August 9, 2013
SHREE RAM INVESTMENTS, INC., Plaintiff-Appellant,
DIRECTOR, DIVISION OF TAXATION, Defendant-Respondent.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued December 19, 2012
On appeal from the Tax Court of New Jersey, Docket No. 010503-2007.
Robert W. Lynch argued the cause for appellant (Lynch, Karcich & Yellin, LLP, attorneys; Mr. Lynch, on the brief).
Michael J. Duffy, Deputy Attorney General, argued the cause for respondent (Jeffrey S. Chiesa, Attorney General, attorney; Lewis A. Scheindlin, Assistant Attorney General, of counsel; Mr. Duffy, on the brief).
Before Judges Grall, Simonelli and Koblitz.
Shree Ram Investments, Inc. (SRI) appeals from an order of the Tax Court denying its motion for summary judgment and granting summary judgment to the Director of the Division of Taxation (respectively, Director and Division). The judgment was entered on SRI's complaint challenging the Director's denial of its claim for a refund of corporate business tax paid by SRI in response to the Division's notice of deficiency and demand.
In reviewing a motion for summary judgment, the question for this court is whether the prevailing party was entitled to judgment as a matter of law. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520, 540 (1995). For reasons other than those set forth in the Tax Court's letter opinion of August 22, 2011, we affirm.
The deficiency assessment that SRI sought to recover by refund was based on the Division's determination that SRI paid taxes in 2003 and 2004 at the rate appropriate for an S corporation, without filing the requisite election to be taxed as an S corporation. See N.J.S.A. 54:10A-5.22 (setting forth the procedure for New Jersey S corporation election); N.J.S.A. 54:10A-4(p) (defining "New Jersey S corporation" to mean "a corporation that is an S corporation; which has made a valid election pursuant to [N.J.S.A. 54:10A-5.22]"); N.J.S.A. 54:10A-4(o) (defining "S corporation" to mean "a corporation included in the definition of an 'S corporation' pursuant to section 1361 of the federal Internal Revenue Code of 1986, 26 U.S.C. § 1361"); N.J.S.A. 54:10A-5(c)(1) & (c)(2) (respectively setting forth corporate business and S-corporation tax rates).
The material facts are not in dispute. SRI's brief provides a statement of facts that recites the facts set forth in the judge's letter opinion, adding nothing other than citations to the record. We summarize and, where noted, supplement the record set forth in the letter opinion with additional undisputed facts.
In 1996, SRI, a Delaware corporation, filed an election with the Internal Revenue Service to be taxed as an S corporation. Between 1996 and March 2001, SRI did business in Delaware, but since April 2001 SRI has done business in New Jersey. On May 3, 2001, SRI filed an election to be treated as an S corporation under the New Jersey Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -41. The Division did not, however, accept SRI's S corporation election form because SRI had not yet received a certificate of authority to do business in New Jersey. It returned the form with a letter of May 30, 2001, explaining that there was no record of SRI's registration as either a "New Jersey corporation or foreign corporation authorized to do business in New Jersey." The May 30 letter further advised that SRI could "apply for S-Corporation status" once it had registered. While SRI's president denies recalling receipt of that letter, he admits that it was found in SRI's files subsequent to the issuance of the deficiency assessment.
Despite the letter, SRI did not re-file the S corporation election form once it received its requisite certificate of authority to do business in New Jersey. Nevertheless, SRI submitted federal and state returns as an S corporation for years 2001 through 2005. The Division accepted the state returns as filed until receipt of the 2005 return. During the same years, SRI's shareholders filed New Jersey Gross Income Tax resident returns reporting S corporation income (or loss) from SRI.
On March 22, 2006, the Director issued SRI a notice of deficiency, penalty and interest for 2003 and 2004. Subsequently, on May 2, 2006, SRI filed an S corporation election. With that form SRI submitted a certification asserting that
[t]he taxpayer thought the original [S corporation election form] was filed. Upon searching through his files it was discovered that the original copies were in a file and were signed and clipped to an envelope ready for mailing. The taxpayer had thought the forms were mailed when in fact it appears they were not. Based upon the above explanation, the taxpayer requests that the S-election be accepted under Rev Proc 2003-43[, 2003-1 C.B. 998, which is a federal tax rule providing a method for taxpayers to request relief for late filing of S corporation elections.]
By letter of May 5, 2006, the Division advised SRI that its S corporation election had been accepted as effective January 1, 2006. And by letter of May 10, 2006, the Director explained that SRI's request for a retroactive New Jersey S corporation election had been rejected. The letter explained:
Be advised that unlike the Federal government New Jersey law does not have a retroactive S-Corporation election procedure. An election must be submitted by the 15th day of the fourth month of the year for which the election is requested to be effective.
Records of the Division of Revenue does [sic] not reflect that a timely election was received. Unless you can demonstrate that the election was submitted your request for a retroactive election cannot be granted.
Your New Jersey S-Corporation election will remain effective as of January 1, 2006.
Corporation Business Tax Returns should have been filed on form CBT-100 [corporate tax form] and not CBT-100S [S-corporation form]. The 2005 return should be filed on form CBT-100.
The individual personal income tax returns of the shareholders, if filed, may need to be amended to exclude the net pro rata share of S-Corporation income and possibly include any distributions received.
Enclosed are your protest and appeal rights.
This letter does not refer to SRI's 2003 or 2004 return. Presumably because this determination, while ultimately critical to whether the taxes SRI paid in 2003 and 2004 were deficient, had relevance beyond those years — it affected SRI's tax liability for 2005 as well.
The enclosure setting forth the appeal rights states:
New Jersey statutes grant you certain appeal rights. Therefore, if you disagree with any portion of this assessment, you may either (1) protest and request an informal administrative conference with the Conference and Appeals Branch, (2) file an appeal with the required fee to the Tax Court or (3) for assessments regarding tax periods ending on or after January 1, 1999, a taxpayer who paid the entire assessment within one year after time to protest or appeal has expired may thereafter file a refund claim on form A-1730 within 450 days after the time to protest or appeal has expired. If the taxpayer initially requests a conference or files a refund claim pursuant to the aforementioned, the taxpayer may subsequently appeal that decision to the Tax Court.
In the event that no protest is filed within the prescribed time periods and payment is not received, collection proceedings will be instituted. Please be advised that interest accrues on outstanding liabilities regardless of whether a protest or complaint is filed.
The notice of appeal rights provides additional guidance on each of the three options described as alternatives. With respect to the third option it advises:
As an alternative to protesting or appealing an audit assessment . . . a taxpayer who does not timely protest or appeal the assessment may pay the assessment and then file for a refund of payment. However, the taxpayer must (1) pay the entire assessment within one year after the time for filing the protest expires and (2) file the refund claim on form A-1730 with all supporting documentation within 450 days after the time for filing the protest expires. This provision only applies to those assessments resulting from the audit of one of the following taxes: Corporation Business Tax, Corporation Income Tax . . . .
Following the May 10, 2006 denial of retroactive S corporation election, the Director issued, on June 20, 2006, a "NOTICE AND DEMAND FOR PAYMENT OF TAX." SRI did not respond, and, pursuant to N.J.S.A. 54:49-12, the Director filed a certificate of debt and, by letter of February 14, 2007, advised SRI that if it did not pay the full amount prior to February 28, 2007, its assets would be subject to seizure.
On February 22, 2007, SRI paid the amount due after reduction of penalties that were waived when SRI met with a Division investigator. We note that the record includes a post-payment audit done in April 2007 that reflects a zero balance.
On May 7, 2007, SRI filed a refund claim using the A-1703 form for an audit assessment referenced in the May 10, 2006 denial of its request for retroactive S corporation election. SRI's contention was that the Director's March 22 and June 20, 2006 demands improperly disregarded its S corporation status. In short, SRI contended that the deficiency assessment and the May 10, 2006 denial of retroactive election was improper because it had filed an election in May 2001.
The Division's chief auditor denied the refund and gave the following reasons in a June 26, 2007 letter to SRI's counsel:
Procedurally, [N.J.A.C. 18:2-5.5(c)(1)(ii)] requires the taxpayer pay the additional assessments in full including all penalties and interest. Records indicate that Investigator Szychulski abated $4, 724.77 in penalties.
On the underlying merit of the claim, the Division of Revenue returned the taxpayer's [S-corporation election form] in May of 2001 advising the taxpayer it could not be processed. The Division of Revenue never authorized the taxpayer to be a New Jersey S Corporation. The taxpayer never challenged or protested the Division of Revenue's actions. It merely ignored the Division of Revenue's notice and filed as if it was a New Jersey S Corporation without approval. It did not reapply as instructed.
The taxpayer registration and issuance of a Sales and Use Tax Certificate of Authority as of April 18, 2001 is not a Corporate Authorization of a Foreign Corporation. Same was issued on June 13 [sic], 2001.
On September 24, 2007, SRI filed its complaint with the Tax Court challenging the Director's June 26, 2007 denial of a refund claim filed pursuant to N.J.S.A. 54:49-14a-b. Pursuant to N.J.S.A. 54:10A-19.2b, a provision of the Corporation Business Tax Act, "Any aggrieved taxpayer that has neither protested or appealed from an additional assessment of tax may, pursuant to subsection b of [N.J.S.A. 54:49-14], file a claim for refund of the assessment paid."
The Tax Court granted summary judgment, in part, on the ground that it did not have jurisdiction to review SRI's challenge to the Director's May 10, 2006 denial of its request to make a retroactive S corporation election. Setting aside our disagreement with the Tax Court's characterization of SRI's claim and its conclusion on jurisdiction, we determine that the Director is entitled to summary judgment based on SRI's failure to meet the requirements for filing a refund claim pursuant to N.J.S.A. 54:49-14b — specifically the bar imposed by regulation, N.J.A.C. 18:2-5.5(c)(1)(ii), referenced in the June 26, 2007 denial.
The regulation incorporates the Legislature's articulation of the circumstances under which a taxpayer may file a refund claim. N.J.S.A. 54:49-14 provides in pertinent part:
a. Any taxpayer, at any time within four years after the payment of any original or additional tax assessed against him, unless a shorter limit is fixed by the law imposing the tax, may file with the director a claim under oath for refund, in such form as the director may prescribe, stating the grounds therefor, but no claim for refund shall be required or permitted to be filed with respect to a tax paid, after protest has been filed with the director or after proceedings on appeal have been commenced as provided in this subtitle, until such protest or appeal has been finally determined. The signing of an agreement by the taxpayer and the director extending the period for assessment shall likewise extend the period for filing a claim for refund.
b. No taxpayer shall be precluded from claiming a refund of additional tax assessed solely on the ground that the taxpayer neither protested or appealed from any part of the assessment. A taxpayer may, pursuant to this subsection, file a claim for the refund of the assessment of additional tax if (1) the taxpayer neither protested nor appealed from the assessment, (2) the taxpayer paid the assessment in full within one year after the expiration of the period allowed for filing a protest of the assessment, (3) the taxpayer files the claim for the refund within 450 days of the expiration of the period allowed for filing such a protest, and (4) the amount of the refund claimed pursuant to this subsection does not exceed the amount of the assessment paid. The time periods provided shall apply solely for purposes of refund claims under this subsection and shall be inapplicable with respect to any penalty and interest payments that may be due. A refund claim shall be filed under oath, in a form as the director may prescribe, and shall state the grounds therefor, which grounds shall be limited to those issues raised by the deficiency assessment itself and shall not include any additional issues with respect to the original assessment of tax. The filing of a claim for refund by the taxpayer under this subsection shall neither extend or toll the time to request a hearing or appeal an additional assessment of tax as otherwise provided by law. The denial of a claim for refund shall be an action of the director subject to review pursuant to [N.J.S.A. 54:51A-14].
The Legislature added subsection b in 1998. L. 1998, c. 106, § 13 (adopting A-1730 as amended by the Assembly Appropriations Committee in the first and only reprint of the bill). As the Statement to the Committee Amendments explains, one of the three purposes for the changes in the law was to "allow an alternate remedy for taxpayers that disagree with deficiency assessments." Assembly Appropriations Comm. Statement to A. 1730 (June 4, 1998). The statement further explains:
New deficiency assessment remedy: pay, then claim refund.
Currently, taxpayers that are assessed a deficiency have, in most cases, 90 days in which to either protest a deficiency assessment or pay the deficiency assessed. Under the federal Internal Revenue Code and the tax laws of most other states, taxpayers have an additional alternative: they may pay the amount of the assessed deficiency and file for a refund. This bill would allow a taxpayer that has not protested or appealed any part of that assessment, but instead paid the assessed deficiency in full within one year after expiration of the time allowed for protesting the assessment, to file a claim for refund of the assessment paid at any time within 450 days of the date of expiration.
The Division has adopted a regulation, N.J.A.C. 18:2-5.5, that generally tracks the language of subsection b of N.J.S.A. 54:49-14 in defining the new remedy for paying a deficiency assessment and claiming a refund. In pertinent part, N.J.A.C. 18:2-5.5 provides:
(b) Except as provided by (c)1 below, and N.J.A.C. 18:2-5.7, no claim for refund shall be permitted for items which were previously the subject of an assessment by the Director where the taxpayer was permitted 90 days to protest the assessment pursuant to N.J.S.A. 54:49-18, or similar provisions of any particular tax statute. Failure to timely protest the assessment shall be deemed a waiver of the taxpayer's right for review of that item.
(c) The extended refund request period exception is as follows:
1. For a return period beginning on or after January 1, 1999, a taxpayer may file a claim for refund of a payment of an additional assessment issued by the Director with respect to Corporation Business Tax, Corporation Income Tax, Savings Institution Tax, Petroleum Gross Receipts Tax, Tobacco Products Wholesale Tax, Sales and Use Tax or Gross Income Tax, or in the case of a decedent dying on or after January 1, 1999, a taxpayer may file a claim for refund of a payment of an additional assessment issued by the Director with respect to Transfer Inheritance Tax or Estate Tax, if the taxpayer:
i. Neither has protested the additional tax assessment to the Director in compliance with the applicable statutory protest period nor appealed the additional tax assessment to the New Jersey Tax Court in compliance with the statutory appeal period;
ii. Pays the additional tax assessment in full, including all penalty and interest imposed thereon for which the taxpayer had received notice, within one year after the date the applicable statutory protest period has expired;
iii. Files a claim for refund of the payment made pursuant to (c)1ii above, on the refund claim form prescribed by the Director (Form A-1730) within 450 days after the date the protest period described in (c)1ii above expires;
iv. Uses a separate refund claim form for each type of tax paid for which a refund is sought, whether or not the notice of additional tax assessment included more than one tax and whether or not the taxpayer used only one check to pay two or more tax assessments; and
v. Explains in the refund claim form the ground(s) upon which the refund is claimed, limited to the ground(s) for the additional tax assessment provided in the notice of assessment . . . .
The June 26, 2007 letter denying SRI's claim, previously set forth, identifies a procedural problem with SRI's claim — that it failed to pay the full assessment and, instead, secured an abatement of penalties and paid the abated amount. This defect is more than procedural. It is one of the prerequisites specified by the Legislature for grant of a refund, pursuant to N.J.S.A. 54:49-14b and the regulation, despite the taxpayer's failure to file a protest or appeal within ninety days as required by N.J.S.A. 54:49-18a. Thus, by virtue of SRI's failure to pay the full assessment, the Director had no authority to grant a refund pursuant to N.J.S.A. 54:49-14b.
Moreover, the Director had no authority to provide a refund pursuant to N.J.S.A. 54:49-14a of a payment made on the assessment of additional tax based on the Division's determination that SRI had not filed a S corporation election because SRI had not challenged that assessment in conformity with N.J.S.A. 54:49-18a. See Don Dan Const. Co. v. Dir., Div. of Taxation, 14
N.J.Tax. 569, 574 (Tax 1995) (noting, in a case involving a claim for refund of a payment made before subsection b was added to N.J.S.A. 54:49-14, that "the satisfaction of a tax obligation upon final determination by the Division is not a payment to which the refund claim period established by N.J.S.A. 54:49-14 applies, " and explaining that "once a taxpayer has notice of a determination made by the Director, it is reasonable to require the taxpayer to acknowledge or contest the determination within a relatively short period").
Solely because SRI did not meet the requirements of subsection b of N.J.S.A. 54:49-14 and had not protested or appealed the Director's assessment within ninety days, the Director was entitled to summary judgment as a matter of law.
There is an alternative reason why the Director is entitled to summary judgment as a matter of law. The Director's authority to grant a refund in not unlimited. Refunds may be awarded when there has been an overpayment of tax, N.J.S.A. 54:49-15; when tax has been erroneously collected or paid under a mistake of fact or law, N.J.S.A. 54:49-16; when tax liability is satisfied, N.J.S.A. 54A:9-7(a); when the tax has been adjudicated discriminatory, N.J.S.A. 54:49-14d; or as an equitable remedy where the tax is invalid, Exxon Corp. v. Hunt, 109 N.J. 110, 128 (1987). Since there was neither a statute nor a regulation directly authorizing the retroactive S corporation election, the Director's denial of the refund was appropriate.
SRI's arguments on appeal all concern its entitlement to summary judgment based on N.J.A.C. 18:7-20.3, a regulation providing for retroactive S corporation election that was adopted while this case was pending before the Tax Court. It does not point to error in the grant of summary judgment to defendant.
The Tax Court addressed SRI's claimed entitlement to relief under the newly promulgated regulation, without explaining why that question was properly before the court on this appeal from the denial of a refund. It is not at all clear that it was. The Director denied this refund claim on June 26, 2007, and the regulation authorizing retroactive S corporation election was first proposed on September 4, 2007. 39 N.J.R. 3730(a) (Sept. 4, 2007). It was adopted and took effect on January 7, 2008, months after SRI had filed its complaint in the Tax Court. 40 N.J.R. 192(b) (Jan. 7, 2008).
In this case, where the court decided it lacked jurisdiction to resolve SRI's other objections to the May 10, 2006 denial of its request to make a retroactive S corporation election, the court's discussion of the applicability of N.J.A.C. 18:7-20.3 was dicta. The matter was before the court pursuant to N.J.S.A. 54:49-14b and N.J.S.A. 54:51A-14, which permit judicial review of the Director's determination on a refund claim. We are not aware of any authority for a court to determine, in the first instance, whether a taxpayer is entitled to a benefit available pursuant to a newly-adopted regulation before the taxpayer has sought that benefit in the Division.
To the extent the Tax Court perceived SRI's eligibility under the new regulation relevant to the issue presented in the case, the court should have transferred the matter to the Division for a determination of that question pursuant to Rule 1:13-4 or explained the relevance of the new regulation to the denial of the refund and remanded the matter to the Director for reconsideration in conformity with the opinion.
We recognize that the Tax Court's letter opinion indicates that SRI made an unsuccessful attempt to file an application for retroactive S corporation election under the new regulation while the case was pending in that court. It states:
As a result of an inquiry by the [Tax] Court as to whether the Director would reconsider its determination in this matter in light of the new regulation, [SRI], through counsel, made application for a retroactive election as an S Corporation pursuant to the regulation. The Director declined to reconsider its earlier determination.
Neither party to this appeal has provided this court with SRI's post-complaint application or the Director's post-complaint determination, and there is no indication that the Tax Court had the documents either. The portion of the letter opinion, quoted above, is its only reference to these post-complaint actions, and nothing in the letter opinion suggests that the Tax Court was reviewing that post-complaint determination. Rather, the letter opinion indicates that the Tax Court resolved the question of SRI's eligibility under the new regulation solely on the basis of the arguments presented, its review of the papers submitted on summary judgment and its review of the rule proposal and adoption. If the Tax Court had transferred or remanded rather than suggesting that SRI file an application, then both the Tax Court and this court would have had the benefit of the Director's interpretation of its regulation as it applies to this taxpayer.
Because SRI did not challenge the propriety of the Director's post-complaint determination by joining it with the appeal pending in the Tax Court, it is not before us. Moreover, even if we were inclined to review the propriety of the Director's post-complaint determination based on the Tax Court's assertion that SRI filed an application that the Director declined to "reconsider, " we could not conduct a proper review without considering the application and determination, which, as previously noted, we do not have. See Soc'y Hill Condo. Ass'n, Inc. v. Soc'y Hill Assocs., 347 N.J.Super. 163, 177-78 (App. Div. 2002).
For all of the foregoing reasons, we do not address N.J.A.C. 18:7-20.3.