Michelle G. Darcey v. Director, Division of Taxation

TAX COURT OF NEW JERSEY
Kathi F. Fiamingo 120 High Street
Judge Mount Holly, NJ 08060
Tel: (609) 288-9500 EXT 38303
NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
June 19, 2019
Russell K. Stewart
800 N. Kings Highway, Ste 201
Cherry Hill, NJ 08034
Miles Eckardt
Deputy Attorney General
Attorney General of New Jersey
R.J. Hughes Justice Complex
25 Market Street
Trenton, New Jersey 08625-0106
Re: Michelle G. Darcey v. Director, Division of Taxation
Docket No. 001480-2018
Dear Counsel:
This letter constitutes the court’s opinion with respect to the motion for summary judgment
filed by the Director, Division of Taxation (“Director”) to dismiss Michelle G. Darcey’s
(“plaintiff”) complaint. The court finds that the plaintiff failed to include in her income subject to
New Jersey Gross Income Tax for 2013 all of the wages reported to her from her employer for that
year. The court also finds that plaintiff is not entitled to a credit for taxes alleged to have been
paid to the State of Pennsylvania in a prior taxable year on income paid to her in a later taxable
year when she was a resident of New Jersey.
Thus for the reasons hereinafter detailed the court grants the Director’s motion for
summary judgment and dismisses the complaint of plaintiff.
*
A. Findings of Fact 1 and Procedural History
In 2003 and 2004, plaintiff lived and worked in Pennsylvania. During those years, pursuant
to an agreement with her employer, she had compensation deferred to future years. A portion of
the compensation deferred in 2003 and 2004 was subject to tax by the State of Pennsylvania and
the City of Philadelphia in those years.
In 2013, plaintiff, then a resident of New Jersey, received a NJ Form W-2 from her
employer reporting $1,139,399.12 as N.J. wages, tips, etc. Although plaintiff reported $1,136,961
as wages on her U.S. individual income tax return for 2013 she reported only $999,024 in wages
on her 2013 New Jersey Gross Income Tax Return.
Plaintiff’s 2013 NJ Gross Income Tax Return was audited and on October 5, 2017 a Notice
of Deficiency (“NOD”) finding a tax deficiency in the amount of $15,681 was issued. The NOD
stated that the wages should have been reported as $1,139,399 and stated that “[a]ll wages,
regardless of where they are earned are subject to NJ Gross Income Tax.” (emphasis in original).
The NOD further noted that “Employee contributions to a 401(k) plan are deductible from
wages.” Further, the NOD stated “Contributions are to only be taxed once; and upon the
distribution of any plan, if one is to pay taxes on it, he/she should deduct the contribution amounts
that were already taxed.”
The NOD further noted that,
Similar to the court ruling of[,] Estate of Tina Guzzardi v. Director,
Division of Taxation (Dec 1995), the income that was previously
taxed by Pennsylvania cannot be deducted from the income earned
in the current tax year for New Jersey. Also, no credit is available
for the taxes paid from 2003 & 2004 since they did not take place in
the same taxable year.
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The following facts are based on the respective statements of Material Facts submitted by the
parties to the extent those facts are admitted for the purposes of this motion.
2
On December 5, 2017, plaintiff submitted a written protest to the NOD. 2 Before the
Director could respond to the protest, plaintiff paid the contested tax and on February 27, 2018
filed the instant complaint in the Tax Court. On April 30, 2018, the Director filed an answer and
on April 30, 2019 filed the instant motion seeking summary judgment and dismissal of plaintiff’s
complaint. On May 16, 2019, plaintiff submitted opposition to the motion. The Director submitted
a reply on June 14, 2019.
B. Discussion
1. Summary Judgment
Summary judgment should be granted where “the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, if any, show there is no
genuine issue as to any material fact challenged and 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 Insurance Company, 142 N.J.
520 (1995), the New Jersey Supreme Court established the standard for summary judgment:
[W]hen deciding a motion for summary judgement 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.
[Brill v. Guardian Life Ins. Co., 142 N.J. at 523.]
The trial court’s “function is not . . . to weigh the evidence and determine the truth . . . but
to determine whether there is a genuine issue for trial.” Id., at 540 (quoting Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 249 (1986)). The trial judge must consider “whether the competent
2
The Director notes that the protest letter contained a faulty mailing address, as a result of which
receipt was delayed until February 20, 2018. A memorandum issued by the Conference and Appeals Branch
conceded the timeliness of the protest, notwithstanding its untimely receipt.
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evidential materials presented, when viewed in the light most favorable to the non-moving party,
are sufficient to permit a rational fact finder to resolve the alleged disputed issue in favor of the
non-moving party.” Ibid. When the facts present “a single, unavoidable resolution” and the
evidence “is so one-sided that one party must prevail as a matter of law,” then a trial court should
grant summary judgment. Ibid.If a motion is based on facts not appearing of record or not judicially
noticeable, the court may hear it on affidavits made on personal
knowledge, setting forth only facts which are admissible in evidence
to which the affiant is competent to testify and which may have
annexed thereto certified copies of all papers or parts thereof
referred to therein.
[R. 1:6-6]
All material facts submitted by the movant which are sufficiently supported are to be
deemed admitted unless the other party specifically disputes such facts. See R. 4:46-2(b).
“The party defending against a motion for summary judgment cannot defeat the motion
unless it provides specific facts that show the case presents a genuine issue of material fact, such
that a jury might return a verdict in its favor.” School Alliance Ins. Fund v. Fama Constr. Co., 353
N.J. Super. 131, 135-136 (Law Div. 2001) (citing Anderson v. Liberty Lobby Inc., 477 U.S. 242,
248 (1986)). Here there is no dispute as to the facts. Thus the matter is ripe for summary
judgment.
2. Legal Standard
“The settled rule is that there is a presumption that an assessment made by the proper
authority is correct and the burden of proof is on the taxpayer to show otherwise.” Aetna Life Ins.
Co. v. Newark, 10 N.J. 99, 105 (1952); Atlantic City Transp. Co. v. Dir., Div. of Taxation, 12 N.J.
130, 146 (1953). “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.
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Tax 584, 589 (Tax 1997) (citing Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327
(1984)). “Generally, courts accord substantial deference to the interpretation an agency gives to a
statute that the agency is charged with enforcing.” GE Solid State, Inc. v. Director, Div. of
Taxation, 132 N.J. 298, 306 (1993). Taxation’s “interpretation will prevail as long as it is not
plainly unreasonable.” Koch v. Dir., Div. of Taxation, 157 N.J. 1, 8 (1999) (citation and internal
quotation marks omitted). “[A]n administrative agency may not, under the guise of interpretation,
extend a statute to give it a greater effect than its language permits” GE Solid State, Inc. v. Dir.,
Div. of Taxation, 132 N.J. at 306.
3. Gross Income Tax Act and Resident Credit
N.J.S.A. 54A:2-1 imposes a tax on the gross income of every resident of the State of New
Jersey. Generally, the Gross Income Tax (“GIT”) applies to all income received, and domicile or
residence will provide a sufficient basis for the imposition of the tax on income received. N.J.S.A.
54A: 5-1; See Guzzardi, Estate of, v. Director, Div. of Taxation, 15 N.J. Tax 395 (Tax 1995) aff’d
16 N.J. Tax 374 (App. Div. 1996). N.J.S.A. 54A:5-1 enumerates categories of income properly
included in an individual’s taxable gross income and includes salaries, wages, tips, fees
commissions, bonuses, and other remuneration received in exchange for services rendered.
“Under the clear and explicit provisions of subsection (a), any employed taxpayer is taxable on the
full amount of the compensation received from his employment, whether it is in the form of a
salary or commissions or otherwise.” Domenick v. Director, Division of Taxation, 176 N.J. Super.
121, 128 (App. Div. 1980). Just as clearly, N.J.S.A. 54A:5-1(j) includes in taxable gross income
“[a]mounts distributed from an employee trust attributable to contributions to the trust which were
excluded from gross income under the provisions of chapter 6 of Title 54A of the New Jersey
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Statutes, . . . and pensions and annuities except to the extent of exclusions in N.J.S.A. 54:6-10
hereunder. . .”
When examined as a whole, the GIT Act establishes a tax on New
Jersey gross income reduced only by deductions, exemptions and
credits expressly recognized by the Legislature. Vinnik, supra, 12
N.J. Tax at 453-54. Thus, "[t]axation is the rule and exemption is the
exception to the rule[,][and][t]he legislative design to release one
from his just proportion of the public burden [must] be expressed in
clear and unequivocal terms." AT & T Co. v. Director, Div. of
Taxation, 13 N.J. Tax 534, 543 (Tax 1993); see also Princeton
University Press v. Borough of Princeton, 35 N.J. 209, 214, 172
A.2d 420 (1961). To the extent that plaintiffs seek to establish a
deduction from taxable gross income, they have the burden of
establishing a clear statutory basis therefor. See Amerada Hess
Corp. v. Director, Div. of Taxation, 107 N.J. 307, 319-20, 526 A.2d
1029 (1987), aff'd, 490 U.S. 66, 109 S. Ct. 1617, 104 L. Ed. 2d 58(1989); Metpath, Inc. v. Director, Div. of Taxation, 96 N.J. 147, 153,
474 A.2d 1065 (1984); Princeton University Press, supra, 35 N.J. at
214, 172 A.2d 420.
Reck v. Dir., Div. of Taxation, 345 N.J. Super. 443, 449 (App. Div.
2001)
Plaintiff has provided nothing to this court demonstrating her entitlement to an exemption
from tax or deduction from income. Although plaintiff maintains, and the Director concedes, that
a portion of the income paid to her by her employer in 2013 was previously taxed by the State of
Pennsylvania, plaintiff provides no support for her claim that she is entitled to any exemption for
such previously taxed income, or a deduction from her current gross income for such amounts.
Plaintiff argues that the amounts taxed in 2003 and 2004 were paid to her pursuant to the
provisions of the Ryan Beck & Co., Inc. New Voluntary Deferred Compensation Plan (the “Plan”).
The Director notes that the Plan was not made effective until 2005, after the compensation at issue
was deferred and that the income could not have been deferred pursuant to that Plan. Nonetheless
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the Director argues that whether or not the deferred compensation was paid to plaintiff pursuant to
the Plan provisions, the inclusion in taxable income in the year paid was the proper treatment.
Specifically the Plan by its terms is a non-qualified deferred compensation plan intended
to comply with the provisions of Internal Revenue Code 409A. Generally, under that provision of
the Internal Revenue Code compensation deferred under an Section 409A plan is not taxable when
the election to defer is made, but is taxable when the compensation is actually received or is no
longer subject to a substantial risk of forfeiture. Thus, to the extent any of the income deferred in
2003 and 2004 was paid pursuant to the Plan in 2013, it was taxed to plaintiff for federal income
tax purposes in the year paid. As a result, such income is also subject to New Jersey gross income
tax in the year of receipt. “The New Jersey Gross Income Tax Act requires use of federal
accounting methods in reporting income. N.J.S.A. 54A:8-3(c) provides that ‘[A] taxpayer's
accounting method under this act shall be the same as his accounting method for federal income
tax purposes.’ Smoyer v. Taxation Div. Dir., 4 N.J. Tax 42, 46 (1982). Thus, assuming that any
amounts paid to plaintiff represented income payable under the Plan, or its predecessor, New
Jersey law requires that it be included in income in the year paid, in this case 2013.
Plaintiff further argues that deferred income once taxed by the State of Pennsylvania,
became “an asset assigned for the retirement benefit of the employee under applicable state law.
It is thus a capital asset with a basis equal to its reported taxable value.” Plaintiff did not provide
the applicable state law and the court is unaware of any such law. Under New Jersey law, “the
basis of property shall be the adjusted basis used for federal income tax purposes, except as
expressly provided for under [the New Jersey Gross Income Tax Act].” N.J.S.A. 54A:5-1(c). The
evidence submitted demonstrates that plaintiff reported on her federal income tax return all of the
income reported on her 2013 W-2, without reduction for basis. Thus, there is nothing in the record
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to support plaintiff’s contention that she acquired a basis in the deferred income so that it was not
subject to tax upon distribution. The court is unaware of any state or federal law which would
support such a position.
Nor has plaintiff provided any support for any other exclusion of the income from her
taxable gross income. Thus the Director has demonstrated that there is no genuine issue of material
fact that all of the income at issue was includable in plaintiff’s 2013 gross income tax return.
There is also no genuine dispute that plaintiff is entitled to a credit against tax. 3 N.J.S.A.
54A:4-1(a) provides, in pertinent part, that a resident taxpayer shall be allowed a credit against the
tax otherwise due … for the amount of any income tax … imposed for the taxable year by another
state of the United States or political subdivision of such state… with respect to income which is
also subject to tax” in New Jersey. “The design of the statute obviously is to avoid taxation of the
same income by more than one state.” Sorensen v. Director, Division of Taxation, 2 N.J. Tax 470,
475 (Tax 1981). “The purpose of the resident income tax credit is to minimize or avoid double
taxation of New Jersey residents' gross income that is also subject to tax in the same year in another
state. Ambrose v. Director, Div. of Taxation, 198 N.J. Super. 546, 552, 487 A.2d 1274(App.Div.1985).” Sutkowski v. Dir., Div. of Taxation, 312 N.J. Super. 465, 470 (App. Div. 1998).
(Emphasis supplied).
Neither the federal nor the state constitutions require an income tax credit for income taxed
by a foreign jurisdiction. See Laurite v. Director, Division of Taxation, 12 N.J. Tax 483, 491 (Tax
1992) add’d per curium o.b., 14 N.J. Tax 166 (App.Div.1993), certif. denied, 135 N.J. 301 (1994).
A credit “is a matter of grace and a state may impose conditions on its application. The New Jersey
3
Although plaintiff does not argue for a credit against the tax, the court will nonetheless
address this issue.
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Legislature has expressly imposed conditions on the calculation of the credit for out-of-state tax
paid and has limited entitlement to credit to income taxed by another state in the same tax year.”
Ibid. (emphasis added);
In Guzzardi, Estate of, v. Director, Div. of Taxation, 15 N.J. Tax 395 (Tax 1995), aff’d 16
N.J. Tax 374 (App. Div. 1996) the taxpayer, while a resident of Pennsylvania, sold real property
and received in return cash and notes to be paid on an installment basis. Pennsylvania taxed the
entire gain realized by the taxpayer in 1981, the year of the sale. The taxpayers thereafter relocated
to New Jersey. In 1988 the taxpayers recognized income on the sale for federal income tax
purposes. The income was found to be taxable for New Jersey Gross Income Tax purposes without
reduction for a capital loss carryover allowed for federal income tax purposes. In addition, the
court found that the taxpayer was not entitled to a credit against tax for the tax paid on the income
to Pennsylvania in a prior year. Id. at 405. Specifically, referencing the Appellate Court’s decision
in Laurite, 14 N.J. Tax 166, the court found that “the resident credit is available only when double
taxation by New Jersey and another state occurs in the same taxable year.” Guzzardi, 15 N.J. Tax
405.
For all of the foregoing reasons, the Director’s motion for summary judgment is granted.
Plaintiff’s complaint is dismissed.
Very truly yours,
Kathi F. Fiamingo, J.T.C.
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