On appeal from the Tax Court of New Jersey, Docket No. 1191-2009.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Ashrafi and Fasciale.
Plaintiffs Harlan W. Waksal and Carol Waksal appeal from a July 30, 2010 order dismissing their complaint and granting summary judgment to defendant Director, Division of Taxation (the Director). Plaintiffs argue primarily that their nonbusiness bad debt is "a sale, exchange or other disposition of property" under N.J.S.A. 54A:5-1(c), and, as a result, they are allowed to report the loss on their New Jersey Gross Income Tax Return and offset capital gains. Because the New Jersey Gross Income Tax Act (the Act), N.J.S.A. 54A:1-1 to -10, does not permit such a deduction, we affirm.
In January 2002, Harlan loaned $14,769,320 to his brother, who signed a promissory note and agreed to repay the loan on or before January 31, 2004. His brother then defaulted on the loan. Subsequently, plaintiffs filed a 2004 United States Individual Income Tax Return, Form 1040, and reported a short term capital loss of $14,769,320, pursuant to I.R.C. § 166(d)(1)(B). They also filed a 2004 New Jersey Gross Income Tax Return and reported the same amount as a loss from the "sale, exchange or other disposition of property," pursuant to N.J.S.A. 54A:5-1(c). After using the loss to offset capital gains, they reported $6,644,022 as a net gain in their New Jersey tax return.
On September 15, 2008, the Director issued to plaintiffs a Notice of Deficiency for the 2004 tax year and disallowed the $14,769,320 loss they used to offset gains. Thus, the Director increased plaintiffs' net gain to $21,413,342 and assessed $2,001,602 in tax and late penalties. Plaintiffs did not file a protest with the Director within ninety days of the assessment. On March 4, 2009, plaintiffs filed a complaint in the tax court and challenged the Director's final assessment. Thereafter, both parties moved for summary judgment.
The judge conducted oral argument on January 22, 2010. Plaintiffs argued that federal methods of accounting applied to determine net gains and losses. They contended that the nonbusiness bad debt should be considered on their state tax return as a net loss derived from the "sale, exchange or other disposition of property," as it is on their federal tax return. The Director argued that New Jersey does not permit the deduction or offset of a personal loss, despite contrary federal treatment.
The judge issued an eleven-page written opinion granting the Director's motion. He relied on Walsh v. Director, Division of Taxation, 15 N.J. Tax 180 (App. Div. 1995), and King v. Director, Division of Taxation, 22 N.J. Tax 627 (App. Div. 2005), which held that a loss from a nonbusiness bad debt could not be used to offset gains "derived from the sale, exchange, or other disposition of property" under N.J.S.A. 54A:5-1(c). (Internal quotation marks omitted). He indicated that "net gains or income from disposition of property" is considered taxable income under N.J.S.A. 54A:5-1(c), which provides in part that New Jersey gross income consists of certain categories, including:
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.. . . .
The term "net gains or income" shall not include gains or income from transactions to the extent to which non-recognition is allowed for federal income tax purposes.
The judge reasoned that the Act "does not mirror federal taxing statutes" and observed that the Supreme Court explained in Smith v. Director, Division of Taxation, 108 N.J. 19, 32 (1987), that:
Even a cursory comparison of the New Jersey Gross Income Tax and the Internal Revenue Code indicate [sic] that they are fundamentally disparate statutes. The federal income tax model was rejected by the Legislature in favor of a gross ...