In a recent consolidated decision, International Business
Machines Corporation v. Director, Division of Taxation / Creston
Electronics, Inc. v. Director, Division of Taxation,
011630-2008 / 011795-2009, _____ N.J. Tax _____ (Tax 2011), the New
Jersey Tax Court held that for the periods at issue, the Director,
Division of Taxation (the "Director") exceeded his
statutory authority when he included extraterritorial income
excluded from federal taxable income under Section 114(a) of the
Internal Revenue Code of 1986 (the "Code") in the
taxpayer's entire net income for New Jersey corporation
business tax ("CBT") purposes.
The court's decision was based on two similar sets of facts.
From 2002 through 2004 Plaintiff International Business Machines
Corporation ("IBM") received extraterritorial income from
sources outside of the United States, which it properly excluded
when calculating its "taxable income before net operating loss
deduction and special deductions" at line 28 of its federal
income tax return. IBM reported the exact amounts shown on line 28
of the federal return on its New Jersey CBT return. After an audit,
the New Jersey Division of Taxation (the "Division")
added back to IBM's New Jersey CBT return the extraterritorial
income excluded for federal tax purposes.
In 2004 and 2005 Plaintiff Creston Electronics, Inc.
("Creston"), filed CBT returns on which it added back the
extraterritorial income it excluded on its federal return. Creston
later filed amended returns for 2004 and 2005 and excluded the
extraterritorial income it had previously added back. After audit,
the Division added back the extraterritorial income.
The CBT is imposed on a corporation's "entire net
income," which is statutorily defined to include "total
net income from all sources, whether within or without the United
States." However, the statute couples entire income for CBT
purposes to line 28 of the federal income tax return, as the
statute limits the definition of "entire net income" 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 purposes of computing its federal income tax."
The court found the statute's coupling language unambiguous. It
rejected the Director's reliance on the all-encompassing
provision of the statute that defines entire net income as
"income from all sources, whether within or without the United
States" by likening it to the kind of sweeping declaration
provided in Section 61 of the Code, which defines income subject to
federal tax as "all income from whatever sourced
derived[.]" Like Section 61 of the Code, the New Jersey
statute is followed by more detailed statutory provisions that must
be read in conjunction with the broad language that precedes
it.
Congress repealed the extraterritorial income exclusion in 2004 and
replaced it with a "qualified production activities
income" deduction. The New Jersey Legislature responded by
providing for a partial exception to the "qualified production
activities income" exclusion when determining entire net
income for New Jersey CBT purposes. Taxpayers who added
extraterritorial income to their New Jersey CBT returns may still
file a refund claim for years in which the statute of limitation
has not closed.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
