The New Jersey Supreme Court’s recent term featured several significant opinions that have an impact on tax practitioners.
The first, Praxair Technology, Inc. v. Director, Division of Taxation , 201 N.J. Super., 126, 988 A 2d 92 (2009), dealt with the issue of whether the New Jersey business activities of an out-of-state corporate taxpayer established nexus with New Jersey to allow it to subject the corporation to its corporate business tax jurisdiction.
In a significant taxpayer loss which extended the reach of the Court’s prior decision in Lanco v. Director, Division of Taxation , 379 N.J. Super. 562, 879 A. 2d 1234 (2005), aff’d per curiam, 188 N.J. 388, 908 A. 2d 176 (2006), cert. denied, 127 S. Ct. 2974 (2007), regarding the economic presence-nexus standard, the Supreme Court reversed an Appellate Division decision and reinstated a decision of the Tax Court.
In a unanimous decision, the Court held that a corporation that licensed its patents, trade secrets and technology to its parent corporation which had facilities in New Jersey, had sufficient nexus with the state for the Division of Taxation to impose corporate business tax (CBT) under N.J.S.A. 54:10A-2 on the income it earned from that activity in the 1994 to 1996 tax years, before retroactive application of a regulatory example in N.J.A.C. 18:7-1.9 which had been promulgated in 1996.
Plaintiff Praxair Technology Inc. is a Delaware corporation with its principal place of business in Connecticut. Praxair owned patents, trade secrets and technology relating to the equipment to manufacture and the manufacture of industrial gases and existed only to license the use of that intangible property to its corporate affiliates. Praxair’s corporate parent manufactured and sold industrial gases in New Jersey. From 1994 through 1999, Praxair’s parent used Praxair’s intellectual property in its manufacturing process pursuant to a licensing agreement and paid licensing fees to Praxair for that use. During that time period, Praxair did not file N.J. Corporate Business Tax returns.
The Director of the Division of Taxation issued a final determination finding Praxair liable for corporate business taxes for 1994 through 1999, together with interest and late filing penalties.
Praxair sought a redetermination in the Tax Court which upheld the director’s determination and found that N.J.S.A. 54:10A-2 required every foreign corporation to pay an annual franchise tax “for the privilege of doing business” in New Jersey applied to Praxair. Furthermore, it held the regulation N.J.S.C. 18:7-1.9 interpreting the meaning of “doing business” under the statute which added an example in 1996 stating that a foreign corporation that received fees for licensing trademarks to New Jersey companies for use in New Jersey is subject to the corporate business tax applied to Praxair and rejected the claim that in the adoption of the regulatory example the director expanded this taxing power.
Praxair appealed and the Appellate Division reversed in part finding that there was sufficient doubt as to whether Praxair’s business activities were subject to corporate business tax in 1996 to necessitate the addition of an explanatory example to the regulations, and as such would not apply it retroactively.
Both parties petitioned for certiorari with the Supreme Court. The Supreme Court found the scope of a taxing statute cannot be expanded by the adoption of or amendment to a regulation and that the addition of the regulatory example in 1996 did not mean that there was no tax liability prior to the addition of the example. The Court determined that under both N.J.S.A. 54:10A-2 and N.J.S.C. 18:7-19 prior to the 1996 addition of an example, Praxair was doing business in New Jersey sufficiently to render it liable for corporate business taxes.
Finally, the Court remanded the case for the Appellate Division for plenary consideration of Praxair’s challenge to the significant late filing (25 percent) and post-tax amnesty (5 percent) penalties imposed by the Division of Taxation.
The Praxair ruling should serve as serious “food for thought” for all foreign companies and their tax advisors evaluating their exposure for past corporate business tax liability, and determining whether to take advantage of the Division of Taxation’s Voluntary Disclosure Program to limit CBT liability exposure.
In the real property tax appeal field, the Supreme Court addressed several issues in a trio of cases which sent an important message to taxpayers pursuing property tax appeals, and their attorneys, of their obligation to comply with municipal tax assessors’ requests for income and expense information/documentation, and the adverse consequences which follow from their discovery gamesmanship and noncompliance.
In McKesson Water Products Co. v. Director, New Jersey Division of Taxation ,408 N.J. Super. 213 (App. Div. 2009), cert. denied, 983 A. 2d 1113 (November 20, 2009), the Appellate Division affirmed the Tax Court’s decision at 23 N.J. Tax 449 (Tax 2007) and held that gain derived by the deemed asset sale of a water products company under IRC §338(h)(10) was not subject to the corporation business tax because it did not constitute operational income as defined in the New Jersey corporate business tax.
Under both the Appellate Court’s and underlying??Tax Court opinions, the courts discussed and reviewed the legislative history and public policy implications of N.J.S.A . 54:10A-6.1(a), and determined that McKesson Water’s deemed asset sale and liquidation did not constitute “operational income” as defined in N.J.S.A. 54:10A-6.1(a). Consequently, the gain derived was “not allocable to New Jersey and must be assigned to California, the location of (McKesson-Water’s) principal place of business.”
In 1717 Realty Assets LLC v. Borough of Fair Lawn, 990 A.2d 636 (2010), and Davanne Realty v. Edison Township , 990 A.2d 639 (2010), both property tax appeal plaintiffs had failed to respond to municipal tax assessors’ requests for income and expense information under N.J.S.A. Section 54:4-43, but nevertheless filed appeals with the Tax Court in response to tax increases that resulted from valuation increases of the subject commercial properties.
In such situations, the Supreme Court opined that it was correct for the Tax Court to limit its review to the reasonableness of the increased valuation based on the information available to the assessor and the methodology used and that any resulting tax increase did not constitute an unconstitutional imposition of an excess fine or penalty. Thus, circumscribing a taxpayer’s remedy in such a situation, a taxpayer will be relegated at a hearing to proving an assessment was not reasonable based on the information available to the tax assessor at the time.
In Lucent Technologies Inc. v. Township of Berkeley Heights , 201 N.J. 237 (2010), the Supreme Court in an unanimous opinion by Justice Hoens upheld the power of municipal tax authorities to obtain an increase where commercial property owners provided false information in response to an answer for income and expenses under N.J.S.A. Section 54:4-34.
Specifically, Lucent in response to the municipal tax assessor’s request for income and expenses stated that the building at issue was owner occupied, when in fact it occupied the building as a lessee. In response to the township’s motions to dismiss the subject three tax appeals, the Tax Court granted two of the motions to dismiss, but held that R. 8:7(e) placed a time limit on when a municipality could file a motion to dismiss a tax appeal due to the taxpayer’s false or fraudulent account and that one of the township’s dismissal motions was untimely. The Appellate Division and the Supreme Court held that neither N.J.S.A. Section 54:4-34 or R. 8.7(e) limited the time within which a municipality was required to move to dismiss a tax appeal founded on false or fraudulent information. The Supreme Court did reverse the Appellate Division in part, though, by finding that even in a false or fraudulent Chapter 91 response-type situation, a taxpayer was still entitled to a review limited to the question of whether the assessor’s valuation was reasonable, and accordingly held that the tax appeal should not be dismissed in its entirety, notwithstanding the sanction language of N.J.S.A. Section 54:4-34. In reaching its holding, the Supreme Court found that R. 8:7(e) does not apply, and therefore does not impose a time limitation that restricts the right of the municipality to dismiss a tax appeal based on a false or fraudulent account. Instead, it remanded to the Tax Court for the limited purpose of holding a hearing restricted to determine whether the valuation was reasonable based on the information available to the assessor and the methodology used.
Finally, in a unanimous decision in City of Atlantic City v. Trupos, 201 N.J. 447, 992 A. 2d 762 (2010), the Court held that a law firm was not disqualified under Rule of Professional Conduct (“RPC”) 1.9 (a) because its prior representation of a municipality in defense of tax appeals during 2006-2007 was not substantially related to the law firm’s prosecution of individual taxpayers’ 2009 tax appeals against the municipality.(See Bennett J. Wasserman and Krishna J. Shah, Legal Ethics & Malpractice, 201 N.J.L.J. 744.)
In reversing the Appellate Division and vacating the Tax Court’s order disqualifying the subject law firm from handling taxpayer appeals, the Supreme Court interpreted the “substantially related matter” language in RPC 1.9 (a) by adopting the following standard: First, matters are deemed substantially related if the lawyer received confidential information from the former client that can be used against that client in the subsequent representation of parties adverse to the former client, and second, matters are deemed substantially related if the facts relevant to the prior representation are both relevant and material to the subsequent representation.
In the case at bar the Court found that no confidential communication was shared by Atlantic City with counsel that could have been used against it in prosecuting the 2009 tax appeals, and no proof that settlement tactics or strategy was shared with the law firm. In view of the Court’s guidance with respect to attorneys representing parties in cases against former clients, we can expect to see more “changing sides” by real property tax appeal practitioners in the future.
Alter is a partner with Sills Cummis & Gross in Newark. He specializes in representing taxpayers in civil and criminal tax disputes with state and federal tax authorities and is past Chair of the Section of Taxation of the New Jersey Bar Association.