Court Opinion

ID: 4562635
Source: CourtListenerOpinion
Date Created: 2020-09-03 14:08:33.295478+00
Date Added: 2024-06-11T12:10:02.704382
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE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.

                                                        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).
            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.

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                                        2
      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.

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                                         3
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 hand-
written 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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                            4
            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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                                        5
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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                                        6
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 carry-

forward 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 anti-
            shelter provisions . . . also be deemed immune to the
            application of N.J.S.A. 54A:5-2.

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                                        7
            [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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                                       8
      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

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                                       9
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.

                                                                           A-0252-18T1
                                       10
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).

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                                        11
      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.

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                                       12
            [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

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                                        13
"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.
                                                                               A-0252-18T1
                                         14
              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

                                                                         A-0252-18T1
                                       15
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

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                                         16
& 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 well-
             established 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]

                                                                              A-0252-18T1
                                         17
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

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                                       18
[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 effect ive
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.
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                                        19
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

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$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

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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

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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.

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      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.

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      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.

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      "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.

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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.

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