On appeal from the Tax Court of New Jersey, Docket No. 8766-96, whose opinion is reported at 18 N.J. Tax 598 (2000).
Before Judges Stern, Eichen and Parker.
The opinion of the court was delivered by: Stern, P.J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
The interesting and important question raised by this appeal is whether contributions made to a qualified retirement plan under the federal Keogh Act are deductible for purposes of New Jersey State Gross Income Tax purposes. We uphold the determination of the Director of the Division of Taxation that they are not, and reverse the Tax Court's decision in this case to the contrary.
Defendant, the Director of the Division of Taxation, appeals from a judgment of the Tax Court, entered on April 27, 2000, in essence, rejecting the Director's assessments for the tax years 1992 and 1993 for Keogh Plan contributions.*fn1 The matter was tried on stipulated facts, and the issue before us is purely one of law regarding whether Keogh Plan contributions are deductible from the "partner's distributive share of partnership income" (under N.J.S.A. 54A:5-1k) for purposes of the New Jersey Gross Income Tax Act, N.J.S.A. 54A:1-1 to 10-12. The Director argues that:
The trial court incorrectly determined that taxpayers may deduct from their gross income the amounts diverted from partnership profits to a partner's personal non-[Internal Revenue Code] section 401(k) retirement plan.
While "[w]e generally defer to the Tax Court's expertise" and have a limited scope of review following a determination of that court, Little Egg Harbor Tp. v. Bonsanque, 316 N.J. Super. 271, 285 (App. Div. 1998), we must also recognize "the Director's expertise, particularly when exercised in the specialized and complex area covered by the provisions" of the Gross Income Tax ("GIT") Act. Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984). In this case, we must recognize the primacy of the latter and, given our scope of review, validate the Director's interpretation.
We acknowledge our concern that contributions, pursuant to an act of Congress, designed to defer the taxation of income on the federal level until distribution of the pensions are not given such treatment in New Jersey. But State taxation, like federal taxation, is a matter of statutory law and the states can tax income even if deductible or subject to an exclusion under federal tax law. The state and federal tax statutes are not parallel. Smith v. Director, Div. of Taxation, 108 N.J. 19, 32 (1987). Thus, while we should endeavor to interpret our income tax law to be consistent with federal law, in order to provide uniformity, understanding and consistency when our statute does not provide otherwise, this case requires a different result because N.J.S.A. 54A:6-21 permits a deduction only for contributions to I.R.C. § 401(k) plans. See 26 U.S.C.A. § 401. There is no dispute that the Keogh Plan involved in this case qualifies under I.R.C. § 401(a) but is not an approved plan under section 401(k).
The background and facts are well detailed by the trial judge in his thorough reported opinion. Reck v. Director, Div. of Taxation, 18 N.J. Tax 598, 600-02 (Tax 2000). The judge concluded that the Keogh Plan contributions made by the Ernst & Young partnership of which plaintiff John Reck was a member could be taken as deductions on plaintiff's 1992 and 1993 New Jersey gross income tax returns. Id. at 610. Ernst & Young also had a qualified section 401(k) pension plan, and deductions for contributions thereto are not in dispute. Reck, supra, 18 N.J. Tax at 602. As the Tax Court noted the Division's regulations for the tax years in question, and at present, permit deductibility of contributions on behalf of partners to qualified section 401(k) plans, but not to plans which do not qualify under section 401(k). The Tax Court nevertheless concluded that the Supreme Court's opinion in Koch v. Director, Div. of Taxation, 157 N.J. 1 (1999),*fn2 and "N.J.S.A. 54A:5-1j and N.J.S.A. 54A:6-10 and -21 necessarily incorporate a determination that partnership contributions to Keogh Plans on behalf of partners are deductible business expenses under N.J.S.A. 54A:5-1b, which defines net profits from business." Id. at 617. Because we do not read Koch as applying to a case involving retirement and pension plan contributions and believe that N.J.S.A. 54A:6-21 is controlling, we reverse the judgment of the Tax Court.
Like all administrative regulations, the Division's regulations are entitled to a presumption of reasonableness. A person challenging a regulation, therefore, has to demonstrate that the rule is arbitrary, capricious or unreasonable. See New Jersey Guild of Hearing Aid Dispensers v. Long, 75 N.J. 544, 562- 63 (1978). "When an administrative agency interprets and applies a statute it is charged with administering in a manner that is reasonable, not arbitrary or capricious, and not contrary to the evident purpose of the statute, that interpretation should be upheld, irrespective of how the forum court would interpret the same statute in the absence of regulatory history." Blecker v. State, 323 N.J. Super. 434, 442 (App. Div. 1999). See also Smith v. Director, Div. of Taxation, supra, 108 N.J. at 25-26; Sutton Warehousing, Inc. v. Director, Div. of Taxation, 290 N.J. Super. 686, 697 (App. Div. 1996). This is particularly so because the true meaning and intent of a provision of the GIT Act "must be read and interpreted in the context of [legislation] as a whole." Vinnik v. Director, Div. of Taxation, 12 N.J. Tax 450, 453 (Tax 1992).
When examined as a whole, the GIT Act establishes a tax on New Jersey gross income reduced only by deductions, exemptions and credits expressly recognized by the Legislature. Vinnik, supra, 12 N.J. Tax at 453-54. Thus, "[t]axation is the rule and exemption is the exception to the rule[,] [and] [t]he legislative design to release one from his just proportion of the public burden [must] be expressed in clear and unequivocal terms." AT&T Co. v. Director, Div. of Taxation, 13 N.J. Tax 534, 543 (Tax 1993); see also Princeton University Press v. Borough of Princeton, 35 N.J. 209, 214 (1961). To the extent that plaintiffs seek to establish a deduction from taxable gross income, they have the burden of establishing a clear statutory basis therefor. See Amerada Hess Corp. v. Director, Div. of Taxation, 107 ...