the county jail awaiting trial. She elected to have her mother come to the United States to live in plaintiff's residence and assist plaintiff with her affairs during her incarceration. Plaintiff admits that her mother received the April 5, 2011 Notice of Deficiency and, despite plaintiff's requests, refused to bring the Notice, along with plaintiff's other mail, to plaintiff at the jail. It was not until October 2011 that plaintiff arranged to have a friend bring her mail, including the April 5, 2011 Notice of Deficiency, to her at the jail.
During the period between the April 2011 mailing of the Notice of Deficiency to plaintiff and the October 2011 delivery of the Notice of Deficiency to plaintiff by her friend, several critical statutory deadlines passed with no communication being sent by plaintiff to the Director. The effect that those missed deadlines had on plaintiff's tax year 2007 gross income tax liability was significant:
(a) The 90-day period in which plaintiff could request a redetermination of the Notice of Deficiency expired. According to N.J.S.A. 54A:9-2(b), "[a]fter 90 days from the mailing of a notice of deficiency" the deficiency "notice shall be an assessment of the amount of tax specified in such notice," plus interest and penalties, "except only for any such amounts as to which the taxpayer has within such 90-day period filed with the director a petition under section 54A:9-9."
Here, the Notice of Deficiency was mailed on April 5, 2011 by certified mail. The return receipt card associated with the April 5, 2011 Notice of Deficiency indicates that as of April 7, 2011, plaintiff's agent did not claim the letter. The return receipt card also indicates that plaintiff's agent ultimately claimed the letter on May 5, 2011. The court will begin counting the 90-day period on April 7, 2011, given that plaintiff should not benefit from her agent's initial refusal to claim the letter. Ninety days from April 7, 2011 was July 6, 2011.
The first communication from plaintiff to the Director with respect to her 2007 tax obligation is dated October 30, 2011 and was received by the Division on November 1, 2011. Even if the court were to give plaintiff the benefit of the doubt and consider the October 30, 2011 correspondence to be a written request for a redetermination of the tax year 2007 Notice of Deficiency, the request was filed too late. On July 6, 2011, the amounts in the Notice of Deficiency became an assessment against plaintiff for tax year 2007.
(b) The 90-day period in which to challenge the assessment against plaintiff for tax year 2007 expired. Ninety days from July 6, 2011 was October 4, 2011. According to N.J.S.A. 54A:9-10, plaintiff's exclusive remedy to challenge the tax year 2007 assessment of gross income tax was to file a Complaint in this court by October 4, 2011. Plaintiff did not meet that deadline. Her Tax Court Complaint was filed on May 24, 2012. The amounts assessed against plaintiff with respect to tax year 2007 became fixed and final on October 4, 2011. Having failed to challenge the assessment in a timely fashion, plaintiff is precluded from seeking review of her tax year 2007 gross income tax liability in this court.
The Director did not raise the jurisdictional issue by way of motion. He instead stated his position that it "appears the evidence as to whether the Plaintiff received the 2007 and 2008 deficiency notices is inadequate or questionable in view of the unique facts and circumstances of this case. Consequently, Plaintiff's letter to the Division dated October 30, 2011, may be deemed a timely administrative protest of the Division's April 5, 2011 . . . deficiency notice[.]" The court, however, is not bound by the Director's interpretation of the statutes establishing Tax Court jurisdiction and is charged with the obligation to make an independent evaluation of whether it has authority to review a taxpayer's Complaint. American Trucking Ass'ns v. State, 324 N.J. Super. 1, 10 (App. Div. 1999), opinion after remand, 180 N.J. 377 (2004).
As our Supreme Court explained, the "Tax Court is vested with limited jurisdiction" defined by statute. McMahon v. City of Newark, 195 N.J. 526, 546 (2008). The statutory scheme establishing this court's jurisdiction is "one with which continuing strict and unerring compliance must be observed . . . ." Id. at 543. Adherence to statutory filing deadlines is of particular concern in tax matters, given "the exigencies of taxation and the administration of . . . government." F.M.C. Stores Co. v. Borough of Morris Plains, 100 N.J. 418, 424 (1985)(citing Princeton Univ. Press v. Borough of Princeton, 35 N.J. 209, 214 (1961)); see also Bonnano v. Director, Div. of Taxation, 12 N.J. Tax 552, 556 (Tax 1992). A failure to establish jurisdiction due to a taxpayer's untimely action obtains even in the absence of harm to the taxing authority. Lawrenceville Garden Apartments v. Township of Lawrence, 14 N.J. Tax 285 (App. Div. 1994). These rules allow for the effective administration of the State's finances by removing doubt as to the validity of fixed and final tax assessments. Once the filing deadline has passed, the Director is entitled to assume that his determination is final and no longer subject to review. Commercial Refrigeration & Fixture Co. v. Director, Div. of Taxation, 2 N.J. Tax 415, 419 (Tax 1981).
Plaintiff acknowledges that her mother, the agent she elected to retrieve her mail during her incarceration, received the April 5, 2011 Notice of Deficiency and refused plaintiff's requests to bring the Notice to plaintiff at the county jail. Several months later, plaintiff arranged for a friend to go to plaintiff's home, retrieve the mail that had accumulated, and bring it to plaintiff. It was the delay in delivery of the Notice by plaintiff's agent that caused plaintiff to miss the statutory deadlines for seeking a redetermination of the tax year 2007 deficiency and filing a timely Tax Court Complaint challenging the deficiency after it became an assessment.
While it may be unusual for a taxpayer in a Tax Court proceeding to be incarcerated, this fact alone is does not excuse the taxpayer's obligation to challenge a tax assessment in a timely fashion. Incarcerated litigants routinely file legal papers in a variety of judicial proceedings. They are expected to comply with statutes, court rules and legal precedents, even when they elect to proceed without representation by counsel. Our State's official reporters are replete with legal opinions in actions brought in a timely fashion by self-represented inmates in correctional facilities. Plaintiff makes no argument that she was denied access to a law library, legal materials, or mail services while housed at the county jail. In fact, once she arranged for her personal mail to be brought to the facility, plaintiff promptly mailed the October 30, 2011 letter to the Division.
Plaintiff should be put in no better a position than a citizen who is not incarcerated and who would be expected to comply with the statutory deadlines for challenging a tax assessment. Plaintiff's pretrial incarceration was the result of her criminal acts. Having found herself in jail due to the murder of her husband, plaintiff did not take sufficient steps to ensure that her personal affairs were satisfactorily addressed.
On July 9, 2013, plaintiff was convicted by a jury of murder and hindering apprehension. "Tianle Li, N.J. Chemist, Convicted of Fatally Poisoning Husband," www.cbsnews.com, (last checked January 28, 2015). She subsequently was sentenced to incarceration for life with a sixty-three-year period of parole ineligibility. "Life for Chemist Convicted of Poisoning Husband," www.usatoday.com (last checked January 28, 2015). Plaintiff is presently incarcerated at the Edna Mahan Correctional Facility for Women.
The Complaint with respect to plaintiff's tax year 2007 gross income tax obligation is, therefore, dismissed for want of jurisdiction.
In light of the court's conclusion that it lacks jurisdiction to review plaintiff's challenge to the tax year 2007 assessment, the court lacks authority to adjudicate plaintiff's claim that the April 5, 2011 Notice of Deficiency was issued outside of the statute of limitation for assessments for that tax year. The court notes, however, that plaintiff's argument on this point is based on her misinterpretation of the controlling statute.
N.J.S.A. 54A:9-4(a) provides that "[e]xcept as otherwise provided in this section, any tax under this act shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed.)." The statute further provides that "[f]or purpose of this section a return of income tax . . . filed before the last day prescribed by law or by regulations . . . shall be deemed to be filed on such last day." N.J.S.A. 54A:9-4(b)(1). The Director received plaintiff's 2007 gross income tax return on March 19, 2008. The last day for filing that return in a timely fashion was April 15, 2008. N.J.S.A. 54A:8-1(a)("a return . . . shall be filed . . . on or before April 15 following the close of such calendar year . . . ."). Plaintiff's return, therefore, is considered to have been filed on April 15, 2008 for statute of limitations purposes. The Director's Notice of Deficiency for tax year 2007 was mailed to plaintiff on April 5, 2011, less than three years after April 15, 2008. The return receipt card associated with the Notice indicates that it was refused by plaintiff's agent on April 7, 2011, also within three years of April 15, 2008. B. Tax Year 2008.
The holding in DiStefano v. Director, Div. of Taxation, 23 N.J. Tax 609 (Tax 2008), on which plaintiff relies, is not favorable to her position. In DiStefano, the taxpayers filed an amended gross income tax return after the filing of their original return. The court held that the three-year limitations period commenced with the filing of the original return and was not tolled by the filing of the amended return. Here, plaintiff's original return filing date, which is deemed by statute to be April 15, 2008, controls, consistent with the holding in DiStefano. Nor is the court convinced that N.J.S.A. 54A:9-2(d), which provides that the Director may notify a taxpayer of a "mathematical error" on a gross income tax return without regard to the time limits controlling income tax assessments, applies here. The April 5, 2011 Notice of Deficiency assesses gross income tax against plaintiff based not on a mathematical error on plaintiff's gross income tax return but on plaintiff's erroneous interpretation and application of N.J.S.A. 54A:4-1. Plaintiff did not incorrectly add or subtract the figures on her return. She misinterpreted the statute allowing for a credit of taxes she paid to New York State. The fact that a taxpayer's misinterpretation of law requires that her tax liability be recalculated does not trigger N.J.S.A. 54A:9-2(d). All assessments issued by the Director with respect to a taxpayer's misinterpretation of a statute involve some element of mathematical calculations.
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Plaintiff's challenge to her tax year 2008 gross income tax assessment, on the other hand, is within this court's jurisdiction. The Director issued a Notice of Deficiency to plaintiff with respect to tax year 2008 on August 4, 2011. Plaintiff had 90 days in which to seek a redetermination of the deficiency. N.J.S.A. 54A:9-9(b). Ninety days from August 4, 2011 was November 2, 2011. The Director has conceded that plaintiff's October 30, 2011 correspondence, received by the Director on November 1, 2011, constituted a request for a redetermination of the August 4, 2011 Notice of Deficiency. The Director should have entertained plaintiff's request for a redetermination of her 2008 gross income tax liability.
The court could, at this point, remand to the Director plaintiff's challenge to the tax year 2008 deficiency. The Director, however, has informed the court that he does not seek a remand and that, because plaintiff's claims concern the interpretation of a statute, the Director's position on remand would be the same as the arguments he advanced in this court in support of his motion for summary judgment. Thus, if the matter were to be remanded, plaintiff likely would return to this court raising the same claims with respect to tax year 2008 as are raised in her summary judgment motion. In light of these circumstances, the court elects to adjudicate plaintiff's substantive claims.
The court's examination of an assessment of tax by the Director 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 the 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."). However, judicial deference is not absolute. An administrative agency's interpretation of the law that is plainly at odds with the statute will not be upheld. See Oberhand v. Director, Div. of Taxation, 193 N.J. 558, 568 (2008)(citing GE Solid State, supra, 132 N.J. at 306).
At issue here is N.J.S.A. 54A:4-1, which defines the parameters of the credit available for residents who pay income tax to New Jersey and another jurisdiction on the same earnings. The statute provides:
(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 . . . .The 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,
(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 as follows:
[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 x New Jersey Tax = Credit
Entire New Jersey income
The objective of N.J.S.A. 54A:4-1 is to "protect from double taxation the non-New Jersey source income taxed by another jurisdiction." Jenkins v. Director, Div. of Taxation, 4 N.J. Tax 127, 133 (Tax 1982). "The statutory scheme minimizes or avoids double taxation based on what is actually, not potentially, taxed." Nielsen v. Director, Div. of Taxation, 4 N.J. Tax 438, 443 (Tax 1982). "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, 2 N.J. Tax 470, 471 (Tax 1981). The statute "shield[s] only that portion of the taxpayer's income which is subject to tax in the other state." Ambrose v. Director, Div. of Taxation, 198 N.J. Super. 546, 553 (App. Div. 1985). As the Appellate Division explained, "we perceive a clear legislative design to limit the credit to income actually subject to taxation in the foreign jurisdiction." Ibid.; accord Chin v. Director, Div. of Taxation, 14 N.J. Tax 304, 308-09 (Tax 1994).
Plaintiff misapplied the relevant formula when calculating the resident credit for tax year 2008. Plaintiff and her spouse reported wages, salaries, tips and other compensation of $176,906. After application of $2,000 in exemptions, and a $3,608 deduction for local property taxes, the couple reported $171,298 in income subject to tax by New Jersey. ($176,906 - $2,000 - $3,608 = $171,298). On this taxable income, plaintiff's owed $6,869 in New Jersey tax.
A W-2 form attached to their return indicated that Mr. Wang earned $106,165.30 in wages in New York State. The couple calculated the resident credit to which they are entitled for the taxes paid to New York State on this income. Their return shows a credit of $6,192. Contrary to written instructions, the couple did not attached a Schedule A to their tax year 2008 gross income tax return. They did not, therefore, show how they calculated the $6,192 credit they claimed.
Deducting this $6,192 credit from their New Jersey gross income tax obligation, plaintiff and her spouse reported a 2008 gross income tax liability of $676 ($6,869 - $6,192 = $676 (rounded)). The couple reported $1,393 in New Jersey gross income tax withheld during tax year 2008. Thus, the couple's return reported a refund due of $717 ($1,393 - $676 = $717 (rounded)). The Director subsequently issued the refund reported on the couple's return.
A review of the couple's return revealed that they had not correctly calculated the resident credit. Tax information provided to the Director by New York State officials revealed that the couple had not paid New York State personal income tax on all of the $106,165.30 earned by Mr. Wang in that State. The taxpayers' 2008 New York IT-203 return for tax year 2008 shows that the couple deducted $75,092 in business losses and an additional negative $3,000 adjustment from wages, salaries and tips. Thus, the couple was actually taxed by New York State on $28,073 in income ($106,165 - $75,092 - $3,000 = $28,073). They paid actual income tax of $1,241 to New York State for tax year 2008.
The correct calculation of the couple's resident credit for tax year 2008, therefore, is demonstrated as follows:
Income subject to tax by other jurisdiction
before allowance for exemptions and deductions x New Jersey Tax = Credit
Entire New Jersey income
$28,073 x $6,869 = $1,090
$176,906
This is precisely how the Director calculated plaintiff's tax year 2008 resident credit.
The couple owed $6,869 in New Jersey gross income tax for tax year 2008 before application of the credit. After the $1,090 credit is applied, the couple's 2008 gross income tax liability is $5,779 ($6,869 - $1,090 = $5,779). The couple had $1,394 in New Jersey income tax withheld from their pay during 2008. However, because the taxpayers claimed and received a refund of $717 for tax year 2008, the amount of New Jersey income tax they actually paid was $677 ($1,394 - $717 = $677). Plaintiff's outstanding tax year 2008 gross income tax liability, therefore, is $5,102 ($5,779 - $677 = $5,102). This is the amount stated in the August 4, 2011 Notice of Deficiency.
Plaintiff does not offer an alternative calculation of her tax year 2008 resident credit. She argues, instead, that the tax liability should be waived. Plaintiff advances two theories in support of her waiver argument. First, plaintiff argues that her spouse earned income in New York State, while plaintiff earned income in New Jersey, and because her spouse was secretive about his finances plaintiff should not be responsible for the outstanding New Jersey income tax. Second, plaintiff argues that waiver of her tax liability is warranted "due to a lack of a prompt response from New York tax Division." Apparently, this argument is based on the fact that New York State withheld more tax from Mr. Wang's income than he ultimately was obligated to pay and refunded the excess withholding to him at a later date.
No statutory provision exists authorizing the Director to waive a taxpayer's gross income tax liability. Plaintiff offers no cogent argument for her request that she be permitted to escape paying the tax due on the income she and her husband earned in 2008.
Plaintiff also argues that the Director should waive or remit penalties and interest on plaintiff's tax year 2008 gross income tax liability. N.J.S.A. 54:49-3 requires the Director to assess interest on any late payment of gross income tax. The statute provides:
Any taxpayer who shall fail to pay any State tax on or before the day when the same shall be required by law to be paid shall pay in addition to the tax, unless otherwise provided in the law imposing such tax, interest and penalty, if any, on said tax at the rate of three percentage points above the prime rate assessed for each month or
fraction thereof, compounded annually at the end of each year, from the date the tax was originally due until the date of actual payment.N.J.S.A. 54:49-11a vests the Director with authority to waive or remit interest in certain circumstances. That statute states:
[N.J.S.A. 54:49-3.]
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 any interest charge in excess of the rate of three percentage points above the prime rate . . . .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.]
In light of the fact that the only authorized rate of interest for gross income tax cases is three percentage points above the prime rate, the rate assessed by the Director in this case, the Director is without statutory authority to remit interest on the tax year 2008 assessment any further. N.J.S.A. 54:49-11a limits the Director's discretion in remitting interest at three points above the prime rate. Thus, this is not a situation in which the Director is authorized to assess interest within a range of percentage points and may remit the interest rate to the minimum rate when satisfied that a taxpayer acted reasonably in not paying a tax in a timely fashion. See Patel v. Director, Div. of Taxation, 13 N.J. Tax 509 (Tax 1993); 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).
In addition, the Director assessed a late penalty against plaintiff of five percent. N.J.S.A. 54:49-4(a) provides that "[u]nless 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, noted above with respect to the Director's authority to waive interest, also applies to statutory penalties. The statute states:
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 . . . ."The Director's exercise of discretion in granting or denying waiver should not be disturbed unless found to be manifestly arbitrary or unreasonable." United Parcel Serv. General Servs. Co. v. Director, Div. of Taxation, 420 N.J. Super. 1, 10 (App. Div. 2013), aff'd, 220 N.J. 90 (2014).
[N.J.S.A. 54:49-11a.]
The Director promulgated N.J.A.C. 18:2-2.7(c), which sets forth examples of grounds for reasonable cause for abatement of a penalty. Those grounds include
(1) The death or serious illness of a taxpayer which precluded timely compliance;
(2) The destruction of the taxpayer's place of business or business records by fire or other documented casualty which precluded timely compliance;
(3) The inability, for reasons beyond the taxpayer's control, to timely obtain and assemble essential information required for the preparation of the return, despite reasonable efforts;
(4) A pending conference with the Division of Taxation, or pending action for a judicial determination, until the time in which the taxpayer has exhausted its administrative or judicial remedies for a taxable period or periods the return or returns for which are due subsequent to the commencement of the administrative or judicial proceeding;
(5) Any other cause that would appear to a person of ordinary prudence and intelligence as a reasonable cause for delay and clearly indicates an absence of willful neglect. N.J.A.C. 18:2-2.7(c)(1) through (5). "Ignorance of the law, however, will not be considered as a basis for reasonable cause." N.J.A.C. 18:2-2.7(c)5; see also Schirmer National Co. v. Director, Div. of Taxation, 17 N.J. Tax 495, 502 (Tax 1998)("[E]very person is conclusively presumed to know the law; ignorance is no excuse."), aff'd, 17 N.J. Tax 47 (App. Div. 2000).
In addition, a failure to pay will be considered to be due to reasonable cause "to the extent that the taxpayer has made a satisfactory showing that he exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date." N.J.A.C. 18:2-.2.7(d). "In determining whether the taxpayer was unable to pay the tax in spite of the exercise of ordinary business care and prudence in providing for payment of his tax liability, consideration will be given to all the facts and circumstances of the taxpayer's financial situation . . . ." Ibid.
The Director's determination that an abatement of penalties is not warranted here is not an abuse of his discretion. At the time that the 2008 gross income tax return was filed, plaintiff was not incarcerated. She makes no allegation that the couple was indigent at the time that the return, which showed considerable income, was filed. Plaintiff and her husband filed a timely return, demonstrating that they had access to sufficient records. However, because of their misinterpretation of N.J.S.A.: 54A:4-1 the couple underreported their tax liability. Their failure to pay their 2008 gross income tax was due to their ignorance of the law concerning the correct method of calculating the resident credit. When the Notice of Deficiency was delivered to plaintiff and at all times since, plaintiff has been incarcerated. She argues, without the submission of evidence in support of her assertions, that she is indigent and unable to pay her outstanding tax liability. It is likely true that plaintiff has no funds, having lost her job shortly after her arrest in 2011. Any assets she had were likely dissipated on the expense of defending against a murder charge. If, as plaintiff alleges, she is indigent, she did not exercise "ordinary business care and prudence" to ensure that she had the funds to pay her tax obligations. Plaintiff's indigence is the direct result of her criminal acts. It was reasonable for the Director to determine that a waiver of penalties was not appropriate in these circumstances. The court will not disturb the Director's decision.
The court will enter a Judgment effectuating this opinion.
Very truly yours,
/s/_________
Patrick DeAlmeida, P.J.T.C.