Preview:

a2089-10.opn.html
108 N.J. 19, 32 (1987), New Jersey's Gross Income Tax Act (GIT Act) was not based on the federal Internal
Revenue Code (I.R.C.), and therefore the GIT Act prohibits certain deductions that the I.R.C. allows. ">
Original Wordprocessor Version
(NOTE: The status of this decision is Unpublished.) Original Wordprocessor Version
(NOTE: The status of this decision is Published.)
FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-2089-10T3
DANIEL SCHULMANN and DEBBIE
SCHULMANN,
APPROVED FOR PUBLICATION
December 6, 2011
APPELLATE DIVISION
Plaintiffs-Appellants,
and
UAK MANAGEMENT CORP.1 , and
TSK FRANCHISE SYSTEMS, INC.
(d/b/a TIGER SCHULMANN'S
file:///C|/Users/Peter/Desktop/Opinions/a2089-10.opn.html[4/20/2013 3:06:23 PM]




a2089-10.opn.html
KARATE CENTER HEADQUARTERS),
Plaintiffs,
v.
DIRECTOR, NEW JERSEY DIVISION
OF TAXATION,
Defendant-Respondent.
December 6, 2011
Submitted November 1, 2011 - Decided
Before Judges Reisner, Simonelli and Hayden.
On appeal from the Tax Court of New Jersey, Docket No. 007221-2005, whose opinion
is published at 25 N.J. Tax 573 (Tax 2011).
Scott Craig Levenson, attorney for plaintiffs.
Paula T. Dow, Attorney General, attorney for respondent (Lewis A. Scheindlin, Assistant
Attorney General, of counsel; Ramanjit K. Chawla, Deputy Attorney General, on the
brief).
The opinion of the court was delivered by
REISNER, J.A.D.
During the tax years 2000, 2001 and 2002, Daniel Schulmann used his personal funds to pay commissions
that two S corporations, UAK Management Corp. and TSK Franchise Systems, Inc., were contractually
file:///C|/Users/Peter/Desktop/Opinions/a2089-10.opn.html[4/20/2013 3:06:23 PM]




a2089-10.opn.html
obligated to provide to instructors at Tiger Schulmann karate schools.2 The corporations did not report
those commissions as expenses on their corporate business tax returns. Instead, Schulmann and his wife
deducted the commission expenses from the S corporation income that they reported on their personal
income tax returns. The Division of Taxation disallowed the deductions. In a published opinion, Judge Mala
Narayanan affirmed the Director's determination. Shulmann v. Dir., Div. of Taxation, 25 N.J. Tax 573 (Tax
2011). We affirm substantially for the reasons stated in Judge Narayanan's cogent opinion. We add these
comments.
As the Supreme Court recognized in Smith v. Director, Division of Taxation, 108 N.J. 19, 32 (1987), New
Jersey's Gross Income Tax Act (GIT Act) was not based on the federal Internal Revenue Code (I.R.C.), and
therefore the GIT Act prohibits certain deductions that the I.R.C. allows.
We disagree that the Legislature patterned the New Jersey Gross Income Tax
Act on the Internal Revenue Code. . .                                                                        . The federal income tax model was
rejected by the Legislature in favor of a gross income tax to avoid the loopholes
available under the Code. For example, the Code taxes all income, from
whatever source derived, except income expressly exempted from tax. I.R.C. §
61. On the other hand, the Gross Income Tax Act only taxes expressly identified
classes of income. The Code taxes all income on a net consolidated basis. The
Gross Income Tax Act taxes some income on a net basis and other income on a
gross basis. The Gross Income Tax Act establishes "categories" of income
against which the cross-netting of losses is barred. No such device is included in
the Code.
[Ibid. (emphasis added).]
We agree with the Tax Court that Schulmann may not deduct payments made out of his S corporation
income as a business expense under N.J.S.A. 54A:5-1(b) (net income from the operation of a business).
Income from an S corporation is a separate income category, under N.J.S.A. 54:5-1(p), and Schulmann
cannot "cross-net" an alleged business expense against his S corporation income.
The [GIT] Act imposes taxes on distinct and separate categories of income.
N.J.S.A. 54A:5-1. Since income is taxed on a category-by-category basis, the Act
expressly prohibits the netting of income and losses among the different
categories. N.J.S.A. 54A:5-2; Walsh v. Director, Div. of Taxation, 15 N.J. Tax
180, 184 (Tax 1995); and Marrinan v. Director, Div. of Taxation, 17 N.J. Tax 47,
51 (Tax 1997).
The Act provides only one category for the reporting of Subchapter S corporation
file:///C|/Users/Peter/Desktop/Opinions/a2089-10.opn.html[4/20/2013 3:06:23 PM]




a2089-10.opn.html
income, N.J.S.A. 54A:5-1(p), which provides for taxation of the "[n]et pro rata
share of S corporation income."
[Miller v. Dir., Div. of Taxation, 352 N.J. Super. 98, 104 (App. Div. 2002).]
We also agree with the Tax Court that, regardless of Schulmann's reasons for paying the commissions from
his own funds, he may not disregard the corporate form by taking personal deductions for paying corporate
obligations. See Sidman v. Dir., Div. of Taxation, 18 N.J. Tax 636 (Tax 2000), aff'd, 19 N.J. Tax 484 (App.
Div.), certif. denied, 170 N.J. 387 (2001). The fact that the S corporations could have taken deductions for
the commissions, had they paid them, see N.J.S.A. 54A:5-10, I.R.C. § 162, and I.R.C. § 1366, does not
mean that Schulmann can deduct them on his personal tax return. "'[W]hile a taxpayer is free to organize
his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his
choice, whether contemplated or not . . ., and may not enjoy the benefit of some other route he might
have chosen to follow but did not.'" Gen. Trading Co. v. Dir., Div. of Taxation, 83 N.J. 122, 136 (1980)
(quoting Comm'r v. Nat'l Alfalfa Dehydrating and Milling Co., 417 U.S. 134, 149, 94 S. Ct. 2129, 2137, 40 L.
Ed.2d 717, 727 (1975)).
Affirmed.
1 UAK Management Corp. was also referred to as UAK Management Co., Inc. The corporate plaintiffs did
not participate in the Tax Court proceedings, which only addressed the New Jersey income tax liability of
Daniel and Debbie Schulmann.
2 The somewhat complex system, in which Schulmann-trained martial arts instructors were financially
encouraged to open martial arts schools and train other instructors who would, in turn, also open schools,
is described in the Tax Court's opinion and need not be repeated here.
This archive is a service of Rutgers School of Law - Camden.
This archive is a service of Rutgers School of Law - Camden.
file:///C|/Users/Peter/Desktop/Opinions/a2089-10.opn.html[4/20/2013 3:06:23 PM]

Download a2089-10.opn.pdf

New Jersey Law