Opinion
Dkt No. 010589-2010
10-03-2014
Re: Elan Pharmaceuticals, Inc. v. Director, Division of Taxation
BY ELECTRONIC MAIL Charles J. Moll III, Esq. Jeffrey P. Catenacci, Esq. Winston & Strawn, L.L.P. One Riverfront Plaza, Suite 730 Newark, New Jersey 07102 Michael J. Duffy Deputy Attorney General RJ Hughes Justice Complex, P.O. Box 106 Trenton, New Jersey 08625
NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS BY ELECTRONIC MAIL
Charles J. Moll III, Esq.
Jeffrey P. Catenacci, Esq.
Winston & Strawn, L.L.P.
One Riverfront Plaza, Suite 730
Newark, New Jersey 07102
Michael J. Duffy
Deputy Attorney General
RJ Hughes Justice Complex, P.O. Box 106
Trenton, New Jersey 08625
Dear Counsel:
This opinion addresses plaintiff's motion for reconsideration of this court's Order of May 2, 2014, granting defendant's partial summary judgment motion, and denying plaintiff's partial summary judgment motion. Plaintiff contends that in subjecting the proceeds from the sale of its U.S. and Canadian markets for ABELCET, an anti-fungal medication, along with the drug's manufacturing facility, to corporation business tax ("CBT"), the court committed the following errors: (i) the court assumed that Plaintiff's business and operations were unitary with its Irish parent and family, and if it did, the issue requires a factual hearing; (ii) the court misapplied the ruling in McKesson Water Prods. Co. v. Director, Div. of Taxation, 23 N.J. Tax 449 (Tax 2007), aff'd, 408 N.J. Super. 213 (App. Div.), certif. denied, 200 N.J. 506 (2009) that cessation of a line of business is non-operational income; (iii) the court's findings as to the use of the sale proceeds was irrelevant as a matter of law, and in any event precluded summary judgment.
For the reasons explained below, the court finds that the issues raised by Plaintiff do not meet the standards for reconsideration. Plaintiff's allegation that the court erred as a matter of law due to is misapplication of McKesson, is grounds for an appellate review. Likewise, Plaintiff's allegation of factual errors which establish its dissatisfaction with this court's interpretation of the undisputed facts, most of which were provided by Plaintiff in support of its motion are also grounds for an appellate review. Plaintiff's claim of other factual errors are immaterial or irrelevant to the issue decided. Therefore, Plaintiff's motion for reconsideration is denied. FACTS AND PROCEDURAL HISTORY
The facts of the case are detailed in the court's prior opinion of May 2, 2014. Briefly, for context of this motion, Plaintiff is a Delaware company headquartered in California and doing pharmaceutical business in New Jersey. Its parent was Elan Corporation, PLC, ("Parent"), an Irish public limited company. Parent and its family were engaged in a worldwide pharmaceutical drug business including the buying and selling of companies in the business of biotechnology, drug delivery and genomics.
In 2000, Parent acquired Liposome Company, Inc. ("Liposome") and its subsidiaries for about $731 million. Liposome was qualified to do business in New Jersey. Its R&D facility was in Princeton. Its manufacturing facility in Indianapolis was operated by its wholly-owned subsidiary, the Liposome Manufacturing Company, Inc., which was headquartered in Indiana. Among others, Liposome had developed, patented, manufactured, marketed and sold worldwide, ABELCET a drug for treatment of systemic fungal infections in cancer, AIDS or transplant patients. Another Liposome-developed and sold drug was MYOCET, for use in metastatic breast cancer patients.
In a series of inter-corporate transfers, Plaintiff became owner of Liposome and its subsidiaries. Parent also created other foreign subsidiaries in France, Germany, Italy, and Spain for marketing ABELCET and MYOCET in Europe. At some point, the European ABELCET business and distribution rights; the MYOCET distribution rights in Europe; and the Asian rights in ABELCET were transferred to and held by Elan Pharma International, Ltd. ("EPIL"), an Irish-based subsidiary of Parent. EPIL sold ABELCET and MYOCET to these subsidiaries, which in turn sold those products to the local health care providers in the respective countries. Title to the intellectual property (i.e., of ABELCET's patents, trademarks, or licenses) always remained with Plaintiff.
In 2002, due to financial difficulties of the Elan family, Parent (along with Plaintiff and Plaintiff's subsidiaries) sold the U.S. and Canadian rights to ABELCET with associated assets (intellectual property) and the Indianapolis facility, to Enzon, Inc., a Delaware corporation headquartered in New Jersey, for about $360 million. Plaintiff agreed to sell and handle returns of ABELCET in Canada for a one-year period and retained the exclusive right and license to ABELCET-related intellectual property rights (know-how and patents) within and outside the U.S., Canadian, and Japanese markets for certain purposes. Enzon agreed to manufacture and supply ABELCET and MYOCET to EPIL. Plaintiff claimed it retained no portion of the proceeds for itself. Defendant ("Taxation") maintained Plaintiff recovered and retained at least some portion of the proceeds.
On its 2002 CBT return, Plaintiff reduced its reported federal net income by $340,332,168, the gain from the Enzon sale, as being nonoperational income. Taxation's audit added back the entire amount not only because Plaintiff did not allocate the entire income to California but also because the transaction did not "meet the criteria allowing for the business liquidation exception." The total assessment was $3,062,795.15 (tax $1,560,546.50; penalty $156,054.66; interest $1,346,193.99).
A portion of the assessment is disputed under the throw-out rule, which issue was not before the court.
ANALYSIS
(4) Standards for Analyzing a Reconsideration Motion
A motion for rehearing or reconsideration is governed by R. 4:49-2. See also R. 8:10 R. 4:49-2 applies to the Tax Court matters). The rule requires that a motion be served no later than 20 days after service of the judgment or order, and "state with specificity the basis on which it is made, including a statement of the matters or controlling decisions which counsel believes the court has overlooked or as to which it has erred." Ibid. Here, Plaintiff's motion is timely.
A motion for rehearing or reconsideration is granted sparingly. It is allowed "only for those cases which fall into that narrow corridor in which either, 1) the Court has expressed its decision based upon a palpably incorrect or irrational basis, or 2) it is obvious that the Court either did not consider, or failed to appreciate the significance of probative, competent evidence." D'Atria v. D'Atria, 242 N.J. Super. 392, 401 (Ch. Div. 1990). The movant must "initially" show that the trial court "acted in an arbitrary, capricious, or unreasonable manner, before the Court should engage in the actual reconsideration process." Ibid. This standard of analysis "is the least demanding form of judicial review." Ibid.
(B) Law
The CBT taxes operational income. This is income allocated to New Jersey and statutorily includes income "from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations and includes investment income serving an operational function." N.J.S.A. 54:10A-6.1(a). "Nonoperational income" is not allocable, and thus not taxed. A taxpayer is required to demonstrate by "clear and convincing" evidence that income is "nonoperational." Ibid. However, if a taxpayer's principal place from which it directs or manages its trade or business is New Jersey, then 100% of such nonoperational income is allocable to, and thus taxed by, New Jersey (subject to the Constitution or federal laws). Ibid.
In McKesson, supra, this court ruled that income from an I.R.C. §338(h)(10) sale of stock of a subsidiary, a non-domiciliary which did business in New Jersey, was nonoperational income not subject to CBT under a "liquidation exception." The subsidiary sold bottled drinking water nationally, whereas parent sold "health-related, primarily pharmaceutical-type, products." 23 N.J. Tax at 451. The court surveyed various cases in which courts (except California) had held that "where the sales have constituted liquidations or partial liquidations of a business, and the sale proceeds have not been reinvested in the business, . . . the sale proceeds were nonbusiness income." Id. at 457. It then concluded that the sale at issue was "an extraordinary event in the company's history, resulting in the deemed termination of its operations and existence" therefore, the resultant gain was not "operational income nor investment income serving an operational function because no operational function of [subsidiary] continued after the deemed sale of assets and liquidation, and Parent did not invest the proceeds of the sale in a business similar to that conducted by [subsidiary]." Id. at 465.
The Appellate Division affirmed. 408 N.J. Super. at 220-21 (noting that the case was decided on "purely statutory grounds," thus, "the constitutional issues implicated in the unitary business principle" need not be analyzed).
(C) Findings
Plaintiff maintains that the court improperly distinguished the present case vis-a-vis McKesson, supra, specifically that here there was no asset-sale liquidation pursuant to I.R.C. §338(h)(10), and further failed to recognize McKesson's explicit acceptance of partial liquidations as meriting tax exemption. These, per Plaintiff are errors of law.
The court is not persuaded. The court did note that as a matter of fact the sale of the ABELCET line of business was not the same as a complete liquidation of the subsidiary in McKesson, which liquidation was pursuant to I.R.C. §338(h)(10). This fact is undisputed. Therefore, there is no factual error.
Further, a stock sale under I.R.C. §338(h)(10) contemplates a successor and predecessor entity, thus, the company which sold the stock ceases to exist. When Plaintiff (along with its parent and other subsidiaries) sold the proprietary rights in and to ABELCET (for the U.S. and Canadian markets), there was no such cessation. Hence, the court made a distinction in that the transaction in McKesson ended the subsidiary's corporate existence whereas here, no corporate extinction took place. Hence, there is no error of fact or law.
More importantly, the court's conclusion that McKesson did not apply, was not based upon this distinction (i.e., direct sale of assets rather than stock). Rather, the court acknowledged the holding in McKesson, supra, that income from disposition of a capital asset is not apportionable if it was earned in a liquidation context since a complete "cessation of the subsidiary's business due to the sale of all of its stock/assets is an "extraordinary event," thus, the resultant income is not operational especially where the sale proceeds were not re-invested in a "similar business." 23 N.J. Tax at 465. The court then went on to distinguish the facts as evidence of non-cessation of Plaintiff. Plaintiff's disagreement with the court's interpretation of the facts is not a basis for reconsideration. Indeed, Plaintiff's entire argument is premised upon a "given," namely, that the sale of ABELCET's U.S. and Canadian markets is a partial liquidation, and since McKesson acknowledged partial liquidations as meriting the liquidation exception, no further inquiry is needed. McKesson never mandated this result. Its acceptance of the liquidation exception did not foreclose this court from examining distinguishing facts.
Further, this court's findings did not hold that partial liquidations do not and cannot come within the liquidation exception. Indeed, the court addressed Plaintiff's argument in this regard and found the cases relied upon in this context to be inapplicable. Plaintiff's disagreement with the court's reasoning and distinction of the out-of-state cases so holding (which cases were referenced in the McKesson decision), forms the basis of a further appeal. It does not establish that the court's interpretation and application of McKesson, supra, was made on a "palpably incorrect or irrational basis" for purposes of the reconsideration.
The court found Plaintiff's cited cases inapplicable specifically because those cases did not involve or contemplate the sale of intangible intellectual property or a seller's post-sale retention of those rights.
Plaintiff argued that the court appeared to be biased or pre-disposed against the liquidation exception when it ruled that the same should be narrowly applied. In the absence of any controlling New Jersey law as to the interpretive scope of the liquidation exception, Plaintiff's arguments are meritless.
Plaintiff next argues that the court's opinion was sprinkled with references of the unitary nature of Plaintiff s business with its Parent and the Elan family, and this was wrong or required development of a factual record if it formed the basis for the court's opinion.
Both parties agreed that the unitary aspect of Plaintiff's business was irrelevant to the sole issue before the court. Indeed, the court found the parties' motions for partial summary judgment appropriate because the only issue was application of law to decide the allocation and taxability of the sale proceeds from the Enzon transaction since material facts as to the acquisition and disposition of the U.S. and Canadian ABELCET business lines were undisputed. Thus, the legal standards for analysis of a unitary business were not relevant and therefore, not discussed or applied by this court. In any event, Plaintiff does not dispute any of the facts recited by the court as to Parent's or other subsidiaries' participation and role in the acquisition, operation, management, and sale of ABELCET and MYOCET. The documents supplied by the parties in this connection also evidenced these facts. Therefore, the court does not perceive that it "acted in an arbitrary, capricious, or unreasonable manner" in reciting these undisputed facts, and taking the same into account to decide that the tangible and intangible rights in and to ABELCET were employed as a business asset, which when sold, resulted in business income. Plaintiff's disagreement with the court's interpretation of the undisputed facts or its insistence of the stand-alone nature of the ABELCET's U.S. business in the uncharted territory of oncology by the Elan family (a fact contradicted by its own public annual statements), is not a basis for reconsideration.
For the same reason, the court need not address Plaintiff's alternative argument that should the "unitary business" be of any relevance, summary judgment was inappropriate due to unresolved factual issues in this regard.
--------
Plaintiff correctly notes that the court committed an error when it noted that ABELCET was manufactured in New Jersey (at page 1 of the opinion). This was a harmless error because (i) it was mentioned in a paragraph which merely summarized Plaintiff's and Taxation's relevant positions in their respective motions; (ii) the correct location of the manufacturing facility was recited in the factual and analytical portions of the opinion, and (iii) the one typographical error did not factor into the court's analysis or legal conclusion at all.
The remaining errors which Plaintiff contends merit reconsideration are based upon the court's alleged misinterpretation of the facts. Specifically, Plaintiff disagrees with the court's interpretation of the role ABELCET played in its, or Parent's or Elan's group's business divisions, and more specifically, its "pain management" business. However, the court's recitation of facts and conclusions in this regard were based upon a perusal of documents provided by Plaintiff in support of its summary judgment motion. That Plaintiff now dismisses those same documents as either non-supportive, speculative, or conclusory is not a sufficient basis for a reconsideration.
Next, Plaintiff argues that the court incorrectly found that Plaintiff was parent of the foreign subsidiaries which sold ABELCET in Europe and somehow implied that Plaintiff was involved in the European market for the marketing/sale of ABELCET. A careful reading of the factual portion of the court's opinion shows that the court recited that EPIL was licensed to sell ABELCET abroad by Plaintiff; the European subsidiaries were created by Parent to market/sell ABELCET abroad but were reflected as Plaintiff's subsidiaries in a corporate chart provided by Plaintiff; and EPIL distributed/sold ABELCET to those subsidiaries. Thus, there was no factual error. Further, the court noted that Plaintiff always remained the owner and proprietor of ABELCET, even when sold in the European markets, a fact borne by the documents submitted by Plaintiff in support of its summary judgment motion. The court's decision and conclusion was based on these facts. Any error complained of as to interpretation of those undisputed facts belongs in an argument to be made before the Appellate Division.
Plaintiff contends that the court's recitation of the facts pertaining to Plaintiff's personnel was wrong, as was its conclusion that management of ABELCET was in New Jersey. First, the court simply pointed out the parties' position in this regard under the "Facts" portion of the opinion. Second, these facts played no role at all in the determination of the issue of the tax treatment of the sale proceeds. They may have been relevant for the alternative argument by Taxation, namely, that if the sale proceeds were nonoperational income, they are still taxable because Plaintiff was conducting and operating the ABELCET business in and from New Jersey. The court neither decided nor relied upon this alternative argument as stated in footnote 13 of its opinion. Therefore, reconsideration is unwarranted.
The next factual error which Plaintiff claims merits reconsideration is that the court mistakenly "state[dj" that Plaintiff's subsidiary Elan Canada, Inc. "did not exit the Abelcet market" by virtue of the court's reference to and reliance upon a post-sale interim services agreement between Enzon and the subsidiary. Plaintiff argues that the interim sales agreement was not evidence of Plaintiff's continued operations, just as a continuation of "administrative activities" by a liquidating taxpayer did not in National Holdings Inc. v. Zehnder, 874 N.E.2d 91, 93, 99 (Ill. App. Ct. 2007).
The court's recitation of the facts of the sale to Enzon clearly noted that Elan Canada, Inc. was a party to the transaction and that Enzon purchased the ABELCET assets (drug manufacturing plus intangible rights) in the Canadian market. Thus, there is no factual error. Moreover, no factual error exists in recitation of the interim services agreement because its source was Plaintiff's own document provided in support of its summary judgment motion. The fact that the court did not give the agreement the minimal weight or significance desired by Plaintiff is not persuasive grounds for reconsideration. The Illinois case does not require a different result. There, the selling company completely ceased to operate the "retail grocery business" and was "there-after involved only in the collection of receivables, the payment of liabilities, and other administrative activities." Id. at 93. There are no details of such "administrative" activities and whether the fully liquidating taxpayer continued to sell its prior products and services in return for remuneration. Therefore, the court is not persuaded that the activities under the interim services agreement equates to an "administrative" activity such that it plays an irrelevant role in deciding whether the liquidation exception should apply.
Last, Plaintiff argues that the court should have denied summary judgment because its findings of the distribution of the ABELCET proceeds were based upon "an undated worksheet, prepared by an unknown author" but which was produced by Plaintiff in response to Taxation's discovery requests. Plaintiff fails to mention that in addressing the issue of distribution of the ABELCET proceeds, the court first analyzed Plaintiff's 2002 CBT returns and found that its own reporting belied its litigational position. Even if Plaintiff claims that its employee's certification as to the distribution of the sale proceeds (created for and in this litigation) trumps Plaintiff's worksheet, and thus, requires a factual hearing, the court's decision was that the sale of the U.S. and Canadian markets for ABELCET did not merit a liquidation exception based on the facts of the matter (as interpreted by this court). Thus, an analysis of the distribution of the sale proceeds is unnecessary. A trial on this issue would require this court to first reverse itself by finding that the liquidation exception applies. As noted above, this is the Appellate Division's prerogative. CONCLUSION
Plaintiff failed to show that this court ignored controlling law or failed to consider all of the evidence before it. That this court did not give such undisputed evidence the same weight or significance desired by Plaintiff does not establish that this court acted in an arbitrary, capricious of unreasonable manner.
Therefore, and for the aforementioned reasons, Plaintiff's motion for reconsideration is denied. An Order reflecting this conclusion will be entered with this opinion.
Very truly yours,
/s/_________
Mala Sundar, J.T.C.