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Chemical New Jersey Holdings, Inc. v. Director, New Jersey Division of Taxation

A-5175-02T2 (N.J. Super. App. Div. 2004) (Unpublished)

TAXATION—Where the Division of Taxation rejects a taxpayer’s filing status election after an amended return can no longer be filed, the taxpayer is not precluded from selecting a different filing status when challenging the Division’s tax assessment.

In 1992 and 1993, a bank holding company’s principal asset was its subsidiary stock and the loans it made to the subsidiary. The holding company would borrow from its parent, and then lend the money to its subsidiary. The holding company filed Corporate Business Tax (CBT) returns for 1992 and 1993. In each of these returns, it filed as an “investment company,” and calculated its CBT liability pursuant to the provisions of N.J.S.A. 54:10A-4(f). Several years later, the holding company was audited by the New Jersey Division of Taxation (Division). Based on the audit, the director of the Division determined that the company was not an investment company because it made the loans and was not just an investor in the loans. This resulted in an assessment for additional taxes for the years in question. In making its calculations, the Division used the income figures claimed by the company as an investment company without considering whether the company’s net income would have been different if it had been deemed something other than an investment company.

In its appeal to the Tax Court, the holding company claimed that it had been wrongly taxed as an “investment company,” the status it originally filed under, because it was actually a “financial business corporation.” Thus, it would not have been liable for any tax because its net income actually amounted to a loss. However, it did not re-file as a financial business corporation on the appropriate form or within the applicable time period. The holding company also failed to seek a refund within the statutory period. As a result, the Tax Court held that the holding company was precluded from asserting its status as a financial business corporation because, under the business decision rule, it was bound by its initial filing status. In effect, the Court held that a taxpayer’s decision as to filing status is binding and may not be disregarded or revoked in the context of tax appeal proceedings.

On further appeal, the holding company challenged the Tax Court’s reliance on the business decision rule to prevent it from claiming status as a financial business corporation. It argued that its decision to file as an investment company instead of as a financial business corporation was simply a ministerial determination and not a business decision within the scope of the rule. It claimed that its binding business decision had always been its decision to borrow from its parent and lend to its subsidiary, and that the necessary facts for determining its tax liability were fully and accurately provided regardless of which tax form it filed.

The Appellate Division rejected the holding company’s assertion that its choice of filing status was merely a ministerial task. That decision was clearly of significant business importance because the holding company presumably made that election to take advantage of the preferential tax treatment afforded to investment companies. Despite that holding, the Court ruled that the business decision rule does not prevent a taxpayer from declaring its income under a different corporate status than the one it originally claimed, in good faith, where the Division rejects the initial filing status and assigns a new status if the new assessment is based on the income declared in the original filing. Traditionally, the rule operated to bar taxpayer challenged to assessments where the Division had accepted the taxpayer’s business decision and assessed the proper tax accordingly. In this case, the holding company’s initial business decision was ultimately rejected by the Division. Significantly, a taxpayer’s net income as an investment company is calculated differently than it would be as a financial business corporation. Here, the holding company neither misstated nor omitted facts in its original filing. Furthermore, it did not engage in a completely different business practice after filing its initial return. Rather, the holding company had always been in the business of borrowing from its parent and lending to its subsidiary. The only difference was the label it used on its tax return to characterize that business.

Ultimately, the Appellate Division held that the holding company’s good faith tax filing was a business decision, but because it was rejected by the Division well after a timely amended return could have been filed, the business decision rule did not bind the holding company to its original filing. In such cases, a taxpayer cannot be precluded from advocating and providing an alternate basis of tax liability before the Tax Court. For that reason, the Court reversed the lower court’s decision and remanded the case back to the Tax Court.

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