United Parcel Service General Services v. Division of Taxation (072421)

SYLLABUS
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the
convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the
interest of brevity, portions of any opinion may not have been summarized.)
United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation (A-16/17-13) (072421)
(NOTE: The Court did not write a plenary opinion in this case. Instead, the Court affirms the judgment of
the Appellate Division substantially for the reasons expressed in Judge Lihotz’s written opinion, which is
published at 430 N.J. Super. 1 (App. Div. 2013).)
Argued September 23, 2014 -- Decided December 4, 2014
PER CURIAM
In this appeal, the Court considers the propriety of the New Jersey Division of Taxation’s (the Division)
assessment of late payment and tax amnesty penalties under the New Jersey Corporation Business Tax Act, N.J.S.A.
54:49-6(a), N.J.S.A. 54:53-17, -18, against plaintiffs, five subsidiaries of United Parcel Service of America (UPS).
UPS and its affiliates used a cash management system that included routine inter-company fund transfers.
Plaintiffs ascribed no tax consequence to these inter-company transfers on their corporate tax returns. After a tax
audit, the Division concluded that the inter-company transfers constituted loans as to which interest income should
be imputed. The Division assessed unpaid taxes on the imputed income, late payment penalties under N.J.S.A.
54:49-6(a), and tax amnesty penalties under N.J.S.A. 54:53-17 and N.J.S.A. 54:53-18. Plaintiffs filed complaints in
Tax Court contesting the Division’s actions. Following a trial, the Tax Court determined that the Division
reasonably concluded that the inter-company fund transfers constituted loans as to which interest should be imputed
for purposes of the Corporate Business Tax Act. United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, 25
N.J. Tax. 1, 24 (2009). The Tax Court also concluded, however, that the Division abused its discretion in denying
plaintiffs’ application for a waiver of late payment penalties under N.J.S.A. 54:49-11(a) and N.J.A.C. 18:2-2.7, and
incorrectly assessed an amnesty penalty on plaintiffs under N.J.S.A. 54:53-17 and -18. Id. at 50, 54.
The Appellate Division affirmed the Tax Court’s decision. United Parcel Serv. Gen. Servs. Co. v. Dir.,
Div. of Taxation, 430 N.J. Super. 1, 17 (App. Div. 2013). The panel agreed with the Tax Court that plaintiffs were
entitled to a waiver of late payment penalties under N.J.S.A. 54:49-11(a) and N.J.A.C. 18:2-2.7, which permits a
waiver of late penalties if the taxpayer shows a “reasonable cause” for its failure to pay the taxes when due. The
panel agreed that, because plaintiffs’ initial position that no tax consequences arose from the inter-company fund
transfers was reasonable under existing law, they had reasonable cause for their late payment of taxes on the
imputed income at issue. Id. at 10-14. The panel also agreed with the Tax Court that the tax amnesty statutes,
N.J.S.A. 54:53-17 and -18, are inapplicable to a taxpayer, such as plaintiffs, who timely filed all applicable tax
returns, paid all reported taxes, and was later found to owe additional taxes after an audit. Id. at 14-17. This Court
granted certification. 216 N.J. 5 (2013).
HELD: The judgment of the Appellate Division is AFFIRMED substantially for the reasons expressed in Judge
Lihotz’s opinion.
1. Although the Court underscores the deference afforded to the Division’s determinations in tax matters, it concurs
with the conclusion of the Tax Court and the Appellate Division that the Division improperly exercised its discretion
in this case. A taxpayer’s showing of “[a]n honest misunderstanding of fact or law that is reasonable in light of the
experience, knowledge and education of the taxpayer” supports a finding of “reasonable cause.” N.J.A.C. 18:2-
2.7(d)(1)(i). Such a finding is warranted here. As the Tax Court observed, with no directly pertinent legal authority
then in existence, “genuine questions of fact and law existed concerning the propriety of the Director’s imputation of
interest” with respect to plaintiffs’ fund transfers conducted under the UPS cash management system. United Parcel
Serv. Gen. Servs. Co., 25 N.J. Tax. at 50. Indeed, citing N.J.A.C. 18:2-2.7(b)’s standard for the grant of an
abatement, the Division acknowledged in writing that one of the plaintiffs had demonstrated “reasonable cause in
this matter.” The Court therefore agrees with the Appellate Division and affirms the Tax Court’s finding that the
1
Division did not exercise properly the discretion that the Legislature afforded to it in N.J.S.A. 54:49-11(a) when it
declined to waive late payment penalties imposed on plaintiffs. (pp. 3-4)
2. The penalty provisions of both tax amnesty statutes require the Division to impose a penalty on “a taxpayer who
has failed to pay any State tax” before the day upon which it is due. N.J.S.A. 54:53-17(a), -18(a). Neither statute
expressly indicates whether a taxpayer who timely files tax returns, pays all reported tax liabilities, and is found to
be liable for additional taxes following an audit, such as plaintiffs here, has “failed to pay” New Jersey taxes, and
therefore should be assessed a penalty. Ibid. Applying traditional principles of statutory construction, the Court
relies upon the State Treasurer’s testimony in the hearings that led to the enactment of the 1996 amnesty statute,
N.J.S.A. 54:53-17, testimony incorporated into statements of the Legislative committee that reviewed the
legislation: “the bill’s penalties will not be applied to deficiencies assessed pursuant to a question of law or fact
uncovered through routine audits of taxpayers otherwise in compliance with filing and payment requirements of
State taxes.” Assembly Appropriations Comm. Statement to Assembly Comm. Substitute for Assembly Bill No.
1420 (Feb. 5, 1996). Guided by the legislative history, the Court concurs with the Tax Court and the Appellate
Division that N.J.S.A. 54:53-17 and -18 were not intended to authorize or mandate a tax amnesty penalty in the
setting of this case. (pp. 4-7)
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN, PATTERSON, FERNANDEZ-
VINA, and SOLOMON join in this opinion. JUDGE CUFF (temporarily assigned) did not participate.
2
SUPREME COURT OF NEW JERSEY
A-16/17 September Term 2013
072421
UNITED PARCEL SERVICE GENERAL
SERVICES CO.; UNITED PARCEL SERVICE
CO.; UPS TELECOMMUNICATIONS, INC.;
UPS WORLDWIDE FORWARDING INC.; UPS
WORLDWIDE FORWARDING INC., as
Successor in Interest to UPS AIR
FORWARDING, INC.,
Plaintiffs-Respondents
and Cross-Appellants,
v.
DIRECTOR, DIVISION OF
TAXATION,
Defendant-Appellant
and Cross-Respondent.
Argued September 23, 2014 – Decided December 4, 2014
On certification to the Superior Court,
Appellate Division, whose opinion is
reported at 430 N.J. Super. 1 (2013).
Marlene G. Brown, Senior Deputy Attorney
General, argued the cause for appellant and
cross-respondent (John J. Hoffman, Acting
Attorney General; Melissa H. Raksa,
Assistant Attorney General, of counsel).
Mitchell A. Newmark argued the cause for
respondents and cross-appellants (Morrison &
Foerster, attorneys).
PER CURIAM
This appeal arises from the New Jersey Division of
Taxation’s assessment of late payment and tax amnesty penalties
1
under the New Jersey Corporation Business Tax Act, N.J.S.A.
54:49-6(a), N.J.S.A. 54:53-17, -18, against plaintiffs, five
subsidiaries of United Parcel Service of America (UPS).
Following a trial, the Tax Court determined that the
Division reasonably had concluded that two categories of
routine, inter-company transfers of funds, conducted by
plaintiffs as part of the cash management system used by UPS and
its affiliates, constituted loans as to which interest should be
imputed for purposes of the Corporate Business Tax Act. United
Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, 25 N.J.
Tax 1, 24 (2009). However, the Tax Court concluded that the
Division improperly had denied plaintiffs’ application for a
waiver of late payment penalties under N.J.S.A. 54:49-11(a) and
N.J.A.C. 18:2-2.7, and that the Division incorrectly had
assessed a five percent amnesty penalty on plaintiffs pursuant
to N.J.S.A. 54:53-17 and -18. Id. at 50, 54. The Appellate
Division affirmed the Tax Court’s determination with respect to
the late payment and tax amnesty penalties, adopting Judge
Kuskin’s comprehensive findings of fact and concurring with his
detailed analysis of the relevant provisions of the Corporate
Business Tax Act. United Parcel Serv. Gen. Servs. Co. v. Dir.,
Div. of Taxation, 430 N.J. Super. 1, 17 (App. Div. 2013). We
granted certification. 216 N.J. 5 (2013).
2
We affirm, substantially for the reasons stated by the
Appellate Division, and add the following brief comments.
First, notwithstanding the outcome in this matter, we
underscore the deference afforded to the determinations of the
Division, whose expertise in the complex and specialized subject
of tax law “is entitled to great respect by the courts.”
Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313, 327
(1984); see also Koch v. Dir., Div. of Taxation, 157 N.J. 1, 8
(1999); Yilmaz, Inc. v. Dir., Div. of Taxation, 390 N.J. Super.
435, 440 (App. Div.), certif. denied, 192 N.J. 69 (2007). The
Legislature has conferred upon the Division substantial
discretion to determine whether to “remit or waive the payment
of the whole or any part of any penalty” imposed upon a taxpayer
for a late filing. N.J.S.A. 54:49-11(a); see also N.J.A.C.
18:2-2.7.
However, we concur with the conclusion of the Tax Court and
the Appellate Division that, in the factual setting of this
case, the Division improperly exercised its discretion. We note
that under N.J.A.C. 18:2-2.7(c)(4), the pendency of an “action
or proceeding for judicial determination may constitute
reasonable cause, until the time in which the taxpayer has
exhausted its administrative or judicial remedies,” provided
that “[t]he action or proceeding involves a question or issue
affecting whether or not the . . . entity is required to . . .
3
pay tax; [t]he action or proceeding is not based on a position
which is frivolous; and [t]he facts and circumstances for such
taxable period or periods are identical or virtually identical
to those of the taxable period or periods covered by the action
or proceeding.” N.J.A.C. 18:2-2.7(c)(4). A taxpayer’s showing
of “[a]n honest misunderstanding of fact or law that is
reasonable in light of the experience, knowledge and education
of the taxpayer” supports a finding of “reasonable cause.”
N.J.A.C. 18:2-2.7(d)(1)(i). Such a finding is warranted here.
As the Tax Court observed, with no directly pertinent legal
authority then in existence, “genuine questions of fact and law
existed concerning the propriety of the Director’s imputation of
interest” with respect to plaintiffs’ disputed transfers
conducted under the UPS cash management system. United Parcel
Serv. Gen. Servs. Co., supra, 25 N.J. Tax at 50. Indeed, citing
N.J.A.C. 18:2-2.7(b)’s standard for the grant of an abatement,
the Division acknowledged in writing that one of the plaintiffs
had demonstrated “reasonable cause in this matter.” We
therefore agree with the Appellate Division and affirm the Tax
Court’s finding that the Division did not exercise properly the
discretion that the Legislature afforded to it in N.J.S.A.
54:49-11(a) when it declined to waive late payment penalties
imposed on plaintiffs.
4
Second, we concur with the Appellate Division that neither
of the tax amnesty statutes that govern this case clearly
indicates whether the Legislature intended to authorize the
imposition of a tax amnesty penalty against a taxpayer in
plaintiffs’ circumstances. United Parcel Serv. Gen. Servs. Co.,
supra, 430 N.J. Super. at 15-16. The penalty provisions of both
tax amnesty statutes require the Division to impose a penalty on
“a taxpayer who has failed to pay any State tax” before the day
upon which it is due. N.J.S.A. 54:53-17(a), -18(a). Neither
statute expressly indicates whether a taxpayer who timely files
tax returns, pays all reported tax liabilities and is found to
be liable for additional taxes following an audit, has “failed
to pay” New Jersey taxes, and therefore should be assessed a
penalty. Ibid.
Applying traditional principles of statutory construction,
“we look to the legislative history to aid in determining the
legislative intent of” a statute whose plain language is subject
to more than one reasonable interpretation. Oberhand v. Dir.,
Div. of Taxation, 193 N.J. 558, 568 (2008). We rely upon the
State Treasurer’s testimony in the hearings that led to the
enactment of the 1996 amnesty statute, N.J.S.A. 54:53-17,
testimony incorporated into statements of the Legislative
committee that reviewed the legislation: “the bill’s penalties
will not be applied to deficiencies assessed pursuant to a
5
question of law or fact uncovered through routine audits of
taxpayers otherwise in compliance with filing and payment
requirements of State taxes.” Assembly Appropriations Comm.
Statement to Assembly Comm. Substitute for Assembly Bill No.
1420 (Feb. 5, 1996); see also Senate Budget & Appropriations
Comm. Statement to Senate Comm. Substitute for Senate Bill No.
675 (Feb. 15, 1996).1
Guided by the legislative history, we concur with the Tax
Court and the Appellate Division that N.J.S.A. 54:53-17 and -18
were not intended to authorize or mandate a tax amnesty penalty
in the setting of this case. As the parties agree, and as the
Tax Court found, plaintiffs timely filed their corporate tax
returns and paid the taxes reported to be due in those returns.
United Parcel Serv. Gen. Servs. Co., supra, 25 N.J. Tax at 53.
Further, as the parties agree, and as the Tax Court found, the
Division discovered the bases for its assessments against
plaintiffs during an audit of plaintiffs’ tax returns. Ibid.
1We acknowledge that the State Treasurer did not provide
analogous testimony during the legislative hearings that led to
the 2002 amnesty statute, N.J.S.A. 54:53-18, but note that the
language of the penalty provisions of N.J.S.A. 54:53-17 and
N.J.S.A. 54:53-18 is identical, and that no contrary statement
was made during the hearings that led to the 2002 tax amnesty
statute. Assembly Appropriations Comm. Statement to Assembly
Comm. for Assembly Bill No. 2001 (Mar. 4, 2002) (substituted by
S16/404); Senate Budget and Appropriations Comm. Statement to
Senate Comm. Substitute for Senate Bill Nos. 16 and 404 (Feb.
21, 2002).
6
Accordingly, we concur with the Tax Court’s conclusion, affirmed
by the Appellate Division, that the Division improperly assessed
tax amnesty penalties on plaintiffs pursuant to N.J.S.A. 54:53-
17 and -18.
The judgment of the Appellate Division is affirmed.
CHIEF JUSTICE RABNER and JUSTICES LaVECCHIA, ALBIN,
PATTERSON, FERNANDEZ-VINA, and SOLOMON join in this opinion.
JUDGE CUFF (temporarily assigned) did not participate.
7
SUPREME COURT OF NEW JERSEY
NO. A-16/17 SEPTEMBER TERM 2013
ON CERTIFICATION TO Appellate Division, Superior Court
UNITED PARCEL SERVICE GENERAL
SERVICES CO.; UNITED PARCEL SERVICE
CO.; UPS TELECOMMUNICATIONS, INC.;
UPS WORLDWIDE FORWARDING INC.; UPS
WORLDWIDE FORWARDING INC., as
Successor in Interest to UPS AIR
FORWARDING, INC.,
Plaintiffs-Respondents
and Cross-Appellants,
v.
DIRECTOR, DIVISION OF
TAXATION,
Defendant-Appellant
and Cross-Respondent.
DECIDED December 4, 2014
Chief Justice Rabner PRESIDING
OPINION BY Per Curiam
CONCURRING/DISSENTING OPINIONS BY
DISSENTING OPINION BY
CHECKLIST AFFIRM
CHIEF JUSTICE RABNER X
JUSTICE LaVECCHIA X
JUSTICE ALBIN X
JUSTICE PATTERSON X
JUSTICE FERNANDEZ-VINA X
JUSTICE SOLOMON X
JUDGE CUFF (t/a) ------------------------- ---------------------
TOTALS 6
1