New Jersey ~ Personal Income Tax: Refund and Interest Compelled in Lottery Winnings Case

CCH Tax Day Report

The New Jersey Tax Court granted the taxpayers’ motion for a judgment reversing the Director of the Division of Taxation’s final determinations and compelling the refund of gross (personal) income tax, plus interest, paid by the taxpayers on 2009 lottery winnings. The Director had argued for a stay of any refunds until all claims alleged by taxpayers were resolved. In an earlier decision (TAXDAY 2016/09/29, S.21), the court had dismissed the Director’s motion to dismiss the taxpayers’ claims. However, that court order did not specifically reverse the Director’s final determinations denying the taxpayers’ refund claims. That order also did not expressly compel the Director to refund any amount to taxpayers. The case involves taxation of lottery winnings from a prize awarded on or after January 1, 2009 but before June 29, 2009. Seven taxpayers, along with three coworkers, won the New Jersey Lottery on March 3, 2009. They chose to receive a lump sum payment. After the prize winnings were split ten ways, each taxpayer received approximately $14 million. At the time the taxpayers purchased the lottery ticket the state did not imposes its income tax on New Jersey lottery winnings. The fact that these winnings were not subject to New Jersey gross income tax was advertised in the Lottery’s brochures and on its website. A few months after the taxpayers claimed their lottery prize, a bill was introduced in the New Jersey Legislature amended the statute to say that New Jersey Lottery “winnings from a prize in an amount exceeding $10,000 shall be included in gross income”. The bill was enacted into law on June 29, 2009, and provided that the amendment “shall take effect immediately and apply to taxable years beginning on or after January 1, 2009”. In the previous order, the court found the square corners doctrine precluded the assessment of New Jersey gross income tax on the taxpayers’ lottery winnings from a prize awarded on or after January 1, 2009 but before June 29, 2009.

In this decision, the court found there had been no failure on the part of the Director to comply with the court’s order. Although New Jersey rule R. 1:10-3 addresses civil contempt, the New Jersey Supreme Court has interpreted it as one designed to provide relief to litigants, whether or not a party had willfully violated a court order. New Jersey statute, N.J.S.A. 54A:9-10, provides in subsection (a) that a taxpayer whose request for a refund of gross income tax is denied by the Director may seek review of the Director’s decision in accordance with the State Uniform Tax Procedure Law. Under subsection (c), the statute states that this type of appeal is the “exclusive remedy available to any taxpayer for review of a decision of the director with respect to the determination of the liability of the taxpayer” for gross income tax. Subsection (d) then stated “if the amount of a deficiency determined by the director is disallowed in whole or in part, the amount so disallowed shall be credited or refunded to the taxpayer, without the making of claim therefore, or, if payment has not been made, shall be abated.” Thus, the court found that nothing in (d) provided that a court awarded refund of gross income tax was not effective until final judgment was entered or until any appeal, should one ultimately be filed, was fully resolved.

The court further stated that it was plain that the New Jersey Legislature established protections for a taxpayer challenging an assessment of gross income tax. Whether in the context of an administrative appeal before the Director, or a judicial appeal in the Tax Court, collection of an assessment of gross income tax was, in effect, stayed until a final determination of the taxpayer’s liability. The Legislature, however, enacted no statutory provision effectively staying the award of a refund of gross income tax when a judicial determination had been made in favor of the taxpayer. The court concluded that the Legislature, having enacted detailed statutory provisions staying an assessment of gross income tax when the assessment was challenged by a taxpayer, was aware that a taxpayer might also challenge the denial of a gross income tax refund request, and enacted no statute staying the award of a refund until final judgment was entered. The court also considered the Director’s cross-motion for a stay and concluded that under Crowe v. De Gioia, 90 N.J. 126, 133 (1982) a stay was not warranted.

Harrington v. Director, Division of Taxation, and State of New Jersey, Department of Treasury, Division of State Lottery, New Jersey Tax Court, Nos. 009529-2011, 000622-2011, 007022-2011, 007023-2011, 007024-2011, 007025-2011, 007027-2011, 007052-2011, December 13, 2016, ¶402-019

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