New Jersey Taxpayer Off the Hook for Tax on Partnership Gain

The New Jersey Division of Taxation improperly taxed $2.3 million that a bankrupt limited liability company allocated to an individual member of the partnership, the state tax court ruled.

Because the sum—used to zero out a negative capital account—doesn’t represent economic gain or recovery of a past benefit, it isn’t taxable, New Jersey Tax Court Judge Mark Cimino held in an unpublished opinion posted Thursday.

Joseph Musumeci invested $1.1 million in H2M Beverage LLC, which held a patent for an energy drink bottle. The company wasn’t successful and eventually declared bankruptcy.

To zero out the individual member capital accounts, H2M’s ...