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Sitar v. Director

August 4, 2009


On appeal from the Tax Court of New Jersey, Docket No. 5141-02.

Per curiam.


Argued February 2, 2009

Before Judges Carchman and Sabatino.

Plaintiffs, William and Margaret Sitar, husband and wife appeal from a February 1, 2008 order of the Tax Court granting summary judgment to defendant Director of the New Jersey Division of Taxation (the Director). The judgment upheld the 2002 Final Determination by the Director against plaintiffs for the 1998 tax year, assessing plaintiffs with an additional gross income tax of $122,886.*fn1 The assessment disallowed the capitalization of personal expenses utilized to reflect a higher basis when the same expenses were taken as personal deductions on plaintiffs' federal returns. We now affirm.

The facts are simple and straightforward. Plaintiffs are New Jersey residents who, for "about ten (10) years," owned a large, vacant parcel of property in the Borough of Tinton Falls. In 1998, the plaintiffs sold the land for $10,065,000. They reported the sale in their 1998 federal tax return, utilizing a basis for the property of $3,369,269. As a result of the sale, for tax year 1998, they reported $4,451,319 as "installment sale income" and $4,518,955 in capital gains. On their state return, filed pursuant to the New Jersey Gross Income Tax Act, N.J.S.A. 54A:1-1 to 10-12 (the GIT), the plaintiffs reported a gain of $3,185,286 as income from the sale. The disparity resulted from the capitalization of $2,006,384 in interest and real estate taxes in computing the basis for the state return when those same expenses had been deducted as personal expenses on plaintiffs' federal return. The capitalization of these expenses created a New Jersey tax basis of $5,375,653.

By letter dated August 28, 2001, the Director requested that plaintiffs explain the $1,333,669 difference in capital gains reported on the federal and state tax returns. In response, plaintiffs informed the Director that the difference "represents the additional basis resulting from the Taxpayer capitalizing the interest and taxes on the vacant land during his holding period. The Taxpayer received no New Jersey Tax benefits from his holding of the land."

Thereafter, on October 15, 2001, the Director issued a Notice of Deficiency for the tax year 1998. Plaintiffs responded by sending a protest to the Director. Plaintiffs maintained the property was held for "investment purposes" and that the "assessment should be zero" relying on the Supreme Court's decision in Koch v. Director, Div. of Taxation, 157 N.J. 1 (1999).

The Director issued his Final Determination and calculated the amount due as $122,886, which included $84,557 in tax; a 5% amnesty penalty for $4,228; and interest in the amount of $34,101. The Director noted that the Division "requires the taxpayer annually to take the same depreciation expense allowed for Federal purposes in determining net income." Plaintiffs filed a complaint with the Tax Court seeking an abatement of the "Gross Income Tax assessment . . . ." Following discovery, the parties cross-moved for summary judgment. In granting the Director's motion and denying plaintiffs' cross-motion, Judge Bianco identified the substantive issues of the case.

The crux of the case lies in the reading of [Koch] that we have cited earlier. Plaintiff gives a broad, and in this Court's opinion a very broad, reading for the proposition that [the] New Jersey Legislature intended all taxation to be on a taxpayer's economic gain and not on a return of capital.

Plaintiff asked this Court to capitalize all the carrying costs associated with the holding -- with holding land in a personal manner.

The Court does not find support in New Jersey statutes for such a result or case law for that matter.

He then went on to distinguish Koch, the primary authority relied on by plaintiffs.

[Koch] instructs the Director on computing gain on disposition of property to reduce basis only to the extent that the expenses previously conferred a tax benefit to the taxpayer. [Koch] is, therefore, distinguishable in the present case. In this case plaintiff is arguing that he is being taxed on return of capital because under the federal scheme he may be able to capitalize carrying costs and gain or taX benefit that he was not able to in New Jersey.

And I note that he did not, in fact, [plaintiffs] did not, in fact, capitalize the expenses for federal purposes.

Plaintiffs want[] to use this so-called New Jersey basis which was the cost unadjusted for the benefits . . . received under the federal system.

However, in the present matter there was never any right under New Jersey law for the plaintiffs to capitalize the carrying costs in the first place.

Therefore, the Director's assessment here does not result in a [tax on] return of capital as it would have in [Koch]. In essence, carrying costs were never capital in New Jersey. An analysis of other federal taxation schemes as suggested by the plaintiff is not necessary because no double taxation is being done.

Furthermore, applicable New Jersey tax law, namely, [N.J.S.A. 54A:5-1c] plainly requires New Jersey to follow the adjusted federal basis for calculation of ...

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