U.S. Supreme Court May Review the Ability of a State to Tax Income on Bonds Issued by Other States

[View All]

Title:
U.S. Supreme Court May Review the Ability of a State to Tax Income on Bonds Issued by Other States
Date:
February 27, 2007
Publication:
From the March 2007 Riker Danzig Tax and Trusts & Estates UPDATE.
Author(s):
Robert C. Daleo
Area(s) of Practice:
Tax Law
PDF File:
Download / View PDF File (672 KB)

In Davis v. Department of Revenue of the Finance and Administrative Cabinet, Commonwealth of Kentucky, a Kentucky court recently held unconstitutional a Kentucky law that does not tax interest income derived from bonds issued by Kentucky or its subdivisions but does tax interest income derived from bonds issued by another state or its subdivisions. The state of Kentucky has requested that the U.S. Supreme Court review this decision.

The New Jersey Gross Income Tax (the “NJGIT”), which imposes a tax on individuals, estates and trusts, includes a provision similar to Kentucky’s: it does not tax interest derived from bonds issued by New Jersey or its subdivisions but does tax interest derived from bonds issued by other states or their subdivisions. In addition, the NJGIT does not impose a tax on gain derived from bonds issued by New Jersey or its subdivisions but does impose a tax on gain derived from bonds issued by other states or their subdivisions.

If the U.S. Supreme Court decides to hear Kentucky’s appeal and rules that Kentucky’s statute is unconstitutional, the provisions of the NJGIT taxing interest only from bonds issued by other states or their subdivisions should likewise not pass constitutional muster. This would also appear to be true with respect to the provisions of the NJGIT taxing gain only from bonds issued by other states or their subdivisions.

It is not clear when the U.S. Supreme Court will decide to accept the case and, if it accepts the case, render a decision. Therefore, it would be prudent for taxpayers that have paid tax pursuant to the NJGIT with respect to gain or interest derived from bonds issued by states other than New Jersey or its subdivisions to file protective refund claims prior to the expiration of the applicable statute of limitations. As a general rule, a taxpayer must make a claim for refund of taxes paid pursuant to the NJGIT by the later of: (i) the date that is 3 years from the date the tax return was filed or (ii) 2 years from the date the tax was paid. Therefore, in many cases, the statute of limitations for making a refund claim under the NJGIT will expire on April 15, 2007, with respect to the 2003 tax year.