New Jersey Supreme Court Rules That Erroneous Refund Must Be Returned

By Irwin Mittleman, JD, CPA

A corporate taxpayer found that an erroneous corporation tax refund had to be returned to the state of New Jersey. The New Jersey State Supreme Court rejected the argument that the refund acted as a waiver of the refund statute of limitations, an argument that had similarly been rejected by two lower courts (Playmates Inc. v. Director, NJ Sup. Ct., Dkt. No. A-70-98, 12-21-99).

The Decision

The taxpayer was audited by the New Jersey Division of Taxation for the tax years 1989 through 1992 and received a Notice of Assessment dated December 28, 1995. The notice indicated that there was an assessment for the years 1991 and 1992 and an overpayment for the years 1989 and 1990. After offsetting the assessment against the overpayment, there remained an overpayment of $63,463 that the division refused to pay, asserting its defense that the refund was outside of the statutory period of two years (NJSA 54:49-14), a period that was increased to four years for claims accruing on or after July 1, 1993. On March 27, 1996, the taxpayer filed a protest with the division with regard to the assessment and concurrently sought a refund for the excess amount. The division later upheld the assessment and refunded the overpayment, but then, realizing that it should not have returned the overpayment, notified the taxpayer shortly thereafter to return it.
The taxpayer argued that the payment of the overpayment constituted a waiver by the division of its statute of limitations defense. The taxpayer also asked the court to take judicial notice that a provision in the Gross Income Tax Act specifically makes an erroneous refund an underpayment of tax, while no such provision is found in the Corporation Business Tax Act. The court found no merit in these arguments and stated that the concept of waiver is one of “voluntary and intentional” relinquishment of a known existing right or such conduct that warrants an inference of such a right. The court also went on to note that the taxpayer did not rely upon the waiver to establish any detrimental reliance because the director issued an order to return the money within weeks of its disbursement.

Analysis

It should be noted that statutes of limitations are substantive matters that are rarely waived by the courts. One exception, found in the Sales Tax Act, gives limited relief to the refund statute of limitations under NJSA 54:32B-27. This exception extends the refund statute of limitations by six months beyond the assessment period, but only when there is a waiver of the assessment period statute of limitations.