Estate of Monihan v. Director, Division of Taxation (NJ Tax Court, 2026)
Background
On January 14, 2026, the New Jersey Tax Court issued its first published decision of the year in the case of Estate of Michael R. Monihan and Holly P. Monihan v. Director, Division of Taxation. The court granted the Division of Taxation’s Cross-Motion for Summary Judgment, ruling against the taxpayers.
Key Facts
- Michael Monihan was a licensed Real Estate Broker and owned 50% of Monihan Realty, Inc.
- He served as president, treasurer, and performed management functions (e.g., securing insurance, coordinating accounting/legal services), as well as acting as broker-salesperson and Broker of Record.
- An Independent Contractor Agreement (ICA) was executed between Monihan and the company, specifying his status as an independent contractor for sales and rental activity, and stating he would not be treated as an employee for tax purposes.
- Monihan received three types of income from the company:
- Wages for officer/employee services (W-2)
- S corporation income distribution (K-1)
- Commissions for individual real estate transactions (1099-MISC)
Tax Audit and Dispute
The Division of Taxation audited Monihan’s Gross Income Tax Returns (GITR) and, on March 19, 2020, issued a notice of deficiency, reclassifying the 1099-MISC commission income as W-2 wage income. Without this reclassification, Monihan’s reported wages for 2016, 2017, and 2019 were $41,600 annually; with reclassification, they increased to $234,438, $229,123, and $146,912, respectively. Monihan protested, but the Conference and Appeals Branch upheld the audit findings.
Taxpayer’s Arguments
- Monihan argued his tax treatment should be dictated by the New Jersey Broker’s Act (as amended in 2018), which allows the relationship between broker and salesperson to be defined as either employer/employee or independent contractor via written agreement.
- He maintained that the language of the ICA should control, per the Broker’s Act’s “notwithstanding any other law, rule, or regulation to the contrary” clause.
- The Division, however, based its reclassification on Monihan’s status as a corporate officer, citing N.J.A.C. 18:35-7.1(e)(1), which generally requires officers to be treated as employees for tax purposes.
- Monihan contended that the Broker’s Act should override the GIT regulation, making him an independent contractor for commissions.
Court’s Analysis and Decision
The court found that Monihan’s interpretation of the Broker’s Act was overly broad, incorrectly assuming that the “notwithstanding” clause provided unlimited override of all other laws and regulations. The court emphasized that the phrase “to the contrary” limits the override to conflicting provisions within the Broker’s Act or related statutes, not all state tax regulations. Accepting Monihan’s position would allow all real estate salespersons with ICAs to treat commissions as business income and deduct expenses, undermining New Jersey’s statutory tax scheme. The court concluded that the Legislature intended to restrict, not expand, deductions and tax treatment, and sided with the Division of Taxation.
Conclusion
The NJ Tax Court upheld the Division’s reclassification of Monihan’s commissions as wage income, affirming the priority of officer status and related tax regulations over the ICA’s designation under the Broker’s Act in these circumstances.