Decided: February 3, 1969.
AMERICAN RADIATOR AND STANDARD SANITARY CORPORATION, PETITIONER-RESPONDENT,
DIRECTOR, DIVISION OF TAXATION OF THE STATE OF NEW JERSEY, RESPONDENT-APPELLANT
Conford, Kilkenny and Leonard.
[104 NJSuper Page 323]
We agree with the determination of the Division of Tax Appeals that in recasting the taxpayer's book inventory for corporate franchise tax purposes the Director of the Division of Taxation was required, as a matter of sound accounting principles, under the unrefuted expert proofs, to allow a reserve for liability for the increased federal income taxes which would have been incurred by the company if such a change in inventories had actually been reflected on its books of account.
In R.H. Macy & Co. Inc. v. Director, Division of Taxation, 77 N.J. Super, 155 (App. Div. 1962), affirmed o.b. 41 N.J. 3 (1963), we sustained the Director's right to revise a taxpayer's inventory from a Lifo to a Fifo basis, but the question as to whether sound accounting principles would require as a concomitant thereof the allowance of a reserve for accompanying increase of income tax liability was not considered by the court because not raised by the taxpayer.
The State's contention that the Director's mere administrative action in this matter will not actually increase the taxpayer's income tax liability for the years in question is irrelevant. Since the Director has departed from actual book
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inventory for present franchise tax purposes, he must assume, for such purposes, the hypothetical state of facts in relation to the taxpayer's income tax liability which sound accounting principles, according to the evidence in this case, would require to be reflected on the taxpayer's books concomitantly with a substitution of Fifo for Lifo inventory figures. Cf. American Can Co. v. Director of Div. of Tax., 87 N.J. Super. 1 (App. Div. 1965), certification denied 44 N.J. 587 (1965).