The opinion of the court was delivered by: Kuskin
The primary issue in this appeal is whether, under N.J.S.A. 54A:5-1(b) of the New Jersey Gross Income Tax Act, N.J.S.A. 54A:1-1 to 54A:9-27, an operating loss from a prior year may be carried over and deducted in calculating "net profits from business." N.J.S.A. 54A:5-1(b) provides:
New Jersey gross income shall consist of the following categories of income: . . .
b. Net profits from business. The net income from the operation of a business, profession or other activity after provision for all costs and expenses incurred in the conduct thereof, determined either on a cash or accrual basis in accordance with the method of accounting allowed for federal income tax purposes . . .
Plaintiffs contend that the quoted reference to "the method of accounting allowed for federal income tax purposes" incorporates the substance of § 172 of the Internal Revenue Code which specifically permits the deduction of net operating loss carryovers, generally for fifteen years following the taxable year in which the loss occurs. *fn1 Plaintiffs further contend that deduction of such loss carryover should be permitted under the Gross Income Tax Act because such deduction is permitted under N.J.S.A. 54:10A-4(k)(2)(G)(6)(B), which provides that, in calculating "entire net income" for purposes of the New Jersey Corporation Business Tax, N.J.S.A. 54:10A-1 to -40, "a net operating loss for any taxable year ending after June 30, 1984 shall be a net operating loss carryover to each of the seven years following the year of loss." Finally, plaintiffs contend that the Director is estopped from disallowing deduction by them of a loss carryover.
This matter was submitted on stipulated facts, R. 8:8-1(b), which are as follows. On their 1991, 1992 and 1993 New Jersey Income Tax Resident Returns, plaintiffs reported their business income in accordance with Marrinan v. Division of Taxation, Director, 10 N.J. Tax 542 (Tax 1989) in which the Tax Court determined that: (i) plaintiff John C. Marrinan individually, and not as a corporation, was engaged in the business of a securities trader, and (ii) dividends and interest income realized in the conduct of such business were not discrete items of income under N.J.S.A. 54A:5-1(e) and 1(f) but rather constituted portions of business income for purposes of calculating net profits from business under N.J.S.A. 54A:5-1(b).
Plaintiffs' 1991 return reported a tax liability of $4,117. Plaintiffs had already paid gross income tax of $8,000 and requested that the overpayment of $3,883 be applied to their 1992 gross income tax liability. Plaintiffs' 1992 return reported a tax liability of $13,816, less the credit from the 1991 return (which had been reduced by the Division of Taxation to $3,573), leaving an outstanding liability of $10,243 which was paid when the return was filed. Plaintiffs' 1993 return reported a tax liability of $663 which was paid when the return was filed.
On each of their 1991, 1992 and 1993 returns, plaintiffs, in calculating net profits from business, did not deduct losses incurred in previous tax years. On February 26, 1993, Mr. Marrinan wrote to the Division of Taxation requesting an explanation of why sole proprietorships and partnerships were not permitted to carry forward net operating losses under the Gross Income Tax Act while corporations were permitted to do so. *fn2 In reply to this inquiry, a tax services specialist from the Tax Services Branch of the Division of Taxation wrote to Mr. Marrinan on April 21, 1993 as follows:
gain can only be offset against a loss in the same category of income if each occurs in the same year. No carry forward is permitted.
The New Jersey Gross Income Tax Act was intended as a tax on gross income from enumerated sources (as opposed to the Corporate Business Tax which is a tax on net income) and was purposely designed by the Legislature to avoid the loopholes and items of tax preference prevalent in the Federal Internal Revenue Code. The limitation of offset within the same category of income in the same tax year can only be changed by the Legislature.
Notwithstanding this response, on August 24, 1994, plaintiffs filed Amended New Jersey Income Tax Resident Returns for the years 1991, 1992 and 1993. In each amended return, plaintiffs reduced business profits by applying operating losses incurred in prior years, and, as a result, reduced their tax liability to zero for 1991 and 1992 and to $9 for 1993.
On February 2, 1995, a Division of Taxation computer generated a Notice of Adjustment setting forth the figures appearing on the 1993 amended return and indicating a $651.93 overpayment of 1993 taxes, which amount the Division refunded by check dated February 6, 1995.
On March 2, 1995, the Division issued two Notices of Adjustment restoring the income tax figures reported on the plaintiffs' original 1992 and 1993 returns. Plaintiffs challenged the disallowance of the loss carryovers, and, on December 13, 1995, the Director issued a Final Determination assessing the following amounts:
Year Gross Income Tax Penalty and Interest Total