Opinion
DOCKET NO. 015751-2009
08-05-2014
FORD MOTOR CREDIT COMPANY, (now known as Ford Motor Credit Company, LLC), Plaintiff, v. DIRECTOR, DIVISION OF TAXATION, Defendant.
Kyle O. Sollie, Esq., for plaintiff (Reed Smith, LLP, attorneys, Kenneth R. Levine, Esq., on the briefs). Jill C. McNally, Deputy Attorney General, for defendant (John J. Hoffman, Acting Attorney General of New Jersey, attorney).
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
OPINION Kyle O. Sollie, Esq., for plaintiff (Reed Smith, LLP, attorneys, Kenneth R. Levine, Esq., on the briefs). Jill C. McNally, Deputy Attorney General, for defendant (John J. Hoffman, Acting Attorney General of New Jersey, attorney). DeALMEIDA, P.J.T.C.
This is the court's opinion with respect to the parties' cross-motions for partial summary judgment. In its Complaint, plaintiff, a vehicle leasing company, raises several issues relating to the Director, Division of Taxation's determination of plaintiff's Corporation Business Tax ("CBT") obligations for its 2002 and 2003 privilege periods. The cross-motions before the court address only one of the questions raised in the Complaint: whether the holding in Moroney v. Director, Div. of Taxation, 376 N.J. Super. 1 (App. Div. 2005), concerning adjustments to federal basis when determining gain from the sale of property for Gross Income Tax ("GIT") purposes, applies to the calculation of plaintiff's "entire net income" from the sale of its property under the CBT Act. The court recently decided this question in Toyota Motor Credit Corp. v. Director, Div. of Taxation, ___ N.J. Tax ___ (Tax Aug. 1, 2004). The facts in this case are not substantively different from those before the court in Toyota Motor Credit. The holding in that case - that a taxpayer, when calculating net gain from the sale of capital assets, is entitled to adjust the basis in its property to account for depreciation deductions that provided a federal tax benefit but not a New Jersey tax benefit - applies here. The court, therefore, grants FMCC's motion for partial summary judgment and denies the Director's cross-motion for partial summary judgment.
I. Findings of Fact and Procedural History
The court makes the following findings of fact based on the submissions of the parties on their cross-motions for partial summary judgment. R. 1:7-4.
Plaintiff Ford Motor Credit Company ("FMCC") is a Delaware corporation which operates a vehicle financing business in New Jersey and elsewhere. FMCC's financing operations include lease-financing arrangements. In the typical FMCC lease transaction, an automotive dealer enters into a lease agreement with a consumer for a vehicle. FMCC thereafter purchases the leased vehicle from the dealer, the dealer assigns the lease agreement to FMCC, and FMCC collects the lease payments from the consumer. After completion of the lease, FMCC sells the used vehicle. In every case, the proceeds received by FMCC from each disposition are less than the amount FMCC paid to the dealer for the vehicle.
For federal income tax purposes, FMCC deducts the cost of its leased vehicles during the time that it owns the vehicles. This cost recovery is effectuated through depreciation deductions from FMCC's income. When FMCC disposes of a vehicle at the end of a lease it realizes gain under I.R.C. §1001. To determine FMCC's gain, the basis of the vehicle is adjusted downward for federal tax purposes to account for the depreciation deductions taken by FMCC. The federal adjusted basis is calculated by deducting from the cost of the vehicle the cumulative amount of allowed or allowable depreciation deductions that were available to the taxpayer during ownership of the property. See Hinckley v. Comm'r of Internal Revenue, 410 F.2d 937, 940 (8th Cir. 1969)(requiring reduction of taxpayer's basis in property by the amount allowed each year, even though taxpayer received no tax benefit because he failed to claim deduction); Comm'r of Internal Revenue v. Kennedy Laundry Co., 133 F.2d 660, 662 (7th Cir.)(same), cert. denied, 319 U.S. 770, 63 S. Ct. 1434, 87 L. Ed. 1718 (1943). The downward adjustment of the basis has the effect of increasing FMCC's gain at the time of sale. This is so because FMCC's gain on each transaction is the excess of the proceeds on the transaction over the adjusted basis for the property sold. As a result, at the time that FMCC's vehicles are sold, the lower basis provides for "depreciation recovery" by increasing the gain realized from the sale by the amount of the used and allowable depreciation. I.R.C. § 1001.
FMCC argues that pursuant to the holding in Moroney, supra, FMCC is entitled to depart from its federal adjusted basis when calculating gain. In effect, FMCC contends that New Jersey's limitation on carrying forward net operating losses during the years in question, including depreciation deductions, prevented FMCC from benefitting under State law from approximately $5.2 billion in depreciation deductions available to FMCC under federal law for the years in question. As a result, FMCC contends, the "New Jersey basis" for its vehicles should not be the federal adjusted basis for the vehicles because the federal adjusted basis is adjusted to account for depreciation deductions not recognized by New Jersey. If adopted, this approach, which has been recognized for GIT purposes, would raise the basis for FMCC's vehicles and reduce its entire net income subject to CBT.
On its original CBT returns, FMCC reported approximately $1.1 billion in entire net income for its 2002 privilege period and $1.9 billion in entire net income for its 2003 privilege period. FMCC's reported entire net income for 2002 included $705,137,735 in depreciation recapture. FMCC's reported entire net income for 2003 did not include depreciation recapture of $4,452,223,014 accumulated by FMCC during its 1997-2001 privilege periods but which resulted in no New Jersey tax benefit because of limitations in the CBT Act. When completing its 2003 privilege period return, FMCC took the position that this court's holding in Moroney v. Director, Division of Taxation, 21 N.J. Tax 220 (Tax 2004), allowed FMCC to make adjustments to the basis of the property it sold to account for depreciation deductions that resulted in no New Jersey tax benefit.
A Division of Taxation audit resulted in a Notice of Assessment Related to Final Audit Determination in which the Director increased FMCC's entire net income for both the 2002 and 2003 privilege periods, among other changes. The increase in FMCC's 2003 entire net income was primarily attributable to the inclusion of the $4,452,223,014 in depreciation recapture that the taxpayer excluded under this court's holding in Moroney. FMCC filed a timely appeal of the audit determination.
FMCC also filed a separate refund claim for the 2002 privilege period based on its demand that the holding in Moroney be applied to the calculation of FMCC's entire net income for that privilege period. The Division denied FMCC's refund claim.
On July 23, 2009, the Director issued a Final Determination rejecting FMCC's contention that the holding in Moroney applied to the calculation of FMCC's net gain from the sale of its property for CBT purposes. This resulted in the assessment of CBT, penalties and interest against FMCC. The taxpayer timely challenged the Director's Final Determination through the filing of a Complaint in this court.
The parties cross-moved for partial summary limited to the question of whether the Appellate Division's holding in Moroney, which was issued while this matter was before the Division, applies to the calculation of FMCC's net gain from the sale of its property. FMCC takes the position that it is entitled to increase its basis in the vehicles it sold during those fiscal years by the amount of the depreciation that was unused for CBT purposes. According to FMCC, to do otherwise would result in CBT being imposed on "phantom income" attributable to adjustments in the federal basis of FMCC's property by virtue of federal depreciation deductions which were of no benefit to FMCC in New Jersey. The Director rejects this position.
The Final Determination addressed several issues related to FMCC's CBT obligations for the 2002 and 2003 privilege periods. The issues not included in the parties' cross-motions remain pending before this court and are not addressed in this opinion.
II. Conclusions of Law
Summary judgment should be granted where "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." R. 4:46-2 (c). In Brill v. Guardian Life Ins. Co., 142 N.J. 520, 523 (1995), our Supreme Court established the standard for summary judgment as follows:
[W]hen deciding a motion for summary judgment under Rule 4:46-2, the determination whether there exists a genuine issue with respect to a material fact challenged requires the motion judge to consider whether the competent evidential materials presented, when viewed in the light most favorable to the non-moving party in consideration of the applicable evidentiary standard, are sufficient to permit a rational factfinder to resolve the alleged disputed issue in favor of the non-moving party."The express import of the Brill decision was to 'encourage trial courts not to refrain from granting summary judgment when the proper circumstances present themselves.'" Township of Howell v. Monmouth County Bd. of Taxation, 18 N.J. Tax 149, 153 (Tax 1999)(quoting Brill, supra, 142 N.J. at 541). The court concludes that this matter is ripe for decision by summary judgment. There are no material facts in dispute between the parties relevant to FMCC's CBT obligations for the relevant privilege periods. The court is presented with questions of statutory interpretation which can be determined by application of the law to the undisputed facts.
The holding in Toyota Motor Credit, supra, issued by this court a few days ago, is directly on point. Because the facts in this case and those before the court in Toyota Motor Credit are not materially different, it would suffice for the court simply to rely on the holding in that case and grant FMCC's motion. In the interest of providing a full analysis to the parties and creating a complete record in the event that this matter is subject to appellate review, the court will repeat the relevant portions of its opinion Toyota Motor Credit as it applies to FMCC.
The court's analysis is influenced by the familiar principle that the Director's interpretation of tax statutes is entitled to a presumption of validity. "Courts have recognized the Director's expertise in the highly specialized and technical area of taxation." Aetna Burglar & Fire Alarm Co. v. Director, Div. ofTaxation, 16 N.J. Tax 584, 589 (Tax 1997)(citing Metromedia, Inc v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984)). The scope of judicial review of the Director's decision with respect to the imposition of a tax "is limited." Quest Diagnostics, Inc. v. Director, Div. of Taxation, 387 N.J. Super. 104, 109 (App. Div.), certif. denied, 188 N.J. 577 (2006). The Supreme Court has directed the courts to accord "great respect" to the Director's application of tax statutes, "so long as it is not plainly unreasonable." Metromedia, supra, 97 N.J. at 327. See also GE Solid State, Inc. v. Director, Div. of Taxation, 132 N.J. 298, 306 (1993)("Generally, courts accord substantial deference to the interpretation an agency gives to a statute that the agency is charged with enforcing."). However, judicial deference is not absolute. An administrative agency's interpretation that is plainly at odds with a statute will not be upheld. See Oberhand v. Director, Div. of Taxation, 193 N.J. 558, 568 (2008)(citing GE Solid State, supra, 132 N.J. at 306); Advo, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 504, 511 (Tax 2010).
The CBT Act imposes a tax on each non-exempt domestic corporation and foreign corporation "for the privilege of having or exercising its corporate franchise in this State, or for the privilege of deriving receipts from sources within this State, or for the privilege of engaging in contacts with this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State." N.J.S.A. 54:10A-2. As noted above, the tax is imposed on a corporation's "entire net income," which is defined as follows:
"Entire net income" shall mean total net income from all sources, whether within or without the United States, and shall include the gain derived from the employment of capital or labor, or from both combined, as well as profit gained through a sale or conversion of capital assets.This broad definition of entire net income is limited in the following paragraph of the statute:
[N.J.S.A. 54:10A-4(k)(emphasis added).]
For the purpose of this act, the amount of a taxpayer's entire net income shall be deemed prima facie 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 purpose of computing its federal income tax . . . .This provision of the statute couples entire net income under the CBT Act to line 28 of the federal income tax return which is entitled "Taxable income before net operating loss deduction and special deductions."
[N.J.S.A. 54:10A-4(k).]
After linking entire net income for CBT purposes to line 28 of the federal return, the statute provides that "[e]ntire net income shall be determined without the exclusion, deduction of credit of and lists several exceptions - both additions and subtractions - to federal tax statutes that define federal taxable income. See N.J.S.A. 54:10A-4(k)(2)(A) through (J). The statute also contains various additional subsections refining the calculation of an entity's entire net income for CBT purposes.
The fact that entire net income under the CBT Act is coupled to federal taxable income is well recognized by legal precedents. A corporation's entire net income is presumptively the same as its federal taxable income before net operating loss deductions and special deductions. Amerada Hess Corp. v. Director, Div. of Taxation, 107 N.J. 307, 313 (1987), aff'd, 490 U.S. 66, 109 S. Ct. 1617, 104 L. Ed.2de 58 (1989). The CBT Act uses federal taxable income as a starting point to determine a corporation's entire net income "unless the Legislature specifically enacts legislation nullifying the federal provisions." Nine Franklin Corp. v. Director, Div. of Taxation, 13 N.J. Tax 121, 133 (App. Div. 1993)(accepting the Director's argument that entire net income is equal to federal taxable income). As the Appellate Division explained, "[t]he Internal Revenue Code is intended to be controlling in determining taxable income under N.J.S.A. 54:10A-4(k)." Corporate Property Investors v. Director, Div. of Taxation, 15 N.J. Tax 205, 208 (App. Div. 1995)(citing International Flavors & Fragrances, Inc. v. Director, Div. of Taxation, 5 N.J. Tax 617, 624 (Tax 1983), aff'd, 7 N.J. Tax 652 (App. Div. 1984), aff'd, 102 N.J. 210 (1986)); see also The Reuben D. Donnelley Corp. v. Director, Div. of Taxation, 128 N.J. 218, 224 (1992)("The CBT Act uses federal-taxable income as the starting point to determine a corporation's entire net income . . . .").
The Attorney General of New Jersey acknowledged this interpretation of the CBT Act in a Formal Opinion issued in 1960. The Formal Opinion, which interpreted the then-existing regulation defining entire net income, provides:
[t]he regulation does not appear to contemplate any departures from Federal taxable income other than those expressly prescribed in the statute. It is our opinion that, as suggested by the quoted regulation, the definition of "entire net income" is always equivalent to Federal "taxable income" and that the presumption, which the use of the term "prima facie" implies is subject to being rebutted, is a presumption as to the correctness of the amount of taxable income reported by the taxpayer or determined by the Internal Revenue Service rather than the concept of "taxable income."Although courts "are not bound to adopt the Attorney General's Formal Opinion as a correct statement of the law, it is nonetheless entitled to a degree of deference, in recognition of the Attorney General's special role as the sole legal advisor to most agencies of State Government, including the Treasury Department and the Division of Taxation." Quarto v. Adams, 395 N.J. Super. 502, 513 (App. Div. 2007)(citing Peper v. Princeton Univ. Bd. of Trustee, 77 N.J. 55, 70 (1978) and Board of Educ. v. Board of Educ., 361 N.J. Super. 488, 494 (App. Div. 2003), certif. denied, 178 NL 454 (2004)).
[Attorney General Formal Opinion 1960-2 (Feb. 10, 1960).]
None of the provisions of N.J.S.A. 54:10A-4(k) expressly states that a taxpayer is entitled to depart from its federal taxable income to account for depreciation deductions which benefitted the taxpayer for federal tax purposes but had no benefit for New Jersey tax purposes. This court has held that in the absence of an express statutory provision to the contrary, the legislative declaration in N.J.S.A. 54:10A-4(k) that "entire net income" for CBT Act purposes equates to federal taxable income controls. International Business Machines Corp. v. Director, Div. of Taxation, 26 N.J. Tax 102, 112 (Tax 2011)("The court is not permitted to ignore the unequivocal provisions of N.J.S.A. 54:10A-4(k) linking entire net income to federal taxable income with limited, express exceptions, or the established legal precedents recognizing that the Legislature coupled entire net income under the CBT to federal taxable income.")(citations omitted).
There are, however, provisions of the CBT Act, in particular N.J.S.A. 54:10A-4, that suggest that the Legislature intended to tax only an entity's actual economic gains - the accessions to its wealth - from the sale of its property and not artificial gains resulting from unused depreciation deductions. As noted above, N.J.S.A. 54:10A-4(k) defines "entire net income," the starting point for determining an entity's CBT liability, as including "profit gained through a sale or conversion of capital assets." The Legislature's reference to "profit" is meaningful. Use of that word is indicative of an intention to assess the tax based on accessions to an entity's wealth resulting from the disposition of capital assets.
In addition, N.J.S.A. 54:10A-4(k)(3) provides that the Director
[m]ay, whenever necessary to properly reflect the entire net income of any taxpayer, determine the year or period in which any item of income or deduction shall be included, without being limited to the method of accounting employed by the taxpayer.This provision acknowledges the concept that adjustments to an entity's federal taxable income may be necessary to ensure that its entire net income is properly reflective of the entity's actual gains during the period for which the tax is assessed.
Finally, N.J.A.C. 18:7-5.2(a)(2)(iv), the Director's regulation interpreting the federal bonus depreciation decoupling provision, states that upon early retirement of an asset, "a basis adjustment will be required to equalize Federal and State basis." This is an express declaration by the Director that adjustments to federal basis may be necessary to calculate accurately an entity's gain from the disposition of property for CBT purposes.
Standing alone, these provisions might not be sufficient to depart from the holding in International Business Machines, supra, and the well-recognized concept that an entity's entire net income for CBT purposes equates to its federal taxable income absent an express statutory provision authorizing a deduction or addition to the entity's federal taxable income. There is surface appeal to the argument that the Legislature, having enacted a number of specific additions and deductions from federal taxable income in N.J.S.A. 54:10A-4(k), could easily have enacted a statute expressly requiring adjustments to federal basis to account for federal depreciation deductions which provided no New Jersey tax benefit. Significant appellate precedents interpreting the GIT Act, however, establish a broad principle that State tax policy prohibits the assessment of a tax on "phantom income" resulting from depreciation deductions used by the taxpayer for federal purposes but which resulted in no New Jersey tax benefit. Absent these precedents the court would likely reject FMCC's argument on this point. The court, however, can identify no principled reason why the rule announced in Koch v. Director, Div. of Taxation 157 N.J. 1 (1999), and applied in Moroney, supra, should not apply in the context of the CBT Act. This conclusion is particularly true in light of the above-cited provisions of the Act and the Director's regulation suggesting that the Legislature intended to capture only an entity's profits from the sale of capital assets when calculating entire net income under N.J.S.A. 54:10A-4(k).
The underpinnings of FMCC's argument on this point are found in the Supreme Court's holding in Koch. At issue in that case was the method to be used to calculate a partner's gain from the disposition of his partnership interest for GIT purposes. The taxpayer had purchased his partnership interest for $75,000 cash. He also agreed to be personally liable for a portion of the partnership's indebtedness. 157 N.J. at 3-4. Over the course of four years, the taxpayer was allocated a portion of the partnership's losses. He deducted those losses on his federal income tax return. Id. at 4. Accordingly, the basis of his partnership interest for federal tax purposes was reduced to zero. Ibid. New Jersey law did not allow the taxpayer to use the partnership losses to offset gains on his New Jersey income tax returns.
The taxpayer sold his partnership interest in 1988 for cash, the elimination of his capital account, and a release from the partnership's creditors. Ibid. On his federal income tax return, the taxpayer reported gain calculated using a basis of zero. This was required by federal tax law because the taxpayer had previously used losses from the partnership to offset income in an amount exceeding his original investment of capital in the partnership. On his New Jersey income tax return, the taxpayer reported gain calculated using a basis of $75,000. He did not reduce his New Jersey basis because he had not been able to use any partnership losses to offset income on his New Jersey income tax returns. Id. at 4-5.
The Director recalculated the taxpayer's income from the sale of his partnership interest using a basis of zero. This determination was based on the Director's contention that N.J.S.A. 54A:5-1c required the taxpayer's gain to be calculated using "the adjusted basis used for federal income tax purposes," which was zero. Id. at 5. The reduced basis increased the taxpayer's gain taxable by New Jersey.
Although this court and the Appellate Division agreed with the Director, the Supreme Court reversed. The court held that three provisions of N.J.S.A. 54A:5-1(c) had to be harmonized. Those provisions of the statute require: (1) the taxpayer's use of the method of accounting allowed for federal income tax purposes; (2) the taxpayer's use of the federal adjusted basis; and (3) the exclusion of gains to the extent that federal rules require nonrecognition. The Court concluded that where a taxpayer "has gained no tax benefit under the Act" through use of losses in prior years he can be taxed only on "his actual economic gain and not on fictitious income" when property is sold. Id. at 14. "Any income tax imposed on an amount greater than [the taxpayer's] economic gain . . . constitutes a tax on amounts that represent neither economic gain nor recovery of a past tax benefit. Instead, it represents a tax on a return of capital. Such a result was not intended by the Legislature." Id. at 9. Thus, the Court concluded that where the taxpayer's federal adjusted basis in a partnership interest reflects benefits obtained by the taxpayer under federal law, but not available under New Jersey law, the Director cannot use the federal adjusted basis to calculate gain from the sale of that partnership interest.
The Appellate Division applied the holding in Koch when deciding a challenge to GIT assessments in Moroney. In that case, two couples sold rental properties. In calculating the gain they realized from the sale of their property the Moroneys used the purchase price as the basis. 376 N.J. Super. at 4. They did this because in each year that they owned the property operating expenses exceeded rental income, which resulted in no tax benefit to them under New Jersey law. Thus, although the federal basis of the property was reduced by depreciation, the Moroneys did not use the federal basis when calculating their gain. The Director adjusted the basis of the Moroneys' property by allowed and allowable federal depreciation on the property for the period of their ownership. This had the effect of raising the Moroneys' taxable gain. Ibid.
The other couple, the Denitzios, calculated the gain on the sale of their rental property using the adjusted basis for federal tax purposes. The federal adjusted basis was determined by reducing the cost of the property by the cumulative amount of depreciation deductions allowed or allowable in the years in which they owned the property. Ibid. They subsequently amended their returns. In the amended returns, the Denitzios added back to the basis of their property an amount equal to the depreciation expense that they claimed had not been utilized in determining net income from the property. This decreased their gain, resulting in a refund request. Ibid. The Director agreed that the federal adjusted basis of the property should be adjusted by adding the cumulative amount of depreciation expense that was not utilized by the taxpayers. Ibid. The Director disagreed with the taxpayers, however, with respect to how to determine the amount of depreciation deductions they did not use. Id. at 5.
This Court reversed the Director's determinations. The court recognized that the holding in Koch "required adjustments to the federal adjusted basis to reflect the amount of depreciation that was not used by the taxpayers for New Jersey gross income tax purposes." Ibid. The court found, however, that the Director's approach to making the adjustments was "inconsistent with the 'essence' of the Koch decision." Ibid. The court concluded that "the amount of unutilized depreciation is the cumulative amount of allowed or allowable depreciation that offsets income remaining after deduction of operating expenses in each tax year." Ibid.
The Appellate Division affirmed. The court noted that
[b]ecause N.J.S.A. 54A:5-1(c) imposes a tax on net gain from the sale or disposition of property, this section of the Act reflects an intent on the part of the Legislature to "tax only those transactions from which an individual derives an economic gain."The court observed that "a tax on the return of capital . . . was not intended by the Legislature." Id. at 7. As the court explained,
* * *
"The net gains concept is an expression of the difference between the cost of the property and the amount realized from the sale, which is the accession to wealth."
[Id. at 6-7 (quoting Walsh v. Director, Div. of Taxation, 10 N.J. Tax 447, 460 (Tax 1989), aff'd o.b., 240 N.J. Super. 42 (App. Div. 1990))(citation omitted).]
We are convinced, however, that the use of the federal adjusted basis here would be inconsistent with Koch. In each of the years that the Moroneys owned the rental property, their expenses exceeded gross receipts. Therefore, they did not obtain any benefit for New Jersey tax purposes from the depreciation deductions. Similarly, the gross receipts from the Denitzios' property exceeded expenses in only three years. Thus, the Denitzios realized a tax benefit from depreciation only in those three years. Reducing basis by the cumulative amount of allowed and available depreciation results in a corresponding increase in the net gain from the sale that does not reflect the recovery of a tax benefit actually realized or an economic gain. In these circumstances, use of the federal adjusted basis would result in the imposition of a tax upon a return of capital contrary to the intent of the [Gross Income Tax] Act as interpreted in Koch.
[Id. at 10-11.]
The facts in Moroney and the present matter are strikingly similar. Both the Moroney taxpayers and FMCC purchased property from which they generated rental income. The taxpayers in both instances benefitted from federal depreciation deductions from which they derived no New Jersey tax benefit. They lost money on the rental transactions and were prohibited from carrying forward their losses. In addition, when the taxpayers in both instances disposed for their property the taxpayers were required by federal law to use a basis that was adjusted downward to account for the benefits accorded to the taxpayers by federal depreciation deductions. Without a basis adjustment for New Jersey tax purposes the taxpayers in both circumstances would be taxed by New Jersey on fictitious gains attributable to the federal depreciation deductions which had no New Jersey tax benefit. The Director has offered no convincing argument that FMCC should be treated differently than the taxpayers in Moroney merely because FMCC is subject to CBT and the Moroney taxpayers were subject to GIT.
The court is cognizant of the fact that the GIT Act and the CBT Act "are not in pari materia, are not interchangeable, and provisions from one Act cannot be engrafted into the other." Marrinan v. Director, Div. of Taxation, 17 N.J. Tax 47, 56 (Tax 1997). "The CBT Act and the GIT Act are separate and distinct. They are not in pari materia. In order to be in pari materia, statutes must have "the same purpose or object." Mandelbaum v. Director, Div. of Taxation, 20 N.J. Tax 141, 151 (Tax 2002)(citing Richard's Auto City, Inc. v. Director, Div. of Taxation, 140 N.J. 523, 540 (1995)). As Judge Kuskin explained,
The object of the CBT Act is to impose a tax on a domestic or foreign corporation "for the privilege of having or exercising its corporation franchise in this State." N.J.S.A. 54:10A-2. This tax is not imposed on individuals. By contrast, the purpose of the GIT Act is to impose tax on individuals, estates and trusts. Cooperstein v. Director, Div. of Taxation, 13 N.J. Tax 68, 93 (Tax 1993), aff'd, 14 N.J. Tax 192 (App. Div. 1994)[certif. denied, 140 N.J. 329 (1995)].
[Mandelbaum, supra, 20 N.J. Tax at 151.]
In addition, the CBT Act, unlike the GIT Act, ties taxable income in New Jersey to the taxpayer's federal taxable income. The GIT Act has long been recognized as not mirroring federal taxing statutes. As the Supreme Court's explained in Smith v. Director, Div. of Taxation, 108 N.J. 19, 32 (1987):
[e]ven a cursory comparison of the New Jersey Gross Income tax and the Internal Revenue Code indicate that they are fundamentally disparate statutes.Calculation of CBT liability, on the other hand, begins with the proposition that the taxpayer's "entire net income shall be deemed prima facie to be equal in amount to the taxable income" it is required to report to the federal government. N.J.S.A. 54:10A-4(k).
FMCC, however, does not ask this court to graft a provision of the GIT Act onto the CBT Act. It asks the court to interpret existing provisions of the CBT Act to subject to CBT only the actual gains realized by an entity through the sale of its capital assets. In fact, there are parallels between the GIT Act provisions interpreted in Moroney and the CBT Act's provisions defining an entity's entire net income that support FMCC's position. At issue in Moroney was N.J.S.A. 54A:5-1(c), which defined a category of income subject to GIT. The statute provides that the following shall be included in a taxpayer's taxable income for GIT purposes:
Net gains or net income, less net losses, derived from the sale, exchange or other disposition of property . . . as determined in accordance with the method of accounting allowed for federal income tax purposes. For the purpose of determining gain or loss, the basis of property shall be the adjusted basis used for federal income tax purposes, except as expressly provided for under this act . . . .
* * *
The term "net gains or net income" shall not include gains or income from transactions to the extent to which nonrecognition is allowed for federal income tax purposes.
[N.J.S.A. 54A:5-1(c).]
N.J.S.A. 54:10A-4(k) also imposes a tax on "net income," including "profit gained through a sale . . . of capital assets." In addition, N.J.S.A. 54:10A-4(k), like N.J.S.A. 54A:5-1(c), ties the calculation of net gains to federal tax concepts by deeming entire net income to be "prima facie" the same as federal taxable income. Yet, a departure from federal basis was permitted in Moroney because the GIT Act "expresses an intent to tax only those transactions from which a [taxpayer] derives an economic gain." Koch, supra, 157 N.J. at 9 (quoting Walsh, supra, 10 N.J. Tax at 460). The CBT Act also expresses the intent to tax only the gain a taxpayer realizes from the sale of property. Permitting FMCC to employ a Moroney adjustment to the basis of its property would further this statutory objective.
Nor is the court convinced by the Director's argument that application of the holding in Moroney to calculate FMCC's taxable income would contravene the CBT Act's prohibition on the carry forward of net operating losses during the relevant tax years. Prior to 2002, the CBT Act permitted an entity to carry forward its net operating losses "to each of the seven privilege periods following the period of the loss . . . ." N.J.S.A. 54:10A-4(k)(6)(B). In 2002, the Legislature amended the CBT Act to suspend net operating loss carry forward deductions for the 2002 and 2003 privilege periods. L. 2002, c. 40. For any net operating loss that expired during the 2002 and 2003 privilege periods, however, the carry forward period was extended for an additional two years after the 2003 privilege period. Ibid. The Director argues that adjusting the basis in FMCC's vehicles to account for unused depreciation deductions would circumvent the Legislature's decision to suspend net operating loss carry forwards for the relevant periods.
The Director made the same argument in Moroney, given that the GIT Act also prohibits loss carry forwards. See N.J.S.A. 54A:5-2 ("Losses which occur within one category of gross income may be applied against other sources of gross income within the same category of gross income during the taxable year.")(emphasis added); Estate of Guzzardi v. Director, Div. of Taxation, 15 N.J. Tax 395 (Tax 1995), aff'd, 16 N.J. Tax 374 (App. Div. 1996). The court rejected that position:
The Director characterizes plaintiff's arguments as an attempt to carry forward their allowable depreciation deductions by using them as an addition to basis or a deduction from gain in the year of sale. He asserts that such carryforward is in violation of N.J.S.A. 54A:5-2 as interpreted in Guzzardi. There, the Tax Court held that, under N.J.S.A. 54A:5-2, losses occurring in one year may not be carried forward to a later year, even where the Internal Revenue Code would permit such a carryforward.The Appellate Division in Moroney also noted the existences of the statutory bar to loss carry forwards under the GIT Act. 376 N.J. Super. at 14 ("Third, and most important, the Act expressly bars any carry forward of losses into another tax year."). The court did not view the statutory ban on carrying forward net operating losses to preclude an adjustment to federal basis.
I conclude that the Director's arguments represent an effort to interpret or distinguish Koch in a manner that ignores the essence of the decision. Contrary to the mandate of Koch, the Director
fails to focus on plaintiffs' actual economic benefits (accession to wealth and recovery of past tax benefits) and thereby achieves . . . inappropriate results . . . .
[Moroney v. Director, Div. of Taxation, 21 N.J. Tax 220, 228 (Tax 2004)(citations omitted).]
In addition, it is notable that a Moroney adjustment and a loss carry forward are not the same. A Moroney adjustment increases the tax basis in depreciable property if the depreciation did not produce a New Jersey tax benefit in a prior year. By contrast, a net operating loss carry forward is much broader, allowing a prior year's loss to offset gains in a subsequent year of any type of income, regardless of whether the income in the subsequent year is connected to the property that produced the earlier deduction. Allowing a Moroney adjustment to basis does not equate to permitting a net operating loss carry forward, even if the resulting reduction in taxable income may be the same in some circumstances.
The court, therefore, granted FMCC's motion for partial summary judgment and denies the Director's cross-motion for partial summary judgment. The court will enter an Order directing the Director to recalculate FMCC's CBT obligations for its 2002 and 2003 privilege periods in light of this opinion. If the re-computation of FMCC's CBT obligations does not result in the resolution of this matter, the court will decide the remaining issues addressed in the Complaint.