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Vassilidze v. Director, Division of Taxation

2008 WL 5539677 (Tax Ct. 2008)

TAXATION — Where a taxpayer mistakenly pays personal income tax to a foreign jurisdiction, it cannot obtain credit for that payment on its New Jersey tax return because only those New Jersey residents whose income is actually subject to tax under the laws of both New Jersey and a foreign jurisdiction are entitled to the resident credit.

A New Jersey couple paid income taxes to Pennsylvania on wages earned there even though it was not legally required to do so. They then sought an income tax credit in New Jersey for the amount of the tax paid to Pennsylvania. Under a reciprocal personal income tax agreement, the two states relinquished their authority to collect tax from the other state’s residents on employee compensation earned in their state by a non-resident. The New Jersey Division of Taxation audited the couple’s joint tax return and issued a Notice of Deficiency based on the taxpayers’ failure to reflect their Pennsylvania income on their New Jersey income tax return. They were also assessed a late payment penalty and interest on the amount owed. The taxpayers requested that the Division adjust the Notice of Deficiency. The auditor and then the Director of Taxation denied the taxpayers’ application.

The couple brought an action in the New Jersey Tax Court challenging the Final Determination of the Director of Taxation. The Court granted summary judgment in favor of the Division of Taxation. It ruled “only those New Jersey residents whose income is actually subject to tax under the laws of both New Jersey and a foreign jurisdiction are entitled to the resident credit.” Since the New Jersey residents were not required to pay the tax by reason of a validly enacted statute or other exercise of authority from another state, the Tax Court held that no tax had been imposed by Pennsylvania and therefore no credit was permitted in New Jersey. It ruled the taxpayer voluntarily paid the tax to the other state despite the fact that “the law expressly provided otherwise.” The Tax Court stated “[t]o grant plaintiffs a credit in this case would in effect reverse the substantive provisions of the Reciprocal Personal Income Tax Agreement by allowing Pennsylvania to tax [the couple’s] source wages and granting plaintiffs an exemption from taxation in New Jersey on those earnings.” The Court held this “would in effect permit a deduction not authorized by New Jersey law.” The Tax Court blamed part of this somewhat inequitable result on Pennsylvania, as that State’s “statute of limitations preclude[d] [these taxpayers] from receiving a refund of income taxes they submitted to that State.” The Court also rejected the Director’s adjustment of the interest rate assessed against the taxpayers. It held that “the only authorized rate of interest for gross income tax cases is three percentage points above the prime rate.” The Court found that the Director had no discretion on this matter. The Tax Court also found that where “there were multiple published statements available” to the taxpayers that stated in “clear terms” the applicable tax provisions which were “either ignored by, or unknown to” the couple, “a denial of an abatement of interest by the Director will be upheld.” Finally, the Court held that the Director may assess gross income tax within three years after the return is filed, and thus, there was no basis in the taxpayers’ contention that interest should be limited to one year.

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