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Sutkowski v. Director

December 20, 1996

ERNEST H. AND JEANNE B. SUTKOWSKI, PLAINTIFFS,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT.



The opinion of the court was delivered by: Crabtree

Plaintiffs seek review of a deficiency in gross income tax determined by defendant for the taxable year ended December 31, 1991. The deficiency, amounting to $83,421, arose from defendant's disallowance of a credit claimed by plaintiffs for taxes paid to another jurisdiction. The credit arose from income of a New York subchapter S corporation allegedly taxed by New York in 1991. Defendant also added interest and penalty. After a hearing, the interest rate was reduced and the penalty abated. Plaintiffs have paid the deficiency but not the interest.

The sole issue in this case is whether a 1991 distribution to plaintiff, Ernest H. Sutkowski, from a New York subchapter S corporation was taxed by New York in that year so as to be eligible for the credit for taxes paid to another jurisdiction within the purview of N.J.S.A. 54A:4-1(a).

The parties have stipulated to all the relevant facts pursuant to R. 8:8-1(b), and the case is ready for decision.

At all times pertinent hereto, plaintiff, *fn1 a New Jersey resident, was the owner of all the issued and outstanding stock of The Westchester Business Institute (hereafter WBI), a New York subchapter S corporation, incorporated in 1973. In 1991, WBI made distributions to plaintiff in the aggregate amount of $1,031,065. For federal and New York income tax purposes, *fn2 these distributions were deemed to have been made out of WBI's Accumulated Adjustment Account (hereafter AAA) and were not taxed to plaintiff as dividends.

For the taxable year 1991, WBI allocated to plaintiff, pursuant to section 1366(a) of the Internal Revenue Code of 1986, trade or business income (net of a $10,000 deduction under section 179) in the amount of $1,132,657 and interest income in the amount of $51,846. Plaintiff reported these items, together with salary income of $629,537, on his 1991 New York non-resident income tax return, treating all such items as New York source income, pursuant to section 631(a)(1)(B) of the New York Tax Law.

On his 1991 New Jersey gross income tax return, plaintiff reported a dividend of $1,031,065 from WBI.

WBI's federal corporation income tax return (Form 1120S) for 1990 showed ordinary income from trade or business activities of $995,937. Form K-1, attached to that return, showed that amount, together with portfolio interest income, as taxable to plaintiff as the 100% shareholder. Plaintiff's federal and New York nonresident income tax returns for 1990 reported $985,937, *fn3 together with portfolio interest income of $54,765, *fn4 as income from WBI, identified on plaintiff's returns as a subchapter S corporation. Schedule M-2, Analysis of Accumulated Adjustments Account, Other Adjustment Account, and Shareholders' Undistributed Taxable Income Previously Taxed, included in WBI's 1990 federal income tax return, disclosed the following:

1. Balance at beginning of tax year $1,357,957

2. Ordinary income from page 1, line 21 $995,937

3. Other additions $54,765

4. Loss from page 1, line 21 ....

5. Other reductions $19,637

6. Combine lines 1 through 5 $2,389,022

7. Distributions other than dividend ...


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