Reed Smith Client Alerts

A number of recent New Jersey corporation business tax (“CBT”) developments have created potential refund opportunities, but time is running out to act on them. Calendar-year taxpayers that filed their CBT-100 return on extension must file a refund claim for the 2014 privilege period by October 15.A summary of potential refund opportunities that taxpayers should consider is below.

Autores: David J. Gutowski Matthew L. Setzer

Stopwatch with Tax labeled

Nexus and Tax Base

Interest and intangible expense addback. If your company added back any intercompany interest or intangible expenses, you have a refund opportunity. This follows from Lorillard Tobacco Company v. Director, Division of Taxation,2 in which the Tax Court broadly interpreted the scope of the “unreasonable exception.” Our prior coverage of the Lorillard decision can be found at reedsmith.com.

No tax on partnership income. Under the current CBT statute, a partner and partnership are nonunitary unless the partner (together with any unitary affiliates) owns more than 50% of the voting control of the partnership.3  Accordingly, if a corporate partner lacks voting control over a partnership and the partner’s commercial domicile is outside New Jersey, no CBT is due on its distributive share from the partnership—regardless of whether it has nexus with the state from other activities.

Foreign corporations not taxable on certain income. In Infosys Limited of India Inc. v. Director, Division of Taxation,4 the Tax Court ruled that a foreign corporation’s income is not subject to CBT unless it is reported on Line 29 of their federal 1120-F return. Foreign corporations that paid CBT on foreign-source income or domestic income protected by a U.S. tax treaty may have a refund opportunity. Our prior coverage of Infosys can be viewed at reedsmith.com and at reedsmith.com.

Resurrecting NOL carryovers. Under the statute, a taxpayer’s NOL carryovers are reduced by the amount of any dividends received—even if the dividends qualify for the dividend received deduction.5 If your company reduced its NOL carryovers on account of dividends, you can resurrect those NOLs if the payor and payee are nonunitary. Fortunately, New Jersey has interpreted the unitary business principle in a taxpayer-friendly manner.6 And even if you can’t meet that standard, you can still qualify for factor representation under New Jersey’s equitable apportionment provisions.

State income tax addback. In Daimler Investments US Corporation v. Director, Division of Taxation,7 the Tax Court addressed how New Jersey’s state income tax addback applies to members of a combined group. For income tax expense related to unitary-combined states, the court ruled that New Jersey taxpayers are required to add back only their “pro rata share” of the corporate parent’s actual tax obligation. If your company’s pro rata share is less than the estimated liability reported on your New Jersey return under a tax sharing agreement, you may be entitled to a refund.  Because the court did not define “pro rata share” in its decision, taxpayers have flexibility in computing their addback for CBT purposes.