United Parcel Service General Services Co. v. Director, Division of Taxation, A-0940-10T3; Appellate Division; opinion by Lihotz, J.A.D.; decided and approved for publication March 7, 2013. On appeal from the Tax Court, Nos. 7845-2004, 7879-2004, 7889-2004, 7890-2004, 7891-2004. [Sat below: Judge Kuskin.] DDS No. 35-2-xxxx [22 pp.]

Plaintiffs are five entities of the United Parcel Service group (UPS Group), each of which is a subsidiary of United Parcel Service of America Inc. (America), the parent corporation. United Parcel Service General Services Co. (GS), UPS Telecommunications Inc. (Telecom), UPS Worldwide Forwarding Inc. (WWF), UPS Worldwide Forwarding Inc. as successor in interest to UPS Air Forwarding Inc. (AF), and United Parcel Service Co. (UPSCO) filed separate complaints in the Tax Court, contesting the Division of Taxation’s assessment of corporate business tax (CBT), pursuant to New Jersey’s Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -41, following an audit.

The controversy centers on the tax consequences of the UPS Group’s daily intercompany transfers in operating its corporate cash management system.

Specifically, GS contractually provides centralized management services, including the cash management system, to members of the UPS Group. Daily cash sweeps are made from subsidiaries’ bank accounts and placed in one bank account controlled by America, which is used to pay expenses submitted by group members. Any cash in America’s account not immediately needed to pay subsidiary expenses is deposited for short-term investment. Also, America provides monthly payments to GS for the centralized services provided to the subsidiaries.

On their corporate tax returns, plaintiffs noted the cash sweep transfers as negative receivables and ascribed no tax consequence to them. On audit, the division deemed the intercompany transfers loans imputed interest income and assessed unpaid taxes, statutory interest, and late payment penalties. The monies due GS from America were also characterized as loans and interest income was imputed on them. Tax amnesty penalties, pursuant to N.J.S.A. 54:53-17 and -18, were imposed on taxes due from the unreported income.

Judge Kuskin concluded the facts supported the division’s characterization of the transfers as loans for tax purposes and affirmed the director’s imputation of interest income. However, he found plaintiffs had shown reasonable cause to believe their reporting position was correct, that they had satisfied the requirements justifying waiver of the late payment penalties, and that the director’s refusal to waive the assessed late payment penalties was an abuse of discretion.

On appeal, the director seeks reversal of the abatement of late payment and tax amnesty penalties, arguing that imposition of the penalties is mandatory and that waiver of the penalties and assessments was legal error.

Held: The Tax Court’s application of the late payment waiver statute, after holding that the director’s position that the intercompany transfers were loans that required imputation of income was not unreasonable, is affirmed as the tax liability issue was one of first impression and plaintiffs had satisfied the "reasonable cause" standard for abatement of the penalty. The court’s determination that the tax amnesty penalties were inapplicable is affirmed because plaintiffs’ tax obligation was determined only after the amnesty period ended.

The panel begins by reviewing Judge Kuskin’s analysis. He noted no New Jersey court has considered the tax treatment of the type of transfer at issue. He distinguished the facts here from those in reported cases from other jurisdictions examining similar factual circumstances that concluded such transfers were dividends, not loans, and concluded the director reasonably determined the transfers were loans on which interest should be imputed.

As to the late payment penalties, the judge noted that N.J.S.A. 54:49-6a provides that if the director determines there is a deficiency with respect to the payment of any tax, he shall assess penalties pursuant to state tax, but that the director has discretion under 54:49-11a in determining whether waiver of late payment penalties is appropriate. By regulation, waiver or abatement will be granted if the taxpayer can show reasonable cause for failure to pay any tax when due and makes full payment of the taxes due. A pending action or proceeding for judicial determination may constitute reasonable cause, as may an honest misunderstanding of fact or law that is reasonable in light of the taxpayer’s experience, knowledge and education.

Whether plaintiffs established reasonable cause turns on the facts. Judge Kuskin found plaintiffs’ challenge was based on genuine questions of fact and law concerning the propriety of the director’s imputation of interest.

Deferring to the Tax Court’s factual findings, the panel concludes the legal application of the waiver provision was correct. The tax consequences of the transfers presented an issue of first impression in New Jersey. The case law could be interpreted to suggest that the cash management system may not have generated loans. Further, the director’s contention that plaintiffs failed to establish "reasonable cause" contradicts the statement in the division’s final determination letters that plaintiffs would be granted an abatement on receipt of payment.

The panel rejects the director’s argument that plaintiffs should have asked for the division’s guidance on the tax consequences of its cash management system and the fee arrangement between GS and America, saying it incorrectly bootstraps the statutory good-faith requirement to wholesale acceptance of the division’s taxation determinations.

The panel also rejects the director’s contention that the Tax Court’s "waiver" of the tax amnesty penalties was error in light of the plain statutory language, which provides these penalties are not waivable. Judge Kuskin did not conclude the amnesty penalties must be abated but that the amnesty penalty was inapplicable.

The panel says the amnesty statutes apply to a taxpayer who has failed to pay any state tax on or before the day on which it is due. Here, plaintiffs timely paid all taxes computed to be due for the audited tax periods. Based on the uncertainty of whether plaintiffs had to pay certain taxes, the tax liability was only discovered in the audit, making the amnesty statutes directive inapplicable.

Further, because the division’s assessments were issued after the close of the amnesty period, any additional taxes deemed owed were not eligible to be satisfied during the amnesty period as contemplated by 54:53-17b and -18b. The director’s interpretation requires automatic imposition of the amnesty penalty to a tax assessment issued after the amnesty period, on tax returns filed within the period of amnesty. The panel defers to the finding of the Tax Court that plaintiffs "in good faith, did not know and, by reasonable inquiry, could not have known that additional taxes were due, or that the Director claimed additional taxes were due" until they received the director’s assessment, issued after the amnesty period expired.

For appellant — Marlene G. Brown, Senior Deputy Attorney General (Jeffrey S. Chiesa, Attorney General; Lewis A. Scheindlin, Assistant Attorney General, of counsel). For respondents — Mitchell A. Newmark (Morrison & Foerster; Newmark and Paul H. Frankel on the brief).