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Leonard I. v. Director

April 24, 1995

LEONARD I. AND JANET B. KANAREK, PLAINTIFFS
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT.



The opinion of the court was delivered by: Dougherty

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 City *fn1 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. 18:35-1.12 *fn2 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, 94 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 ...


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