On March 19, 2018, the New Jersey Tax Court (Tax Court), responding to a motion to reconsider its ruling in Infosys Limited of India,¹ again held that the New Jersey Division of Taxation (Division) cannot impose the state's corporate business tax (CBT) on a multinational corporation's foreign-source income that is not taxable for US federal income tax purposes because New Jersey law adopts federal taxable income (Federal 1120-F Line 29) as the starting point for its tax base.

Background

Infosys filed New Jersey CBT returns for its fiscal years ending 2008 through 2011, reporting its worldwide income as taxable income for CBT purposes. Its worldwide income was greater than its federal taxable income, before net operating loss and special deductions, which was reported on line 29 of its federal 1120-F return. Line 29 of Form 1120-F is equivalent to line 28 of the standard Form 1120 for domestic corporations.

After realizing its error, Infosys filed a CBT refund claim for each of the tax years from 2008 through 2011, which the Division denied. Infosys challenged the denial and appealed to the Tax Court; both Infosys and the Division moved for summary judgment on the issue of whether worldwide income must be included in CBT income. Infosys contended that the plain language of N.J.S.A. 54:10A-4(k) requires the calculation of entire net income (ENI) for CBT purposes to begin with line 28 of Form 1120 (line 29 of Form 1120-F), which is then adjusted by the statute, but that there is no statutory requirement to add back worldwide income. The Division contended that ENI meant worldwide income, taking a position very similar to its position in International Business Machines Corp. v. Director, Division of Taxation (IBM),² which the courts had rejected.

In IBM, the Division had argued that extraterritorial income was included in ENI because ENI included net income from all sources inside and outside the United States. The Tax Court, in ruling against the Division, relied on the plain language of N.J.S.A. 54:10A-4(k) linking ENI with line 28, the lack of any addback for extraterritorial income in N.J.S.A. 54:10A-4(k)(2)(A) to (J), the New Jersey Attorney General's Formal Opinion reaching the same conclusion as to starting with line 28, and the long period of legislative inaction following the Formal Opinion. The Tax Court also found highly relevant the fact that the New Jersey Legislature had amended N.J.S.A. 54:10A-4(k) in response to the enactment of other exclusions from federal taxable income by Congress, such as IRC Section 199, but had not taken any action in response to the law permitting the exclusion for extraterritorial income.

In Infosys,³ the Tax Court cited the IBM case and relied on the same reasoning to conclude that only Infosys's Form 1120-F, line 29 income was subject to CBT, and not its worldwide income. Again, a key to the Tax Court's decision was the fact that none of the addback exceptions listed at N.J.S.A. 54:10A-4(k)(2)(A) to (J) provide for the addback of worldwide income that was excluded from federal income taxation. The Tax Court also found unpersuasive the Division's argument that the recent Toyota Motor Credit⁴ case permitted non-statutory adjustments to line 28. The Tax Court distinguished the cases on the basis that the Toyota Motor Credit decision rested on the Legislature's clearly expressed intent not to tax the "phantom income" that was the subject of that case. For Infosys, there was no phantom income and also no legislative intent to tax worldwide income. Accordingly, the Tax Court concluded that nothing in Toyota Motor Credit supported the Division's argument.

Ruling on reconsideration

On March 19, 2018, the Tax Court ruled on the Division's motion for reconsideration. The Tax Court amplified its prior decision, again ruling that only Infosys's line 29 income was subject to CBT. The Tax Court analyzed the statutory language of N.J.S.A. 54:10A-4(k)(2)(A), which permits addback of specific exemptions and credits allowed under the federal income tax law but not the CBT. The Tax Court again emphasized that the state statute did not apply because a treaty is not a federal income tax law providing a specific exemption or credit. Rather, a treaty is a separate part of the supreme law of the land, and it categorically removes certain items from even being considered as income. Because the Division had not considered the relevant treaty or engaged in discovery, the Tax Court suspended the requirement of the Division to pay the requested refund until the date of the trial for the remaining issues.

Implications

It is not yet known whether the Division will appeal the Tax Court's decision. If the Tax Court's decision stands, it will provide additional guidance on the exclusion of income outside the scope of line 28 (or, for a foreign taxpayer filing a Form 1120-F, line 29) on the taxpayer's federal income tax return from New Jersey ENI. The Tax Court's ruling in Infosys clearly builds on its holding in IBM and establishes that the worldwide income of a foreign corporation in excess of its federal taxable income is not included in ENI, which is consistent with the treatment of a domestic corporation. The decision makes it clear that line 28 (or line 29 of Form 1120-F, if relevant) is the starting point for ENI and that only statutory adjustments are permissible. The Infosys ruling, in combination with its earlier IBM ruling, shows that the Tax Court will readily disregard the Division's regulations, which are not expressly derived from the adjustments enumerated in N.J.S.A. 54:10A-4(k)(2)(A) to (J). Taxpayers that have paid CBT on taxable income adjusted by amounts not specifically required by that statute, such as worldwide income excluded from federal income tax, should consider filing CBT refund claims. The statute of limitations for filing CBT refund claims is four years.

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ENDNOTES

¹ Infosys Limited of India Inc. v. Director, Div. of Taxation, No. 012060-2016 (N.J. Tax Ct. March 19, 2018 motion for reconsideration).

² International Business Machines Corp. v. Director, Div. of Taxation, 26 N.J. Tax 102 (Tax 2011).

³ Infosys Limited of India Inc. v. Director, Div. of Taxation, No. 012060-2016 (Tax Court Nov. 28, 2017) (slip op.).

⁴ Toyota Motor Credit Corp. v. Director, Div. of Taxation, 28 N.J. Tax 96 (Tax 2014), aff'd, __ N.J. Tax __ (App. Div. 2017).