LORILLARD TOBACCO COMPANY VS. DIRECTOR, DIVISION OF TAXATION (TAX COURT OF NEW JERSEY) (CONSOLIDATED)

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-3444-18
A-0002-19
LORILLARD TOBACCO
COMPANY,
Plaintiff-Respondent/
Cross-Appellant,
v.
DIRECTOR, DIVISION OF
TAXATION,
Defendant-Appellant/
Cross-Respondent.
_______________________
Argued December 14, 2020 – Decided September 21, 2021
Before Judges Messano, Hoffman and Suter.
On appeal from the Tax Court of New Jersey, Docket
Nos. 008305-2007 and 014043-2012, whose opinion is
reported at 31 N.J. Tax 153 (Tax 2019).
Jamie M. Zug, Deputy Attorney General, argued the
cause for appellant/cross-respondent (Gurbir S.
Grewal, Attorney General, attorney; Melissa H. Raksa,
Assistant Attorney General, of counsel; Jamie M. Zug
and Joseph A. Palumbo, Deputy Attorney General, on
the briefs).
Mitchell A. Newmark argued the cause for
respondent/cross-appellant (Blank Rome, LLP,
attorneys; Mitchell A. Newmark and Craig B. Fields
(Blank Rome, LLP) of the New York bar, admitted pro
hac vice, of counsel and on the briefs).
The opinion of the court was delivered by
SUTER, J.A.D.
In A-3444-18, the Director of the Division of Taxation (defendant)
appeals the February 28, 2019 order granting summary judgment to plaintiff
Lorillard Tobacco Company (Lorillard). The order required the Division of
Taxation (Taxation) to pay the remainder of Lorillard's refund claims for tax
years 2002 through 2005 with statutory interest. Lorillard cross-appeals the
same order to the extent it did not address the constitutional issues it raised. In
A-0002-19, defendant appeals the July 19, 2019 order granting judgment to
Lorillard. A-0002-19 is consolidated with A-3444-18 because it raises the same
issues, although for tax years 2007 through 2010. 1 Lorillard also cross-appealed
this order.
1
The appeals were consolidated on November 15, 2019.
A-3444-18
2
For reasons that follow, we reverse the Tax Court orders because
defendant's application of N.J.A.C. 18:7-5.18(b)(3) and accompanying schedule
was an appropriate exercise of discretion, entitled to deference by the Tax Court,
and was consistent with implementing legislation. We remand the case to the
Tax Court for consideration of the constitutional issues Lorillard has raised.
I.
A.
Lorillard is a Delaware corporation with its headquarters in North
Carolina. Lorillard Tobacco Co. v. Dir., Div. of Tax'n, 31 N.J. Tax 153, 158
(Tax 2019). It "manufactures, markets, distributes, and sells cigarettes" in New
Jersey and other states. Ibid. Lorillard owns Lorillard Licensing Company,
LLC, (Subsidiary), which is a North Carolina company with offices in that state.
In 1999, Lorillard assigned its intellectual property to Subsidiary. Ibid.Subsidiary licenses the use of this intellectual property to Lorillard. These
licenses — which are "perpetual in term" — include the use of trademarks. Ibid.Lorillard pays Subsidiary royalties to use this intellectual property. Ibid.Subsidiary alleged that it did not have offices, employees or property in
New Jersey. It did not file corporation business tax (CBT) returns in New
Jersey, claiming it had no "nexus" to the State. In 2006, Taxation audited
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Subsidiary, claiming the company did have a nexus to New Jersey and that
Subsidiary owed CBT for tax years ending in 1999 through 2004. Taxation
assessed Subsidiary for the payment of taxes, penalties and interest. Taxation
included the royalties that Subsidiary received from Lorillard in determining the
amounts owed. Subsidiary appealed to the Tax Court claiming it did not owe
CBT, but this argument was rejected. See Lorillard Licensing Co., LLC v. Dir.,
Div. of Tax'n (Lorillard I), 28 N.J. Tax 590 (Tax 2014), aff'd, 29 N.J. Tax 275,
277-78 (App. Div. 2015).
Lorillard filed CBT returns in New Jersey. Lorillard, 31 N.J. Tax at 158.
It was required by N.J.S.A. 54:10A-4.4(b) to "add back" to its "earned net
income" royalty payments it made to related members, such as Subsidiary.
While Lorillard I was pending, Lorillard filed an amended CBT return for 2007,
requesting a refund of $4,297,701 for the CBT it paid attributable to royalties to
Subsidiary from 2002 through 2005. In April 2007, defendant denied this
request because Lorillard I was still pending. Ibid.
In July 2007, Lorillard filed a complaint in the Tax Court against
defendant. Count One claims that N.J.S.A. 54:10A-4.4(b) (the Add Back
statute) is unconstitutional on its face. Count Two alleges the statute is
unconstitutional as applied. Count Three alleges that it was an error to deny
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Lorillard's request for a refund because the Add Back statute and its
implementing regulation are unreasonable. Count Four alleges that defendant
abused his discretion by denying Lorillard's refund. Count Five alleges that
defendant's denial of its refund claim is unconstitutional. Count Six alleges that
defendant's denial "violated the square corners doctrine." Lorillard filed a
motion for summary judgment in 2008.
Subsidiary changed course in 2009 by filing CBT returns under the 2009
Tax Amnesty program for tax years 1999 through 2004. Lorillard requested an
expedited refund of the CBT it had paid on royalties to Subsidiary. Taxation
issued refunds to Lorillard in 2010, but only for a portion of what Lorillard
requested. The amount that was not refunded, and which remains in dispute for
tax years 2002 through 2005, is $1,495,424.
Once it was resolved that Subsidiary was to file CBT returns, the parties
filed additional briefs regarding Lorillard's summary judgment motion, and the
Tax Court heard oral argument. On February 28, 2019, it issued an order
granting summary judgment and published its decision. See Lorillard, 31 N.J.
Tax at 153-74. Lorillard was granted a full refund of CBT attributable to the
royalties it paid to Subsidiary for tax years 2002 through 2005. Defendant
appealed the summary judgment order.
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Lorillard filed a new claim seeking a refund of $2,196,0242 in corporate
taxes for tax years 2007 through 2010 based on the same reasons. Defendant
denied this request. Lorillard filed a complaint in the Tax Court. On July 19,
2019, the Tax Court entered an order and final judgment, disposing of the case
on the same bases as the February 28, 2019 summary judgment order because
"all material relevant facts concerning the issue of the extent of royalty
deduction to be added back are materially similar to the facts in the instant
matter." Defendant appealed the order and Lorillard cross-appealed.
B.
The Corporate Business Tax Act (CBTA), N.J.S.A. 54:10A-1 to -40,
imposes a CBT on non-exempt domestic or foreign corporations that have a
nexus with New Jersey. N.J.S.A. 54:10A-2. The CBT "is assessed based on a
corporation's entire net worth and entire net income." Whirlpool Props., Inc. v.
Dir., Div. of Tax'n, 208 N.J. 141, 153 (2011). A corporation pays CBT based
on its allocation factor that is determined by taking into consideration its New
Jersey payroll, property and sales. N.J.S.A. 54:10A-6. "The purpose of the
allocation factor is to limit application of the [CBTA] to only that income that
has a sufficient nexus to New Jersey to satisfy constitutional constraints on State
2
We use the figure set forth in Lorillard's brief.
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taxation." Lorillard I, 28 N.J. Tax at 599. N.J.S.A. 54:10A-8 (Section Eight)
"authorizes [defendant] to exercise discretion to adjust a taxpayer's
apportionment formula." Whirlpool, 208 N.J. at 145.
The starting point in the calculation is the corporation's "entire net
income" as defined in N.J.S.A. 54:10A-4(k). This is deemed by the CBTA to
be "equal in amount to the taxable income, before net operating loss deduction
and special deductions, which the taxpayer is required to report. . . ." Whirlpool,
208 N.J. at 155.
In 2002, the Business Tax Reform Act (BTRA) amended the CBTA. L.
2002, c. 40; see Lorillard, 31 N.J. Tax at 164. The sponsor's statement for the
Senate bill stated it "revises and updates the corporation business tax to close a
number of loopholes and limit certain tax benefits." Sponsor's Statement to S.
1556 51 (May 30, 2002). It was critical of tax loopholes which do not allow the
CBT to "reach some out-of-state companies that do business here," and permit
"multi-state corporations to transfer their profits to related out-of-State and
offshore companies" and "reduce their net income to little or nothing, thus
avoiding the New Jersey taxation." The purpose was to provide "a level playing
field for all businesses, large and small, that invest in New Jersey, employ our
A-3444-18
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citizens and do business here." The sponsor's statement for the Assembly bill
expressed similar objectives. Sponsor's Statement to A. 2501 51 (June 6, 2002).
The Senate Budget and Appropriations Committee's statement noted that
one of the loopholes to be closed by the legislation was a deduction for "royalties
and other intangible expenses and costs . . . when paid to affiliates." S. Budget
& Approps. Comm. Statement to S. 1556 2 (June 27, 2002). They would remain
permissible "in areas that are established as 'non-tax avoidance' situations."
Ibid. To close loopholes, the legislation included language "limit[ing] the ability
of a taxpayer to deduct royalties . . . when paid to affiliates." Lorillard, 31 N.J.
Tax at 164 (quoting from Assembly Budget Comm. Statement to A. 2501 2 (June
27, 2002)). The Director "would have the 'authority to determine . . . whether a
taxpayer has met its evidentiary burden of establishing by clear and convincing
evidence that the addback of an expense is unreasonable.'" Ibid. The Director
also could determine "that it is appropriate to enter into agreements or
compromises with the taxpayer to produce an equitable level of taxation." Ibid.
The CBTA defines "intangible expenses and costs" to include royalties.
N.J.S.A. 54:10A-4.4(a). Effective in July 2002, the CBTA was amended by the
BTRA to provide that
[f]or purposes of computing its [ENI] . . . , a taxpayer
shall add back otherwise deductible . . . intangible
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expenses and costs directly or indirectly paid, accrued
or incurred to, or in connection directly or indirectly
with one or more direct or indirect transactions with,
one or more related members.
[N.J.S.A. 54:10A-4.4(b) (the Add Back statute).]
There are three exceptions to the Add Back statute. Relevant here, the
add backs required in subsection b "shall not apply if . . . the taxpayer establishes
by clear and convincing evidence, as determined by the director, that the
adjustments are unreasonable . . . ." N.J.S.A. 54:10A-4.4(c)(1)(b). Thus, the
add back can be reduced for amounts that are "unreasonable." Ibid.
Defendant promulgated regulations in 2003 to address the CBTA's
exception for unreasonableness in related party transactions. See N.J.A.C. 18:7-
5.18(b). "The purpose of the . . . regulation is avoidance of double taxation."
Lorillard, 31 N.J. Tax at 168. The regulation restates the statutory criteria.
N.J.A.C. 18:7-5.18(a)(1). N.J.A.C. 18:7-5.18(b) provides that "intangible
expenses and costs directly or indirectly paid . . . in connection with a transaction
with one or more related members shall not be deducted in calculating [ENI]"
with certain exceptions. The add back is not required "[i]f the taxpayer
establishes, to the satisfaction of the [d]irector, that the disallowance of a
deduction is unreasonable by showing the extent the related party pays tax in
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New Jersey on the income stream." N.J.A.C. 18:7-5.18(b)(3).3 Thus, as
defendant argued, "clear and convincing evidence" as referenced in the Add
Back statute could be shown to "the extent that a related-entity payee pays tax
in New Jersey on the royalties." Defendant argues the regulation was to prevent
multi-entity businesses from reducing the amount of their CBT by artificially
3
This regulation was amended effective April 8, 2020. Currently, the add back
may not be required,
[i]f the taxpayer establishes, to the satisfaction of the
[d]irector, that the adjustments are unreasonable by
clear and convincing evidence, and any one of the
following circumstances applies:
i. Unfair duplicate taxation;
ii. A technical failure to qualify the
transactions under the statutory
exceptions;
iii. An inability or impediment to meet the
requirements due to legal or financial
constraints;
iv. An unconstitutional result; or
v. The transaction is equivalent to an
unrelated loan transaction;
[N.J.A.C. 18:7-5.18(b)(3).]
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shifting income from a higher allocation factor company to a related company
with a lower allocation factor.
Taxation developed a new tax reporting schedule in connection with
promulgation of the regulation. Schedule G-2 measures the "extent that the
payee pays tax" to avoid double taxation by providing a formula that "can
determine whether or not certain related party transactions, in fact, do qualify
for deductibility as exceptions to the addback rule." 35 N.J.R. 1573(a) (April 7,
2003).
Schedule G-2 calculates the "unreasonableness exception" for the payor
— in this case, Lorillard — based on the allocation factors of the payor and
payee. The payor can take exception as unreasonable from the add back to the
extent the payee paid tax to New Jersey on the royalty income. See N.J.A.C.
18:7-5.18(b)(3). If the payor and payee have the same allocation factors, then
the payor can take exception to the add back. If the payor's allocation factor is
larger than the payee, then the payor will only have a partial exception to the
addback based on the payee's taxes. Lorillard, 31 N.J. Tax at 161. Here,
Lorillard claimed a refund for tax years 2002 through 2005 of $4,297,701 but
was refunded $2,802,277 because Subsidiary had a lower allocation factor than
Lorillard. Lorillard, 31 N.J. Tax at 162-63.
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C.
The Tax Court granted Lorillard's motion for summary judgment.
Lorillard, 31 N.J. Tax at 174. In reaching its decision, the Tax Court found that
it was not "realistic" for a parent and a subsidiary to have the same allocation
factors. Lorillard, 31 N.J. Tax at 172. The Tax Court found that BTRA's goals
were not "frustrated because Subsidiary's allocated royalty income does not
match [Lorillard's] royalty deduction solely due to the difference in their
respective allocation factors . . . ." Ibid. However, it found this was not a reason
to allow only a portion of the royalty deduction to be added back. Ibid.
The Tax Court was critical of Taxation for not explaining why the
difference between the allocation factors raised concerns under the BTRA. It
found "absent" certain allegations and claims such as that Subsidiary's
"reporting and tax payments on the royalty deduction" in other states was not
"clear and convincing evidence"; that what Subsidiary paid in CBT was
irrelevant to any inquiry about unreasonableness; or that Lorillard must provide
some clear and convincing evidence. Ibid. In the absence of these, the Tax
Court found that Taxation's "determination to deny a portion of [Lorillard's]
refund claims [was] not well-founded. " Ibid.
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The Tax Court found that Subsidiary paid CBT to New Jersey using its
allocation factor based on the royalty payments from Lorillard. Because
defendant was not arguing that Subsidiary's allocation factor did not "properly
represent its allocable income to New Jersey," the Tax Court rejected
defendant's argument that "there was a mismatch of income and expense solely
due to the difference in the unchallenged allocation factors of [Lorillard] and
Subsidiary." Ibid. The Tax Court concluded defendant did not "exercise its
discretion fairly by deeming only a portion of the royalties paid by [Lorillard]
to Subsidiary as excepted from addback." Ibid.
On February 28, 2019, the Tax Court granted summary judgment to
Lorillard requiring defendant to refund the remainder of Lorillard's claim for tax
years 2002 through 2005. On July 19, 2019, the Tax Court entered an order and
final judgment in Lorillard's favor for tax years 2007 through 2010 based on its
reasoning in Lorillard. 31 N.J. Tax at 166-74.
D.
Defendant appeals the Tax Court orders raising these issues:
POINT I
THE TAX COURT INCORRECTLY INTERPRETED
THE STATUTE AND TAXATION’S REGULATION
AND GAVE INSUFFICIENT DEFERENCE TO
TAXATION.
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A. The Tax Court Misinterpreted the Plain Language
of the Statute and Regulation.
B. The Tax Court Accorded Taxation Insufficient
Deference.
POINT II
THE TAX COURT’S HOLDING UNDERMINES THE
PURPOSE OF THE BTRA TO PREVENT SHIFTING
INCOME AWAY FROM NEW JERSEY THROUGH
RELATED-ENTITY ROYALTY PAYMENTS.
Lorillard files a cross-appeal from the Tax Court orders because they do
not address the constitutional issues it raised in the summary judgment motion.
It argues:
POINT I
THE STANDARD OF REVIEW IS DE NOVO
A. The Review of a Summary Judgment Order Is a
Legal Question.
B. The Standard of Review Is De Novo and the Tax
Court Is Entitled to Deference on Questions of Law.
C. Defendant's Interpretation of Tax Statutes Is Not
Binding as Ruled in the Supreme Court's Decisions.
POINT II
DEFENDANT'S REGULATION AND SCHEDULE
G-2 ARE NOT REASONABLE INTERPRETATIONS
OF THE ADDBACK STATUTE AND
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UNLAWFULLY NARROW THE UNREASONABLE
EXCEPTION AS APPLIED TO LORILLARD
POINT III
THE TAX COURT CORRECTLY INTERPRETED
THE UNREASONABLE EXCEPTION IN THE
ADDBACK STATUTE.
A. The Tax Court Did Not Endorse an "All-or-
Nothing" Unreasonable Exception.
B. Though Defendant Received Deference from the
Tax Court, Defendant's Position Was Not a Fair
Exercise of Its Discretion.
C. The Tax Court's Proper Interpretation of the
Addback Statute Does Not Undermine the Purpose of
the BTRA.
POINT IV
ALTERNATIVELY, LORILLARD'S REMAINING
REFUND CLAIMS SHOULD BE GRANTED
BECAUSE DEFENDANT'S REGULATION AND
SCHEDULE G-2 ARE UNCONSTITUTIONAL
A. Defendant's Regulation and Schedule G-2 Are
Unconstitutional Because They Are Discriminatory
B. Defendant's Regulation and Schedule G-2 Are
Unconstitutional Because They Indirectly Tax the Out-
of-State Activities of Licensing that New Jersey Cannot
Tax Directly.
C. Defendant's Regulation and Schedule G-2 Are
Unconstitutional Because They Result in Gross
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Distortion and Taxation that Is Out of All Appropriate
Proportion to Lorillard's Activities in New Jersey.
POINT V
DEFENDANT'S CONTINUED DENIAL OF
LORILLARD'S REMAINING REFUND CLAIMS IS
A FAILURE TO TURN SQUARE CORNERS.
II.
We review a court's grant of summary judgment de novo, applying the
same standard as the trial court. Conley v. Guerrero, 228 N.J. 339, 346 (2017).
Summary judgment must be granted if "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." Templo
Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189,
199 (2016) (quoting R. 4:46-2(c)). We do not defer to a trial court's
"interpretation of the law and the legal consequences that flow from established
facts." State v. Harris, 181 N.J. 391, 419 (2004) (quoting Manalapan Realty v.
Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).
The starting place is the BTRA. It was "enacted to address declining
revenues despite economic expansion based on 'evidence that large corporations
with apparently substantial economic activity in this State and substantial profit
A-3444-18
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have managed to avoid having any of this income become taxable by New
Jersey.'" Springs Licensing Grp., Inc. v. Dir., Div. of Tax'n, 29 N.J. Tax 1, 8-9
(Tax 2015) (quoting Statement to Assembly No. 2501). The BTRA was
intended to close loopholes.
One such closure was "limit[ing] the ability of a taxpayer to deduct
royalties . . . when paid to affiliates." Ibid. The Add Back statute requires a
taxpayer to "add back" to its earned net income the royalties that it paid to a
related entity. N.J.S.A. 54:10A-4.4(b). However, because New Jersey is a
"separate entity state," the royalty income received by the related entity payee
also is taxed. Springs Licensing, 29 N.J. Tax at 12. "[T]he Legislature's
response to the specter of double taxation [was] the ability of the payor to claim
an exception to the add-back as being 'unreasonable.'" The statute permits a
taxpayer to reduce the add back by amounts, which are "unreasonable," but the
Legislature did not define what type or amount of an add back was unreasonable.
"When an administrative agency that is charged with enforcing a statute
interprets that statute, we give substantial deference to the agency's
interpretation." Oberhand v. Dir., Div. of Tax'n, 193 N.J. 558, 568 (2008). This
applies "when the Director's expertise is exercised in the 'specialized and
complex area' of the tax statutes." Taylor v. Dir., Div. of Tax'n, 422 N.J. Super.
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336, 341 (App. Div. 2011) (quoting Metromedia v. Dir., Div. of Tax'n, 97 N.J.
313, 327 (1984)). However, an agency cannot interpret a statute to extend it
beyond that permitted by the language of the statute. Oberhand, 193 N.J. at 568.
"Thus, if the agency interpretation of a statute is plainly at odds with the plain
meaning of the statute, the agency interpretation will be set aside." Ibid. Where
the agency's interpretation "is consistent with a plain reading of the statute," the
reviewing court should "give deference to the [agency]'s interpretation of the"
statute and "accept that interpretation as the one intended by the Legislature."
Id. at 569.
Defendant promulgated regulations to implement the Add Back statute's
exception for amounts that are "unreasonable." Lorillard argues defendant's
regulations and tax form Schedule G-2 are not reasonable interpretations of the
statute.
Regulations that are "consistent with statutory authority are presumptively
valid and should also receive deference." United Parcel Gen. Servs. Co. v. Dir.,
Div. of Tax'n, 430 N.J. Super. 1, 8 (App. Div. 2013). The presumptive validity
of administrative actions means that "the burden of proving otherwise is on those
challenging such action." Hills Dev. Co. v. Twp. of Bernards, 103 N.J. 1, 45
(1986). However, "an administrative agency may not, under the guise of
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interpretation, extend a statute to give it a greater effect than its language
permits." GE Solid State v. Dir., Div. of Tax'n, 132 N.J. 298, 306 (1993). Nor
may an agency issue a regulation that is outside "the fair contemplation of the
delegation of the enabling statute." N.J. State League of Mun. v. Dep't of Cmty.
Affs., 158 N.J. 211, 222 (1999) (quoting N.J. Guild of Hearing Aid Dispensers
v. Long, 75 N.J. 544, 561 (1978)).
Applying these standards, we conclude the Tax Court erred by granting
summary judgment to Lorillard. There is nothing unreasonable about allowing
an exception to the add back to the extent the related party paid taxes in New
Jersey to avoid possible double taxation. Defendant's regulation defines one
means by which the add back is unreasonable, e.g., to the extent the related
entity paid New Jersey taxes. Defendant granted Lorillard's refund request,
corresponding to Subsidiary's CBT payments, by using a comparison of the
allocation factors between the payor (Lorillard) and payee (Subsidiary). As the
State described it, "Taxation granted parent a refund for those amounts
corresponding to [S]ubsidiary's CBT payments because Taxation determined,
using Schedule G-2, that it would be unreasonable for parent to pay CBT on
income paid to [S]ubsidiary as royalties to the extent that the [S]ubsidiary paid
CBT on the royalties." The tax on Lorillard's add back that was not excepted as
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unreasonable was related to its activity in New Jersey based on its allocation
factor.
The purpose of the BTRA — as the Tax Court acknowledged — was to
close a loophole on tax avoidance. There was nothing unreasonable about
defendant's decision to grant the exception only to the extent of the New Jersey
taxes paid by Subsidiary. This was a balanced approach. It considered the need
to achieve the intent of the BTRA to close loopholes and the need by the filer to
avoid an unreasonable add back. Lorillard is not precluded from showing that
it is unreasonable in some manner not to refund the balance of the remaining
add back based on facts special to its situation.
The Tax Court appeared to shift the burden from Lorillard to defendant.
The statutes give the taxpayer the burden of establishing an exception to the
disallowance of deductions: "adjustments . . . shall not apply if . . . the taxpayer
establishes by clear and convincing evidence, as determined by the director, that
the adjustments are unreasonable. . . ." N.J.S.A. 54:10A-4.4(c)(1)(b). If further
adjustment was needed, Lorillard was not precluded from requesting this.
Lorillard claims that Schedule G-2, which is a tax form referenced in the
rule proposal, should have been promulgated as a regulation because of its
reference to and then application of allocation factors. See 35 N.J.R. 1573, 1575
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(April 7, 2003) (providing with reference to subsection "(b)3" of the N.J.A.C.
18:7-5.18 that this subsection "allows the deduction of costs if disallowance
would be unreasonable since the payee paid tax to New Jersey on the same
income stream," citing "Schedule G-2, Part II, Exception 2"). We disagree. It
could be fairly inferable from the Add Back statute that the amount up to the tax
paid by a related party payee might be considered as unreasonable and subject
to exception, and thus that a regulation was not needed to allow an exception for
this amount. See Metromedia, 97 N.J. at 329 (providing that rulemaking
generally is not necessary for "[a]n agency determination that is . . . obviously
inferable from the specific language of the enabling statute"). Lorillard obtained
a refund for the amount of tax that was paid by its related party. What is in
dispute is the amount of a refund beyond this amount.
The Tax Court never reached the constitutional issues because of its
determination that defendant did not exercise appropriate discretion. Lorillard,
31 N.J. Tax at 174. In light of our decision, these constitutional issues require
consideration. The Tax Court should decide them in the first instance. We
decline to exercise our original jurisdiction to decide the constitutional questions
that were raised. We have determined to return the cases to the Tax Court for
consideration of these issues because its familiarity with the tax issues in this
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context will be helpful. Given the amendment of N.J.A.C. 18:7-5.18 in the
interim, we also are unable to determine on this record if the constitutional issues
are now moot.
Reversed and remanded for further proceedings. We do not retain
jurisdiction.
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