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Schulmann v. Director, New Jersey Division of Taxation

423 N.J. Super. 333, 32 A.3d 1133 (App. Div. 2011)

TAXATION — Under New Jersey’s tax law, an individual who pays the expenses of his or her corporation cannot deduct those expenses from the amount he or she reports as income from the corporation because individuals cannot disregard the corporate form by taking personal deductions for paying corporate obligations.

During three successive tax years, a taxpayer used his personal funds to pay commissions that two of his two corporations, each organized under Subchapter S of the Internal Revenue Code, were contractually obligated to provide. “The corporations did not report those commissions as expenses on their corporate business tax returns. Instead, [the individual taxpayer] and his wife deducted the commission expenses from the S corporation income that they reported on their personal income tax returns. The Division of Taxation disallowed the deductions.” The lower court agreed with the disallowance and, on appeal, the Appellate Division affirmed “substantially for the reasons stated” by the lower court.

New Jersey’s Gross Income Tax Act “was not based on the federal Internal Revenue Code.” Consequently, New Jersey’s tax law prohibits certain deductions that federal law allows. Specifically, “[t]he Gross Income Tax Act establishes ‘categories’ of income against which the gross-netting of losses is barred. No such device is included in the [Internal Revenue Code].” For that reason, the individual taxpayer could not “gross-net an alleged business expense against his S corporation income.”

Further, and perhaps more importantly, the Court held that “regardless of [the individual taxpayer’s] reasons for paying the commission from his own funds, he [could] not disregard the corporate form by taking personal deductions for paying corporate obligations.” Just because his corporations could have taken the deductions, does not mean that he could take them on his personal tax return. In reaching this holding, the Court decided a basic principle of law, specifically “[w]hile a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not ..., and may not enjoy the benefit of some other route he might have chosen to follow but did not.”


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