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NOT FOR PUBLICATION WITHOUT THE APPROVAL
OF THE TAX COURT COMMITTEE ON OPINIONS
TAX COURT OF NEW JERSEY
DOCKET NO. 012908-93
Leonard I. and Janet B. :
Kanarek, :
Plaintiffs :
:
v. :
:
Director, Division :
of Taxation, :
Defendant. :
:
Decided: April 24, 1995
Leonard I. and Janet B. Kanarek, pro se
Joseph Fogelson for defendant (Deborah T. Poritz,
Attorney General of New Jersey, attorney)
DOUGHERTY, J.T.C.
The above matter is before the court on cross motions for
summary judgment. Summary judgment is appropriate here as there
are no genuine issues of material fact requiring disposition at a
trial. Judson v. Peoples Bank Trust Co. of Westfield,
17 N.J. 67
(1954). For the reasons which follow, the Director's cross-motion
is granted.
For tax year 1988, Leonard I. and Janet B. Kanarek (Taxpayer)
claimed a credit against their tax liability under the Gross Income
Tax Act (N.J.S.A. 54A:1-1 to 10-12) (the Act) for a portion of the
income taxes paid by them to the CitySee footnote 1 and State of New York. The
Director of the Division of Taxation (the Director) reduced the
credit claimed, which resulted in the assessment of a $408.71 tax
deficiency. Taxpayer contests the Director's redetermination
challenging whether $13,914 of net gain from partnership
activities, which was taxed by the foreign jurisdictions but
completely offset by allowable partnership loss deductions in New
Jersey, should be included in the numerator of the credit
limitation computation set out in N.J.S.A. 54A:4-1(b).
Among the items of income included on Taxpayer's 1988 New York
return were: Taxpayer's distributive share of partnership capital
gain ($17,450); and (as per the parties' Stipulation) its
distributive share of partnership capital loss ($3536). On
Taxpayer's 1988 New Jersey return the $17,450 share of partnership
capital gain was treated as income from partnership businesses and,
therefore, included in Taxpayers' income category "distributive
share of partnership income" pursuant to N.J.S.A. 54A:5-1k. The
$3,536 loss allowed by New York State was likewise used to compute
the income category "distributive share of partnership income."
For New Jersey tax purposes, the $17,450 capital gain was
completely offset by Taxpayers' distributive share of the business
losses of other partnerships, with the result that none of this
capital gain was included in Taxpayers' New Jersey income category
"distributive share of partnership income."
The computation of the credit for taxes paid to a foreign
jurisdiction is set out in N.J.S.A. 54A:1-1, which provides in
part:
(a) A resident taxpayer shall be allowed a credit against the
tax otherwise due under this act for the amount of any income
tax...imposed for the taxable year by another state of the
United States...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 this entire New Jersey income.
N.J.A.C. 18:35-1.12See footnote 2 describes the layer of income to which
the credit applies to be:
(a) (4) (i) Income subject to tax by the other
jurisdiction means those categories of income which are
taxed by another jurisdiction before the allowance for
personal exemptions and standard and/or other itemized
deductions and which are also subject to tax under the
New Jersey Gross Income Tax Act [obviously, before the
allowance for personal exemptions]. (emphasis added)
Taxpayer calculated its 1988 resident credit by including in
the fraction Numerator the $13,914 of excess partnership gain which
was included on the New York return and formed a part of its New
York taxable income.
The Director contended that since no part of the $13,914
($17,450 less $3,536) New York partnership gain was taxed by New
Jersey, no part of this amount may be included in the Numerator.
For the reasons which follow, we agree with this conclusion.
Taxpayer says that the critical inquiry for inclusion in the
credit Numerator under N.J.S.A. 54A:4-1 is whether the income is
"subject" to tax by New Jersey, not whether the income is actually
taxed. It contends that if an item of income, otherwise within
reach of New Jersey taxation, is not actually taxed because it is
offset by an item of deduction in the same category, (such as
Taxpayer's distributive share of income, gains, deductions and
losses from its various Partnership interests) the income item does
not lose its character as being "income subject to tax" in New
Jersey, and, to the extent the same item is taxable in the foreign
jurisdiction, should be included in the Numerator of the credit
fraction.
Taxpayer argues that "subject to tax", not being defined by
statute, must be afforded its ordinary, plain and generally
accepted meaning. See In re Barnert Memorial Hospital Rates,
92 N.J. 31 (1983); Levin v. Parsippany-Troy Hills Tp.,
82 N.J. 174
(1980). In this regard, Taxpayer refers us to Webster's New
Collegiate Dictionary definition of "subject" (when used as a verb)
as:
1 a: to bring under control or dominion: subjugate b:
to make (as oneself) amenable to the discipline and
control of a superior 2 a: to make liable: predispose
b: to make accountable 3 to cause to undergo or submit
to
Taxpayer contends that the $13,914 of Partnership income was under
the influence, dominion and control of New Jersey pursuant to the
provisions of the Act, and, as such, was "subject to tax".
In further support of this contention, Taxpayer claims that on
a consistent basis, the Director's own regulations provide that
income need only be "subject to tax" (not "actually" taxed) by New
Jersey to be included in the Numerator, notwithstanding that,
income "subject to tax" by a foreign jurisdiction, must actually be
"taxed" - that is, foreign taxes must be "imposed" and "paid".
[Citing, N.J.A.C. 18:35-1.12]. In effect, Taxpayer would have us
ignore the allowable partnership losses, presumably as not being
"subject to tax".
Finally, Taxpayer argues that whereas "subject to tax" as it
pertains to the foreign jurisdiction is a defined term, (N.J.A.C.
18:35-1.12(a)(4)(i))) neither the statute nor any of the
regulations issued thereunder, provide a definition of "subject to
tax" with respect to New Jersey Numerator income.
The purpose of the resident credit is the amelioration of
multiple taxation of the same income. Sorenson v. Taxation, Div.
Director,
184 N.J. Super. 393, 398,
2 N.J.Tax 470,475 (Tax 1981);
Jenkins v. Taxation Div. Director,
184 N.J. Super 402, 408,
4 N.J.
Tax 127, 133 (Tax 1982).See footnote 3 The State of New Jersey yields, under
N.J.S.A. 54A:4-1, to the foreign jurisdiction by granting a credit
against its own tax for taxes paid by a New Jersey resident to the
foreign jurisdiction on foreign source income. In effect, the
income tax liability owed by a resident taxpayer to the foreign
jurisdiction is treated as a "downpayment" on the taxpayer's New
Jersey income tax liability. The credit resulting under N.J.S.A.
54A:4-1 represents tax which the resident taxpayer would otherwise
have paid to New Jersey which is attributable to the inclusion in
the taxpayer's New Jersey taxable income of the taxpayer's layer of
income subject to multiple tax.
In Stiber v. Director, Division of Taxation,
9 N.J. Tax 623
(Tax Ct. 1988) New York law required the taxpayer to calculate
partnership income using a less accelerated depreciation method
than that permitted for New Jersey Gross Income Tax purposes. In
addition, certain partnership losses allowed under the New Jersey
Act were not allowed by New York. As a result, the Stiber
taxpayer's partnership income actually taxedSee footnote 4 by New Jersey was
less than the amount actually taxed by New York. The court allowed
only that portion which was actually taxed by both New York and New
Jersey to be included in the Numerator. Stiber, supra; see also
Ambrose v. Director, Div. of Taxation,
198 N.J. Super. 546 (App.
Div. 1985). Taxpayer challenges Stiber, arguing that its
conclusion contradicts that court's own discussion of N.J.S.A.
54A:4-1(a) and is inconsistent with both N.J.A.C. 18:35-1.12(a)(4)(i), and the Appellate Division's holding in Ambrose v.
Director, Div. of Taxation,
198 N.J. Super. 546 (App. Div. 1985).
We reject these arguments.
The Stiber court, obviously recognizing that a literal
interpretation of the language of N.J.S.A. 54A:4-1 could lead to
the inclusion in the Numerator of the entirety of the taxpayer's
income actually taxed by the foreign jurisdiction (regardless of
whether it was so taxed in New Jersey), emphasized that:
[N.J.S.A. 54A:4-1] section (b) must be read in
conjunction with section (a). Section (a) clearly
restricts the credit to foreign taxed income which is
also taxed by New Jersey. To include in the maximum
credit factor the foreign income which was not taxed by
New Jersey would be at variance with provisions of
section (a) and would reach the absurd result of having
New Jersey grant a credit against its tax on New Jersey
income on the basis that a resident taxpayer had paid a
tax to a foreign jurisdiction on income which was not
taxable in New Jersey. [Id. at 628.]See footnote 5
In advancing its arguments Taxpayer relies on the Appellate
Division's conclusion that the phrase "income subject to tax" (as
defined in N.J.A.C. 18:35-1.12(a)(4)(i)) "can logically refer to
two different things when applied to New York and New Jersey."
Ambrose, supra, 198 N.J. Super. at 552, citing Sorenson v. Taxation
Div. Director,
184 N.J. Super. 393,
2 N.J. Tax 470, 476 (Tax 1981).
Ambrose analyzed the foreign income component of the Numerator
vis-a-vis the entire New Jersey income component of the Denominator
which is simply not the issue in this case. While an error in the
Denominator might lead to a mistake in the calculation of
Taxpayer's allowable credit, there is neither such argument nor
mistake here. The limitation of N.J.S.A. 54A:4-1(b) prevents an
intrusion upon New Jersey's tax of New Jersey source income where,
as in the within matters, the rate of tax imposed by the foreign
jurisdiction exceeds the rate imposed by New Jersey. Nielsen v.
Taxation, Div. Director,
4 N.J. Tax 438 (Tax 1982). The fraction
described under N.J.S.A. 54:4-1(b) requires the comparison of
quantities of income determined by the same standard in both the
foreign jurisdiction(s) and the State of New Jersey. That standard
requires, in general, an adjustment to Taxpayer's "taxable income"
in each jurisdiction, by adding back allowable deductions for
personal exemptions and a standard and/or other itemized
deductions. The New Jersey taxable income so adjusted is the
Denominator. The Numerator is carved out of the Denominator and
equals that portion thereof which is also included in the
taxpayer's taxable income as determined under the laws of the
foreign jurisdiction and adjusted by adding back any deductions
allowed, as stated above, for a standard and/or itemized deductions
and for personal and dependency exemptions. Under this analysis
Taxpayer's recognized and allowable partnership losses would, of
course, diminish the Numerator as well as the Denominator.
The taxpayer in Berlin v. Division of Taxation, Director,
13 N.J. Tax 405 (Tax Ct. 1993), argued for inclusion in the Numerator
of income not taxed by the foreign jurisdiction but taxed by New
Jersey. Taxpayer here says that Berlin does not support the
Director's position as Berlin did not address the tax treatment of
the New Jersey income component of the Numerator; however, this
court's holding that the "calculation of income subject to tax by
both jurisdictions must take into account the deductions allowed by
either (or both) jurisdictions" is clearly consistent with the
Director's conclusion in the instant case. Id. at 411. The
inclusion in the Numerator of income not actually taxed by New
Jersey would have the effect of providing a credit for taxes never
due or payable, clearly in contravention of the legislative purpose
for the credit provision.
We hold that the Numerator of the resident credit fraction
equals that portion of the Taxpayer's New Jersey taxable income,
adjusted by the addition back of any allowable deductions for
personal exemptions, standard and/or other itemized deductions,
which is also included in the taxpayer's foreign taxable income,
adjusted by the addition back of the same described items of
deduction as may be allowed by the foreign jurisdiction. Income
"subject to tax" under the Act, as that term is used in N.J.S.A.
54A:4-1, therefore encompasses (to state it in other words) only
income actually taxed by the Act. In the present matter,
Taxpayer's $13,914 partnership gain never entered the computation
of New Jersey taxable income. Accordingly, that income was
properly excluded by the Director for purposes of calculation of
the resident credit fraction Numerator.
Judgment will be entered affirming the determination of the
Director.
Footnote: 1The resident credit for tax of another state provided by
N.J.S.A. 54A:4-1 is available for tax imposed on income by a city
in another state. However, if such income has been taxed by the
"other" state and the state has exhausted the maximum credit
allowed, the credit is no longer available for the city taxes paid.
Stiber v. Director, Division of Taxation,
9 N.J. Tax 623 (1988).
Footnote: 2This regulation is a valid exercise of the Director's rule
making authority provided by N.J.S.A. 54A:9-17. This statute reads
in pertinent part:
(a) General. The director shall administer and enforce
the tax imposed by this act and is authorized to make
such rules and regulations, and to require such facts and
information to be reported as he may deem necessary to
enforce the provisions of this act....
Footnote: 3 In Jenkins, the Court said: "(w)e conclude that the
intent of the [Gross Income Tax] act is to avoid double
[multiple] taxation of foreign income by relinquishing all or
part of the New Jersey tax on foreign income, but not [to]
relinquish[ing] New Jersey tax on income earned in New Jersey."
Jenkins, supra, 184 N.J. Super. at 409.
Footnote: 4 We use the phrase "actually taxed" to refer to income
included in the computation of taxable income before the deductions
for standard and/or itemized deductions and personal and dependency
exemptions.
Footnote: 5 See, N.J.A.C. 18:35-1.12(a)6(iii), Example 3.
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