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Amerada Hess Corp. v. Director

Decided: June 22, 1987.


On certification to the Superior Court, Appellate Division, whose opinion is reported at 208 N.J. Super. 201 (1986).

For reversal -- Justices Clifford, Handler, O'Hern, Stein and King. For affirmance -- None. The opinion of the court was delivered by King, P.J.A.D. (temporarily assigned).


This case concerns the interpretation of seven words in the New Jersey Corporation Business Tax (C.B.T.), N.J.S.A. 54:10A-1 to -40. These seven words, "on or measured by profits or income," determine whether the Federal Windfall Profit Tax on Domestic Crude Oil (W.P.T.), 26 U.S.C.A. § 4986 to § 4998, is excludable in computing the oil company plaintiffs' net income taxable under our C.B.T.

Entire net income is the base on which New Jersey's C.B.T. is assessed. The entire net income base for the C.B.T. is similar but not identical to the tax base used for federal corporate income tax purposes. Adjusted gross income for federal tax purposes is calculated by deducting certain federal and State taxes

paid by the corporation. New Jersey law specifically requires that certain amounts paid in federal taxes be added back into the tax base for calculation of the C.B.T. This is called the "add-back" provision. Thus, the base for federal corporate income tax is not identical to the "net income" base on which the C.B.T. is assessed. This difference is at the core of the dispute before us.

The fourteen plaintiffs in this case are vertically integrated oil companies that engage in every aspect of the crude oil business, including exploration, development, refining, manufacturing and marketing. None of the plaintiffs has oil producing properties in New Jersey, but all conduct other aspects of their business within this State. In this case the oil companies urge that they can exclude the amount they paid in the Federal Windfall Profits Tax on Domestic Crude Oil (W.P.T.), I.R.C. §§ 4986 to 4998, from the calculation of their net taxable income for purposes of the New Jersey's Corporation Business Tax (C.B.T.), N.J.S.A. 54:10A-1 to -40. The Director of the Division of Taxation disagrees and argues that these payments are not excludable.

The C.B.T. is a fairly allocated franchise or excise tax levied on business corporations for the privilege of "doing business, employing or owning capital or property, or maintaining an office" in New Jersey. N.J.S.A. 54:10A-2, 10A-8. The tax basis for the C.B.T. is "entire net income" which is defined in N.J.S.A. 54:10A-4(k) as

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.

However, subsection (k) also provides that

(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 * * *.

[ N.J.S.A. 54:10A-4(k)(2)(C) (emphasis supplied).]

The crucial issue in this case is whether the W.P.T. is a tax "on or measured by profits or income" within the intent of N.J.S.A. 54:10A-4(k)(2)(C). If the W.P.T. is a tax "on or measured by profits or income" within the intent of the C.B.T., the Director was correct in disallowing its exclusion from the net income base for C.B.T. purposes. At the time the net income provision was added to the corporation business tax in 1958, L. 1958, c. 63, the W.P.T. did not exist. F.W. Woolworth Co. v. Director, Div. of Taxation, 45 N.J. 466, 473 (1965). Therefore the drafters and adopters of this section of the C.B.T. could not have harbored any specific legislative intent on includability of the W.P.T., which became effective in 1980, in the tax base.

The federal "windfall profits tax on domestic crude oil," I.R.C. §§ 4986-4998 (1980), was imposed after President Carter announced that he would gradually decontrol domestic crude oil prices beginning in June 1979. The price controls originated with President Nixon's Wage and Price Controls in August 1971. The Energy Policy Act made them mandatory through May 1977 and gave the President discretion to remove them until 1981. See H.R.Rep. No. 304 96th Cong. 1st Sess. 1980 U.S.Code Cong. & Ad.News 1980, 410, 591. 42 U.S.C.A. § 6201, and scattered sections to § 6392. Because of the shortage of crude oil for American markets caused by supply cut-backs by Iran and other foreign producers, President Carter decided to exercise his authority and decontrol prices during 1979. The background of the W.P.T. was described by Justice Powell in United States v. Ptasynski, 462 U.S. 74, 76-77, 103 S. Ct. 2239, 2240, 2241, 76 L. Ed. 2d 427 (1983).

In 1979, President Carter announced a program to remove price controls from domestic oil by September 30, 1981. [See H.R.Rep. No. 96-304, 5 (1979) reprinted in 1980 U.S.Cong. & Ad.News 593]. By eliminating price controls, the President sought to encourage exploration for new oil and to increase production of old oil from marginal economic operations. See H.R.Doc. No. 96-107, 2 (1979). He recognized, however, that deregulating oil prices would produce substantial gains (referred to as "windfalls) for some producers. The price of

oil on the world market had risen markedly, and it was anticipated that deregulating the price of oil already in production would allow domestic producers to receive prices far in excess of their initial estimates. See ibid. Accordingly, the President proposed that Congress place an excise tax on the additional revenue resulting from decontrol.

Congress responded by enacting the Crude Oil Windfall Profit Tax Act of 1980, 94 Stat. 229, 26 U.S.C. § 4986 et seq. (1976 ed., Supp V) [I.R.C. §§ 4986 to 4998]. The Act divides domestic crude oil into three tiers and establishes an adjusted base price and tax rate for each tier. See §§ 1986, 1989, and 4991. The base prices generally reflect the selling price of particular categories of oil under price controls, and the tax rates vary according to the vintages and types of oil included within each tier. See Joint Committee on Taxation, General Explanation of the Crude Oil Windfall Profit Tax Act of 1980, 96th Cong., 26-36 (Comm.Print 1981). The House Report explained that the Act is "designed to impose relatively high tax rates where production cannot be expected to respond very much to further increases in price and relatively low tax rates on oil whose production is likely to be responsive to price." H.R.Rep. No. 96-304, at 7 [reprinted in 1980 U.S.Cong. & Ad.News 594]; see S.Rep. No. 96-394, p. 6 (1979) [reprinted in 1980 U.S.Cong. & Ad.News 417]

Thus, the windfall tax was imposed on the incremental income attributable to decontrol of domestic oil prices. This incremental income was created by the cartel-generated international oil shortages, which had driven up foreign oil prices. It was attributable to world market conditions designed to limit supply and to raise prices; it was not generated by any infusions of capital or the expenditure of creative entrepreneurial energy by the domestic oil producers. Thus, there emerged the concept of taxing "windfall profits," or profits not earned by traditional economic activity as known to our economy. In mid-1979 just before the beginning of President Carter's decontrol of oil prices, the controlled price of "old" oil was $5.86 a barrel, the controlled price of "new" oil was $13.06 a barrel, and the uncontrolled world price was approaching $20 per barrel. The world price eventually reached $30 per barrel.

The W.P.T. differed from the regular federal corporate income tax as it was imposed on production at the wellhead rather than on these integrated domestic producers' overall net profits or income ultimately calculated from gross sales and net profits as measured at the pump. This method of taxation creates the dispute at hand -- whether the W.P.T. is "on or

measured by profits or income" or is another species of tax. As noted, the basic measure of the windfall profit was the difference between the uncontrolled and controlled price of a barrel of crude oil at the point the oil was removed from the producing property. The actual tax rate varied from 30% to 70%, I.R.C. § 4987, and was determined by the length of time the property had been productive. Because oil from newly-productive property was taxed at a lower rate than oil from older wells, tax differentials motivated exploration for and discovery of new oil-producing properties by the domestic companies, thus reducing dependency on foreign oil.

A net income limitation (N.I.L.) also was enacted by Congress to insure that the W.P.T. would not be imposed on a company when the costs of production exceeded the income from a particular property. I.R.C. § 4988. The N.I.L. placed a ceiling on the taxable windfall profit equal to 90% of the net income from a barrel of oil, netting barrels sold at a profit with barrels selling at a loss. I.R.C. § 4988(b). The W.P.T. was imposed on the lesser of the windfall profit or 90% of the net income per barrel. All fourteen respondent oil companies used the N.I.L. to calculate their W.P.T. liability for the taxable years under scrutiny, 1980 and 1981. The use of the N.I.L. resulted in a total savings of $1,685,465,293 to these taxpayers over the tax that would have applied if the wellhead assessment had stood alone without the N.I.L. The W.P.T. is a deduction for federal income tax purposes. I.R.C. §§ 164(a)(4), 4988(b). The W.P.T. remains effective until December 1990 or until $227.3 billion is realized, whichever is later. I.R.C. § 4990.

In the spring of 1983 the fourteen respondent oil companies filed complaints in the New Jersey Tax Court challenging either assessments for deficiencies or denial of refund claims in respect of all of their 1980, and in five instances their 1981, C.B.T. returns. The Director of the Division of Taxation in each case had denied deduction of the W.P.T. from the C.B.T. "net income" base. For each denial, the Director had relied on the position of the New York State Department of Taxation and [107 NJ Page 316] Finance, which ruled in May 1982 that the W.P.T. was a measure of profits and not excludable for purposes of determining income under the New York Corporate Franchise Tax, which is similar to the C.B.T. TSI-M 82 (227) CCH State Tax Rptr. (N.Y.) para. 9-909. The New York administrative ruling, set out in the margin in full, concluded: "As the windfall profit tax is measured by profit the modification is required and the tax must be added to entire net income."*fn1

The oil companies and the Director filed cross-motions for summary judgment in the Tax Court. Judge Conley granted summary judgments for the Director. Amerada Hess v. Director, Div. of Taxation, 7 N.J. Tax. 51 (1984) (Amerada I). He concluded that our "legislature surely perceived the windfall profits tax to be a tax on profits or income and felt no need to amend the corporation business tax for that reason." Id. at 56. In holding that the sum of the W.P.T. must be included in the "net income" base, Judge Conley accepted the Director's contention that the Legislature did not have to amend the C.B.T. after the W.P.T. was enacted because the W.P.T. already fell within the "add-back" provision of N.J.S.A. 54:10A-4(k)(2)(C). He rejected the oil companies' contention that because the Legislature did not amend the C.B.T., the W.P.T. did not fall within the "add-back" provisions and that excludability was intended.

The oil companies moved for reconsideration of Judge Conley's decision. Judge Lario, who was assigned to hear these motions because Judge Conley had resigned from the bench to return to private practice, refused to "substitute . . . [his] interpretation of the Legislature's intent," for that of Judge Conley. Amerada Hess Corp. v. Director, Div. of Taxation, 7 N.J. Tax. 275, 282 (1985) (Amerada II).

The Appellate Division reversed the Tax Court and held that the W.P.T. was "a federal excise tax imposed upon the difference between world prices and the adjusted base price." Amerada Hess Corp. v. Director, Div. of Taxation, 208 N.J. Super. 201, 203 (1986) (Amerada III), and that in calculating the net income base for the purposes of C.B.T., the oil companies could exclude the W.P.T.. The Appellate Division reasoned that since the W.P.T. was imposed as each barrel of crude oil is brought to the surface, "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," id. at 203-04, and held that "the W.P.T. is not a tax on or measured by profits or income within the meaning of N.J.S.A. 54:10A-4(k)(2)(C)." The Appellate Division did not think that the 90% N.I.L. materially influenced the analysis because the N.I.L. was calculated on "properties" of the oil producer and not on "overall profitability." Ibid.

For the reasons given below, we reverse the judgment of the Appellate Division and reinstate the judgment of the Tax Court.


We conclude that the Tax Court properly applied the principle of probable legislative intent in deciding that the phrase in N.J.S.A. 54:10-4(k)(2)(C), "taxes paid or accrued to the United States on or measured by profits or income," included the W.P.T. The principle of probable intent applies where the legislative body, when adopting a statute, could not have contemplated a specific situation. In such a case we have said:

Generally, a court's duty in construing a statute is to determine the intent of the Legislature. In cases such as this, where it is clear that the drafters of a statute did not consider or even contemplate a specific situation, this Court had adopted as an established rule of statutory construction the policy of interpreting the statute "consonant with the probable intent of the draftsman 'had he anticipated the situation at hand'." J.C. Chap. Prop. Owner's etc. Assoc. v. City Council, 55 N.J. 86, 101 (1969) (quoting Dvorkin v. Dover Tp., 29 N.J. 303, 315 (1959)); Safeway Trails, Inc. v. Furman, 41 N.J. 467 appeal dismissed and cert. den., 379 U.S. 14, 85 S. Ct. 144, 13 L. Ed. 2d 84 (1964). Such an interpretation will not "turn on literalisms, technisms or the so-called rules of interpretation;

[rather] it will justly turn on the breadth of the objectives of the legislation and the commonsense of the situation." J.C. Chap. Prop. Owner's, 55 N.J. at 100. [ AMN, Inc. v. South Brunswick Township Rent Leveling Bd., 93 N.J. 518, 525 (1983).]

One commentator has noted, "Legislative purpose may also be a valuable guide to decision in cases where the effect of a statute on the situation at hand is unclear . . . because the situation was unforeseen at the time when the act was passed, . . ." 2A C. Sands, Sutherland Statutory Construction, § 45.09 (4th ed. 1984) (hereinafter Sutherland). The "common sense" of this situation, as we perceive it, and as the Tax Court pointed out, Amerada I, 7 N.J. Tax. at 56, is that if the Legislature had anticipated the enactment of the W.P.T., it would have been concerned over the possible effect of a new federal tax on profits on the State's revenues. The deductibility of the W.P.T. would shrink the State's tax base by the amount of the taxes paid. We think the Legislature probably would have viewed the W.P.T. as a tax on the "profits" and "income" of oil companies, thereby avoiding a revenue loss. Thus, no amendment to the C.B.T. would have been necessary to embrace the W.P.T. within the inclusive basis of N.J.S.A. 54:10A-4(k)(2)(C).

We reject the oil companies' contention that the doctrine of legislative intent has no application because the meaning of the statute is unclear and all doubts should be resolved in favor of the taxpayer. See Fedders Fin. Corp. v. Director, Div. of Taxation, 96 N.J. 376, 386 (1984); see also White v. United States, 305 U.S. 281, 292, 59 S. Ct. 179, 184, 83 L. Ed. 172 (1938), where Justice Stone said

We are not impressed by the argument that, as the question here decided is doubtful, all doubts should be resolved in favor of the taxpayer. It is the function and duty of the courts to resolve doubts. We know of no reason why that function should be abdicated in a tax case more than in any other where the rights of suiters turn on the construction of a statute and it is our duty to decide what that construction fairly should be.

Here we do not think the statute is unclear or of doubtful meaning. Moreover, where the taxpayer seeks exemption or deduction urging exclusion from ...

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