NJ Tax Court Clarifies Scope of Income Tax Addback

1 May 2018 Reed Smith Client Alerts

Home Perspectives NJ Tax Court Clarifies Scope of Income Tax Addback

In a decision released today in Rockland Electric,¹ the Tax Court of New Jersey ruled that taxpayers must add back the New Jersey Transitional Energy Facility Assessment (“TEFA”) when computing taxable income for corporation business tax (“CBT”) purposes.

Authors: David J. Gutowski Matthew L. Setzer

Background

The starting point for computing the CBT is a taxpayer’s federal taxable income before the subtraction of any net operating loss deduction and special deductions. Under N.J.S.A. 54:10A–4(K)(2)(C), however, state taxes “on or measured by profits or income, or business presence or business activity” must be added back.² The issue in Rockland Electric was whether the TEFA was a tax subject to addback. The TEFA was a temporary surcharge imposed by New Jersey on utilities following energy deregulation. Prior to its phase out in 2013, the TEFA was designed to offset the revenue loss that resulted from New Jersey’s elimination of gross receipts and franchise taxes on utilities.³ When the TEFA was enacted, the legislature added a separate statutory provision to the CBT that deemed the TEFA to be a “State tax” and that required the amount paid under TEFA to be added back to entire net income “pursuant to” N.J.S.A. 54:10A–4(K)(2)(C).⁴

Following the enactment of the TEFA, the Tax Court of New Jersey held that the only New Jersey tax required to be added back under N.J.S.A. 54:10A–4(K)(2)(C) was the CBT itself.⁵ Accordingly, Rockland argued that the TEFA was distinct from the CBT and thus not subject to addback.

Decision and Takeaways

The Tax Court disagreed with Rockland. Based on the plain language of the TEFA statute and the clear legislative intent, the court ruled that that the TEFA had to be added back to a taxpayer’s entire net income. Because the TEFA expired in 2013, this is not a go-forward issue.⁶ Nonetheless, the court’s analysis may be instructive for other appeals that involve issues of statutory construction.

Ambiguous statutes not construed in favor of taxpayers. Despite prior case law,⁷ the Tax Court found that it did not have to construe any doubts in favor of the taxpayer with respect to questions of statutory interpretation. The decision illustrates that taxpayers should not expect much deference from the court—especially if there is any evidence of legislative intent.
Statute trumps case law. The court placed more weight on the plain language of the statute rather than subsequent case law. After the TEFA was enacted, the Tax Court clarified that only income-based taxes had to be added back under the general CBT addback provisions.⁸ In effect, the court ignored this case law limiting the scope of the statutory addback in order to effectuate what it considered to be the legislature’s intent.

See Docket No. 008111–2016 (N.J. Tax April 30, 2018).
N.J.S.A. 54:10A–4(k)(2)(C).
See N.J.S.A. 54:30A–130.
See N.J.S.A. 54:10A–4.1.
See Ross Fogg Fuel Oil Co. v. Director, Division of Taxation, 22 N.J. Tax 372, 377–78 (N.J. Tax 2005).
See N.J.S.A. 54:30A–102.
See Fedders Fin. Corp. v. Director, Division of Taxation, 96 N.J. 376 (N.J. 1984).
See Duke Energy Corp. v. Director, Division of Taxation, 28 N.J. Tax 226 (N.J. Tax 2014); PPL Electric Utilities Corp. v. Director, Division of Taxation, 28 N.J. Tax 128 (N.J. Tax 2014).

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