Patricia A. Doherty and James Robert Doherty, Jr. Estate of v. Director, Div. of Taxation

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NOT FOR PUBLICATION WITHOUT APPROVAL OF
THE TAX COURT COMMITTEE ON OPINIONS
______________________________
:
PATRICIA A. DOHERTY & : TAX COURT OF NEW JERSEY
THE ESTATE OF JAMES ROBERT : DOCKET NO: 011661-2016
DOHERTY, JR., :
Plaintiffs, :
:
v. :
:
DIRECTOR, DIVISION OF :
TAXATION, :
Defendant. :
______________________________:
Decided: August 17, 2018
Robert E. Salad for Plaintiffs (Cooper, Levenson,
attorneys).
Ramanjit K. Chawla for Defendant (Gurbir S. Grewal,
Attorney General of New Jersey, attorney).
CIMINO, J.T.C.
I. INTRODUCTION
Under the Gross Income Tax (GIT) Act, a resident of the State
of New Jersey is taxed on 100% of income regardless of whether the
income is generated in-state or out-of-state, or a combination
thereof. However, certain credits are allowed against taxes
assessed on income earned in other states.
*
Approved for Publication
In the New Jersey
Tax Court Reports

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Plaintiffs, James Robert Doherty, Jr., later the Estate of
James Robert Doherty, Jr., and Patricia A. Doherty (taxpayers),
argue that the intent of the Legislature is that so long as the
credit does not erode the full amount of taxes due on income
allocated to New Jersey, a credit is permissible against the Gross
Income Tax assessed. On the other hand, defendant, the Director
of the Division of Taxation (Director) argues that the Legislature
set forth by statute how the credit is calculated, and this statute
represents the intent of the Legislature in dealing with the issue.
While this court agrees that there is a general goal of providing
a credit for out-of-state taxes, the Legislature decided to
implement the credit provisions at issue through a specifically
defined credit calculation that does not necessarily guarantee, or
is required to guarantee, that all out-of-state taxes are credited.
This matter comes before this court on cross-motions for
summary judgment. Our Supreme Court has indicated that summary
judgment provides a prompt, business-like and appropriate method
of disposing of litigation in which material facts are not in
dispute. Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520,
530 (1995). While not definitive, cross motions for summary
judgment may represent to the court the ripeness of the matter for
adjudication. Spring Creek Holding Co. v. Shinnihon U.S.A. Co.,
399 N.J. Super. 158, 177 (App. Div. 2008).

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II. STATEMENT OF FACTS
The taxpayers are residents of southern New Jersey living in
Moorestown, New Jersey. Both taxpayers own shares in a family
business, David Weber Company, Inc., located in Philadelphia,
Pennsylvania. David Weber Company, Inc. is in the business of
manufacturing corrugated boxes.
The business is incorporated under the laws of the
Commonwealth of Pennsylvania. However, the shareholders of the
corporation have elected that the corporation be treated as a
Subchapter S corporation under federal law, 26 U.S.C. §§ 1361-
1379, as well as under the laws of this State and Pennsylvania.
Generally speaking, a Subchapter S corporation is not directly
subject to taxation. Rather, the income passes through the
corporation to be taxed as income of each individual shareholder.
The taxpayers duly filed their personal income tax returns
for 2011, 2012 and 2013 with the federal government as well as New
Jersey and Pennsylvania. They were thereafter subjected to audit
by the Director for each of those years. On each GIT return, the
taxpayers reported their pro-rata share of S corporation income in
accordance with the calculation as dictated by the GIT Act. For
their New Jersey taxes, they reported their pro-rata share of
income from the S corporation to be $2,108,894 for 2012.1 The
1 All figures are for the taxpayers’ share of income. For
example, in 2012, taxpayers have a 68.5396% interest in the

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Director does not dispute that the taxpayers correctly reported
total income.
On the Pennsylvania tax returns for the S corporation, the
share of income was reported as $2,252,820. Both New Jersey and
Pennsylvania start with the amount reported on the S corporation
federal return as ordinary business income. N.J.S.A. 54A:5-10, 72
Pa. Stat. Ann. § 7307.8. However, the respective states allow
differing adjustments to arrive at S corporation income.
As non-residents of Pennsylvania, the taxpayers only paid
Pennsylvania tax on the income allocated to Pennsylvania. 72 Pa.
Stat. Ann. § 7310, 61 Pa. Code § 109.5. To determine how much
income is allocated, Pennsylvania mandates the use of an allocation
formula. Ibid. The formula utilized by Pennsylvania determined
that 81.7087% of the income was attributable to Pennsylvania and
18.2913% was attributable to New Jersey. This resulted in 81.7087%
of the $2,252,820, or $1,840,750 of the income of the corporation
being taxed by Pennsylvania. The Pennsylvania tax rate is a flat
3.07% resulting in a tax liability of $56,511. On their New Jersey
corporation. The total income of the corporation as reported on
the New Jersey returns is $3,076,898. The taxpayers’ interest in
the total is $2,108,894.
The court is using tax year 2012 for purpose of the analysis,
and for ease and simplicity. The findings and reasoning, however,
are applicable to tax years 2011 and 2013. Each tax year involved
the same issues.

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return, the taxpayers claimed a credit for the entire tax paid to
Pennsylvania.
However, under the allocation formula mandated by New Jersey,
only 69.5464% of the income of the S corporation was allocable to
Pennsylvania and 30.4536% was allocable to New Jersey. Thus, of
the total pass-through S corporation income of $2,108,894, New
Jersey determined that 69.5464%, or $1,466,660, is allocable to
Pennsylvania.
Using both the lower overall pass-through S corporation
income amount reported to New Jersey, and the allocation to
Pennsylvania as determined by New Jersey law, the Director limited
the credit so it was not against corporation income allocated to
this State. In other words, per New Jersey law, the total income
was $2,108,894. The allocation to Pennsylvania was 69.5464%,
resulting in $2,108,894 times 69.5464%, or $1,466,660 upon which
the credit could be calculated. Multiplying $1,466,660 by the
Pennsylvania tax rate of 3.07% results in a credit of $45,026.
Since the taxpayers claimed a credit of $56,511 based upon both
the higher pass-through income and the allocation to Pennsylvania
as determined under Pennsylvania law, the Director assessed a
deficiency for the difference.
While Pennsylvania has a flat 3.07% tax rate, New Jersey has
progressive tax rates with the top marginal rate of 8.97% for the
years in question. The taxpayers argue that so long as New Jersey

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gets its full share of taxes on the portion of the corporate income
allocated to New Jersey, a credit for all Pennsylvania taxes should
follow. Since the New Jersey rate is nearly triple that of
Pennsylvania, the taxpayers argue that despite Pennsylvania
allocating to itself, and taxing a greater amount of income, New
Jersey will still get all tax revenues for income that is
determined and allocated per New Jersey law. They maintain that
this methodology conforms to the general legislative intent
underlying the grant of a credit. While it is mathematically
correct that the tax on New Jersey allocated income is not eroded,
since New Jersey taxes all income regardless of allocation, the
taxpayers do not point to any specific provision in the law that
indicates the credit is calculated in the way they propose.
Rather, the taxpayers argue that it is the intent of the
Legislature to allow such a credit.
III. CONCLUSIONS OF LAW
A. Background
In 1976, the State Legislature enacted the New Jersey Gross
Income Tax Act, N.J.S.A. 54A:1-1 to 54A:10-10. The tax primarily
applies to individuals. N.J.S.A. 54A:2-1. For the tax years at
issue, 2011 through 2013, the tax was at marginal rates from 1.4%
through 8.97%. Ibid. The Act reaches income earned by a resident
regardless of whether the income is from out-of-state or in-state

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sources. N.J.S.A. 54A:5-1. In other words, the Act taxes 100% of
a resident’s income.2
Constitutionally, a state is permitted to tax 100% of a
resident’s income regardless of whether it is from in-state or
out-of-state sources. New York ex rel. Cohn v. Graves, 300 U.S.
308, 312-13 (1937); Hough v. Dir., Div. of Tax’n, 2 N.J. Tax 67,
72 (Tax 1980), aff'd, 4 N.J. Tax 528 (App. Div. 1981). “Neither
the federal nor state constitutions require a state to provide an
income tax credit for income taxed by a foreign jurisdiction.”
Laurite v. Dir., Div. of Tax’n, 12 N.J. Tax 483, 491 (Tax 1992),
aff’d, 14 N.J. Tax 166 (App. Div. 1993).
Despite taxing income from both in-state and out-of-state
sources, New Jersey has allowed residents a credit for taxes paid
to other states. N.J.S.A. 54A:4-1. “Credit is a matter of grace
and a state may impose conditions on its application.” Laurite,
12 N.J. Tax at 491. The issue in this case is the calculation of
the credit. Taxpayers argue that the Legislature was focused on
the bottom line in that so long as the tax due for income
attributable to New Jersey is not diminished, a credit is allowed.
On the other hand, the Director alleges that the Legislature set
forth a procedure for the calculation of the credit and that method
of calculation must be followed.
2 Parenthetically, for non-residents, only income earned in
New Jersey is taxed. N.J.S.A. 54A:5-7, -8.

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“The duty of the Director, and this court, is to give meaning
to the wording of the statute and, where the words used are
unambiguous, apply its plain meaning in the absence of a
legislative intent to the contrary. Even if there is an ambiguity
attendant to the issue of a tax credit, the rule of construction
is one that favors the taxpayer, not the government.” Sutkowski
v. Dir., Div. of Tax’n, 312 N.J. Super. 465, 475 (App. Div.
1998)(citation omitted). Despite the requirement of a favorable
reading towards the taxpayer, the court cannot ignore the common
sense and plain meaning of the statute gleaned from the overall
legislative scheme and the plain wording of the statute.
B. The initial resident tax credit provision
Upon initial enactment of the Gross Income Tax Act in 1976,
subsection (a) of the resident tax credit provision provided:
A resident taxpayer shall be allowed a credit
against the tax otherwise due under this act for
the amount of any income tax or wage tax imposed
for the taxable year by another state of the
United States or political subdivision of such
state, or by the District of Columbia, with
respect to income which is also subject to tax
under this act.
[L. 1976, c. 47, § 54A:4-1.]
The starting point is, despite taxing 100% of a resident’s
income, the taxpayers are entitled to a dollar-for-dollar credit
for any tax on income or wages that is paid to another state.

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An issue arises when out-of-state income is taxed by the other
state, but not New Jersey. In particular, the question is whether
the taxpayers get a credit for the tax on this out-of-state income
that is untaxed by New Jersey. In Stiber v. Dir., Div. of Tax’n,
9 N.J. Tax 623 (Tax 1988), the taxpayer had income from a New York
partnership. Due to New York using standard depreciation and New
Jersey using accelerated depreciation, additional partnership
income was taxed in New York. Id. at 627. “[Sub]section (a)
clearly restricts the credit to foreign taxed income which is also
taxed by New Jersey.” Id. at 628. Thus, in Stiber, the court
limited the credit to the partnership income which was actually
taxed by New Jersey.
The same issue arises here in a slightly different context.
Both New Jersey and Pennsylvania start with the same income derived
from the federal tax returns for purposes of determining the
corporate income. N.J.S.A. 54A:5-10, 72 Pa. Stat. Ann. § 7307.8.
The income of the corporate entity as determined by New Jersey is
$2,108,894. Conversely, due to various and differing deductions,
the income as determined by Pennsylvania for the total of in-state
and out-of-state income is $2,252,820. However, Pennsylvania only
taxes $1,840,750 since it determines that 81.7087% of the total
income is attributable to Pennsylvania.
The threshold issue is the amount of income which is taxed by
both New Jersey and Pennsylvania for the purposes of a Stiber

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analysis. There are two possible outcomes. The first is that the
taxpayers are entitled to a credit for taxes paid to Pennsylvania
on income of $1,840,750, since that amount is less than the total
taxed by New Jersey of $2,108,894. The second is that the
$1,840,750 taxed by Pennsylvania is proportionally reduced to
reflect the fact that New Jersey has determined that the total in-
state and out-of-state income is only $2,108,894 instead of the
Pennsylvania determination of in-state and out-of-state income of
$2,252,820. Proportionally, this would be $1,840,750 multiplied
by the ratio determined by dividing $2,108,894 by $2,252,820, or
$1,723,150. Thus, the income for which the credit can apply under
subsection (a) alone can be either $1,840,750 or $1,723,150. The
court need not determine the correct result as part of this case
since under either scenario, the subsection (c) calculation which
is discussed and applied below is independent of how Pennsylvania
determines income or allocation, and sets a limitation on the
credit which is less than either subsection (a) calculation.3
3 If the allocation factor of the other state is lower, but
the income is higher, the allocated income can be less than the
subsection (c) maximum. For example, if the total income
determined by Pennsylvania increased to $2,500,000 and the
allocation factor determined by Pennsylvania decreased to 60%,
Pennsylvania would be taxing $1,500,000. Applying the ratio of
New Jersey income to Pennsylvania income for the subsection (a)
calculation would result in a potential subsection (a) limitation
of $1,265,336. This is less than the subsection (c) limitation
discussed below of $1,466,660.

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C. Amendment to the resident tax credit provision
In 1958, Congress enacted Subchapter S of the Internal Revenue
Code providing that closely held corporations with a limited number
of shareholders (now no more than 100 shareholders) could elect
Subchapter S status which would allow most, if not all, of the
income generated to pass through the corporation and only be
taxable by the shareholders as personal income. 26 U.S.C. §§ 1361-
1379. Technical Amendments Act of 1958, Pub. L. No. 85-866, § 64.
72 Stat. 1606, 1650. The income that the S corporation generates
for its shareholders is taxed at one level similar to the taxation
of a partnership, rather than at two levels, corporate and
shareholder. This is in contrast to the traditional provisions
under Subchapter C of the Internal Revenue Code, in which the
corporation was taxed on profits, and then the individual
shareholders were taxed on the profits distributed as dividends.
The Subchapter S corporation is thus recognized as a “pass-through”
entity for taxation purposes.
The New Jersey Legislature decided to implement provisions
similar to the federal provisions in 1993. As part of the enabling
statute, the Legislature amended the resident tax credit provision
of the Gross Income Tax Act. Subsection (a) was amended and
subsection (c) was added to be specifically applicable to S
Corporations. N.J.S.A. 54A:4-1(a), (c). Sections (a) and (c)

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compared side by side are as follows:
A resident taxpayer shall be
allowed a credit
against the tax otherwise due
under this act
for the amount of any income
tax or wage tax imposed for the
taxable year by another state
of the United States or
political subdivision of such
State, or by the District of
Columbia,
with respect to income which is
also subject to tax under this
act,
except as provided by
subsections (c) and (d) of this
section.
[N.J.S.A. 54A:4-1(a)]
No credit shall be allowed
against the tax otherwise due
under this act
for the amount of any income
tax or wage tax imposed for the
taxable year
on S corporation income
allocated to this State.
[N.J.S.A. 54A:4-1(c)]
As shown above, subsection (c) parallels the language of
subsection (a). Instead of providing a broad basis for the credit
against the taxes of other states, subsection (c) provides an
exception to the credit in subsection (a).
The unambiguous language of subsection (c) is to trim the
scope of the credit available under subsection (a). Subsection
(a) is phrased in terms of the “allowed . . . credit” versus
subsection (c) which indicates when “[n]o credit shall be allowed.”
N.J.S.A. 54A:4-1(a), (c). Both sections apply to the tax otherwise

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due under the act. Both subsections indicate that the credit is
for the income or wage tax imposed for the taxable year.
Subsection (a) describes the credit being available “with
respect to income which is also subject to tax” in New Jersey.
N.J.S.A. 54A:4-1(a). The income basis for this credit is broad
and applies so long as the income is taxed by both jurisdictions
as required by Stiber.4 The amended subsection (a) incorporates
by reference and specifically “except[s]” the income addressed in
subsection (c). Ibid.
The plain language of subsection (c) indicates that there
shall be no credit as it pertains to “S corporation income
allocated to this State.” N.J.S.A. 54A:4-1(c). “S corporation
income allocated to this State” is a defined term which means the
portion of S corporation income that is allocated to New Jersey
pursuant to the allocation factor set forth in New Jersey
Corporation Business Tax (CBT) Act, sections 6 through 10.
N.J.S.A. 54A:5-10. See also N.J.S.A. 54:10A-6 to -10. Applying
the allocation formula as defined by the CBT results in 30.4536%
or $642,234 of the corporation income being allocated to New Jersey
and 69.5464% or $1,466,660 allocated to Pennsylvania.
4 This not to be confused with subsection (b) which limits
the credit proportionally and is discussed later in this opinion.
See infra at _____ (slip op. at 15-16).

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Pennsylvania determines a greater amount of overall income
and allocates more of that overall income to Pennsylvania. The
overall income determined by Pennsylvania is $2,252,820 and the
allocation is 81.7087% resulting in income taxable by Pennsylvania
of $1,840,750. This is greater than the $1,466,660 allocated by
the New Jersey CBT to Pennsylvania. This results in Pennsylvania
taxing $374,090 in income which is either not taxed by New Jersey5
or is otherwise allocated to New Jersey per the New Jersey
allocation formula.6
Subsections (a) and (c) focus on the amount of income subject
to tax. Taxpayers incorrectly focus upon the amount of tax. Since
the Pennsylvania tax rate is about one-third the New Jersey rate,
despite Pennsylvania taxing income which clearly is allocated to
New Jersey under New Jersey law or is not otherwise taxed by New
Jersey, the amount of the credit sought by taxpayers is not enough
to diminish the tax otherwise due on the portion of the income
allocated to New Jersey under New Jersey law. However, the plain
wording of subsections (a) and (c) looks to the income being taxed,
not the amount of tax.
5 See discussion of Stiber limitation analysis, supra, at
_____ (slip op. at 9-10).
6 Applying subsection (c) without applying the subsection
(a) Stiber analysis provides the same result here since the
subsection (c) calculation swamps either method of subsection (a)
limitation calculation presented previously.

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The taxpayers conflate the principles of subsection (b),
which focusses upon the overall amount of the credit, with
subsections (a) and (c), which focus upon the income that can be
used to calculate the credit. Subsection (b) provides:
The credit provided under this section shall not
exceed the proportion of the tax otherwise due
under this act that the amount of the taxpayer’s
income subject to tax by the other jurisdiction
bears to his entire New Jersey income.
[N.J.S.A. 54A:4-1(b).]
Subsection (b) was part of the original enactment of the Gross
Income Tax Act in 1976. “The limitation of [subsection (b)]
prevents an intrusion upon New Jersey’s tax of New Jersey source
income where . . . the rate of tax imposed by the foreign
jurisdiction exceeds the rate imposed by New Jersey.” Kanarek v.
Dir., Div. of Tax’n, 14 N.J. Tax 589, 596 (Tax 1995). In the case
at hand, the Pennsylvania rate is substantially less than the top
New Jersey rate. Thus, the maximum tax credit limitation of
subsection (b) does not come into play.
Nonetheless, taxpayers urge the court to apply subsection (b)
without limiting the credit to taxes on income not allocated to
New Jersey in accordance with subsections (a) and (c). The
taxpayers argue that since the rate is substantially lower in
Pennsylvania, the taxpayers can take a credit on taxes paid
regardless of whether the income is allocated to New Jersey so
long as the maximum credit is not reached.

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The general provision in subsection (b) setting a maximum
amount of tax credit does not contradict the specific provisions
of subsections (a) and (c) dealing with S corporation credit
eligibility. This eligibility is determined by whether the income
taxed is allocated to New Jersey. Just because a taxpayer has not
reached the maximum credit allowable, does not mean that the
taxpayer can take a credit on taxes based upon income allocated to
this State.
The intent of the Legislature may also be helpful in
construing statutory provisions. “When attempting ‘to discover
the legislative intent, the statute must be read in light of the
old law, the mischief sought to be eliminated and the proposed
remedy.’” Bd. of Educ. of City of Sea Isle v. Kennedy, 196 N.J.
1, 13 (2008)(citing Brewer v. Porch, 53 N.J. 167, 174 (1969)). In
adopting subsection (c) and amending subsection (a), it is plain
that the Legislature was aware that without the changes, a
difference in allocation between New Jersey and other states would
result in a credit of out-of-state taxes on income allocated to
New Jersey.
While subsection (c) is unambiguous, requiring the court to
apply its plain meaning, the court must still nonetheless inquire
whether there is legislative intent to the contrary which may
affect the court’s conclusions. Sutkowski, 312 N.J. Super at 475.

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“It is not the wording alone but the policies underlying the
statute, the legislative scheme of which it is a part, and the
reasonableness of the proposed interpretation, that guide a court
in ascertaining legislative intent.” Mahwah Realty Associates,
Inc. v. Township of Mahwah, 420 N.J. Super. 341, 352 (App. Div.
2011). “Statutes cannot be read in a vacuum void of relevant
historical and policy considerations and related legislation.”
Borough of Matawan v. Monmouth Cty. Bd. of Tax’n, 51 N.J. 291, 299
(1968); Helfrich v. Township of Hamilton, 182 N.J. Super. 365, 370
(App. Div. 1981). The court must consider the broad legislative
scheme of the credit provisions which are part of the GIT Act.
To that end, as explained by the first presiding judge of the Tax
Court, Judge Lasser, prior to the adoption of the amendments to
the resident tax credit adding subsection (c) and amending
subsection (a):
[T]he intent of the act is to avoid double
taxation of foreign income by relinquishing
all or part of the New Jersey tax on the
foreign income, but not to relinquish New
Jersey tax on income earned in New Jersey.
[Jenkins v. Dir., Div. of Tax’n, 184 N.J.
Super. 402, 409, 4 N.J. Tax 127, 133 (Tax
1982).]
Thus, even prior to the amendments creating Subchapter S
status, the intent was not to allow a foreign tax credit on income
earned in New Jersey. As stated more recently by this court in
the context of subsection (c), “[t]he credit is not designed to

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protect a resident taxpayer from the tax imposed by a foreign
jurisdiction on New Jersey sourced income.” Criticare, Inc. v.
Dir., Div. of Tax’n, 28 N.J. Tax 169, 179 (Tax 2014). Subsection
(c) did not effectuate any change in the policy regarding credits
enunciated long ago by Judge Lasser in Jenkins. Rather, subsection
(c) continues to protect the New Jersey tax base from being
diminished by credits for tax on income not allocated to New
Jersey. The Legislature set forth a plain method of arriving at
the credit. Taxpayers want to rewrite that provision to provide
a greater credit. While it could be argued that the Legislature
could have adopted the scheme proposed by taxpayers and still
protected the New Jersey tax base, the fact remains that the
Legislature instead chose the method set forth in subsection (c)
which undisputedly protects New Jersey source income from
diminishment by the resident tax credit.
Subsections (a) and (c) of the GIT credit provision make sense
when considering the context of the remedy which the Legislature
was implementing. Prior to the statutory amendments creating
Subchapter S status in New Jersey, out-of-state corporations were
only subject to CBT on income allocated to New Jersey. This
obviated the need for a credit of New Jersey CBT on out-of-state
income.7 Subsections (a) and (c), through incorporation of the
7 Parenthetically, shareholders of a corporation were taxed
under the GIT Act on dividends received from a corporation

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terms defined in N.J.S.A. 54A:5-10, mandate the use of the CBT
allocation method to prohibit any credit against the New Jersey
GIT on income allocated to New Jersey. Using the allocation
factor to limit the credit to income not allocated to New Jersey
aligns the GIT credit for out-of-state income of S corporations
with the CBT not reaching income allocated outside New Jersey.
Taxpayers also rely upon Beljakovic v. Dir., Div. of Tax’n,
26 N.J. Tax 455 (Tax 2012), another decision involving S
corporation pass-through income. Beljakovic is factually
different since the S corporation did not have a regular place of
business outside New Jersey. Id. at 469-70. At the time, such a
corporation was imposed the allocation rate of 100% regardless of
the amount of income earned out-of-state. Ibid. This legal
fiction resulted in no credit. This 100% deemed allocation was
provided for in section 6 of the Corporation Business Tax act.
Ibid.
However, subsection (c) uses the term “S corporation income
allocated to this State.” N.J.S.A. 54A:4-1(c). That term is
defined by N.J.S.A. 54A:5-10 which provides that the allocation is
determined not only by section 6 of the Corporation Business Tax
act, but section 8 as well. Beljakovic, 26 N.J. Tax at 472-73.
regardless of whether derived from in-state or out-of-state
activities.

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Section 8 provides for an equitable adjustment if the allocation
calculated by section 6 does not comport with reality. Section 8
is utilized in situations in which section 6 does not lead to a
fair result. See, e.g., Brunswick Corp. v. Dir., Div. of Tax’n,
11 N.J. Tax 530 (Tax 1991), aff’d, 13 N.J. Tax 136 (App. Div.
1993), aff’d, 135 N.J. 107 (1994); N.J.A.C. 18:7-8.10 (allocation
for special industries). In Beljakovic, the court determined that
there was evidence that a significant portion of the corporate
income was earned out-of-state and the proper result was to apply
section 8 and allow a credit for income allocated outside New
Jersey. Beljakovic, 26 N.J. Tax at 469-70. The court’s holding
was also informed by the Director’s own regulations which allowed
an S Corporation with deemed 100% allocation to New Jersey a
reduction for tax paid out-of-state. Id. at 476-77.
Thereafter, in Criticare, the court was faced with a similar
situation as in Beljakovic. Like the Beljakovic taxpayer,
Criticare did not maintain a place of business outside New Jersey
and was subject to 100% taxation. Criticare, 28 N.J. Tax at 173.
New York determined that the allocation was 20% to New Jersey and
80% to New York. Ibid. The taxpayer in Criticare submitted that
the allocation calculation per section 6 of the CBT Act would apply
in the absence of the legal fiction of 100% allocation. Ibid. In
reviewing the record, the court applied the CBT allocation formula
instead of the deemed 100% allocation. Id. at 183.

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Since the tax years at issue in Beljakovic and Criticare, the
Legislature repealed the 100% allocation provision for businesses
that did not have a regular place of business outside New Jersey.
See, L. 2008, c. 120, § 2 (effective July 1, 2010). Nonetheless,
the take-away from both Criticare and Beljakovic is that the court
was not substituting the allocation or income determinations of
another state, but was rather implementing the allocation
calculation as defined by the New Jersey CBT Act in section 6,
albeit indirectly through section 8.
In contrast, taxpayers here want the court to ignore the
allocation provisions of New Jersey law and instead apply the
provisions of Pennsylvania law. In essence, taxpayers want a
credit for all taxes paid to Pennsylvania, regardless of the
allocation under New Jersey law. The problem with taxpayers’
approach is that it presumes that Pennsylvania’s allocation of
income must be accepted despite the New Jersey Legislature
specifically determining otherwise. In a broader sense, the
taxpayers want New Jersey to cede its method of income allocation
to that of another jurisdiction.
While “[a]llocating income among various taxing jurisdictions
bears some resemblance . . . to slicing a shadow,” the New Jersey
legislature has made a determination of the correct allocation
formula to be utilized for New Jersey taxation purposes. See

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Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 192-93
(1983). In setting the allocation factor, it was not the intent
of the Legislature to cede its authority to another State. Just
because there are different methods of allocation available that
may pass constitutional muster, does not mean New Jersey has to
substitute the Pennsylvania allocation method and provide the
credit. The New Jersey Legislature has specifically determined
that the CBT’s allocation method is to be applied to S corporation
credits.
The real quarrel which taxpayers have here is not with New
Jersey not allowing the credit, but rather with Pennsylvania
allocating too much of the income to Pennsylvania per the
allocation factor authorized by the Pennsylvania Legislature.8 In
Estate of Guzzardi v. Dir., Div. of Tax’n, 15 N.J. Tax 395 (Tax
8 New Jersey now utilizes single sales factor allocation and
was heading in that direction at the time this case arose. For
2011, 50% was allocated to sales and 25% to both property and
payroll. For 2012, 70% was allocated to sales and 15% to both
property and payroll. For 2013, 90% was allocated to sales and 5%
to both property and payroll. N.J.S.A. 54:10A-6.
Single sales factor, as the name implies, only uses sales to
allocate income. Pennsylvania continues to utilize three-factor
allocation, called the Massachusetts formula, which gives equal
weight to property, sales and payroll. 72 Pa. Stat. Ann. § 7310,
61 Pa. Code § 109.5. While it is constitutionally permissible to
have three factor apportionment, an allocation formula which
relies more on sales as opposed to property or payroll is more
likely to be found constitutionally permissible. Cf. Hans Rees’
Sons, Inc. v. North Carolina, 283 U.S. 123, 134 (1931).

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1995), aff’d o.b., 16 N.J. Tax 374 (App. Div. 1996), the taxpayer
paid tax to Pennsylvania in 1981 on the full sale proceeds even
though the proceeds included installments to be paid in later
years. Id. at 398. At the time, Pennsylvania taxed installment
sales in the year that the sale was consummated, not when the
payments were made. Ibid. Taxpayer subsequently moved to New
Jersey. Ibid. The final payment received on the sale was in 1988
and was reported to New Jersey. Id. at 398-99. The taxpayer
attempted to credit the 1981 Pennsylvania tax payment against the
1988 New Jersey tax on the final payment. Id. at 399. The resident
credit only applied against taxes paid in the same year and the
credit was denied in accordance with the plain language of the
credit statute. Id. at 405. The court noted that the issue
resulted from Pennsylvania’s refusal to recognize installment sale
accounting, not New Jersey’s credit statute. Id. at 408.
Likewise, the issue here arises not from New Jersey not allowing
a credit against income allocated to Pennsylvania, but rather
Pennsylvania allocating too much income to itself and taxing same.
The next step is the subsection (c) calculation. Pennsylvania
allocates $1,840,750 or 81.7087% of the corporation income to
Pennsylvania and taxes same at a flat rate of 3.07%. As determined
by New Jersey, of the total corporation income of $2,108,894, only
$1,466,660 or 69.5464% is allocable to Pennsylvania. The remaining
amount of $642,234 is S corporation income allocated to New Jersey.

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This means that of the $2,108,894 taxed by New Jersey, the
taxpayers cannot take a credit for taxes paid on $642,234. This
leaves $1,466,660 of the total amount taxed by Pennsylvania
available for calculation of the credit. This is well below either
method of subsection (a) calculation noted previously. Therefore,
the taxpayers are entitled to a credit on tax paid to Pennsylvania
on $1,466,660 of income.9 Multiplying $1,466,660 times the
Pennsylvania flat tax rate of 3.07% results in a credit of $45,026
for 2012 which is the same amount reached by the Director. The
same reasoning applies to 2011 and 2013. Resultantly, the
calculation of the Director stands and the appeal of taxpayers is
denied.
CONCLUSION
For the foregoing reasons, taxpayers’ motion for summary
judgment is denied and the Director’s motion is granted. An Order
will follow.
9 The Pennsylvania non-resident tax is a flat tax. Thus,
the order and method of application of a credit for marginal rates
in calculating the credit does not need to be decided in this case.
Further, a review of taxpayers’ returns reveals that there was
only activity in two states, New Jersey and Pennsylvania.
Adjustments to this calculation of the credit may or may not be
necessary if there is activity in three or more states. However,
the issue of three or more states is not before the court and need
not be decided at this juncture.