SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-0252-18T1

ANDREW J. SHECHTEL,

Plaintiff-Appellant/

Cross-Respondent,

v.

DIRECTOR, DIVISION OF

TAXATION,

Defendant-Respondent/

Cross-Appellant.

________________________

Telephonically argued on March 24, 2020 –

Decided September 3, 2020

Before Judges Rothstadt, Moynihan and Mitterhoff.

On appeal from the Tax Court of New Jersey, Docket 

No. 295-2017, whose opinion is reported at 31 N.J. Tax 

89 (Tax 2018).

John Lindau Berger argued the cause for 

appellant/cross-respondent (Lowenstein Sandler, LLP, 

attorneys; John Lindau Berger, of counsel and on the 

briefs; Kenneth J. Slutsky, on the briefs).

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the 

internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
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Ramanjit K. Chawla, Deputy Attorney General, argued 

the cause for respondent/cross-appellant (Gurbir S. 

Grewal, Attorney General, attorney; Melissa H. Raksa, 

Assistant Attorney General, of counsel; Ramanjit K. 

Chawla, on the briefs).

PER CURIAM 

In this appeal, we are asked to determine whether the Tax Court properly

interpreted the New Jersey Gross Income Tax Act (Act), N.J.S.A. 54A:1-1 to 

54A:10-12, when it held as a matter of law that defendant, the Director, Division 

of Taxation (Division), correctly determined that a taxpayer, plaintiff Andrew 

H. Shechtel, could not reduce his taxable distributive share of a partnership's 

income in 2010 by partnership losses incurred in 2009. According to Shechtel, 

his 2009 losses could not be applied in 2009 because they exceeded his "at risk" 

exposure in the specific partnership in 2009, but not in 2010.

The Division contended that the Act was not subject to the "at risk" 

limitation imposed under § 465 of the United States Internal Revenue Code 

(I.R.C.) that prevented the loss from being applied until the tax year in which 

the loss exceeded the partner's at risk amount. The Division maintained that 

Shechtel should have applied the loss in 2009 and when he failed to do so, he 

lost the deduction forever and could not recoup it by retroactively applying it to 

his 2009 income.
3

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Shechtel pursued his claim in the Tax Court and on July 6, 2018, that court 

issued an order denying his motion for summary judgment, and granting the 

Division's cross-motion for the same relief, except as to the issue of the interest 

and penalties imposed by the Division to which it claimed it was entitled because 

of the improper application of the loss on Shechtel's 2010 return. In support of 

its order, the Tax Court issued a comprehensive opinion explaining why 

Shechtel incorrectly relied upon § 465 and therefore was not entitled to the 

deduction. See Shechtel v. Dir., Div. of Taxation, 31 N.J. Tax 89 (Tax 2018).

Thereafter, Shechtel appealed, arguing to us that the Tax Court incorrectly 

determined his liability as a matter of law. The Division cross-appealed from 

the Tax Court's determination that it was not entitled to interest or penalties.

We have carefully reviewed both parties' contentions in light of the 

undisputed facts and applicable principles of law. For the reasons that follow, 

we reverse the Tax Court's determination as to Shechtel's tax liability and affirm 

its determination as to interest and penalties.

I.

The salient facts are not disputed and were cogently described by the Tax 

Court in its opinion. For context, we repeat them here:

For tax years 2009 and 2010, [Shechtel] was a member 

of several entities which were taxed as partnerships.
4

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One such entity was S&S Yield Company, L.L.C. 

("SSY") in which plaintiff was a 99% member for tax 

years 2009 and 2010.

For tax year 2009, [Shechtel] received income from 

other partnerships totaling $16,858,589. His 

distributive share of loss from SSY was $14,915,338. 

Per [Shechtel], pursuant to I.R.C. § 465, he could only

use $10,051,551 of this loss (to offset income received 

from other partnerships) because the total loss exceeded 

his at risk amount in SSY. The balance of $4,863,787 

($14,915,338 less $10,051,551) was federally 

disallowed and suspended until such time that he made 

up or increased his at risk amount in SSY. He therefore 

reported $6,807,037 (although $16,858,589 minus 

$10,051,551 equals $6,807,038) as his distributive 

share of net partnership income on his 2009 [Gross 

Income Tax (GIT)] return.

For tax year 2010, [Shechtel's] distributive share of 

passed-through income from other partnerships totaled 

$18,616,866. His distributive share of loss from SSY 

was $6,746,831. To this amount, he added the 2009 

suspended loss of $4,863,787 (totaling $11,610,718). 

He then reported his net partnership income on the 2010 

GIT return as $7,006,148 ($18,616,866 less 

$11,610,718). On the NJK-1 issued by SSY, a handwritten notation stated: "[t]here is an additional loss of 

4863787 (sic) taken on this 2010 return. It was 

suspended in 2009 by 'at risk' rule, but allowed now."

[The Division] audited plaintiff's 2010 GIT return 

about three years after it was filed and denied 

$4,863,787 of the $11,610,718 claimed loss. It 

explained that the . . . Act "did not contain a provision 

for the carryback or carryforward of losses, nor does it 

recognize the Federal 'at risk' limitations for 

partnerships," as evidenced by N.J.A.C. 18:35-1.3(d), 
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which requires "any and all" passed-through 

income/loss to be reported as a partner's distributive 

share. [The Division] concluded that the "federal 

suspended loss" for SSY should have been reported by 

[Shechtel] on his 2009 GIT return, and could not be 

"carried forward" to tax year 2010. 

Due to the disallowance, plaintiff's 2010 reported 

income increased by $4,863,787, which in turn, 

increased the GIT due from the reported $622,330 to 

$1,058,611. [The Division] demanded the difference of 

$436,281, which with penalty and interest, totaled 

$540,107. This was despite the fact that for the 2009

tax year, plaintiff reported $1,525,453 as total tax paid 

(through withholdings and payments), and requested 

$903,123 (amount withheld/paid less reported GIT due 

$622,330) be used as a credit towards his 2011 GIT.

[Id. at 93-94.]

In rejecting Shechtel's contentions, the Tax Court first found that there 

was no basis for his argument that the suspension of his 2009 loss until 2010 

was consistent with the Act's mandate that "[a] taxpayer's accounting method 

under this act shall be the same as his accounting method for Federal income tax 

purposes." Id. at 95 (quoting N.J.S.A. 54A:8-3(c)). According to the court, the 

I.R.C.'s limitation on a taxpayer's ability to recognize a partnership loss up to 

"the aggregate amount with respect to which the taxpayer is at risk . . . for such 

activity at the close of the taxable year," I.R.C. § 465(a)(1), and then apply any 

excess over the at risk amount to a subsequent year when the at risk amount was 
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sufficient, under § 465(a)(2), was not a federal accounting method even though 

it was included within those sections of the I.R.C. commonly viewed as defining 

federal accounting methods. See Shechtel, 31 N.J. Tax at 98.

According to the Tax Court, § 465 was a legislative device to prevent tax

shelters and based on its legislative history, was not an accounting method that 

was to be employed in the calculation of a taxpayer's income for New Jersey 

GIT purposes. Id. at 98-100. The court stated that, 

the crux of I.R.C. § 465 is whether, and how much, is 

the at risk amount. The consequent suspension of the 

deductibility of amounts in excess of the at risk amount 

is dependent on when and how much of the at risk 

amount is restored, thus, not an attempt to match the 

loss incurred with the income earned in the same 

taxable year, the aim of an overall accounting method.

[Id. at 99-100 (footnote omitted).]

For that reason, the court concluded "that I.R.C. § 465, is a substantive 

provision, and not merely a timing statute. Therefore, it is not incorporated into 

N.J.S.A. 54A:8-3(c)." Id. at 100.

The court found support for its decision in N.J.S.A. 54A:5-2, which

permits the application of losses that "occur within one category of gross 

income . . . against other sources of gross income within the same category of 

gross income during the taxable year." Quoting from Estate of Guzzardi v. 
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Director, Division of Taxation, 15 N.J. Tax 395, 400 (Tax 1995), aff'd o.b., 16 

N.J. Tax 374 (App. Div. 1996), the court stated "[t]his allowance of loss offset 

requires that the 'items of loss and gross income must occur during the same 

taxable year.'" Shechtel, 31 N.J. Tax at 101. According to the court, even if §

465 was a federal accounting method, it could not "'control the determination 

of . . . losses,' especially where N.J.S.A. 54A:5-2 does not incorporate nor 

reference 'federal accounting methods.'" Ibid. (quoting Guzzardi, 15 N.J. Tax 

at 404). 

The Tax Court stated that "N.J.S.A. 54A:5-2 does not permit a carryforward of the incurred and passed-through loss of a prior tax year," id. at 103, 

as the statute was not limited only to allowable loses under the I.R.C., "which 

[are] not useable solely because there is insufficient income in the same category 

to absorb such loss," id. at 104. The court concluded "that I.R.C. § 465 via 

application of N.J.S.A. 54A:8-3(c) does not render N.J.S.A. 54A:5-2 as either 

inapplicable or as non-controlling," and Shechtel's arguments that he be 

allowed a carry forward of the federally disallowed loss 

until such time he increases his at risk amount (which 

could be as here, one year, or for an indefinite period as 

recognized by I.R.C. § 465) . . . would not only render 

the loss carry-forward prohibition of N.J.S.A. 54A:5-2 

redundant, but would also require that all other antishelter provisions . . . also be deemed immune to the 

application of N.J.S.A. 54A:5-2. 
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[Shechtel, 31 N.J. Tax at 105-06.]

The Tax Court then explained why Shechtel was time barred from 

recovering the excess GIT he paid in 2009 that was due to his following § 465 

and not applying his 2009 partnership losses in full that year even though the 

result "undoubtedly enriched" the State through Shechtel's payment of more than 

he should have paid in 2009. Id. at 108. The court concluded that although 

[i]t appear[ed] unjust to retain such an amount when 

[the Division] does not dispute that the $4,863,787 loss 

could have offset and reduced plaintiff's 2009 taxable 

income . . . the inequity of . . . retaining monies 

mistakenly paid . . . is a necessary corollary to the 

application of statutes of limitation the basis of which 

are "for salutary reasons of predictability and repose,"

as opposed to fairness.

[Id. at 109 (quoting Superior Air Prods. Int'l, Inc. v. 

Dir., Div. of Taxation, 9 N.J. Tax 463, 477 (Tax 

1988))].

In reaching its conclusion, the Tax Court rejected Shechtel's contention 

that he was entitled to such relief because the Division "never issued any 

publications, articles, or regulations on the effect of the at risk rules for GIT 

purposes" because the Act was clear that losses could not be carried forward and 

no further guidance was necessary. Id. at 110.
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Finally, the Tax Court addressed the Division's imposition of interest and 

penalties on the amount owed by Shechtel as a result of the disallowance of his

partnership loss. In rejecting the Division's attempt to collect those amounts, 

the court noted that there was no dispute Shechtel paid more than what was owed 

in 2010, after the disallowance of the carried forward loss, which was originally 

intended to be applied towards his 2011 liability. Those excess amounts were 

available to the Division to apply to any deficiency in 2010. Therefore, no 

interest or penalties should have been charged. 

Thereafter, the parties filed cross-motions for reconsideration, which the 

court denied. This appeal followed. 

On appeal, Shechtel challenges the Tax Court's holding that "the at risk 

rules are not a federal method of accounting that is incorporated into the . . . 

Act" and that as such they "would violate . . . N.J.S.A. 54A:5-2['s]" ban on 

carrying over losses from a prior tax year. He claims that the court "fail[ed] to 

give effect to all relevant statutory provisions," and it erred by "conclud[ing] 

that tax shelters are eliminated without adopting the at-risk rules." Finally, 

Shechtel argues that the Tax Court erred by refusing to find that "equitable 

doctrines precluded the imposition of tax." In its cross-appeal, the Division 
10 A-0252-18T1

contends it was error for the Tax Court to "vacat[e the] interest and penalties" it 

imposed on Shechtel.

II.

In considering the Tax Court's decisions on summary judgment motions, 

our review is de novo employing the same standard as that court. Kite v. Dir., 

Div. of Taxation, 453 N.J. Super. 146, 152 (App. Div. 2018) (citing Globe Motor 

Co. v. Igdalev, 225 N.J. 469, 479 (2016)). When reviewing a trial court's order 

granting or denying summary judgment, we apply the same standard that 

governs the trial court. Lee v. Brown, 232 N.J. 114, 126 (2018). Summary 

judgment shall be granted when there is no genuine issue of material fact and 

the moving party is entitled to judgment as a matter of law. R. 4:46-2(c). Here, 

the material facts are not in dispute, and the question raised on appeal is whether 

the Tax Court erred by finding as a matter of law that the Act barred Shechtel 

from applying his losses as required by § 465.

In our review, we owe "no special deference to the legal determinations 

of the [Tax] [C]ourt." Templo Fuente De Vida Corp. v. Nat'l Union Fire Ins., 

224 N.J. 189, 199 (2016). "Although the Tax Court's factual findings 'are 

entitled to deference because of that court's expertise in the field,' we need not 

defer to its interpretation of a statute or legal principles." Advance Hous., Inc. 
11 A-0252-18T1

v. Township of Teaneck, 215 N.J. 549, 566 (2013) (quoting Waksal v. Dir., Div. 

of Taxation, 215 N.J. 224, 231-32 (2013)).

III.

§ 465

We begin our de novo review by addressing the parties' contentions about 

the Tax Court's view of § 465 in this case. It is undisputed that this provision

of the I.R.C. expressly defines when a partner can apply a qualified loss to 

reduce his distributive share of partnership income. I.R.C. § 465. Specifically, 

it provides that "any loss from such activity for the taxable year shall be allowed 

only to the extent of the aggregate amount with respect to which the taxpayer is 

at risk (within the meaning of subsection (b)) for such activity at the close of the 

taxable year." I.R.C. § 465(a)(1). Under subsection (b)(1), "a taxpayer shall be 

considered at risk for an activity with respect to amounts including—(A) the 

amount of money and the adjusted basis of other property contributed by the 

taxpayer to the activity, and (B) amounts borrowed with respect to such activity 

(as determined under paragraph (2))." I.R.C. § 465(b)(1). Where the loss for 

any tax year exceeds the at risk amount and is therefore "not allowed under this 

section for the taxable year[, it] shall be treated as a deduction allocable to such 

activity in the first succeeding taxable year." I.R.C. § 465(a)(2).
12 A-0252-18T1

If, as Shechtel argues, § 465 is a federal method of accounting, then under 

N.J.S.A. 54A:8-3(c) of the Act, he properly calculated his 2009 GIT liability by 

not including the amount of the loss that exceeded his at risk amount and 

correctly applied it to 2010 when his at risk amount exceeded the loss. That 

portion of the Act mandates that "[a] taxpayer’s accounting method under this 

act shall be the same as his accounting method for Federal income tax purposes." 

N.J.S.A. 54A:8-3(c). 

Years before Shechtel applied the disputed loss, the Division publicly 

reinforced the requirement that taxpayers follow federal methods of accounting. 

Specifically, a 1998 edition of N.J. State Tax News, "a bi-monthly newsletter 

published by the Division itself," Airwork Serv. Div. v. Dir., Div. of Taxation, 

97 N.J. 290, 295 (1984), which is considered an official publication, see Toys 

"R" Us, Inc. v. Dir., Div. of Taxation, 300 N.J. Super. 163, 172 (App. Div. 1997), 

contained information about the role of federal accounting methods. It stated 

the following:

A taxpayer's method of accounting for Federal income 

tax purposes determines not only the method to be used 

to compute income but also determines when income is 

to be recognized for [GIT] purposes, unless otherwise 

provided for in the Act or under Regulations. Thus, in 

most instances, a taxpayer will recognize and report 

income for [GIT] purposes in the same period as he 

does for Federal income tax purposes. 
13 A-0252-18T1

[N.J. State Tax News, Winter 1998, at 11.]

The Division reiterated this information in 2000, stating in another edition of its 

publication that N.J.S.A. 54A:8-3(c) provides that a taxpayer's accounting 

method under the Act "shall be the same as his accounting method for Federal 

income tax purposes," and "[a] taxpayer's method of accounting for Federal 

income tax purposes determines not only the method used to compute income 

but also determines when income is to be recognized and reported." N.J. State 

Tax News, Winter 2000, at 4 (emphasis added). Moreover, the Division stated 

that "[i]f a taxpayer makes a Federal election that allows them to defer 

recognition and reporting of the income until some future time or event, they 

may do so for [GIT] purposes." Ibid. 

Here, it is undisputed that generally those federal methods of accounting 

are contained in Part II of the I.R.C. at §§ 446-475, of which § 465 is obviously

a part. Those sections are considered federal income tax accounting methods 

that are incorporated into the Act. See Guzzardi, 15 N.J. Tax at 403.

1 They 

1

 We view the Tax Court's reliance on Guzzardi to be inapposite. That case did 

not address the federal accounting methods in Part II of the I.R.C. at §§ 446-

475. In that case, the taxpayer argued that the Act "adopt[ed] 'in toto . . . the 

federal scheme for taxation of capital gains which clearly . . . permits the carry 

forward of capital losses.'" Id. at 399 (alterations in original). In rejecting that 
14 A-0252-18T1

"constitute the statutory law governing the accounting periods and methods 

allowable for purposes of calculating income subject to federal income tax. These 

are substantive provisions prescribing the taxable year . . . in which income (loss) 

earned and allowable items of deduction paid or incurred will be recognized." 

Sabino v. Dir., Div. of Taxation, 17 N.J. Tax 29, 35 (Tax 1997). By requiring the 

application of "federal income tax accounting methods . . . , the Legislature has 

accepted all accounting methods recognized by the [I.R.C.] and the Regulations[, 

and its] purpose was to adopt a simple procedure for the determination and timing 

of income and deductions, in accordance with federal income tax accounting 

principles." DuBois v. Dir., Div. of Taxation, 4 N.J. Tax 11, 23 (Tax 1981), aff'd

o.b., 6 N.J. Tax 249 (App. Div. 1982), aff'd, 95 N.J. 234 (1983).

"[M]ethod of accounting allowed for federal tax 

purposes" . . . is not limited to the recognized overall 

methods of accounting, such as the cash method or 

accrual method, but rather was intended to include any 

method or system as used for federal tax purposes 'by 

which taxpayers determine the amount of their income, 

gains, losses, deductions and credits, as well as the time 

when such items must be realized and recognized."

[Baldwin v. Dir., Div. of Taxation, 10 N.J. Tax 273, 

284 (Tax 1988) (emphasis added) (quoting 10 Federal 

contention, the Tax Court specifically noted that it was not "decid[ing] the scope 

of [a provision in the Act's] reference to federal income tax accounting methods 

[as it relied upon a] specific, contrary provision [in the Act that it held] controls." 

Guzzardi, 15 N.J. Tax at 403. 
15 A-0252-18T1

Tax Coordinator 2d ¶ G-2001 at 24, 103-24, 104 

(Research Inst. of Am. Dec. 1987 ed.)), aff'd, 237 N.J. 

Super. 327 (App. Div. 1990).]

By referring to federal accounting methods for income tax purposes, 

"what was intended was gains or losses that are recognized for federal income 

tax purposes in accordance with established federal income tax accounting 

procedures for measuring allowable gains and losses." Id. at 285 (emphasis 

added). 

Applying these well-settled principles about the relation of the federal 

methods of accounting to the Act, we conclude that the Tax Court here erred 

when it held that § 465 was excluded from those methods. That section

specifically defines when and how the subject losses can be realized and 

therefore by definition is a federal method of accounting. That determination

alone, however, does not resolve the issue. To the extent that another provision

in the Act otherwise prevents application of the generally required federal 

method of accounting, then that provision would control. See Guzzardi, 15 N.J. 

Tax at 403.

N.J.S.A. 54A:5-2

In its opinion, the Tax Court here relied upon N.J.S.A. 54A:5-2, which 

bars the carrying forward of losses, and found that it prevented Shechtel from 
16 A-0252-18T1

applying the disputed loss to his 2010 income, even if § 465 was a federal 

accounting method. We disagree.

In determining the meaning of this portion of the Act we apply well-settled 

rules. "In construing a statute, our 'overriding goal is to determine as best we 

can the intent of the Legislature, and to give effect to that intent.'" Bermudez v. 

Kessler Inst. for Rehab., 439 N.J. Super. 45, 50 (App. Div. 2015) (quoting State 

v. Hudson, 209 N.J. 513, 529 (2012)). An agency's interpretation of a statute it 

is charged with administering should not be upheld if it is "contrary to the 

evident purpose of the statute." Reck v. Dir. Div. of Taxation, 345 N.J. Super. 

443, 448 (App. Div. 2001) (quoting Blecker v. State, 323 N.J. Super. 434, 442

(App. Div. 1999)). "[W]hatever be the rule of [statutory] construction, it is 

subordinate to the goal of effectuating the legislative plan as it may be gathered 

from the enactment read in full light of its history, purpose and context." Koch

v. Dir. Div. of Taxation, 157 N.J. 1, 7 (1999) (second alteration in original) 

(quoting State v. Haliski, 140 N.J. 1, 9 (1995)).

"[I]t is a fundamental principle of statutory interpretation that a court 'should 

try to give effect to every word of the statute, and should not assume that the 

Legislature used meaningless language.'" Verniero v. Beverly Hills, Ltd., 316 N.J. 

Super. 121, 127 (App. Div. 1998) (quoting Med. Soc'y of N.J. v. N.J. Dep't of Law 
17 A-0252-18T1

& Pub. Safety, 120 N.J. 18, 26 (1990)). Moreover, "it is well-established that a 

statute should not be construed in a manner that renders any portion of it a nullity." 

Smith v. Dir. Div. of Taxation, 108 N.J. 19, 27 (1987). 

When there is a conflict in interpretation, it is wellestablished that "a legislative provision should not be 

read in isolation or in a way which sacrifices what 

appears to be the scheme of the statute as a whole. 

Rather a statute is to be interpreted in an integrated way 

without undue emphasis on any particular word or 

phrase and, if possible, in a manner which harmonizes 

all of its parts so as to do justice to its overall meaning." 

[Koch, 157 N.J. at 7 (quoting Zimmerman v. Mun.

Clerk of Berkeley, 201 N.J. Super. 363, 368 (App. Div. 

1985)).]

"The first step in determining the Legislature's intent is to look at the plain 

language of the statute." Caput Mortuum, L.L.C. v. S&S Crown Servs., Ltd., 

366 N.J. Super. 323, 332 (App. Div. 2004). A statute's plain language serves as 

"the best indicator" of the Legislature's intent. DiProspero v. Penn, 183 N.J. 

477, 492 (2005). When we discern the meaning of the Legislature's selected 

words, we may "draw inferences based on the statute's overall structure and 

composition." State v. S.B., 230 N.J. 62, 68 (2017).

"In reading the language used by the Legislature, the court will give words 

their ordinary meaning absent any direction from the Legislature to the contrary. 

'If the plain language leads to a clear and unambiguous result, then [the] 
18 A-0252-18T1

interpretive process is over.'" TAC Assocs. v. N.J. Dep't of Envtl. Prot., 202 

N.J. 533, 541 (2010) (alteration in original) (citation omitted) (quoting 

Richardson v. Bd. of Trs., Police & Firemen's Ret. Sys., 192 N.J. 189, 195 

(2007)). However, "[w]hen the plain meaning does not point the court to a 'clear 

and unambiguous result,' it then considers extrinsic evidence from which it 

hopes to glean the Legislature's intent." Ibid. (quoting Bedford v. Riello, 195 

N.J. 210, 222 (2008)). Included within the extrinsic evidence a court may 

consider "are legislative history and statutory context, which may shed light on 

the drafters' motives." Ibid.

The plain language of this section of the Act states that losses realized in 

one tax year cannot be applied to a subsequent year's income. Specifically, the 

statute states, in pertinent part, that "[l]osses which occur within one category 

of gross income may be applied against other sources of gross income within 

the same category of gross income during the taxable year." N.J.S.A. 54A:5-2. 

Although the statute does not expressly require that loss be taken in the "same" 

taxable year, "[i]t is firmly established that [N.J.S.A. 54A:5-2] does not allow a 

taxpayer to apply losses from one tax year to offset income in another tax year." 

Murphy v. Dir., Div. of Taxation, 26 N.J. Tax 432, 449 (Tax 2012). "Unlike the
19 A-0252-18T1

[I.R.C.], the GIT Act does not allow for the carry forward or carry back of losses, 

underlining the annual nature of the State tax."

2

 Ibid. 

However, the statute assumes that the loss a taxpayer might seek to carry 

forward is a loss that could be applied under federal accounting methods to an 

earlier year. And, as already discussed, a loss that exceeds a partner's at risk 

amount in the endeavor is not cognizable until the year in which the at risk 

amount is sufficient to allow for the application of the losses. A commonsense 

reading of the plain language of N.J.S.A. 54A:5-2 requires that there be a loss 

that, but for the statute, could be carried over if allowed under federal accounting 

methods. Under federal accounting methods, Shechtel did not have a loss he 

could fully apply in 2009.

Under the Tax Court's interpretation of the relationship between § 465 as 

incorporated by N.J.S.A. 54A:8-3, and N.J.S.A. 54A:5-2, partnership losses for

the years prior to 2012 could have been unlimited and taken even in years in 

2

 An exception to the prohibition in carrying forward losses became effective 

in 2012 and is set forth in N.J.S.A. 54A:3-9. L. 2011, c. 60, § 2. It was enacted 

to permit taxpayers to carry forward net losses from business-related categories 

of income and apply those losses "against income in future taxable years." L.

2011, c. 60, § 1. It specifically allows taxpayers to carry forward losses 

sustained from their distributive share of partnership income and apply those 

losses against income (albeit, within the same category of income) in subsequent 

tax years. Ibid.; see also N.J.S.A. 54A:3-9.
20 A-0252-18T1

which a partner had "no skin in the game." Requiring that before a loss can even 

be realized it must exceed the partner's at risk amount is consistent with the 

goals of the Act. Like § 465, which was designed "to combat what Congress 

perceived to be an increasing incidence of abuses in tax shelters," Brand v. 

Comm'r of Internal Revenue, 81 T.C. 821, 828 (1983); see also Shechtel, 31 N.J. 

Tax at 105, "tax shelter avoidance was [also] a significant legislative objective" 

of the Act, Smith, 108 N.J. at 30.

It would be antithetical to the Act's purposes if N.J.S.A. 54A:5-2 was 

understood to require a partner to apply a loss in a tax year where the partner 

had no exposure. Stated otherwise, if a taxpayer's right to apply a loss occurred 

before it exceeded his or her at risk amount was sufficient, the taxpayer who had 

no at risk amount to lose, would be able to reduce to even zero any "distributive

share of partnership income," N.J.S.A. 54A:5-1(k), that would otherwise be 

taxable, even though he or she never actually realized any loss. Consistent with 

the purposes of the Act, the application of § 465 prevents that result by not 

making a loss allowable only in the year in which the at risk amount is sufficient. 

We turn to Shechtel's circumstances here to illustrate the impact of 

upholding the Tax Court's decision in this case on the purposes of the Act. As 

discussed above, Shechtel's distributive share of SSY's loss in 2009 was 
21 A-0252-18T1

$14,915,338 and his at-risk economic amount in SSY was $10,051,551 at the 

end of 2009. Thus, under the federal income tax methods of accounting stated 

in § 465, Shechtel could not use his entire distributive share of SSY loss in 2009 

to offset his income from other partnerships; rather, he was only permitted to 

deduct $10,051,551 of his distributive share of SSY loss, representing his 

amount at risk in SSY in that year. 

The remaining $4,863,787, or the SSY suspended loss, was not allowable 

until plaintiff increased his amount at risk in SSY. However, plaintiff's other 

partnership income in 2009 was large enough that, if the SSY loss had not been 

suspended by § 465, plaintiff would have been able to apply the full amount of 

$14,915,338 against his 2009 partnership income, thereby providing him with a 

significant tax benefit in 2009. Although Shechtel did not do so because of his 

belief that § 465 was incorporated into the Act by N.J.S.A. 54A:8-3, such a 

deduction would have operated as a tax shelter in his favor by allowing him to 

offset his partnership income by a phantom loss in excess of the actual loss 

sustained by plaintiff. The benefit derived by such a phantom loss was 

prevented by the federal at risk rules. 

Under the Tax Court's holding, it would have been an allowable tax shelter 

contrary to the Act's purposes. Thus, the Tax Court's interpretation of the Act 
22 A-0252-18T1

would allow income to escape tax, "a result not intended by the Legislature." 

Walsh v. State, Dep't of Treasury, Div. of Taxation, 10 N.J. Tax 447, 462 (Tax 

1989), aff'd o.b., 240 N.J. Super. 42 (App. Div. 1990). 

Under these circumstances, we are constrained to reverse the Tax Court's 

holding in this case and direct that summary judgment be entered in favor of 

Shechtel and against the Division.

IV.

Recoupment and Mitigation

In light of our determination that Shechtel was entitled to apply his 2009 

loss against his 2010 distributive share of partnership income, we need not 

address at length his contentions about the Tax Court's refusal to allow him to 

recoup his lost allowable losses. For completeness, we make the following brief 

observations.

We conclude that even if we were to affirm the Tax Court's decision here, 

Shechtel should have been allowed to recoup his lost deduction under the 

"square corners" doctrine, rather than been barred from recovery. We find 

support in the fact that the Division's official publication continuously reiterated 

the need to follow the timing provided for recognizing taxable income, which 
23 A-0252-18T1

by definition is calculated after applying allowable losses, as stated in the federal 

accounting methods under the I.R.C. 

To hold otherwise would allow the Division to not "turn square corners" 

to the taxpayer's detriment. See Residuary Trust v. Dir. Div. of Taxation, 28 

N.J. Tax 541, 546-47 (App. Div. 2015) (stating "an agency may not spring upon 

the regulated community a new policy, never before announced, and apply it 

retroactively"). "The square corners doctrine is particularly important in the field of 

taxation, because trusts, businesses, individuals and others must be able to reliably 

engage in tax planning and, to do so, they must know what the rules are." Id. at 548. 

It is "fundamentally unfair" for the Division to announce in its official 

publication that, under a certain set of facts, federal methods of accounting will be 

applied, "and then retroactively apply a different standard years later." Ibid. "Courts 

have not hesitated to apply the [square corners] doctrine to preclude the 

assessment of tax where taxpayers made financial decisions relying on 

representations by State officials regarding how tax laws will be applied, only 

to have those officials change position later." Milligan v. Dir. Div. of Taxation, 

29 N.J. Tax 381, 400 (Tax 2016). We find the present circumstances to be of the 

type that entitled Shechtel relief.
24 A-0252-18T1

However, we reject Shechtel's contention that, even if he was barred by 

N.J.S.A. 54A:5-2 from applying his 2009 losses to 2010, he was entitled to 

equitable recoupment. "As an equitable concept, judges invented the doctrine 

of equitable recoupment in order to avoid an unusually harsh or egregious result 

from a strict application of a statute of limitations." Superior Air Prods. Int'l, 

Inc., 9 N.J. Tax at 471. A claim of equitable recoupment must have three 

essential elements: "(1) a single transaction, (2) an identity of interest among 

parties, and (3) a need to balance the equities." Id. at 473. 

"[A] single transaction, '[is] one involving only a particular item on a tax 

return or a single event or transaction during the tax period [in question].'" Id.

at 474 (third alteration in original) (quoting Nat'l Cash Register Co. v. Joseph, 

86 N.E.2d 561, 562 (N.Y. 1949)). Thus, "a claim of equitable recoupment will 

lie only where the Government has taxed a single transaction, item, or taxable 

event under two inconsistent theories." Gen. Motors Acceptance Corp. v. Dir., 

Div. of Taxation, 25 N.J. Tax 428, 439 (Tax 2010) (quoting United States v. 

Dalm, 494 U.S. 596, 605-06 n.5 (1990)). 

The Tax Court here correctly concluded that Shechtel's claim involved

two separate transactions so that recovery under equitable recoupment was not 

permitted. We have no basis to disagree.
25 A-0252-18T1

We also reject Shechtel's contention that the Tax Court should have 

applied the doctrine of mitigation, under I.R.C. §§ 1311-1314, which according 

to Shechtel, allows "a taxpayer to correct the effect of an erroneous treatment of 

an item in a taxable year which is closed by the statute of limitations where, in 

determining the tax for another taxable year, it is determined that the item was 

treated erroneously in the closed year." 

The problem is the mitigation rules Shechtel cites have not been 

incorporated into the Act nor applied by New Jersey courts, a fact that Shechtel 

concedes. The Tax Court rejected plaintiff's argument that mitigation should 

apply, concluding that Shechtel's "request that this court afford relief similar to 

the mitigation provisions of I.R.C. § 1313 cannot be entertained as the court 

cannot engraft a federal statute into the GIT Act." Shechtel, 31 N.J. Tax at 110 

n.10. We agree. 

It is well-established that the Act is not modeled on the Internal Revenue 

Code and our Legislature "chose, instead, to create an income tax based on a 

simpler system, shorn of many of the deductions and credits incorporated in 

federal law." Murphy, 26 N.J. Tax at 444. Thus, federal tax concepts will not 

be incorporated into the Act unless "a provision of the GIT Act expressly 

incorporates" them. Ibid.
26 A-0252-18T1

"Our tax laws must be interpreted in light of the Legislature's express 

intent that New Jersey tax law diverge from the federal model in significant 

respects." Waksal, 215 N.J. at 241. There is no authority in the Act or in our 

case law that permits a court to apply the mitigation rules relied upon by 

Shechtel. We have no basis to hold to incorporate those rules into the Act or 

apply them to this matter.

V.

Interest and Penalties

We also conclude that we have no cause to disturb the Tax Court's 

determination that interest and penalties were not warranted. We find the 

Division's arguments to the contrary to be without sufficient merit to warrant 

discussion in a written opinion. R. 2:11-3(e)(1)(E). Suffice it to say, we agree

with the Tax Court's reliance on Shechtel's overpayment of his taxes in 2010 as 

reason for interest and penalties not being assessed under the circumstances. 

The Division's reliance on Shechtel's request to apply any overpayment to a 

succeeding tax year did not deprive the Division of the ability to apply the 

payment to the current tax year if needed because if taxes were due, there was 

no overpayment to be applied in accordance with the taxpayer's instructions. 
27 A-0252-18T1

The mere fact that the Division did not realize that issue until it audited 

Shechtel's returns in 2014 did not alter that reality.

Affirmed in part; reversed in part and remanded to the Tax Court for entry 

of an order granting Shechtel's motion for summary judgment and denying the 

Division's motion. We do not retain jurisdiction.