On certification to the Superior Court, Appellate Division.
For affirmance -- Justices Garibaldi, Pollock, Stein and Clifford. For reversal -- Justices O'Hern and Handler. The opinion of the Court was delivered by Garibaldi, J. Clifford, J., concurring. O'Hern, J., dissenting.
This appeal requires us to interpret provisions of the New Jersey Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40. Under the Act, the tax is measured by a corporation's net worth and net income. This case concerns the calculation of net income. Specifically, at issue is N.J.S.A. 54:10A-4(k)(1) (section 4(k)(1)), which provides that 100% of the dividends that a corporate taxpayer receives from a subsidiary owned by the taxpayer "to the extent of 80% or more ownership of investment" shall be excluded from the taxpayer's net income. The critical question is whether section 4(k)(1) requires direct record ownership of 80% of a subsidiary's stock or whether it is permissible for the corporate taxpayer and its wholly-owned subsidiary to aggregate the stock that they own in the dividend-paying subsidiary in order to satisfy the 80% ownership test.
The facts are stipulated. International Flavors and Fragrances, Inc. (IFF), a New York corporation authorized to do business in New Jersey, is subject to the New Jersey Corporation Business Tax Act. During 1975 and 1976, the tax years in issue, IFF owned 100% of the capital stock of International Flavors & Fragrances IFF (Nederland) B.V. (IFF-Holland), 30%
of the capital stock of International Flavors & Fragrances IFF (France) S.A.R.L. (IFF-France), and 63% of the capital stock of I.F.F. Essencia & Frangrancias Ltda. (IFF-Brazil). IFF's wholly-owned subsidiary IFF-Holland owned all of the remaining stock of IFF-Brazil and IFF-France.
During the tax years 1975 and 1976, IFF received dividends from IFF-France and IFF-Brazil that it included in its taxable income for federal income-tax purposes.*fn1 On its New Jersey corporation business-tax return, IFF excluded from its entire net income-tax base 100% of the dividends that it received from IFF-France and IFF-Brazil pursuant to section 4(k)(1).*fn2
The Director of the New Jersey Division of Taxation, Department of the Treasury (the Director), took the position that "80% or more ownership of investment" required that IFF be the direct record owner of the stock of IFF-Brazil and IFF-France. Consistent with this interpretation, the Director issued a final determination that IFF had underreported its net income-tax base by failing to include 50% of the dividends that it had received from IFF-France and IFF-Brazil during the tax
years in issue.*fn3 The Director, therefore, assessed additional taxes and interest for those years. IFF filed a complaint with the Tax Court, contending that it met the "80% or more ownership of investment" test by aggregating IFF and IFF-Holland's direct ownership of stock in IFF-France and IFF-Brazil. Thus, IFF argues that it was entitled to the 100% dividend exclusion from net income even though it was not the record owner of 80% of the stock of IFF-Brazil and IFF-France, because the remainder of the stock of those corporations was owned by IFF-Holland, its wholly-owned subsidiary.
The Tax Court held that IFF-France and IFF-Brazil were 80%-owned subsidiaries of IFF under section 4(k)(1) and therefore IFF was entitled to the 100% dividend exclusion. 5 N.J. Tax. 617 (1983). In a published per curiam opinion, the Appellate Division affirmed, 7 N.J. Tax. 652, essentially for the reasons stated in the Tax Court's opinion, with a brief additional discussion of Fedders Fin.Corp. v. Director, Div. of Taxation, 96 N.J. 376 (1984), and Mobay Chem. Corp. v. Director, Div. of Taxation, 96 N.J. 407 (1984).
The New Jersey Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40, enacted in 1945, requires a corporation to pay a franchise tax "for the privilege of having or exercising its corporate franchise in this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State." N.J.S.A. 54:10A-2. The tax is assessed on the basis of entire net income. N.J.S.A. 54:10A-5.
Entire net income is defined as total net income from all sources, and is deemed prima facie equal to the taxable income that the taxpayer is required to report to the United States
Treasury Department, with exceptions that are not pertinent here. N.J.S.A. 54:10A-4(d), -4(b), -5. The Act provides for certain adjustments to federal taxable income. One such adjustment is at issue in this case, namely, N.J.S.A. 54:10A-4(k)(1), which states:
Entire net income shall exclude 100% of dividends which were included in computing such taxable income for federal income tax purposes, paid to the taxpayer by one or more subsidiaries owned by the taxpayer to the extent of the 80% or more ownership of investment described in subsection (d) of this section. With respect to other dividends, entire net income shall not include 50% of the total included in computing such taxable income for federal income tax purposes * * *. (Emphasis added.)
"Ownership of investment" is described in N.J.S.A. 54:10A-4(d) (section 4(d)), which provides for a reduction in the net worth of a corporation. In pertinent part, it reads:
The foregoing aggregate of values shall be reduced by 50% of the amount disclosed by the books of the corporation for investment in the capital stock of one or more subsidiaries, which investment is defined as ownership (1) of at least 80% of the total combined voting power of all classes of stock of the subsidiary entitled to vote and (2) of at least 80% of the total number of shares of all other classes of stock except nonvoting stock which is limited and preferred as to dividends. In the case of investment in an entity organized under the laws of a foreign country, the foregoing requisite degree of ownership shall effect a like reduction of such investment from net worth of the taxpayer, if the foreign entity is considered a corporation for any purpose under the United States federal income tax laws, such as (but not by way of sole examples) for the purpose of supplying deemed-paid foreign tax credits or for the purpose of status as a controlled foreign corporation. (Emphasis added.)
The critical question is whether the New Jersey Legislature intended to exclude from a corporation's net income base 100% of the dividends that it receives from an indirectly-owned subsidiary. We look first at the statutory language. It is a well-established principle of statutory construction that a court should follow the clear import of statutory language. Fedders Fin.Corp. v. Director, Div. of Taxation, 96 N.J. at 385. Neither N.J.S.A. 54:10A-4(k)(1) nor N.J.S.A. 54:10A-(4)(d) contains an express requirement of record ownership. Section 4(k)(1) refers to "ownership of investment" and section 4(d)(1) speaks in terms of "total combined voting power." Therefore, to aid in
interpreting the statute, we look beyond its words to examine, first, the Legislature's purpose in adopting the 80%-of-ownership-of-investment requirement, and second, the ordinary and well-understood meaning of ownership in the corporate world. Such an examination discloses that the Legislature intended that the 80%-ownership test be satisfied by aggregating a corporate taxpayer's stock with that of its wholly-owned subsidiary in a dividend-paying subsidiary.
First, the terms used by the Legislature in N.J.S.A. 54:10A-4(k)(1), and in the pertinent part of N.J.S.A. 54:10A-4(d), all reflect the same objective. That objective, revealed in the first sentence of section 4(k)(1), is to provide relief from the potential double taxation that inheres in the taxation of corporate dividends received from a corporate subsidiary.
The 1968 amendments to the Corporation Business Tax Act, L. 1968, c. 250, which provide for the 100% exclusion of subsidiary dividends and for the section 4(d) definition of subsidiary, were designed to implement the recommendations of the State Tax Policy Commission (the Commission). It is clear that a major concern of then-Governor Richard J. Hughes and the Commission was to remove impediments to New Jersey's economic growth. Among those impediments was the treatment "afforded corporations which do business in New Jersey but also have substantial investment in subsidiaries, especially foreign subsidiaries incorporated in foreign countries and in other states." Commission on State Tax Policy, The 12th Report at XV (1968). By letter to Senator Toolan, Governor Hughes requested the Commission to study a number of proposals, including a proposal to eliminate the "taxation of dividends received by a parent company from a subsidiary company . . ." Letter from Governor Richard J. Hughes to Senator John E. Toolan (May 25th, 1967), reprinted in Commission on State Tax Policy, The 12th Report at 115. Moreover, the Governor requested the Commission "to review the New Jersey corporate tax structure, with particular reference to its effect on the
location of corporate headquarters and their capital investment employment in the state." Commission on State Tax Policy, The 12th Report at 31. The Commission's Report found that two of the three significant areas of inequity in the corporate-tax law, as it stood prior to the amendments, were its treatment of subsidiary capital and subsidiary dividends. Id. at 44. It considered those two areas of inequity to be negative factors when corporations considered where to locate their headquarters. The Commission Report stated:
Dividends received from such subsidiaries are also an important tax factor. Under the present tax law such subsidiary capital is included in the tax base for the net worth tax, and 50% of the dividends received by the parent corporation from the subsidiary are included in the tax base for the income tax. The result is that major corporations will find a serious tax disadvantage in locating their corporate headquarters in New Jersey, especially if they do a national or worldwide business in which subsidiaries are often a required form of business organization. These same corporations can be a source of important economic development, jobs and tax base for the state. [ Id. (emphasis added.)]
In the Press Release accompanying the amendment, Governor Hughes proclaimed the revisions as essential to the continuation of the equitable relationship between government and commerce. New Jersey Press Release Accompanying S. 837 (1968). He stated:
These adjustments derive from recommendations of the State Tax Policy Commission, which was established to insure that New Jersey is not left behind by other states whose tax policies have taken into account the multi-state nature of so much of today's big business. The division of income and net worth among several taxing jurisdictions, each with a legitimate interest in a business concern, presents one of the most complex and far-reaching questions which government must resolve. We in New Jersey, by this change in our law, make crystal clear our determination to derive from industry and commerce no more than a full fair share of financial support. (Emphasis added.)
The Commission's Report and Governor Hughes' statement make it clear that the major reason for the 1968 amendments adopting section 4(k)(1) was to encourage corporations to locate in New Jersey by removing the added tax on dividend income received from a subsidiary. Both the Commission and the Governor thought that New Jersey's corporate tax policy was
shortsighted, particularly with respect to the taxation of investments in, and dividends from, subsidiaries of large multi-national corporations. To make New Jersey competitive with those other states, the Commission recommended the adoption of section 4(k)(1). In so doing, the Commission and the Governor believed strongly that such corporations would be an important boost to the economic growth of the state, leading to more jobs and eventually to more taxes for the state. The solution that the Legislature chose -- to offer tax incentives to businesses in order to encourage them to locate in this state -- is not usual. Legislatures do so because they think that the benefit the entire state will derive from the infusion of new economic blood into its economy more than compensates for any temporary loss of tax revenue that it may incur.
Given the Legislature's clear objective to encourage economic growth by removing the tax on the dividends that a corporation receives from its subsidiary, we do not believe that it intended to differentiate between first-tier and second-tier subsidiaries. Whether a corporation directly owns 80% of a subsidiary's stock (first tier) or whether it indirectly owns 80% of the subsidiary's stock through a wholly-owned subsidiary (second tier) is of no matter. A corporation deciding where to locate is hardly less deterred by a tax on its second-tier subsidiary than by one on its first. IFF and its subsidiaries, notwithstanding their complex structure, retained the essential unity that the Legislature intended to favor by its enactment of N.J.S.A. 54:10A-4(k)(1).
The Director urges that we ignore the Legislature's intent and interpret the statutory provisions on the basis of the Division of Taxation's administrative practice. Since the enactment in 1968 of the statutory provisions in question, the Division of Taxation has consistently interpreted the term "subsidiary," as defined by N.J.S.A. 54:10A-4(d), and as used in N.J.S.A. 54:10A-4(k)(1), -4(d), and 54:10A-9, to require the taxpayer corporation to have actual ownership of 80% of the total
voting and nonvoting stock of another corporation, except nonvoting stock that is limited and preferred as to dividends.*fn4
Recently, in two tax cases, we specifically addressed the deference to be given an administrative agency's construction of a statute. In Airwork Servs. Div. v. Director, Div. of Taxation, 97 N.J. 290, 296 (1984), we acknowledged that the practical administrative construction of a statute over a period of years ...