Daimler Investments US Corporation v. Director, Division of Taxation

Annotate this Case

TAX COURT OF NEW JERSEY
210 S. Broad Street, 5th Floor
Hon. Mary Siobhan Brennan, J.T.C. Trenton, New Jersey 08608
JUDGE (609) 815-2922, Ext. 54560

January 31, 2019
Morrison & Foster LLP
Mitchell A. Newmark, Esquire
Craig B. Fields, Esquire (Pro Hac Vice)
250 West 55th Street
New York, NY 10019-9601

Office of the Attorney General
Michael J. Duffy, Deputy Attorney General
Richard J. Hughes Justice Complex
25 Market Street
PO Box 106
Trenton, New Jersey 08625-0106

RE: Daimler Investments US Corporation v. Director, Division of Taxation
Docket # 008165-2016

Dear Counsellors:

This is the court’s opinion with respect to the parties’ cross-motions for summary judgment.

At issue is whether N.J.S.A. 54:10A-4 (k) (2) (C), requires the add-back of taxes attributable to

a New Jersey Taxpayer’s income in a non-separate reporting State. For the reasons explained more fully

below, the court concludes that N.J.S.A. 54:10A-4 (k) (2) (C) is independent of the filing and payment

requirements of other States, and that the statutory term, “taxes paid or accrued” is meant to refer to the

tax liability of an entity and not to the payer of the tax. As such, N.J.S.A. 54:10A-4 (k) (2) (C) requires

the add-back of all taxes derived from the Taxpayer’s activities in other States, regardless of which entity

paid the tax.

I. Findings of Fact and Procedural History

The court makes the following findings of fact based on the submissions of the parties’ cross-

motions for summary judgement. R. 1:7-4.

1
1. Separate versus Non-Separate Reporting of Corporate Income Tax

Domestic corporations calculate their federal corporate income taxes by reporting their income,

gains, losses, deductions and credits on a Form 1120 corporation income tax return. Although not an

Internal Revenue Service requirement, corporations that are members of an affiliated group 1 have the

option of filing a consolidated return, which combines the financial activity of all affiliated group

members to arrive at a single taxable income figure. The principal advantage of filing a consolidated

return is that the losses of one corporation can offset the profit of another, which means that less tax is

owed than if separate returns are filed for each member corporation.

At the State level, corporation income tax returns and filing requirements vary considerably.

Forty-four States and the District of Columbia levy a corporation income tax. 2 The remaining States

either levy a gross receipts tax or do not impose a corporation tax or gross receipts tax at all.

Generally speaking, there are two types of corporation income tax reporting methods used by the

States. Non-separate reporting permits a designated entity (usually the parent) to file one corporation

1
An affiliated group exists when one corporation (referred to as the parent) holds stock that satisfies the
voting and value requirements in at least one other corporation (subsidiary). Generally, the parent must
hold at least 80 percent of value of the subsidiary’s outstanding stock and must possess at least 80 percent
of the shares that are eligible to vote. See e.g., I.R.C. § 1504; Idaho Code § 63-3027(t) et al. Moreover,
additional corporations directly owned by the subsidiary (which means the parent does not hold the
additional corporations’ stock) can also be members of the affiliated group.
2
Forty States, along with the District of Columbia, have adopted combined reporting. These States are:
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut (2016), Florida, Georgia (need
governmental approval), Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine,
Massachusetts (2008), Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New
Hampshire, New Jersey (2019), New Mexico, New York (2007), North Carolina, North Dakota,
Oklahoma, Oregon, Rhode Island (2014), South Carolina, Tennessee, Utah, Vermont, Virginia, West
Virginia, and Wisconsin (2009). The remaining four States, that have not adopted combined are
Delaware, Louisiana, Maryland and Pennsylvania. For the four States have gross receipts taxes instead
of corporation income tax, Ohio and Texas allow combined reporting, and Nevada and Washington
require separate filing. South Dakota and Wyoming are the only States that do not levy a corporate
income tax or a gross receipt tax.

2
business tax return on behalf of the affiliated group. For convenience the court will refer to these as

combined returns. 3 The second type of State corporation business tax return is known as separate entity

reporting. The major difference between the methods is how they treat the income and expenses the

entity incurs from its transactions with affiliates. In non-separate reporting, inter-company transactions

are eliminated when determining net taxable income/loss, while in separate reporting they are not.

The laws of each State can be similar or different, and the definitions of combined, consolidated,

and unitary can vary. Generally, combined reporting is a State tax filing method wherein members of a

commonly controlled group of businesses, called a unitary group, are required to be treated as a unitary

business. The unitary group’s combined net income is used to calculate its total worldwide earnings

which is taxed as income in each State in which it operates. Each State imposes specific requirements

regarding which entity in a unitary group must file the corporation tax return. Additionally, the liability

for payment of the resulting tax due is also specified, with most non-separate States imposing joint and

several liability on all members of the group for the tax due. 4

Conversely, separate reporting States require that each member of an affiliated group file a

separate corporation tax return reporting the individual entity’s income and deductions, whether or not

a consolidated federal income tax return was filed. In separate reporting States, transactions between

affiliates are treated as unrelated and consequently they appear as income or tax-deductible expenses on

the separate tax return.

3
Although there are multiple designations for this type of tax return (mandatory combined reporting,
unitary/combined reporting, elective consolidated reporting), for the purpose of this opinion, the court
will refer to these as combined returns.

4
See e.g. Conn. Gen. Stat. § 12-222 (g) (3); 830 Mass. Code Regs. 63.32B.2; N.Y. Tax Law § 210-C
(6).
3
2. The Taxpayer and its Parent.

The plaintiff, Daimler Investments US Corporation (“Taxpayer”) 5, is wholly owned by Daimler

North America Corporation (“Parent”). Taxpayer serves as the financing arm of Parent, which is a

division of a multinational automotive company with brands including Mercedes-Benz Cars, Daimler

Trucks, Mercedes-Benz Vans, and Daimler Buses.

During the audit period, December 2008 through December 2011, Taxpayer was the sole member

of several limited liability companies which were disregarded entities for federal income tax purposes.

Taxpayer and/or its limited liability companies held an interest in certain partnerships during the audit

period. Taxpayer itself, without its limited liability companies or investment interests, has no business

activity in New Jersey.

Based on their nation-wide business activities, Parent and Taxpayer were required to file

corporation tax returns in the majority of States in the United States of America, and in the District of

Columbia. Some of these jurisdictions had non-separate return requirements, and others required

separate reporting. During the audit period, New Jersey was a separate return State, and therefore both

Parent and Taxpayer were required to file separate New Jersey Corporation Business Tax (“CBT”)

returns. 6 See N.J.A.C. 18:7-11.15.

In the non-separate reporting jurisdictions, Parent filed the group’s corporation business tax

combined returns and paid the tax. To fairly apportion these tax liabilities paid by Parent, on May 1,

5
Taxpayer is a Delaware corporation with a principal place of business in Farmington Hills, Michigan.
6 Effective July 1, 2018, New Jersey permits combined reporting for tax year 2019. See N.J.S.A.
54:10A-4.8 (2018).

4
2007 7 , Parent entered into a tax sharing agreement (“Intercompany Agreement”) with its affiliates,

including Taxpayer. The Intercompany Agreement required the parties to make Intercompany Payments

to each other, based on the estimated tax liabilities and benefits amongst the affiliates arising from State

combined tax returns (“Intercompany Payments”).

The Intercompany Payments are computed by multiplying the affiliate’s estimated federal

taxable income by the effective tax rate. The effective tax rate is a percentage of the affiliate’s total State

apportionment percentages multiplied by the State tax rates in those States. A true-up (reconciliation) is

performed every year based on the affiliate’s actual federal taxable income. 8

The Intercompany Payments do not equate to the same amount of tax the affiliate would have

had to pay if it had filed a separate return in a non-separate return State. This is because the entity

7
There have been three addendums to the Intercompany Agreement. A December 31, 2008 addendum
covers LOLO/SILO adjustments, the consolidated group’s election to forego bonus depreciation, and
adjustment of definition of federal Taxable Income (line 28 less line 29b). A January 29, 2010 addendum
covers the adjustment to definition of Federal taxable income, forced bonus depreciation and LILO/SILO
adjustments. A January 11, 2011 addendum replaces the original Intercompany Agreement, and
provides for the allocation of State income taxes to Parent from Taxpayer’s State income tax returns
attributable to the Mercedes-Benz Financial Services Group.
8
The Calculation has six basic steps:

1. The affiliate’s federal taxable income for the year is estimated.
2. The effective tax rate is determined. The effective tax rate is the total
apportionment factor from the preceding year of every affiliate, in each
of the total combined, consolidated and unitary States, that is
multiplied by the tax rate in that State.
3. The Effective Rates in each State are added together.
4. The total Effective Rate is then multiplied by each affiliate’s estimated
federal taxable income.
5. Multiplying the affiliate’s estimated taxable income by the total
Effective Tax Rate provides the calculation for the Affiliate’s
Intercompany Payment.
6. At a later time, a “true-up” is prepared using the affiliate’s actual
federal taxable income for that year.

5
designated to file the non-separate return (usually the parent) reports all income, gains, losses, deductions

and credits of its affiliates as one entity (unitary business), and has the ability to offset certain losses.

Prior to 2008, Parent and its affiliate companies did not have a uniform method for representing

the Intercompany Payments on the federal tax return. As a result, not all affiliate companies were

reporting the Intercompany Payments on the same line of the federal income tax return. In order to

ensure consistency, Parent directed all affiliates to report the Intercompany Payments on Line 17 “Taxes

and Licenses” on their Federal Form 1120 Corporation Income Tax Return, beginning with tax year

2008.

For 2008 and 2009, Taxpayer received more payments from its affiliates than Taxpayer paid

under the Intercompany Agreement. Therefore, Taxpayer had negative net Intercompany Payments for

those years. For 2010 and 2011, Taxpayer paid more to its affiliates than it received under the

Intercompany Agreement. Consequently, Taxpayer had positive net Intercompany Payments for those

years.

3. The 2008 through 2011 Corporation Business Tax Returns

a. Federal

For the tax years at issue, Parent filed a consolidated Federal Form 1120 Corporation Income

Tax Return on behalf of itself and its subsidiaries, including Taxpayer. In computing its federal taxable

income, Parent deducted all of the taxes that it paid to States and other jurisdictions. Parent also deducted

the net Intercompany Payments pursuant to the Intercompany Agreement as ordinary and necessary

business expenses. 9

9
Based on questions posed by the court during the first oral argument, the parties agreed to provide
additional information using the sample tax year ending December 31, 2011. For that year, Parent filed
corporate income tax returns in thirty-five combined, consolidated and/or unitary States, plus the District
of Columbia, all of which included the income and activities of Taxpayer.
6
As instructed by Parent, Taxpayer included both the deduction for taxes it paid directly to a State,

city or locality, and the Intercompany Payments (negative or positive) on Line 17 of its Federal pro

forma income tax return.

b. New Jersey

Parent and Taxpayer also timely filed separate New Jersey CBT returns for the tax years at issue.

When calculating entire net income on its CBT returns, Parent added to its federal taxable income

all of the taxes that it paid to States, including the thirty-four States and the District of Columbia in which

it filed combined returns. Parent did not add to its federal taxable income the net payments it paid or

received under the Intercompany Agreement for 2009, 2010, and 2011. It did however add the amounts

that it received under the Intercompany Agreement to its federal taxable income in 2008.

On its CBT returns, Taxpayer calculated its entire net income by adding to its federal taxable

income all of the taxes that it paid directly to States, however it did not add back its Intercompany

Payments, and treated the net Intercompany Payments as an ordinary and necessary business expense.

c. New Jersey Audit

In December of 2012, the Director, Division of Taxation’s (“Director”) audited Taxpayer’s 2008,

2009, 2010 and 2011 CBT returns. As a result of the audit, the Director issued a Notice of Assessment

Related to Final Audit Determination (“Notice”), dated October 20, 2014, asserting a balance due for

the years at issue. The Director denied the Intercompany Payment deductions as an unsubstantiated

expense. The Director recomputed Taxpayer’s entire net income by adding to Taxpayer’s federal taxable

income the positive net Intercompany payments for 2010 and 2011 only. The Director did not add to

Taxpayer’s federal taxable income for 2008 and 2009 the negative net Intercompany Payments. The

Notice also asserted a 5% late penalty payment on the additional tax asserted as due.

7
On January 16, 2015, Taxpayer timely filed a protest of the Notice and requested a hearing. The

parties participated in an administrative conference on July 16, 2015.

On November 25, 2015, the Director requested that Taxpayer provide the calculation worksheet

for the “State Income Taxes – Tax Sharing” account for 2007, 2008, 2009, 2010, and 2011. The Director

asserts that Taxpayer did not provide the requested information.

On February 12, 2016, the Director issued a Final Determination that upheld the adjustments

relating to the add-back of the Intercompany Payments for 2010 and 2011, but did not add the negative

net Intercompany Payments back to Taxpayer’s federal taxable income for 2008 and 2009. The Conferee

concluded that based on the information provided by Taxpayer, he could not determine whether

Taxpayer had accurately reported its income to New Jersey. Alternatively, assuming Taxpayer provided

sufficient proofs, the Director asserted that Taxpayer is nevertheless required to add-back the

Intercompany Payments as de facto State income tax payments, pursuant to N.J.S.A. 54:10-4(k) (2) (C).

The Director assessed additional CBT of $4,884,370.45 10 including interest and penalties. 11

On May 11, 2016, Taxpayer timely filed a Complaint in the Tax Court contesting the Final

Determination. Taxation filed its Answer on September 13, 2016. The parties exchanged discovery and

Taxpayer filed its motion for summary judgment on October 13, 2017. The Director opposed Taxpayer’s

motion and filed a cross motion for summary judgment on March 2, 2018. The court heard oral argument

on April 11, 2018.

10 On August 3, 2017, in response to discovery requests, the Director asserted the following tax
obligations:
Tax Year CBT Penalty Interest Total
2010 $1,845,575.68 $92,278.78 $668,930.76 $2,606,785.22
2011 $1,713,287.25 $85,664.36 $478,633.62 $2,277,585.23
Total $3,558,682.93 $177,943.14 $1,147,564.38 $4,884,370.45
11
The Director continues to assert a 5% late payment penalty on the tax asserted as due.

8
At the conclusion of the hearing, the court requested additional information and submissions.

Both parties filed supplemental pleadings and a second hearing was held on January 15, 2019.

II. Legal Analysis

A. Summary Judgment

Summary judgment should be granted where “the pleadings, depositions, answers to

interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine

issue as to any material fact challenged and that the moving party is entitled to a judgment or order as a

matter of law.” R. 4:46-2(c). In Brill v. Guardian Life Ins. Co. of Am., 142 N.J. 520 (1995), our Supreme

Court established the standard for summary judgment as follows:

[W]hen deciding a motion for summary judgment under Rule 4:46-2, the
determination whether there exists a genuine issue with respect to a
material fact challenged requires the motion judge to consider whether the
competent evidential materials presented, when viewed in the light most
favorable to the non-moving party in consideration of the applicable
evidentiary standard, are sufficient to permit a rational factfinder to
resolve the alleged disputed issue in favor of the non-moving party.

[Brill, 142 N.J. at 523.]

“The express import of the Brill decision was to 'encourage trial courts not to refrain from granting

summary judgment when the proper circumstances present themselves.’” Howell Twp. v. Monmouth

County Bd. of Taxation, 18 N.J. Tax 149, 153 (Tax 1999) (quoting Brill, 142 N.J. at 541).

There are no material facts in dispute between the parties relevant to the issue of whether

Intercompany Payments, based on tax sharing agreements that serve to estimate other States’ tax

obligations, are subject to CBT add-back for the purpose of computing entire net income. The sole

question is one of statutory interpretation concerning the calculation of the tax base, which can be

determined by application of the law to the undisputed facts.

9
Taxpayer contends that the plain language of the controlling statute, N.J.S.A. 54:10A-4 (k) (2)

(C), applies only to the payer of the tax. Since Parent paid the corporation business tax due in the non-

separate reporting States (not Taxpayer), Taxpayer posits that Parent is the entity that is subject to the

N.J.S.A. 54:10A-4 (k) (2) (C) add back. Also since the taxes were paid by Parent, the taxes are not

Taxpayer’s liability as accrued to a State. Finally Taxpayer argues that Intercompany Payments are

estimates of taxes and do not represent payments of any specific tax, and that any ambiguity in the statute

should be resolved in its favor.

The Director asserts four arguments. First, it argues that Taxpayer is statutorily required to add-

back the Intercompany Payments pursuant to N.J.S.A. 54:10A-4 (k) (2) (C) and -10. Second, the

Director argues that Taxpayer failed to provide adequate supporting documentation for the Intercompany

Payments. Third, the Director claims that Taxpayer’s financial reporting of its Intercompany Payments

is distortive and raises income-shifting concerns. Finally, the Director asserts that Taxpayer is required

to add-back the Intercompany Payments as de facto State income tax payments.

As this is entirely a matter of statutory interpretation, the court finds that this matter is ripe for

summary judgment.

B. Standard of Review

The court’s analysis is guided by the familiar principle that the Director’s interpretation of tax

statutes is entitled to a presumption of validity. “Courts have recognized the Director’s expertise in the

highly specialized and technical area of taxation.” Aetna Burglar & Fire Alarm Co. v. Director, Div. of

Taxation, 16 N.J. Tax 584, 589 (Tax 1997) (citing Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984)). The scope of judicial review of the Director’s decision with respect to the

imposition of a tax “is limited.” Quest Diagnostics, Inc. v. Director, Div. of Taxation, 387 N.J. Super.
104, 109 (App. Div. 2006), certif. denied, 188 N.J. 577 (2006). “The Supreme Court has directed the

10
courts to accord 'great respect’ to Taxation’s application of tax statutes, 'so long as it is not plainly

unreasonable.’” PPL Elec. Utilities Corp. v. Director, Div. of Taxation, 28 N.J. Tax 128, 137 (Tax 2014)

(citing Metromedia, 97 N.J. at 327); see also GE Solid State, Inc. v. Director, Div. of Taxation, 132 N.J.
298, 306 (1993) (“Generally, courts accord substantial deference to the interpretation an agency gives to

a statute that the agency is charged with enforcing.”).

However, judicial deference is not absolute. An administrative agency’s interpretation that is

plainly at odds with a statute will not be upheld. See Oberhand v. Director, Div. of Taxation, 193 N.J.
558, 568 (2008) (citing GE Solid State, 132 N.J. at 306); Advo, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 504, 511 (Tax 2010).

The court also acknowledges that the question of how broadly New Jersey can apply its tax is a

question of tax imposition not deduction and accordingly, any doubt must be resolved in favor of the

Taxpayer. As referenced by our Supreme Court in Fedders Fin. Corp. v. Director, Div. of Taxation, 96 N.J. 376 (1984), there are two principles of statutory interpretation relevant to the analysis of taxing

statutes. In that opinion, Justice Schreiber wrote:

First, the court should follow the clear import of statutory language.
Second, when interpretation of a taxing provision is in doubt, and there is
no legislative history that dispels that doubt, the court should construe the
statute in favor of the Taxpayer. We applied those guidelines in Kingsley
v. Hawthorne Fabrics, 41 N.J. 521 (1964) when interpreting two of the
same provisions that are under consideration here, N.J.S.A. 54:10A-4(d)
and -4(e). In Kingsley, we quoted approvingly the following language
from Gould v. Gould, 245 U.S. 151, 153 (1917):

In the interpretation of statutes levying taxes it is the
established rule not to extend their provisions, by
implication, beyond the clear import of the language used,
or to enlarge their operations so as to embrace matters not
specifically pointed out. In case of doubt they are
construed most strongly against the government, and in
favor of the citizen.

11
[W]e continue to adhere to the view that our task is to ascertain the
legislative intent. When the statutory language is unclear and the
legislative history is wanting, the doubt referred to in Gould exists and its
principle is applicable. This situation is to be distinguished from the one
in which the Taxpayer seeks an exemption from a taxing statute. Then the
probable legislative intent is one of inclusion and exemptions are to be
construed narrowly.

[Fedders, 96 N.J. at 385-86 (alterations in original, citations omitted).]

With these guiding principles in mind, the court examines the parties’ interpretation of N.J.S.A.

54:10A-4 (k) (2) (C) as it relates to Taxpayer’s Intercompany Payments.

C. CBT and the Add-Back Statute

New Jersey’s CBT Act taxes each non-exempt domestic and foreign corporation:

[F]or the privilege of having or exercising its corporate franchise in this
State, or for the privilege of deriving receipts from sources within this
State, or for the privilege of engaging in contacts with this State, or for the
privilege of doing business, employing or owning capital or property, or
maintaining an office, in this State.

[N.J.S.A. 54:10A-2.]

The determination of CBT tax base is a two-step process. Step one is the determination of a corporation’s

entire net income, and step two is the application of an allocation factor. 12 Only step one, the

determination of entire net income, is at issue in this motion.

N.J.S.A. 54:10A-4 (k) defines a corporation’s entire net income as the “total net income from all

sources, whether within or without the United States, and shall include the gain derived from the

employment of capital or labor, or from both combined, as well as profit gained through a sale or

12
New Jersey may only tax its State-specific share of the total entire net income, and therefore must
apply an allocation factor pursuant to N.J.S.A. 54:10A-6, which provides that the “portion of its entire
net income to be used as a measure of the tax imposed…shall be determined by multiplying such…entire
net income…by an allocation factor. . . .” N.J.S.A. 54:10A-6.
12
conversion of capital assets.” This broad definition of entire net income is further limited in the

following paragraph of the statute:

For the purpose of this act, the amount of a Taxpayer’s entire net income
shall be deemed prima facie to be equal in amount to the taxable income,
before net operating loss deduction and special deductions, which the
Taxpayer is required to report . . . to the United States Treasury
Department for the purpose of computing its federal income tax . . . .

[Ibid.]

After linking entire net income to the federal return, the statute provides that “[e]ntire net income

shall be determined without the exclusion, deduction or credit of” and lists more than a dozen exceptions

– both additions and subtractions – to federal statutes that define federal taxable income. See N.J.S.A.

54:10A-4 (k) (2) (A) through (J). The statute also contains various subsections refining the calculation

of an entity’s entire net income for CBT purposes.

The Director contends that N.J.S.A. 54:10A-4 (k) (2) (C) is a specific statutory add-back

provision that applies to Taxpayer’s Intercompany Payments. That statutory section provides for the

add-back of:

Taxes paid or accrued to the United States, a possession or territory of the
United States, a state, a political subdivision thereof, or the District of
Columbia, or to any foreign country, state, province, territory or
subdivision thereof, on or measured by profits or income, or business
presence or business activity, or the tax imposed by this act, or any tax
paid or accrued with respect to subsidiary dividends excluded from entire
net income as provided in paragraph (5) of subsection (k) of this section.

[ N.J.S.A. 54:10A-4 (k) (2) (C) (emphases added).]

Taxes that do not qualify as being measured by business presence or business activity are

enumerated in the regulation N.J.A.C. 18:7-8.7(f) which states that: “ '[b]usiness presence’ or 'business

activity’ taxes include, but are not limited to, net worth taxes, gross receipts taxes, and single business

taxes.”

13
Both the Director and Taxpayer agree that Taxpayer added back all of the taxes that it paid to

other separate reporting States on its CBT return. The legal issue to be decided is whether Taxpayer is

required to add back any tax liabilities to the non-separate reporting jurisdictions, despite those tax

payments having been made by Parent as part of combined reporting.

The Director asserts that Taxpayer must add-back the positive 2010 and 2011 Intercompany

Payments because they represent either intercompany reimbursements for State income taxes paid or de

facto State income tax payments. The Director argues that only positive tax sharing amounts are

potentially valid deductions and subject to add-back pursuant to N.J.S.A. 54:10A-4 (k) (2) (C). 13 In

support of this argument, the Director points to Taxpayer’s Intercompany Agreement that states as its

purpose “for allocation of State taxes to corporate members of the DIUS Group from combined,

consolidated and unitary tax returns.” The Director also relies on the fact that the Intercompany

Payments are listed as “State-Income Taxes-Tax Sharing” on the accompanying CBT Line 17.

Taxpayer argues that the Intercompany Payments are not de facto State income tax payments at

all. Taxpayer refers to a plain reading of N.J.S.A. 54:10A-4 (k) (2) (C), and asserts that the add-back

payment must represent a tax paid or accrued directly by the Taxpayer. Taxpayer posits that the

Intercompany Payments paid to affiliates are not payments to a State, and moreover the payments do not

represent a specific tax accrued to a State. It notes that without a legally enforceable claim against

Taxpayer in those non-separate return States, the taxes are not accrued. Since Parent filed and paid all

the non-separate return State income taxes, those States do not have a legal claim against Taxpayer for

any accrued taxes.

13
The Director suggests that the negative tax sharing amounts reported by Taxpayer in 2008 and 2009
simply mean that an affiliate(s) paid more than it received, the affiliate(s) has a positive net tax sharing
balance, and such amounts are potentially deductible to the affiliate and subject to the add-back. In sum,
the negative tax sharing amounts do not belong on Taxpayer’s CBT tax return.
14
Taxpayer also argues that a plain reading of the add-back statute required the Parent to add back

the taxes paid to non-separate reporting jurisdictions, and that to require an add-back of the Intercompany

Payments by Taxpayer as a de facto tax would result in double taxation. There is no evidence to dispute

that Parent’s 2008 through 2011 CBT returns included the add-back of all State income taxes that it paid

in both separate and non-separate reporting States.

At the court’s request, Taxpayer provided a supplemental submission analyzing the non-separate

State income tax returns filed by Parent to determine the legal responsibility for payment of the State

income tax in those non-separate reporting jurisdictions. Due to the volume of information requested,

Taxpayer provided as a sample the 2011 State corporate income tax returns for Connecticut, Illinois,

Texas, West Virginia, and Wisconsin.14

D. Analysis

The Court agrees with Taxpayer’s position that the Intercompany Payment is not a tax. A tax is

levied by a governmental agency and measured by profits or income, or business presence or activity.

Nor is the Intercompany Payment an accrued tax, which is a tax that has been incurred but not yet paid

or payable. Black’s Law Dictionary 1469 (7th ed. 1999).

The Court also disagrees with Director’s position that the Intercompany Payment is an indirect

payment of tax. First, as Taxpayer argued, the statutory language of N.J.S.A. 54:10A-4 (k) (2) (C) does

not have the requirement for adding back the “indirect” payment of tax. This distinguishes N.J.S.A.

54:10A-4 (k) (2) (C) from other statutory add-back provisions in which our Legislature has specifically

required the add-back of indirect payments. See N.J.S.A. 54:10A-4 (k) (2) (I); N.J.S.A. 54:10A-4.4 (b)

(referring to intercompany interest payments and intangible (royalty) payments).

14
Taxpayer analyzed the responsibilities of both Parent and Taxpayer in five of the 35 States in which
Taxpayer has a substantial presence, and offered to submit an analysis of the remaining 30 States and
the District of Columbia. No additional submission was requested by the Court or the Director.
15
Second, the Intercompany Payments do not relate to a specific State tax payment made by the

Parent on behalf of Taxpayer or any other affiliate. Instead, the Intercompany Payments are an

accounting mechanism employed by Parent to calculate, estimate, and reconcile Parent’s payment of

Taxpayer’s tax obligations on its apportioned income in consolidated and combined reporting

jurisdictions. The Intercompany Payment is not an indirect payment or reimbursement of the separately

calculated State tax that was due and owing by Taxpayer, nor is it based on Taxpayer’s actual tax liability

in any given State.

As to the Director’s argument that the Intercompany Payments are accrued taxes, this is simply

not the case. Without a legally enforceable claim against Taxpayer in those non-separate return States,

the taxes cannot be categorized as accrued. Since Parent filed the necessary corporation business tax

returns, and paid all of the non-separate return State taxes, those States do not have a legal claim against

Taxpayer and the taxes are not accrued.

The court finds that the Intercompany Payments are fundamentally nothing more than contractual

obligations within the consolidated group to fairly apportion expenses undertaken or imposed on the

Parent. Unlike other intercompany payments that are perceived as having been designed to artificially

move and hide income from one entity to another related entity, the Intercompany Agreements at issue

here are entirely based on the estimated tax obligations of the individual affiliates, as calculated utilizing

the benefit of consolidated or combined reporting. Thus the court finds that the reference to “taxes paid

or accrued” does not refer to the Intercompany Payments. “Taxes paid or accrued” refers to is the tax

liability itself, without regard to filing requirements of any given State or the entity making the actual

payment of the tax.

The court recognizes that many of the add-back provisions were enacted as a result of corporate

structures that were designed to close tax loopholes by increasing a company’s expenses through

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diversion of income to a separate related entity in a different taxing jurisdiction deemed more beneficial

to the group as a whole. The tax add-back statute however, does not appear to have been in response to

any tax avoidance schemes or loopholes, as evidenced by the Legislative history of the statutes.

In passing N.J.S.A. 54:10A-4.4, the Legislature specifically described the proposed statute as

“loophole closers”, and in the Assembly Statement, the Assembly Budget Committee addressed the

reason for the add-back requirement for indirect payments of interest and intangibles as follows:

The provision addresses, but does not apply solely to, a tax avoidance
device that allows a multicorporate structure to export income from a state
where the income is generated as a form of expense (for example, as a
royalty payment to an out-of-state affiliate that the paying corporation
deducts from its income) and then import the income back (for example
as a tax-free dividend or as a loan). The bill continues to allow such
deductions in areas that are established as “non-tax avoidance” situations.
…

The bill also restricts deductibility of inter-affiliate interest expenses.
However, the bill again continues to such deductions in areas that are
established as “non-tax avoidance” situations.

[Assemb. Budget Comm. Statement to A. 2501 (L. 2002, c. 40) at 2. (N.J. 2002).]

This is not the case for the add-back pursuant to N.J.S.A. 54:10A-4 (k) (2) (C). The purpose of

the add-back of taxes paid or accrued to other jurisdictions is to measure an entity’s income as it comports

to its business activities in New Jersey. When amending N.J.S.A. 54:10A-4 (k) (2) (C), the Legislature

added in the phrase “business presence or business activity” and in the Assembly Appropriations

Committee Statement, the Legislature further clarified that:

If the deduction of the taxes of other jurisdictions is allowed, corporations
which do business in several states pay a lower effective rate of tax on
their New Jersey activities than do corporations which only do business in
New Jersey. This bill ends that tax rate discrimination.

[Assemb. Appropriations Comm. Statement to A. 273/ A. 1870 at 2. (L.
1993, c. 173) (N.J. 1993).]

17
For this reason, non-separate reporting States generally have adopted this add-back provision

even though they have consolidated, combined or unitary filing. 15 The tax add-backs are essential in

formulating a snapshot of the allocable business activity or presence among the various States in which

a taxpayer does business.

The Legislature’s intent and the Court’s rationale are premised on the need to measure business

activity or presence for the purpose of imposing fair and balanced taxation. In a non-separate reporting

State, a subsidiary in a corporate group must calculate and contribute its apportioned income on the basis

of the corporate group’s combined profit. This does not mean that the subsidiary does not have any tax

liability for its business activity or presence in that State, or that only the parent has the tax liability. This

is evident by the imposition of joint and several liability for the payment of the tax.

By way of example, in the present case, if Parent did not have nexus with New Jersey, then it

would not have been required to file a separate CBT return. If Parent did not file a CBT return, under

Taxpayer’s interpretation of N.J.S.A. 54:10A-4 (k) (2) (C), no entity would be required to add-back the

taxes paid to non-separate reporting States. In that instance, Taxpayer’s business activity or presence as

measured by its tax liability in the non-separate return States would not be accounted for, and the tax

rate discrimination the Legislature intended to prevent would result.

III. Conclusion

The court concludes that the controlling statute, N.J.S.A. 54:10A-4 (k) (2) (C), is meant to refer

to the tax liability of the reporting entity in other jurisdictions, and not to the entity making payment of

15
See e.g. Conn. Gen. Stat. § 12-217 (a) (1) (A) (i); 35 Ill. Comp. Stat. 5/203 (b) (2) (B); Mass. Gen.
Laws. ch. 63, § 30 (4) (iii); W.Va. Code. § 11-24-6 (a) (3); Wis. Stat. § 71.26 (3) (g).

18
the tax. The Intercompany Payments, although based on estimated tax payments, are irrelevant for the

purpose of reporting tax liability. The add-back is to be calculated based on the tax liability of Taxpayer

as calculated by its pro rata share of the Parent’s total tax obligation to the other non-separate reporting

jurisdictions. Once these calculations are made and the add-back is totaled, equity demands that

Taxpayer’s CBT tax obligations be reduced by any overpayment of CBT made by its Parent on

Taxpayer’s behalf, for the tax years 2008 through 2011.

Additionally, the court finds that Parent’s CBT reporting of the add-back of payments to other

jurisdictions while in error, was based on its reading of the statute, the lack of any specific regulations

by the Director, and the lack of any such guidance or recommendation during the audit period.

Therefore, upon reconciliation of Taxpayer’s CBT, any outstanding tax obligation by Taxpayer shall

include statutory interest, but not any penalty.

Sincerely,

/s/ Mary Siobhan Brennan, J.T.C.

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