Could a New Jersey taxpayer use I.R.C. § 1341 or amend a prior return after repaying income previously reported under a claim of right?

Plain-English summary

New Jersey did not adopt the federal I.R.C. § 1341 claim-of-right relief methods and did not allow taxpayers to reopen the earlier year when previously reported income was repaid.

Federal law allowed either a deduction in the repayment year or an alternative calculation using the original income year. New Jersey's Gross Income Tax Act contained no similar provision.

Under Wigton v. Director, the earlier year was not reopened. A New Jersey taxpayer therefore could not amend that prior return to recover tax on income received and used under a claim of right.

Instead, N.J.S.A. 54A:5-2 allowed the repayment to offset other income only:

• in the same income category; and
• in the same tax year as the repayment.

For example, wages repaid in 2011 could reduce other 2011 wages. If the calculation made that income category negative, the taxpayer reported zero.

What this means for you

Taxpayers repaying prior income

Do not assume the federal § 1341 method carries to New Jersey. Match the repayment against the same category in the repayment year.

Tax preparers

Do not amend the original New Jersey year solely to remove claim-of-right income under this TAM.

Taxpayers with repayments exceeding current-category income

The TAM required zero for that category rather than a negative amount.

Common questions

Q: Did New Jersey adopt I.R.C. § 1341?
A: No.

Q: Could the taxpayer amend the earlier New Jersey return?
A: No.

Q: Where was the repayment used?
A: Against income in the same category during the repayment year.

Q: Could the category become negative?
A: No. The taxpayer reported zero.

Citations and references

• I.R.C. § 1341 — federal claim-of-right adjustment
• N.J.S.A. 54A:5-2 — same-category, same-year netting
• Wigton v. Director, 12 N.J. Tax 373 (1992)

Source

• Landing page: https://www.nj.gov/treasury/taxation/tam-pubs.shtml
• Original PDF: https://www.nj.gov/treasury/taxation/pdf/pubs/tams/tam7.pdf

Original ruling text

Claim of Right Repayment Refunds (IRC 1341)
TAM 2011-7 – Issued January 13, 2011
Tax: Gross Income Tax
For Federal Income Tax purposes, if a taxpayer must return income paid and already included in
income, a deduction for this amount in the year of repayment is allowed under the “claim of
right doctrine.” This doctrine states that if a taxpayer is required to restore amounts which
previously have been included in income, the taxpayer is permitted a deduction in the year of
repayment.
The administration of this deduction in the year of repayment is governed by section 1341 of
the Internal Revenue Code. This section provides a taxpayer with two alternate methods of
calculating a claim of right adjustment. Under section 1341, the taxpayer may either take the
deduction in the year of repayment or treat the amount as if the repayment had been excluded
in the year the claim of right income was first reported.
The New Jersey Gross Income Tax Act, however, does not contain provisions similar to IRC
section 1341.
In Wigton v. Director, 12 N.J. Tax 373 (1992), the Tax Court stated that federal and State case law
interpreting section 1341 holds that this section does not result in a reopening of the earlier
taxable year. The prior year is simply used as a means of determining the least amount of tax
due under the section 1341 recalculation. Therefore, for New Jersey Gross income Tax purposes,
New Jersey does not permit taxpayers to file an amended return to recover repaid amounts
taxed in prior years since the income was received and used under the “claim of right” doctrine.
Also, the New Jersey Legislature did not adopt the IRC section 1341 alternative calculation
method allowing a taxpayer to compute tax due in the year of repayment using the original
payment year as the basis for calculation instead of the repayment year.
On the Gross Income Tax return, any repayment or deduction may be applied against other
income earned in the same category and in the same tax year as the repayment in accordance
with N.J.S.A. 54A:5-2. For example, if wages received by the taxpayer in 2010 are repaid back to
the employer in 2011, the taxpayer can adjust 2011 year wages by the repayment made during
the 2011 tax year. If the offset results in a net loss or negative amount, the taxpayer must report
zero income in that category.

Note: A Technical Advisory Memorandum (“TAM”) is an informational statement of the law,
regulations, or Division policies. It is accurate on the date issued. Subsequent changes in the law
or regulations, judicial decisions or changes in Division policies could affect the validity of the
information presented in a TAM.

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