Reed Smith Client Alerts

Today, the New Jersey Tax Court published its opinion in Xylem Dewatering Solutions, Inc. v. Director, Division of Taxation.1 The issue was whether the gain from a deemed asset sale under I.R.C. § 338(h)(10) recognized by a New Jersey-based S corporation was nonoperational (nonbusiness) income and thus 100% allocable to New Jersey, rather than subject to apportionment.2 Applying precedent developed under New Jersey’s corporation business (income) tax,3 the court ruled that the deemed asset sale and liquidation resulted in nonbusiness income, and that New Jersey had the right to tax 100% of the gain.

Authors: David J. Gutowski Matthew L. Setzer

Today, the New Jersey Tax Court published its opinion in Xylem Dewatering Solutions, Inc. v. Director, Division of Taxation.1 The issue was whether the gain from a deemed asset sale under I.R.C. § 338(h)(10) recognized by a New Jersey-based S corporation was nonoperational (nonbusiness) income and thus 100% allocable to New Jersey, rather than subject to apportionment.2 Applying precedent developed under New Jersey’s corporation business (income) tax,3 the court ruled that the deemed asset sale and liquidation resulted in nonbusiness income, and that New Jersey had the right to tax 100% of the gain.

The decision is a warning for New Jersey-based taxpayers: the court concluded that the Division of Taxation (not just taxpayers) can take advantage of nonbusiness income principles. But the decision is also relevant for out-of-state taxpayers.