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McDonald v. Director

Decided: April 12, 1991.

MALCOLM W. MCDONALD AND MARY P. MCDONALD, PLAINTIFFS-APPELLANTS,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-RESPONDENT



On appeal from the Final Judgment of the Tax Court of New Jersey whose opinion is reported at 10 N.J. Tax. 556 (Tax Ct. 1989).

Antell, Scalera and Keefe. The opinion of the court was delivered by Keefe, J.A.D.

Keefe

[247 NJSuper Page 327] Plaintiffs, Malcolm W. McDonald and his wife Mary P. McDonald filed a joint New Jersey gross income tax return and were assessed a New Jersey income tax based upon a determination by defendant, Division of Taxation, that plaintiff was a

resident of New Jersey in 1985 when he received a distribution from his profit sharing plan upon retirement of $6,460,999.*fn1 Plaintiff challenged his gross income tax assessment and the Tax Court, in a reported opinion at 10 N.J. Tax. 556 (Tax Ct. 1989), held that plaintiff was a nonresident tax payer for 1985, as plaintiff maintained, but the entire lump-sum distribution from his New Jersey employer's profit sharing plan was taxable to him as a nonresident.

On appeal, plaintiff first contends that the excess of the lump-sum distribution over employer contributions that he received from the profit sharing plan is not New Jersey source income and, therefore, not taxable as gross income. Second, plaintiff maintains that the portions of the employer's contributions to the plan and other deferred income received in 1985 which were attributable to services rendered by him outside New Jersey are not New Jersey source income and not subject to New Jersey gross income tax. Third, plaintiff asserts that the amount credited to the profit sharing account prior to, and vested as of, July 1, 1976 (the effective date of the Gross Income Tax Act) was "earned" prior to the effective date of the act and, thus, not subject to New Jersey Gross Income Tax. Fourth, plaintiff argues that the lump-sum distribution and other deferred income were received when there was insufficient nexus with New Jersey for the imposition of New Jersey gross income tax. These were the same issues presented to the Tax Court and decided adversely to plaintiff.

For the reasons stated herein, we find merit only in plaintiff's second contention. Thus, we hold that the portion of the employer's contributions to the profit sharing plan and other deferred income attributable to services rendered by a taxpayer outside New Jersey is not New Jersey source income and, thus,

is not subject to New Jersey gross income tax. However, we affirm the remainder of the judgment under review substantially for the reasons stated by Judge Rimm in his opinion.*fn2

As indicated above, plaintiff maintains that the portions of his employer's contributions to the profit sharing plan and other deferred income received by him in 1985 which was attributable to services rendered by him outside New Jersey are not New Jersey source income and thus not subject to gross income taxation. The Tax Court judge's ruling on this issue was as follows:

Plaintiff was on the cash basis for income tax purposes in 1985. It is beyond dispute that his income is to be taxed in accordance with its nature in the year of receipt. Smoyer v. Taxation Div. Director, 4 N.J. Tax. 42 (Tax Ct.1982), [ aff'd o.b. 6 N.J. Tax. 251 (App.Div.1982),] aff'd 95 N.J. 139, 469 A.2d 920 (1983); DuBois v. Taxation Div. Director, 4 N.J. Tax. 11 (Tax Ct.1982), aff'd [o.b.] 6 N.J. Tax. 249 (App.Div.1982).

There is no evidence before me that plaintiff performed any services outside of New Jersey for NTD in 1985. The resolution, therefore, of this issue is that, since plaintiff's contention is based on his status as a nonresident in 1985 when he received payment from the profit sharing plan and since he did not engage in any occupation without the State in 1985, he does not come under the provisions of N.J.S.A. 54A:5-7.

10 N.J. Tax. at 580.

Plaintiff claims that the trial judge erred in his reliance on Smoyer, supra, and DuBois, supra. We agree. Neither Smoyer nor DuBois dealt with the source or the character of the income in question in those cases. They addressed the meaning of the word "earned" for purposes of N.J.S.A. 54A:9-27. Thus, the opinion of the trial court appears to have confused an issue concerning when income is received and must be reported with the issue presented here concerning the source

of the income. Neither of those cases discusses non-New ...


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