State Barred by Statute of Limitations from Recovering an Erroneous Refund Payment

The BR State + Local Tax Spotlight

The New Jersey Tax Court recently granted a pro se taxpayer’s motion for summary judgment and ruled that the Division of Taxation was barred by the statute of limitations from recovering an erroneous income tax refund payment caused by the taxpayer’s mistake. Malhotra v. Dir., Div. of Tax’n, 2021 N.J. Tax LEXIS 13 (Dec. 16, 2021). 

Facts: The taxpayer, Punish Malhotra, was a New Jersey resident who worked in New York.  Mr. Malhotra filed a New York State nonresident income tax return for 2013 reporting 100 percent of his income sourced to and taxable by New York State. Mr. Malhotra’s Form W-2 showed that his employer only withheld income tax on behalf of New York and did not withhold any income tax on behalf of New Jersey. Mr. Malhotra and his spouse also filed a joint New Jersey resident income tax return with New Jersey reporting the amount of New York withholding shown on his W-2 as New Jersey withholding, and claiming a credit for his taxes paid to New York. As a result of the erroneous withholding reported on the New Jersey return and the credit claimed for New York tax paid, Mr. Malhotra reported an overpayment on his New Jersey return and requested and received a refund of income taxes paid.

The Division of Taxation later examined Mr. Malhotra’s New Jersey return and corrected it to remove the amount reported as New Jersey withholding. More than three years after Mr. Malhotra received the refund of income taxes from the Division, the Division issued a NJ Gross Income Tax Adjustment underpayment billing notice (“billing notice”) for the amount of the refund paid, plus penalty and interest. Cross-motions for summary judgment ensued.

The Decision: Under New Jersey law, “an assessment of a deficiency arising out of an erroneous refund may be made at any time within 3 years from the making of the refund, except that assessment may be made within 5 years from the making of the refund if it appears that any part of the refund was induced by fraud or misrepresentation of a material fact.” N.J. Stat. § 54A:9-4. 

The Division did not argue that Mr. Malhotra acted with fraudulent intent and did not challenge his assertion that his failure to pay the appropriate taxes was simply an innocent mistake. As a result, the court found that it did not need to reach the issue of intent. 

Instead, the Division asserted that the term “misrepresentation” does not have an intent element, but only requires a false statement of a material fact, even an unintentional one. Accordingly, the Division asserted that Mr. Malhotra’s mistaken claim of New Jersey withholding amounts constituted a misrepresentation of a material fact. 

In interpreting the phrase “misrepresentation of a material fact,” the court looked to how that phrase had been interpreted by other courts in the context of contract law and insurance law, and to the Black’s Law Dictionary definition. The court found that a common thread of those interpretations was that while a “misrepresentation” does not require the same level of intent as fraud, it cannot be done accidentally. The court further noted that if it found every mistake by a taxpayer amounts to a “misrepresentation,” it would render the distinction between the five-year and three-year statute of limitations meaningless. As there was no dispute in this case that Mr. Malhotra’s misstatement of New Jersey withholding amounts was anything other than an innocent mistake, the court held that the Division was barred by the statute of limitations from recovering its erroneous refund payment.

This article is one in a series of articles written for the January 2022 edition of The BR State + Local Tax Spotlight.

© 2022 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.