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Garfield Trust Co. v. Director

Decided: May 22, 1986.

GARFIELD TRUST COMPANY, PLAINTIFF-APPELLANT,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-RESPONDENT



On certification to the Superior Court, Appellate Division.

For affirmance -- Justices Clifford, Handler, O'Hern, Garibaldi and Stein. For reversal -- none. The opinion of the Court was delivered by Garibaldi, J.

Garibaldi

This appeal presents the questions whether, first, the Federal Public Debt Statute, 31 U.S.C.A. § 742, and second, the state enabling legislation for debt obligations, exempt the principal and interest income of federal and state obligations from inclusion in the net worth and net income bases for calculating the New Jersey Corporation Business Tax (CBT). A third question of discriminatory treatment is presented only if the federal statute is interpreted to require inclusion of the principal and interest income of federal obligations in these tax bases at the same time that the state legislation is interpreted to require exclusion of the principal and interest income of state obligations, or vice versa. To answer these questions, we must determine whether the CBT is a bona fide franchise tax, whether the enabling legislation exempts state obligations from such a franchise tax, and finally whether the CBT is a nondiscriminatory franchise tax.

The petitioner, Garfield Trust Company (GTC), now known as County Trust Company, is a commercial banking corporation organized under the laws of the State of New Jersey.*fn1 In its CBT return for the tax year ending December 31, 1976, GTC included the face value of federal as well as state and local obligations in its net worth tax base, and included interest income from these securities in its net income tax base. After paying the tax, GTC filed a refund claim for $89,897 with respondent, Director of the Division of Taxation (Director), who denied the claim.

GTC then filed a complaint with the Tax Court, which affirmed the Director's denial of GTC's refund claim. 6 N.J. Tax 462 (1984). The Appellate Division in a per curiam opinion affirmed the Tax Court substantially for the reasons expressed in that court's opinion, 7 N.J. Tax. 664.

We granted GTC's petition for certification. 102 N.J. 303 (1985). We affirm.

I

The New Jersey Corporation Business Tax Act (the Act), N.J.S.A. 54:10A-1 to -40, was enacted in 1945 (L. 1945, c. 162) on the recommendation of the Report of the Commission on Taxation on Intangible Property (1945), which had endorsed the imposition of a "franchise tax" in lieu of the existing ad valorem tax on intangible property. The Act now requires, as it then required, a corporation to pay an annual 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 now is computed by adding together prescribed percentages of a net worth base and an entire net income base. N.J.S.A. 54:10A-4(d), 4(k), and 5.

The net worth base is broadly defined under N.J.S.A. 54:10A-4(d), constituting "in essence the stockholders' book equity in the corporation . . .," subject to some adjustments not relevant here. F.W. Woolworth Co. v. Director, Div. of Taxation, 45 N.J. 466, 473 (1965). The statutory definition is all-inclusive, encompassing the principal value of all securities owned by the corporate taxpayer. Motor Fin. Corp. v. Director, Div. of Taxation, 129 N.J. Super. 19, 23-24 (App.Div.), certif. den., 66 N.J. 319 (1974).

The entire net income base is prima facie the amount of taxable income reported for federal income tax purposes, less net operating loss deductions and special deductions. N.J.S.A. 54:10A-4(k). But the Legislature has provided for the following adjustments to the federal taxable income base:

(2) Entire net income shall be determined without the exclusion, deduction or credit of:

(A) The amount of any specific exemption or credit allowed in any law of the United States imposing any tax on or measured by the income of corporations;

(B) Any part of any income from dividends or interest on any kind of stock, securities or indebtedness, except as provided in subsection (k)(1) [which excludes specified dividend income from the tax base] of this section. . . . [ N.J.S.A. 54:10A-4(k)(2).]

Therefore, the entire net income base includes interest income that is derived from any kind of securities or indebtedness, notwithstanding any specific federal or state exemption or exclusion.

II

In 1976, the Federal Public Debt Statute provided that:

Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other obligations of the United States, shall be exempt from taxation by or under State or municipal or local authority. This exemption extends to every form of taxation that would require that either the obligations or the interest thereon, or both, be considered, directly or indirectly, in the computation of the tax, except nondiscriminatory franchise or other nonproperty taxes in lieu thereof imposed on corporations and except estate taxes or inheritance taxes. [31 U.S.C.A. § 742 (emphasis added).*fn2

The nondiscriminatory franchise tax exception to this statute's exemption of the principal and interest income of federal obligations from "every form of taxation" stems from Werner Machine Co. v. Director, Div. of Taxation, 17 N.J. 121 (1954), aff'd, 350 U.S. 492, 76 S. Ct. 534, 100 L. Ed. 634 (1956). To come within this exception, and therefore to include the principal and interest income of ...


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