On appeal from Tax Court of New Jersey, whose decision is reported at 13 N.J. Tax 359 (Tax 1993).
Before Judges Petrella, Brochin and Cuff.
The opinion of the court was delivered by
This appeal concerns whether Rollins Leasing Corporation (Rollins), the taxpayer, properly deducted interest expenses on certain notes payable to a trustee for debenture holders on its Corporation Business Tax (CBT) returns for the years between October 1, 1984 and September 30, 1989. Rollins appeals from the December 13, 1993 order and final judgment entered in favor of the Director, Division of Taxation (Director), by the Tax Court, which upheld the Director's disallowance of certain interest deductions.
The matter was tried in the Tax Court largely on stipulated facts, and the decision is reported at 13 N.J. Tax 339. Rollins, a Delaware corporation, is a wholly-owned subsidiary of Rollins Truck Leasing Corporation (RTL),*fn1 a publicly-held company listed on the New York Stock Exchange. Rollins is engaged in leasing, renting, and maintaining trucks, tractors, and trailers.
To provide Rollins with cash for its operations, RTL issued a series of debentures in the public market between April 18, 1983 and March 15, 1989.*fn2 At the same time, RTL transferred the funds raised to Rollins in exchange for a promissory note payable to RTL, and in accordance with various loan agreements and a collateral trust indenture, dated as of March 21, 1983 (with various subsequent supplements).
All documents acknowledged that they were subject to the March 21, 1983 trust indenture (and subsequently also to seven supplements thereto) between RTL and Continental. The latter corporation is a publicly-held banking institution and is unrelated to Rollins, RTL, or any affiliates.
In all, eight promissory notes were issued according to the loan agreements, under which Rollins and RTL agreed to the assignment and negotiation of the notes and loan agreements, as security, to Continental Illinois National Bank and Trust Company of Chicago (Continental), trustee for RTL's debenture holders. RTL first assigned its "right, title and interest" in the notes to Continental in an April 18, 1983 "Assignment of Loan Agreement," which Continental also signed and accepted. Rollins consented to the assignment. The assignment agreement referred to the terms of the collateral trust indenture (and any supplements thereto). Consequently, Rollins paid the principal and interest on the promissory notes directly to Continental. Significantly, the loan agreement provided Continental, as holder of the notes, with the following remedies in the event Rollins defaulted:
SECTION 10. Remedies. The holder of the Note, being a party to, or an assignee of, this Agreement, shall be entitled and empowered to institute any suits, actions or proceedings at law, in equity or otherwise, whether for the specific performance of any covenant or agreement contained herein or in the Note or in aid of the exercise of any power granted herein or in the Note, or may proceed to enforce the payment of the Note after demand, or to enforce any other legal or equitable right as holder of the Note, or may proceed to take any action authorized or permitted under the terms of the Indenture with respect to the Note or under any applicable law.
The loan agreement further provided in Section 11:
Section 12 of the loan agreement stated:
Successors and Assigns. All the covenants, warranties and agreements contained in this Agreement by or on behalf of the Corporation, the Borrower or the holder of the Note shall bind and inure to the benefit of their respective successors and assigns, whether so expressed or not.
On July 23, 1991, the Director issued a notice of tax assessment to Rollins and assessed CBT deficiencies totaling $251,936, plus interest and penalties, for the taxable periods between October 1, 1984 through September 30, 1989. These deficiencies resulted, in part, because the Director disallowed certain amounts Rollins had excluded as interest expense on its CBT returns. 13 N.J. Tax at 362. Rollins protested the assessment, and the parties subsequently conferred. The Director then issued "a revised final determination in the amount of $239,063, plus penalties and interest." Ibid.
The Tax Court upheld the final determination of the Director (with minor modifications to the amount owed by Rollins), reasoning that RTL was the primary obligor under the debenture agreements. Id. at 369. Although the Tax Court appropriately ruled out indirect payments of the debt from Rollins to RTL, id. at 369-370, it then found that the payments were direct payments owing from Rollins to RTL, stating:
The use of a trustee and the negotiation of the notes are integral parts of the transaction in which the parent has borrowed directly for the purpose of lending to its subsidiary. The payments by taxpayer to the trustee constitute a repayment by the subsidiary of the parent's primary obligation to repay the debentures. Therefore, the loan ...