Opinion
Docket No. 006464-2003
11-01-2013
Re: Linda O. Weissman v. Director, Division of Taxation
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
Patrick DeAlmeida
Presiding Judge
Robert M. Jacobs, Esq.
Winne, Banta, Hetherington,
Basralian & Kahn, P.C.
Court Plaza South - East Wing
21 Main Street
P.O. Box 647
Hackensack, New Jersey 07602
Heather Lynn Anderson
Deputy Attorney General
Division of Law
R.J. Hughes Justice Complex
25 Market Street
P.O. Box 106
Trenton, New Jersey 08625-0106
Dear counsel:
This letter constitutes the court's opinion with respect to the motion of defendant, Director, Division of Taxation (the "Director"), for summary judgment in the above-referenced matter in which plaintiff challenges the Director's final determination declining to accept plaintiff's amended 1994 New Jersey gross income tax return. For the reasons explained more fully below, the Director's motion for summary judgment is granted and the final determination is affirmed.
I. Findings of Fact and Procedural History
In 1994, plaintiff Linda O. Weissman was not a resident of New Jersey. At that time, she was a partner in a series of related limited partnerships. In some instances she was a direct partner because she owned her partnership interest in her own name. In other instances she was an indirect partner because she was the beneficiary of the Bernard Weissman Trust (the "Trust"), which itself owned limited partnership interests. The other partners in the limited partnerships were her brother Frederick Weissman and her father Bernard Weissman. The 1994 New Jersey gross income tax liability of Frederick Weissman was addressed in a separate letter opinion issued on October 30, 2013.
The partnerships held interests in real property located in New Jersey. Plaintiff's 1994 New Jersey gross income tax liability is based, in part, on income attributed to her by the partnerships and the Trust as a result of the partnerships' disposition of real property assets during 1994.
On October 16, 1995, plaintiff filed with the Director a 1994 New Jersey non-resident gross income tax return. The return reported $125,688 in distributive share of partnership income as net gains from the disposition of property attributable to New Jersey, as well as $175 in interest income from the partnerships. Plaintiff's return reported an outstanding gross income tax liability of $6,520 for tax year 1994. She did not pay the tax due.
On April 19, 1996, the Division of Taxation sent a bill to Ms. Weissman requesting payment of the $6,520 in gross income tax reported as due on her return for tax year 1994, along with penalties and interest. Ms. Weissman's total outstanding liability at that time, including penalties and interest, was $9,352.35. Ms. Weissman did not respond to the bill or pay the outstanding liability.
On October 16, 1997, the Director filed a Certificate of Debt with the Superior Court memorializing a total unpaid debt against Ms. Weissman of $11,306.08 in gross income tax, penalties and interest for tax year 1994.
On October 19, 1998, approximately a year after issuance of the Certificate of Debt, Ms. Weissman filed an amended 1994 New Jersey non-resident gross income tax return. The amended return reported "None" in all categories of income. As a result, the amended return reported no gross income tax liability.
An unsigned and undated statement attached to the amended return explained Ms. Weissman's contention that no partnership income should have been attributed to her by her partnerships for 1994 and that she "decreased" her reported income "because of improper recording of K-1 items." According to the statement, over the course of several years Ms. Weissman's partnerships reported on K-1 forms the distribution of passive losses to partners. In 1994, when the partnerships sold, abandoned or deeded in lieu of foreclosure parcels of real property the partnerships realized substantial artificial gains as a result of the prior passive losses. According to Ms. Weissman, the artificial gains were reported in 1994 K-1 statements as distributed to the partners, including Ms. Weissman. However, plaintiff contends, the reporting of losses and gains "was not symmetrical." She contends that the partnerships attributed gains to her in 1994 despite the fact that the partnerships had not attributed passive losses to her in the same proportion in prior years. Thus, plaintiff argues, she was burdened with artificial gains in 1994 even though she did not receive any income that year and did not in prior tax years have the benefit of offsetting income with passive losses from the partnerships. She contends that the gains reported to her in 1994 were approximately equal to the unused passive losses of the Bernard Weissman Trust and should have been attributed to the Trust, which could have applied the unused passive losses to offset the artificial gains.
At the time that she filed her amended 1994 return, plaintiff submitted no evidence in support of the assertions made in the written statement. No amended K-1 "Partner's Share of Income, Credits, Deductions, etc." was submitted for any partnership altering, amending or removing the amount of gains attributed to Ms. Wiessman by any partnership during 1994.
On October 12, 1999, the Director filed a Warrant for Satisfaction of Judgment with the Superior Court Clerk. The Warrant states that the Division "received satisfaction" of the debt recorded against Ms. Weissman in the October 16, 1997 Certificate of Debt. In addition, the Warrant asks the Clerk "to enter an acknowledgment of satisfaction upon the record of said judgment, and for your so doing this shall be your sufficient warrant and discharge in that behalf." The Warrant is signed by the Director. The Director did not acknowledge the filing of the Warrant of Satisfaction in his initial moving papers.
The parties agree that no payment was made by Ms. Weissman with respect to her 1994 New Jersey gross income tax obligation. According to a supplemental certification filed by the Director, after issuance of the Certificate of Debt, Ms. Weissman's outstanding 1994 gross income tax obligation was transferred to the Debt Recovery Section of the Division of Law. The Division of Law is a component of the Department of Law and Public Safety, the cabinet-level agency headed by the Attorney General. After Ms. Weissman filed her amended 1994 income tax return showing no tax obligation, an unidentified person at the Division of Law filed the October 12, 1999 Warrant of Satisfaction, apparently based on the erroneous conclusion that the amended return had been accepted by the Director. No steps have subsequently been taken to vacate the Warrant of Satisfaction.
On August 7, 2011, a Division employee sent Ms. Weissman a letter rejecting her amended 1994 income tax return because the original return correctly reported her taxable partnership income. Because plaintiff did not submit amended K-1 returns distributing income and losses in the "symmetrical" fashion plaintiff contends the partnerships should have used, plaintiff's amended 1994 return was not accepted by the Director.
Additionally, the August 7, 2001, notification stated that the holding in Koch v. Director, Div. of Taxation, 157 N.J. 1 (1999), which examined the method for calculating capital gains upon the dissolution of a partnership, was inapplicable to plaintiff because no final K-1 for any partnership had been submitted to the Director. In fact, one partnership had filed a 1995 partnership return and K-1 form with the Director showing the distribution of income and passive losses to plaintiff in 1995.
On November 5, 2001, Ms. Weissman filed an administrative protest with the conference and appeals branch of the Division.
After a telephonic conference, a Division conferee issued an August 13, 2003, conference report. The conferee determined that plaintiff failed to produce any evidence that she liquidated her ownership in any partnership during the 1994 tax year. As a result, the conferee concluded that the holding in Koch, supra, does not apply to plaintiff's 1994 gross income tax liability as reported on her original return. In addition, the conferee determined that plaintiff produced no evidence that losses and gains were misreported by any partnerships on the 1994 K-1 returns. No amended K-1 returns were produced, nor was any proof produced that plaintiff contributed capital to the partnerships or did not benefit from the use of the partnerships' passive losses in past years. The conferee did not address Ms. Weissman's argument that the assessment of tax against her was untimely. Nor did the conferee address the significance of the filing of a Warrant of Satisfaction relating to Ms. Weissman's 1994 gross income tax liability.
On August 29, 2003, the Director issued a final determination upholding the assessment of $6,522.78 in gross income tax against Ms. Weissman. The discrepancy between Ms. Weissman's reported tax liability of $6,520 on her original return and the $6522.78 figure contained in the final determination has not been explained. With penalties and interest, at the time that the final determination was issued Ms. Weissman's total outstanding liability was $19,586.02.
On November 7, 2003, plaintiff filed a Complaint in this court challenging the Director's final determination.
The resolution of this matter was adjourned for many years to permit plaintiff to obtain for her partnerships amended K-1 returns changing or eliminating the reported income distributed to plaintiff in 1994. Amended K-1 returns were never obtained by plaintiff. Her counsel reported to the court that litigation between and among the partners, partnerships, Trust, and their accountants was ongoing and acrimonious while this matter was pending. As a result, according to counsel, plaintiff has been unable to obtain amended K-1 returns or any records proving the distribution of losses and gains by the partnerships over the years.
After the close of discovery, the Director moved for summary judgment. The Director views the matter essentially as one in which the taxpayer failed to produce evidence supporting her 1994 amended gross income tax return. The Director argues that plaintiff produced no records supporting her contention that her partnerships incorrectly attributed gains to her in 1994, that she did not benefit from partnership losses in prior years, that any partnership was dissolved in 1994 or that the holding in Koch, supra, applies to the calculation of plaintiff's taxable income for 1994. At oral argument, counsel for the Director stated that the Director would have considered recalculation of plaintiff's 1994 gross income tax liability had plaintiff produced: (1) an amended K-1 return from any partnership changing the reported income distributed to plaintiff in 1994; (2) any evidence that one of her partnerships dissolved in 1994, warranting application of the holding in Koch; (3) proof of plaintiff's capital contributions to the partnerships (which the Director contends is necessary to apply the holding in Koch should it be applicable); or (4) proof of how losses and gains were distributed to partners by the various partnerships over the years.
Plaintiff opposed the Director's motion. Although plaintiff did not cross-move for summary judgment, she effectively seeks summary relief in her favor, given that she argues that the court should vacate the Director's assessment of gross income tax against plaintiff as time barred. In addition, plaintiff argues that the Director's filing of a Warrant of Satisfaction vacated plaintiff' s 1994 gross income tax obligation. Finally, with respect to the substantive issues, plaintiff argues that if the court determines that the assessment is not time barred the final determination should be reversed because plaintiff's proposed amended 1994 gross income tax return properly calculates plaintiff's tax liability under the holding in Koch, supra. Despite asking the court to rule in her favor on three grounds, plaintiff also argues that summary judgment is not appropriate because material facts remain in dispute between the parties.
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. 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 and that the legal issues presented are ripe for resolution through summary judgment.
A. The Timeliness of the Director's Assessment of Gross Income Tax.
According to N.J.S.A. 54A:9-4(a), a provision of the Gross Income Tax Act, "[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 purposes of this section a return of income tax, except withholding tax, filed before the last day prescribed by law or by regulations promulgated pursuant to law for the filing thereof, shall be deemed to be filed on such last day." N.J.S.A. 54A:9-4(b)(1).
In this case, plaintiff received an extension to October 16, 1995 of the filing deadline for her 1994 New Jersey gross income tax return. Plaintiff filed her gross income tax return on the final day of that period, October 16, 1995. The return showed a gross income tax liability of $6,520.
Although plaintiff's extension request was approved to October 15, 1995, that day was a Sunday. This extended her deadline to the following day.
According to N.J.S.A. 54A:9-3(a), "[t]he amount of tax which a return shows to be due, or the amount of tax which a return would have shown to be due but for a mathematical error, shall be deemed to be assessed on the date of filing of the return (including any amended return showing an increase of tax)." Thus, plaintiff's 1994 gross income tax obligation was assessed against her on the day that her return was filed. This obviously was within the three-year period. The Director has not sought to increase plaintiff's 1994 gross income tax obligation beyond the amount plaintiff reported to be due on her original return.
The court considers the $2.78 difference between the amount reported on plaintiff's original 1994 income tax return and the amount set forth in the Director's final determination to be insignificant, as the difference may be attributable to rounding.
On October 17, 1997, the Director filed a Certificate of Debt memorializing plaintiff's outstanding gross income tax obligation, as reported by plaintiff in her 1994 gross income tax return. The Director's authority to issue a Certificate of Debt and have information from that Certificate of Debt entered in the record of docketed judgments by the Superior Court Clerk is established in N.J.S.A. 54:49-12. That statute states:
As an additional remedy, the Director of the Division of Taxation may issue a certificate to the Clerk of the Superior Court that any person is indebted under such State tax law in such an amount as shall be stated in the certificate. The certificate shall contain a short name of the tax under which the said indebtedness arises. Thereupon the clerk to whom such certificate shall have been issued shall immediately enter upon his record of docketed judgments the name of such person, and of the State, the address of the place of business where such tax liability was incurred, if shown in the certificate, the amount of the debt so certified, a short name of the tax, and the date of making such entries. The making of the entries shall have the same force and effect as the entry of a docketed judgment in the office of such clerk, and the director shall have all the remedies and may take all of the proceedings for the collection thereof which may be had or taken upon the recovery of a judgment in an action, but without prejudice to the taxpayer's right of appeal.
[N.J.S.A. 54:49-12.]
This court has long held that the filing of a Certificate of Debt is not an assessment of tax by the Director. It is, instead, a collection tool for taxes already assessed. See Millwork Installation, Inc. v. State, 25 N.J. Tax 452 (Tax 2010). As Judge Rimm explained in C.J. Kowasaki, Inc. v. Director, Div. of Taxation, 13 N.J. Tax 160, 165 (Tax 1993), the "statutory scheme relating to the imposition of state tax liability differentiates between tax liability and collection of taxes." Id. at 165. The court succinctly stated that
Plaintiffs completely misconstrue the nature and purpose of a [Certificate of Debt]. It is a device for collecting taxes, not an independent determination of tax liability. It has no meaning except as it relates to an already ascertained tax liability. Its purpose is to give the Director a tool for imposing a lien on a delinquent taxpayer's property. It is not the basis for a dispute as to tax liability.
[Id. at 169.]
The filing of a Certificate of Debt memorializing plaintiff's gross income tax obligation did not constitute an assessment of tax. Gross income tax was assessed against plaintiff on October 16, 1995 when she filed her tax return stating that she owed $6,520 in gross income tax to the State. The Director's attempt to collect the tax with the October 17, 1997 filing of a Certificate of Debt was merely a tool for the collection of the tax plaintiff effectively self-assessed with the filing of her original 1994 gross income tax return.
The filing of a Warrant of Satisfaction on the Director's behalf did not extinguish plaintiff's 1994 income tax obligation. According to R. 4:101-5(b), "[w]here a judgment is satisfied, the entry of satisfaction may be made at any discernible place on or at the entry of such judgment on the Civil Judgment and Order Docket or other book in which it may be entered." An entry of satisfaction, made on behalf of a judgment creditor by the creditor's counsel, is not effective "unless the proof of payment thereof is full and satisfactory." Robino v. Santanello, 34 N.J. Super. 329, 332 (App. Div. 1955). This is true even if a warrant of satisfaction is filed, if the judgment creditor's counsel entered the warrant without authority to do so. Id. at 332-33 (citing Faughnan v. City of Elizabeth, 58 N.J. L. 309 (Sup. Ct. 1895)).
Here, it is not disputed that Ms. Weissman did not satisfy her 1994 gross income tax obligation. She made no payment towards the amount memorialized in the Director's Certificate of Debt. The Warrant of Satisfaction was entered in error by the Director's counsel, apparently based on the erroneous conclusion that Ms. Weissman's amended 1994 income tax return showing no tax liability had been accepted by the Director. Nor did Ms. Weissman produce any proof of reliance to her detriment on the Warrant of Satisfaction. While it would seem prudent for the Director to move to vacate the Warrant of Satisfaction, the fact of its filing, based as it was on the erroneous assumption that Ms. Weissman was not liable for gross income taxes for 1994, did not erase the outstanding income tax obligation she reported on her original return. At best, the filing of the Warrant of Satisfaction created a temporary obstacle to the Director's ability to collect Ms. Weissman's income tax obligation though use of the Certificate of Debt.
Nor is the court convinced that the Director's rejection of plaintiff's amended 1994 gross income tax return represents the assessment of tax against plaintiff. The Director rejected the amended return, which purported to reduce plaintiff's already established 1994 gross income tax obligation to zero. By rejecting the amended return, which was entirely unsupported by partnership records, the Director did not alter or increase plaintiff's 1994 gross income tax liability. He merely rejected plaintiff's contention that the tax liability reported by plaintiff in the original return should be erased. Plaintiff's timeliness argument is, therefore, without merit.
B. Plaintiff's 1994 Gross Income Tax Obligation.
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.").
N.J.S.A. 54A:2-1 provides that "[t]here is hereby imposed a tax for each taxable year (which shall be the same as the taxable year for federal income tax purposes) on the New Jersey gross income as herein defined of every individual, estate or trust (other than a charitable trust or a trust forming part of a pension or profit-sharing plan), subject to the deductions, limitations and modifications hereinafter provided . . . ." According to N.J.S.A. 54A:5-4 a "partnership or association as such shall not be subject to the tax imposed by this act, but the income or gain of a member of a partnership or association shall be subject to the tax and the tax shall be imposed on his share, whether or not distributed, of the income or gain received by the partnership or association for its taxable year ending within or with the partner's or member's taxable year." Thus, plaintiff, a non-resident, is subject to gross income tax on her "[d]istributive share of partnership income" attributable to New Jersey. N.J.S.A. 54A:5-1k.
Among the categories of taxable income that may be distributed to a partner by a partnership is "net gains or income from disposition of property." N.J.S.A. 54A:5-1c. The category is defined as
Net gains or net income, less net losses, derived from the sale, exchange or other disposition of property, including real or personal, whether tangible or intangible as determined in accordance with the method of accounting allowed for federal income tax purposes. For purposes of determining gain or loss, the basis of the property shall be the adjusted basis used for federal income tax purposes.
* * *
The term "net gains or income" shall not include gains or income from transactions to the extent to which nonrecognition is allowed for federal income tax purposes.
[N.J.S.A. 54A:5-1c.]
Plaintiff reported her distributive share of partnership income, including the gains allocated to her by her partnerships from the disposition of real property, on her 1994 gross income tax return. The return comports with the partnership K-1 returns produced by plaintiff's partnerships. She produced no amended K-1 return during discovery or in response to the Director's summary judgment motion altering in any way the income that her partnerships reported to have distributed to her in 1994. There is no evidence in the record suggesting that the amounts of income reported by plaintiff on her original 1994 return were incorrect.
In addition, plaintiff produced no documentary evidence suggesting that the Director was compelled by the holding in Koch, supra, to accept plaintiff's amended 1994 gross income tax return. At issue in Koch was the method to be used to calculate a partner's gain from the disposition of his partnership interest. The taxpayer had purchased his partnership interest for $75,000 cash. He also agreed to be personally liable for a portion of the partnership's indebtedness. 157 N.J. at 3-4. Over the course of four years, the taxpayer was allocated a portion of the partnership's losses. He deducted those losses on his federal income tax return. Id. at 4. Accordingly, the basis of his partnership interest for federal tax purposes was reduced to zero. Ibid. New Jersey law did not allow the taxpayer to use the partnership losses to offset gains on his New Jersey income tax returns.
The taxpayer sold his partnership interest in 1988 for cash, the elimination of his capital account, and a release from the partnership's creditors. Ibid. On his federal income tax return, the taxpayer reported gain calculated using a basis of zero. This was required by federal tax law because the taxpayer had previously used losses from the partnership to offset income in an amount exceeding his original investment of capital in the partnership. On his New Jersey income tax return, the taxpayer reported gain calculated using a basis of $75,000. He did not reduce his New Jersey basis because he had not been able to use any partnership losses to offset income on his New Jersey income tax returns. Id. at 4-5.
The Director recalculated the taxpayer's income for the sale of his partnership interest using a basis of zero. This determination was based on the Director's contention that N.J.S.A. 54A:5-1c required the taxpayer's gain to be calculated using "the adjusted basis allowed for federal income tax purposes," which in that case was zero. Id. at 5.
Although this court and the Appellate Division agreed with the Director, the Supreme Court reversed. The court held that three provisions of N.J.S.A. 54A:5-1c: (1) the method of accounting allowed for federal income tax purposes; (2) the use of the federal adjusted basis; and (3) the exclusion of gains to the extent that federal rules require nonrecognition must be harmonized. The Court concluded that where a taxpayer "has gained no tax benefit under the Act" through use of losses in prior years he can be taxed only on "his actual economic gain and not on fictitious income." Id. at 14. "Any income tax imposed on an amount greater than [the taxpayer's] economic gain . . . constitutes a tax on amounts that represent neither economic gain nor recovery of a past tax benefit. Instead, it represents a tax on a return of capital. Such a result was not intended by the Legislature." Id. at 9. Thus, the Court concluded that where the taxpayer's federal adjusted basis in a partnership interest reflects benefits obtained by the taxpayer under federal law, but not available under New Jersey law, the Director could not use the federal adjusted basis to calculate gain from the sale of that partnership interest.
Plaintiff makes a colorable argument that she is entitled to application of the holding in Koch when calculating her gain from the sale of partnership property in 1994. She claims that her partnerships realized losses in past years which benefitted the Bernard Weissman Trust or other partners for federal income tax purposes. She alleges that she never benefitted from those losses, and was incorrectly allocated the artificial gains realized as a result of those losses when the partnership disposed of its property. She also alleges that one or more partnerships dissolved in 1994, triggering application of Koch.
Where plaintiff's arguments fail, however, is in the proofs. Plaintiff has produced no evidence supporting her claim that her partnerships incorrectly distributed gains to her in 1994. Plaintiff has not produced a K-1 return or any documents from her partnerships or her files indicating that the partnership income reported on plaintiff's original New Jersey income tax return was incorrect.
Nor has plaintiff produced any evidence that the gains attributed to plaintiff were the result of losses used by other partners or the Bernard Weissman Trust in prior years. Plaintiff also has not produce evidence demonstrating that she contributed capital to any of the partnerships in which she was a partner and that an imposition of income tax in the manner reported on her original return would represent taxation of the return of plaintiff's capital. At oral argument, plaintiff's counsel suggested that the partnerships and Trust at issue here were established by plaintiff's father for plaintiff's benefit. It is not at all clear that plaintiff contributed any capital to these ventures, a fact that might well distinguish this case from Koch. Plaintiff has produced no evidence establishing how the partnerships and Trust were formed and her counsel conceded that in light of the acrimonious litigation between the partners and others plaintiff would not be able to make such a production because she does not have access to the records of the partnerships and Trust. Thus, even if the Director were inclined to agree that the holding in Koch is applicable here, plaintiff produced no evidence with which the Director could recalculate plaintiff's gross income tax liability to avoid the taxation of fictitious income or the return of capital to plaintiff.
As a general rule, a taxpayer must keep adequate books and records with respect to tax liability. See Yilmaz, Inc. v. Director, Div. of Taxation, 22 N.J. Tax 204, 235 (Tax 2005), aff'd, 390 N.J. Super. 435 (App. Div.), certif. denied, 192 N.J. 69 (2007). Plaintiff was apparently content to be a member of various partnerships which did not share business records with her. Plaintiff is free to organize her financial affairs in any manner she pleases. She must, however, live with the tax consequences of her business decisions, even if unwise. General Trading Co. v. Director, Div. of Taxation, 83 N.J. 122 (1980). The Director can hardly be faulted for requesting financial documents to support plaintiff's proposed amended 1994 gross income tax return. See N.J.S.A. 54:49-6(a)(authorizing the Director to "cause" tax returns filed with him "to be examined" and to "make such further audit or investigation as he may deem necessary" to determine the taxpayer's tax liabilities). It is the taxpayer who has the burden of overcoming the presumed validity of the Director's final determination and has the onus of coming forward with proof of her claim that the tax liability she reported on her original 1994 return should be vacated.
Plaintiff's allegation that the Director determined that her father was not subject to gross income tax for partnership income for 1994 does not change the court's conclusion. The tax records of plaintiff's father with respect to his 1994 New Jersey gross income tax obligation are not before the court, having not been produced by plaintiff in discovery or in response to the Director's motion. It is not possible, therefore, to determine if plaintiff's father was taxed by the Director on partnership distributions for 1994. Nor would such a determination necessarily be relevant to the resolution of plaintiff's claims. There are a number of reasons why plaintiff's father might have a different gross income tax liability for 1994 than does plaintiff, not the least of which is, as has been suggested by plaintiff, her father may have access to records of the partnerships and Trust that establish whether and how the holding in Koch applies to his 1994 income. In addition, the partnerships at issue may not have distributed income to plaintiff's father for 1994. The only K-1 returns in the motion record show distributions of income to plaintiff for that year. It is possible that the partnerships distributed only losses to plaintiff's father for 1994. Plaintiff produced no proof that all of the partners in the partnerships were entitled to and received equal and "symmetrical" distributions of gains and losses in 1994.
It is also possible that a determination by the Director that plaintiff's father was not subject to gross income tax for 1994, if it was issued, was erroneous.
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Similarly, plaintiff's allegations that the federal government accepted her arguments regarding the taxability of partnership distributions for 1994 are unavailing. It has long been established that the New Jersey Gross Income Tax Act and the Internal Revenue Code are distinct statutory enactments. As our Supreme Court recently noted, the federal income tax statutes could have effectively been incorporated into State law. "Our Legislature, however, set a different course for New Jersey when it enacted the state income tax in 1976." Waksal v. Director, Div. of Taxation, 215 N.J. 224, 233 (2013)(citing Smith v. Director, Div. of Taxation, 108 N.J. 19, 30-31, 33 (1987)). The Smith Court explained:
The Act's legislative history clearly indicates that the Legislature intended to and did reject the federal income tax model in favor of a gross income tax act in order to avoid tax loopholes available under federal tax laws.The fact that a taxpayer may or may not be liable for federal income tax is not determinative of that taxpayer's New Jersey gross income tax obligation. Two separate statutory schemes control income taxation by the two governments. The Director is duty bound to make an independent determination of a taxpayer's liability to pay income tax under New Jersey law. See Stella A. Schaevitz Trust v. Director, Div. of Taxation, 15 N.J. Tax 296, 312 (Tax 1995)("Neither the taxpayer's report of its basis on an amended federal tax return nor the acceptance of the amended return by the IRS examiner is binding on the Director or on the Tax Court.")
[108 N.J. at 33.]
Here, plaintiff presented no evidence establishing that her gross income tax liability is anything less than what plaintiff reported in her original 1994 return. Federal taxing authorities, presented perhaps with different and more complete evidence and interpreting a different statutory regime, may have reached a contrary conclusion under federal law. There is nothing inherently improper about this state of affairs.
The Director's motion for summary is, therefore, granted. The court will enter Judgment affirming the final determination of the Director rejecting plaintiff's 1994 amended gross income tax return and dismissing the Complaint.
Very truly yours,
Patrick DeAlmeida, P.J.T.C.