News and Insights

New Jersey Tax Division Cannot Promulgate Regulations that Contradict Legislative Intent

Tax Development Mar 10, 2017

The New Jersey Tax Court knocked down the Division of Taxation (“Division”) a rung or two in its decision in Manheim Investments Inc. v. Dir., Division of Taxation.1 New Jersey provides for favorable tax treatment of investment companies under N.J.S.A. 54:10A-5(d). In 2006, the Acting Deputy Director of Revenue amended N.J.A.C. 18:7-1.15(b) to exclude investments in pass-through entities from the definition of qualifying investment activities and assets. The Deputy Director’s reasoning behind this change was “to limit tax planning through abusive reorganization.”2 

The plaintiff in this case was a 99% limited partner in a limited partnership. It asserted that the Deputy Director exceeded his authority in promulgating N.J.A.C. 18:7-1.15(b)(9), in that it improperly narrowed the definition of an investment company. The Division argued that the regulation was “properly enacted to end proliferation in the use of flow-through entities and limit tax planning through aggressive reorganization.”

The Tax Court agreed with the taxpayer and found that the regulation was improperly enacted, exceeding the authority of the Division. However, the Court could not conclude that the taxpayer was in fact an investment company and left the case open to make that determination. This decision demonstrates that all regulations are not created equally, nor should they be given equal weight if they differ from the legislative intent of the law they are interpreting.

1 New Jersey Tax Court Release Date: February 27, 2017, Doc 2017-31992.
2 38 N.J.R. 1558(a) (April 3, 2006).


Mary Bernard