On certification to the Superior Court, Appellate Division.
For affirmance -- Justices Clifford, Schreiber, Pollock and Garibaldi. For reversal -- Justices Handler and O'Hern. The opinion of the Court was delivered by Schreiber, J. Handler, J., dissenting. O'Hern, J., joins in the dissenting opinion.
[96 NJ Page 408] This case, like its companion, Fedders Financial Corp. v. Director, Div. of Taxation, 96 N.J. 376 (1984),
requires us to interpret provisions of the New Jersey Corporation Business Tax Act (the Act). The tax under the Act is measured by a corporation's net worth and net income. One provision in dispute made a corporation's "indebtedness owing directly or indirectly" to holders of 10% or more of the corporation's outstanding shares includible in the corporation's net worth. N.J.S.A. 54:10A-4(d).*fn1 The other disputed provision stated that 90% of the amount paid in interest on such indebtedness may not be excluded in computing its net income. At issue again is the meaning of the phrase "owing directly or indirectly" in the context of a corporation's debts owing to an affiliated (nonparent) company.
The Director of the New Jersey Division of Taxation, Department of the Treasury (the Director), determined that plaintiff, Mobay Chemical Corporation, in computing its tax liability under the Act for the year 1974, should have included in the calculation of plaintiff's "net worth" under N.J.S.A. 54:10A-4(d) and -4(e) an indebtedness owed to an affiliated corporation, and should not have excluded when calculating "net income" under N.J.S.A. 54:10A-4(k)(2)(E) and -4(e) 90% of the interest on this debt. The Director, basing his decision on these two statutory provisions, denied plaintiff's refund claim for $68,826.77.
The taxpayer's appeal to the then-existing Division of Tax Appeals was transferred to the Tax Court in accordance with N.J.S.A. 2A:3A-26. The Tax Court upheld plaintiff's claim for a refund. 3 N.J. Tax 597 (1981). In an unpublished per curiam opinion the Appellate Division affirmed, substantially for the reasons expressed in the Tax Court's opinion. We granted the Director's petition for certification, 93 N.J. 274 (1983), and affirm for the same reasons expressed in our
opinion in Fedders v. Director, Div. of Taxation, supra, decided this day.
The parties stipulated the facts. Plaintiff, a New Jersey corporation, was the product of a merger in 1971 of six affiliated companies of Farbenfabriken Bayer Aktiengesellschaft (Bayer A.G.), a corporation organized under the laws of the Federal Republic of Germany. Plaintiff has been primarily involved in manufacturing and marketing chemical products such as polyurethanes, thermoplastics, and synthetic fibers. As of December 31, 1974, the relevant date for this tax assessment under the Act, plaintiff's stock was owned by Rhinechem Corporation, whose stock in turn was owned by Bayer International Finance N.V., whose stock in turn was owned by Bayer A.G. Another wholly owned subsidiary of Bayer A.G. was Baychem Funding Corporation (Baychem Funding), whose sole function was to serve as a vehicle for debt financing for the plaintiff. Another Bayer A.G. subsidiary that played a part in the debt financing was Bayer Nederland B.V. The corporate schematic was as follows:
Bayer International Finance N.V. Baychem Funding
Rhinechem Corporation Bayer Nederland B.V.
On December 31, 1974, the plaintiff was indebted in the principal amount of $56,000,000 to Baychem Funding. At issue is whether this indebtedness owed to an affiliated corporation with a common parent, Bayer A.G., which the Director claims is owed indirectly to that parent, is includible in calculating the plaintiff's net worth. Also at issue is whether 90% of the ...