It is estimated that over 80 percent of tax cases settle before a hearing is held. While this is generally a positive result for both taxpayers and Departments of Revenue, sometimes the fine print is overlooked—especially when the settlement was verbal. The recent New Jersey Tax Court decision in 31 Club, Inc. v. Director, Division of Taxation highlights one such settlement confusion. Dkt. No. 011518-2017 (N.J. Tax Ct. July 22, 2025).

In that case, the taxpayer was assessed sales and use, corporation business, and gross income taxes. The taxpayer challenged the assessment in the New Jersey Tax Court. Prior to a hearing, the parties verbally informed the Court that they had reached a settlement. Both sides confirmed that they agreed to resolve the dispute with no additional monies being paid to the Division—a “zero-dollar settlement.”

However, the parties were unable to finalize the terms of a Stipulation of Dismissal. Significantly, the taxpayer believed that it was entitled to attorney’s fees and costs because the audit position lacked a reasonable basis. Accordingly, the taxpayer filed a motion for summary judgment on that issue.

In reviewing the taxpayer’s motion, the Court stated that there are three requirements for attorney’s fees to be permitted. First, the taxpayer must be the prevailing party in the matter. Second, the taxpayer must establish that the Division’s position was without a reasonable basis in fact or law. Finally, the costs and expenses incurred must be reasonable. Here, the Court stated that there had been no adjudication of the underlying issues on the merits. Therefore, there was no prevailing party despite the taxpayer’s claims that the “zero-dollar settlement” established that it prevailed. Ultimately, the Court ruled that the taxpayer had not satisfied the requirements for attorney’s fees.

In addition, the Court stated that when the parties described the settlement the taxpayer stated that it was agreeing to resolve “the dispute.” Therefore, the Court held that the taxpayer was foreclosed from now arguing that it had intended only to resolve the audit adjustments and not its other claims (i.e., its claims for attorneys’ fees and costs).

A settlement is often in a taxpayer’s best interest. However, it is imperative to fully understand what you are resolving and the ramifications of that settlement. One way to ensure that happens is to document the terms of the settlement in writing. If there are any issues that are excluded from the settlement, they should be explicitly and separately listed in the agreement to avoid any confusion.