On appeal from final judgments of the New Jersey Tax Court whose opinion is reported at 7 N.J. Tax 51.
Antell, Shebell and Muir. The opinion of the court was delivered by, Antell, P.J.A.D.
Plaintiffs, consisting of fourteen domestic oil producers, appeal from a determination of the Tax Court requiring taxes paid to the federal government under the Crude Oil Windfall Profit Tax Act of 1980, 26 U.S.C.A. §§ 4986-4998, (hereinafter referred to as "WPT") to be included as taxable income under the New Jersey Corporation Business Tax Act, N.J.S.A. 54:10A-1 et seq. (hereinafter referred to as "CBT"). The opinion of the Tax Court is reported at 7 N.J. Tax. 51 (Tax Ct.1984). The essential factual and statutory framework is not in dispute.
The CBT was amended in 1958 to provide for the payment of taxes on "entire net income." This is defined by N.J.S.A. 54:10A-4(k) as follows:
(k) "Entire net income" shall mean total net income from all sources, whether within or without the United States, and shall include the gain derived from the employment of capital or labor, or from both combined, as well as profit gained through a sale or conversion of capital assets. For the purpose of this act, the amount of a taxpayer's entire net income shall be deemed prima facie to be equal in amount to the taxable income, before net operating loss deduction and special deductions, which the taxpayer is required to report to the United States Treasury Department for the purpose of computing its federal income tax; provided, however, that in the determination of such entire net income,
(2) Entire net income shall be determined without the exclusion, deduction or credit of:
(C) Taxes paid or accrued to the United States on or measured by profits or income. . . .
This appeal focuses on the proviso that entire net income shall be determined "without the exclusion, deduction or credit of: * * * [t]axes paid or accrued to the United States on or measured by profits or income . . .," referred to as the "add-back" provision. As the Tax Court observed, the precise issue is whether the WPT tax is a tax on or measured by profits or income within the meaning of the foregoing enactment.
The WPT was enacted by Congress following the removal of controls upon the price of domestically produced crude oil. The effect of decontrol was to enable the oil producers to receive prices paid on the world market in competition with foreign producers. As respondent acknowledges, the WPT is a federal excise tax imposed upon the difference between world prices and the adjusted base price, which is the controlled price after allowance for inflation and severance taxes. The so-called windfall profit lies in the difference between the two prices. The tax is imposed on each barrel of crude oil when it is brought to the surface and "removed from the premises," 26 U.S.C.A. § 4986(a), regardless of how much the producer later receives for the barrel, whether it is ever resold on the market and even if it is lost or destroyed. Its consequences are in no way dependent upon the realization of gain or income, and no
provision is made for a refund or credit should the barrel not be sold. However, the WPT provides for a "net income limitation" which confines the tax base to the lesser of the windfall profit per barrel or 90% of the net income attributable to the barrel. 26 U.S.C.A. § 4988(b)(1). The net income attributable to the barrel is calculated by dividing the taxable income realized by the particular oil property by the number of barrels produced. 26 U.S.C.A. § 4988(b)(2).
As one commentator has noted, the term "windfall profit" in the title of the Act is, in part, a misnomer. Shurtz, "The Windfall Profit Tax-Poor Tax Policy? Poor Energy Policy?," 34 U.Miami L.Rev. 1115, 1117 (1980). The structure of the Act is designed to increase the production of domestic oil and to promote energy independence for the United States. Id. at 1156. Thus, oil exploration is encouraged by imposing varying rates of taxation ranging from 30% to 70% on different "tiers" of oil. 26 U.S.C.A. § 4987(b). To greatly simplify, tier-one oil, upon which the highest tax rate is imposed, comes from properties which were producing before 1973; tier-two oil comes from properties which began production after 1972; tier-three oil includes oil produced through very expensive tertiary recovery techniques and oil discovered after January 1979. See 26 U.S.C.A. § 4991; Robison, "The Misnamed Tax: The Crude Oil Windfall Profits Tax of 1980," 84 Dickinson L.Rev. 589, 592-595 (1980). Under the Act, certain newly produced oil, such as that taken from a property in Alaska outside one of the existing ...