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Estate of Guzzardi v. Director

December 6, 1995


The opinion of the court was delivered by: Hamill

There are two principal issues in this gross income tax case. The first is whether, in light of Baldwin v. Director, Div. of Taxation, 10 L. Ed. 2d 273 (Tax 1988), aff'd per curiam o.b., 237 N.J. Super. 327 (App. Div. 1990), plaintiff is entitled to offset a 1988 installment sale gain with a capital loss carryover allowed in that year for federal income tax purposes. The second issue is whether plaintiff is entitled to the resident credit with respect to the installment sale gain received by the taxpayer and taxed by New Jersey in 1988 when the total gain was taxed by Pennsylvania in 1981.

The pretrial order set forth two additional issues, which should be mentioned even though plaintiff has not briefed them. The first is whether New Jersey can tax the installment sale gain at all when the entire gain was realized and recognized in 1981 while Mrs. Guzzardi was a resident of Pennsylvania. New Jersey can tax this gain because the installment at issue was not actually received until 1988, by which time plaintiff had taken up residence in New Jersey. As to individuals, domicile or residence provides a sufficient basis for taxing all income received during the taxable year without regard to its source. Lawrence v. State Tax Comm'n, 286 U.S. 276, 279-81, 52 S. Ct. 556, 557, 76 L. Ed. 2d 1102, 1106 (1931); New York ex rel. Cohn v. Graves, 300 U.S. 308, 312-13, 57 S Ct. 466, 467, 81 L. Ed. 2d 666, 670 (1937); Hough v. Director, Div. of Taxation, 2 L. Ed. 2d 67, 72-74 (Tax 1980), aff'd, 4 L. Ed. 2d 528 (App. Div. 1981), certif. denied, 87 N.J. 418 (1981). See James C. Smith & Walter Hellerstein, State Taxation of Federally Deferred Income: The Interstate Dimension, 44 Tax L. Rev. 349, 372-73 (1989). The second issue that plaintiff has not briefed is whether, assuming that the resident credit is not available, the denial of the credit is constitutional in the factual situation presented here. A brief Discussion of the issue begins below, (infra) p. 18.

The facts have been fully stipulated and are as follows. In 1981 Tina Guzzardi and her husband owned a 40% interest in a partnership. During 1981 when Mr. and Mrs. Guzzardi were Pennsylvania residents, the partnership sold two parcels of real estate receiving as consideration cash and notes secured by mortgages on the two properties. For federal income tax purposes the partnership elected to report the gains on the installment basis. Pennsylvania at that time did not recognize the installment method of reporting. *fn1 Consequently, for Pennsylvania personal income tax purposes, the partnership reported the entire gain on the sale of the two properties in 1981, and Mrs. Guzzardi and her husband reported their 40% share of the entire gain on their 1981 Pennsylvania personal income tax return.

Subsequent to the 1981 sale, Mr. Guzzardi died; Mrs. Guzzardi succeeded to his interest in the partnership, and Mrs. Guzzardi's interest in the partnership was liquidated. As part of the consideration received for her partnership interest, Mrs. Guzzardi received the two notes in respect of the properties sold in 1981. At some point prior to 1988, Mrs. Guzzardi moved to New Jersey.

In 1988 the two notes were paid in full. Mrs. Guzzardi's 1988 installment sale gain, reported for federal income tax purposes, amounted to $272,043. She reported none of this gain on her 1988 New Jersey gross income tax return.

Mrs. Guzzardi's 1988 federal income tax return included as well a net capital loss amounting to $15,847 and a capital loss carry forward from prior years amounting to $155,035.

The assessment at issue is based on the Director's inclusion of the 1988 installment sale gain, net of the 1988 net capital loss, for a net increase in gross income of $256,196 ($272,043 - $15,847). Plaintiff asserts that Mrs. Guzzardi was entitled (1) to offset the net gain of $256,196 with the capital loss carryover reported on her 1988 federal income tax return and (2) to claim the resident credit to the extent that the 1988 installment sale gain was taxed by Pennsylvania in 1981.

The statutory provision on which plaintiff relies in arguing that the capital loss carryover is allowable provides that New Jersey gross income includes:

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.

[N.J.S.A. 54A:5-1.c.]

According to plaintiff, that section permits the deduction of capital loss carryovers because it adopts "in toto... the federal scheme for taxation of capital gains which clearly ... permits the carry forward of capital losses." In support of its argument, plaintiff relies on this court's opinion in Baldwin v. Director, Div. of Taxation, (supra) .

In Baldwin, the court concluded that the reference in N.J.S.A. 54A:5-1.c to "the method of accounting allowed for federal income tax purposes" was not limited to accounting methods but extended as well to substantive provisions of the Internal Revenue Code recognizing (or not recognizing as was the case in Baldwin) gains and losses. 10 L. Ed. 2d at 285. If, as the court concluded in Baldwin, the reference to federal accounting methods incorporates the substantive disallowance of personal losses found in I.R.C. § 165(c), the same accounting language must include the substantive rules of I.R.C. § 165(f) allowing a deduction for losses from sales or exchanges of capital assets, I.R.C. § 1212(b) defining the excess of a net capital loss over a net capital gain for the taxable year as a net capital loss for the ensuing year, and I.R.C. § 1211(b) limiting the deductibility of net capital losses.

The Director responds that no provision of the Gross Income Tax Act permits a deduction for capital losses incurred in a prior year, that N.J.S.A. 54A:5-2 makes clear that only those losses incurred during the taxable year are deductible, and that the reference to federal income tax accounting methods in N.J.S.A. 54A:5-1.c goes no further than permitting the use of federal accounting methods. The Director distinguishes Baldwin on the basis that federal accounting principles control the determination of gains but not losses because the latter are controlled by N.J.S.A. 54A:5-2, which makes no reference to federal accounting methods.

The language of N.J.S.A. 54A:5-2 supports the Director's position. The provision reads in part: "Losses which occur within one category of gross income may be applied against other sources of gross income within the same category of gross income during the taxable year." N.J.S.A. 54A:5-2 (emphasis added). While the statute does not specify precisely that the income and losses that are to be offset must arise during the same taxable year, the phrase "during the taxable year" is superfluous unless it has that meaning. If the Legislature had intended that losses incurred in a prior year could be offset against income in the current year, it would have omitted the words "during the taxable year." It must be presumed that the phrase "during the taxable year" has some meaning. See Gabin v. Skyline Cabana Club, 54 N.J. 550, 555 (1969) ("It is a cardinal rule of statutory construction that full effect should be given, if possible, to ...

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