On certification to Superior Court, Appellate Division.
For reversal -- Chief Justice Wilentz and Justices Sullivan, Pashman, Clifford, Schreiber, Handler and Pollock. For affirmance -- None. The opinion of the Court was delivered by Wilentz, C.J.
[83 NJ Page 123] This extended controversy between the Director of the Division of Taxation ("Director") and respondent, General Trading Co., Inc. ("the taxpayer"), involves the effect on tax liability of a
taxpayer's ignorance of the tax consequences resulting from a corporate decision that had no apparent business purpose, brought no advantage to the taxpayer and caused no detriment or disadvantage to the State. Particularly at issue is the validity of a deficiency assessment levied under the Corporation Business Tax Act (N.J.S.A. 54:10A-1 et seq.) and the procedural requirements for an appeal to the Division of Tax Appeals. The assessment was based on the number of shares which the taxpayer was authorized to issue on April 30, 1969, the last day of its 1968 fiscal year. The Division of Tax Appeals overturned the deficiency assessment and entered judgment in favor of the taxpayer. The Appellate Division affirmed. We granted the Director's petition for certification.
General Trading Co., Inc., is a closely-held domestic corporation engaged in the wholesale distribution of food products. In April 1969 the company's authorized capital structure consisted of 5,000 shares of Class A stock and 1,000 shares of Class B stock. On April 28, the stockholders and board of directors held a special meeting at which they eliminated the two existing classes of stock and approved the preparation of a restated certificate of incorporation to authorize a single class of common stock consisting of ten million no par shares. The attorney who represented General Trading filed the restated certificate of incorporation with the Secretary of State on April 30, 1969, the final day of the taxpayer's fiscal year.
Under section 5 of the Tax Act, as it existed in 1969, the annual corporate franchise tax was determined in part from the taxpayer's net income during its preceding fiscal year. To this amount was added a figure taken either from a schedule based on the taxpayer's net worth or from a schedule based on the number of its authorized shares, whichever yielded the greater amount.*fn1 In this case it is undisputed that the amount based on
respondent's year-end authorization of ten million shares under section 5(e)(ii) exceeded the amount based on respondent's net worth under section 5(a).
On June 19, 1969, while preparing the corporation business tax return, the taxpayer's accountant realized that by increasing the number of authorized shares to ten million on the last day of the fiscal year, the taxpayer had incurred a substantially greater tax liability than would have obtained under the net worth schedule. After he related this information to the taxpayer's attorney, another special meeting of the directors and shareholders was held and the certificate of incorporation was amended to reflect a reduced authorization of 100,000 shares.
On that same day, the taxpayer's attorney telephoned the supervisor of the Corporation Tax Bureau of the Division of Taxation. The attorney explained that the company had inadvertently increased its capitalization to ten million shares instead of to 100,000 shares and asked the supervisor how to proceed. He was advised to submit an affidavit explaining the error together with the company's tax return and a check for the amount due. Basing its calculations on the reduced authorization of 100,000 shares, the corporation computed its franchise tax at $13,553 and filed its return with the supervisor, together with the requested affidavit and a letter reminding him of the earlier telephone conversation.
There matters stood until September 1972, when the taxpayer received a letter from the Tax Division stating that additional taxes were owed based on the Director's finding that the taxpayer was authorized to issue ten million shares on the last day of its 1968 fiscal year.*fn2 In February 1973, following a conference
with the supervisor, the taxpayer was advised by letter of the Tax Division's final determination to assess an additional $26,369.79 in taxes, plus interest. In addition to stating that payment was required within 30 days, the letter informed the taxpayer of its right to take an appeal pursuant to N.J.S.A. 54:10A-19.2, and set out the requirements of that provision. The taxpayer promptly filed an appeal with the Division of Tax Appeals but neither paid the additional tax nor posted security, steps which the Director contends are alternative requirements for an appeal under section 19.2.
Through testimony of the attorney who prepared the restated certificate of incorporation and the accountant who recommended the subsequent reduction in General Trading's authorized capitalization, the taxpayer attempted to show that there was no identifiable business purpose behind the initial decision to authorize ten million shares for this closely-held corporation. Characterizing the choice of a ten million share figure as arbitrary and inadvertent, the taxpayer argued that the restated certificate of incorporation should not result in additional tax liability but should be treated in the same manner as a clerical error appearing on a tax return. The judge of the Division of
Tax Appeals apparently agreed. He acknowledged that the statute did not authorize the Director to ignore the tax consequences that result from a formal increase in authorized shares, but reasoned that the broad administrative authority to correct mistakes extended to cases involving inadvertence and excusable neglect. Concluding that the taxpayer's choice of ten million shares resulted from excusable neglect or inadvertence, the judge reversed the additional assessment and entered a judgment affirming the amount of tax originally paid by General Trading.
The Appellate Division affirmed, in an unreported decision, reasoning that the record amply supported the tax judge's conclusion that the decision to authorize ten million shares was an honest mistake of judgment which should not result in additional tax liability.
We granted certification to determine whether liability under this statute may be avoided where a corporate taxpayer belatedly realizes the adverse tax consequences of its business decisions. Before turning to that issue we must consider whether taxpayer's failure to post security for the disputed tax deprived the Division of Tax Appeals of jurisdiction to hear this appeal, a contention raised by the Director, rejected by the Division of Tax Appeals, and not addressed by the Appellate Division.
We begin with the premise that "[t]he right of appeal to the Division of Tax Appeals is purely statutory and the appellant is required to comply with all applicable statutory requirements." Hackensack Water Co. v. Division of Tax Appeals, 2 N.J. 157, 164 (1949). See also City of Newark v. Fischer, 3 N.J. 488 (1950); Clairol, Inc. v. Kingsley, 109 N.J. Super. 22, 25 (App.Div.1970), aff'd o.b., 57 ...