On appeal from Tax Court of New Jersey, whose opinion is reported in 4 N.J. Tax. 638 (1983).
Botter, Pressler and O'Brien. The opinion of the court was delivered by Botter, P.J.A.D.
We affirm the judgment below substantially for the reasons stated by Judge Crabtree. Some additional comments are appropriate.
Plaintiff American Telephone and Telegraph Company (AT & T) appeals, and the Director of the Division of Taxation cross appeals, from a decision of the Tax Court, 4 N.J. Tax. 638, interpreting the Corporation Business Tax Act (CBTA), N.J.S.A. 54:10A-1 et seq., and pertinent regulations. The decision deals with the "receipts fraction" specified in § 6(B), N.J.S.A. 54:10A-6(B), which is part of the business allocation factor. The issues involve the treatment of two types of revenue received by AT & T. One type is revenue which returns to AT & T from investments made with its idle cash.*fn1 The other is revenue received from the sale of surplus equipment which had been used by AT & T in its telecommunications business.
A short description of the nature and history of the CBTA is contained in F.W. Woolworth Co. v. Director, Div. of Taxation, 45 N.J. 466 (1965). The CBTA tax is computed by adding together specified percentages of a corporation's net worth and net income. N.J.S.A. 54:10A-4(d), -4(k), and -5. When the CBTA was first enacted by L. 1945, c. 162, net worth was the only basis used. The income tax element was added by L. 1958, c. 63. A business allocation factor is used to measure the relationship of business operations in New Jersey with that of the entire operations of a corporate enterprise doing a multi-state and international business. N.J.S.A. 54:10A-4(b); N.J.S.A. 54:10A-6. The formula provided in § 6, N.J.S.A. 54:10A-6, requires that a portion of the entire net worth used to measure the tax imposed by § 5(a), N.J.S.A. 54:10A-5(a), and a portion of entire net income used to measure the tax imposed by § 5(c), N.J.S.A. 54:10A-5(c), be determined by multiplying the entire net worth and entire net income by the average of fractions specified in §§ 6(A), (B) and (C). These fractions represent the New Jersey portion of (a) the value of real and tangible personal property, (b) business receipts and (c) business payroll divided respectively by the total value of tangible property, receipts and payroll of the entire enterprise. The only fraction we are concerned with is the "receipts fraction." This is defined by N.J.S.A. 54:10A-6(B). In a simplified version the fraction is:
New Jersey related receipts from sales, services, etc./Total receipts of taxpayer from sales, services, etc.
As stated above, the issues on appeal concern the inclusion or exclusion in this fraction of (a) revenues received by AT & T from investment of its idle cash in short term obligations, consisting of bonds, certificates of deposits (CDs), commercial paper and similar obligations (termed herein "investment paper") and (b) the sale of business equipment used by AT & T which it determined was no longer needed. The director contends
that only interest earned on investment paper is to be included in the receipts fraction.*fn2 The taxpayer contends that all revenues received upon redemption or sale of investment paper should be included in the fraction and that all revenues received from the sale of its used equipment should also be included in the fraction. In the Tax Court, Judge Crabtree rejected AT & T's position except that he held that the net gain (see infra, note 4), if any, from the sale or redemption of investment paper and from the sale of business equipment should be included in the fraction. The director objects even to the inclusion of net gains resulting from these sales or redemptions, contending that such revenues can be included only when sales are made by a taxpayer regularly engaged in the business of selling investment paper or used equipment of the nature involved. Substantially for the reasons stated by Judge Crabtree, as modified and supplemented by this opinion, we concur in Judge Crabtree's conclusions. This disposition makes it unnecessary for us to consider the director's alternate contention, which is not disputed by AT & T, that the director has the power under N.J.S.A. 54:10A-8 to exclude revenues from these sources if they improperly distort the business allocation factor in a particular case.
We uphold as a general matter the exclusion of gross revenues received by plaintiff from the sale or maturity of investment paper. As Judge Crabtree observed, idle cash can be turned over repeatedly by investment in short term securities. It is no true reflection of the scope of AT & T's business done within and without New Jersey to allocate to the numerator or the denominator of the receipts fraction the full amount of money returned to AT & T upon the sale or redemption of investment paper. To include such receipts in the fraction would be comparable to measuring business activity by the
amount of money that a taxpayer repeatedly deposited and withdrew from its own bank account. The bulk of funds flowing back to AT & T from investment paper was simply its own money. Whatever other justification there is for excluding such revenues from the receipts fraction, it is sufficient to say that to do otherwise produces an absurd interpretation of § 6(B). "It is axiomatic that a statute will not be construed to lead to absurd results. All rules of construction are subordinate to that obvious proposition. [Even the rule of strict construction] does not ...