The opinion of the court was delivered by: Lasser
International Thomson Business Information, Inc. *fn1 (Taxpayer) contests the denial of its election to be taxed as an investment company. Corporation business tax (CBT) assessments imposed by the Director of the Division of Taxation (Director) for the tax years 1986, 1987 and 1988 and Director's denial of Taxpayer's 1988 refund claim are in issue. Director denied Taxpayer's election to be taxed as an investment company under N.J.S.A. 54:10A-5(f) and 54:10A-4(d). A trial was held on the factual and legal issues.
For the tax years in contest, Taxpayer filed New Jersey CBT tax returns pursuant to N.J.S.A. 54:10A-1 et seq. and elected on the returns to be taxed as an investment company. An investment company's CBT is calculated on 25% of the taxpayer's net income and net worth *fn2 whereas a regular corporation's CBT is based on the taxpayer's entire net income and net worth. N.J.S.A. 54:10A-5(d). Director disallowed Taxpayer's election as an investment company and in a final determination and notice of assessment dated July 16, 1991, assessed Taxpayer $152,838 plus interest for the tax years 1986, 1987 and 1988.
During the tax years in contest, Taxpayer was one of 150 corporations which made up the Thomson Corporate Group. Taxpayer, a Delaware corporation with its principal place of business in New Jersey during the tax years in contest, is a company which holds the stock of its wholly owned subsidiaries. Taxpayer's subsidiaries are all in the publishing business. In at least one case, a subsidiary of Taxpayer has subsidiaries of its own. Taxpayer is itself a wholly owned subsidiary of International Thomson Organization, Inc., which, in turn, is a wholly owned subsidiary of International Thomson Holdings, Inc.
The following facts for the years 1986-1988 were established by testimony of Taxpayer's chief executive officer (CEO) and the vice president of tax of International Thomson Holdings, Inc.
Taxpayer was the parent of nine subsidiaries in 1986 and six in 1987 and 1988 (hereinafter referred to as "the subsidiaries"). Taxpayer's investment in these subsidiaries is:
1/1/86 1/1/87 1/1/88 12/31/88
$48,948,226 $85,011,094 $144,971,279 $144,886,279
Taxpayer's subsidiaries operate autonomously. Each has its own management, administrative, finance and human resources staffs. Each keeps its own books and files separate state and local tax returns. Each has a different insurance and pension plan, since each had its own plan when it was acquired by Taxpayer.
Taxpayer's income for the years in question is:
Management Fee *fn3 $3,097,000 $2,675,000 $2,577,000
Interest 21,993 70,281 103,166
Other Adjustments -0- 77,685 39,459
Total Net Income $3,118,993 $2,822,966 $2,719,625
In September 1991, Taxpayer filed a protective $15,045 refund claim for 1988 claiming that it overstated its management fee income by $711,325 for that year. In addition, Taxpayer claims it overstated its management fee income by $412,637 and $581,000 for 1986 and 1987, respectively. Director contends, and Taxpayer concedes, that refund claims for 1986 and 1987 are barred by the two-year statute of limitations. Taxpayer asserts, however, that in the event it is determined not to be an investment company, the alleged overpayments should be used to offset any deficiencies in additional tax payments due. Similarly, the protective claim for 1988 was filed in the event taxpayer is found not to be an investment company.
The management fee is an amount Taxpayer charges its subsidiaries for overhead and expenses incurred for overseeing its investment in the subsidiaries. Examples of the charges are Taxpayer's salaries, rents, employee benefits and travel and entertainment. In justifying the charges for this management fee, Taxpayer's CEO stated that the subsidiaries receive benefits from their association with a Thomson-affiliated group. Taxpayer's CFO stated that Taxpayer's expenses were charged to the subsidiaries because they were for the benefit of the subsidiaries and would have been incurred by the subsidiaries if Taxpayer did not incur them.
Taxpayer also represents the subsidiaries to Taxpayer's parents, and provides spread sheets to the subsidiaries for a consistent collection of financial data. In addition, Taxpayer communicates the Thomson ...