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Richard's Auto City, Inc. v. Director

June 21, 1995

RICHARD'S AUTO CITY, INC., PLAINTIFF-RESPONDENT,
v.
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-APPELLANT.



On certification to the Superior Court, Appellate Division, whose opinion is reported 270 N.J. Super. 92 (1994).

The opinion of the Court was delivered by Handler, J. Chief Justice Wilentz and Justices Pollock, O'hern, Garibaldi, Stein and Coleman join in Justice Handler's opinion.

The opinion of the court was delivered by: Handler

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

RICHARD'S AUTO CITY, INC. V. DIRECTOR, DIVISION OF TAXATION (A-54-94)

Argued January 17, 1995 - Decided June 21, 1995

HANDLER,J., writing for a unanimous Court.

The issue on appeal is whether certain provisions of the Corporation Business Tax Act (CBT), specifically N.J.S.A. 54:10A-4(k), permit the net-operating losses in past tax years by a corporation that has been merged into a successor corporation to be carried over and deducted by the surviving corporation in a subsequent tax year. Also implicated is the validity of N.J.A.C. 18:7-5.13(b),a regulation adopted by the Director of the Division of Taxation to implement the NOL carryover provisions of the CBT.

Richard's Auto City, Inc. (Auto City), a New Jersey corporation formed in 1973, is an automobile dealership in Freehold Township. Catena, Inc. (Catena), incorporated in 1983, was the leasing company affiliated with Auto City, providing lease financing for Auto City's customers. Catena began its operations in 1983 at the Auto City location. Richard Catena was the sole stockholder of each corporation. In January 1984, Richard Catena transferred 100% of his shares of stock in Catena to Auto City, making Catena a wholly-owned subsidiary of Auto City.

Over the next few years, Catena incurred substantial net-operating losses (NOLs), totalling $1,574,294, for the 1984, 1985, and 1986 tax years. In late 1986, pursuant to a plan of merger, Catena merged into Auto City. A Certificate of Merger filed with the Secretary of State on December 19, 1986 identified Auto City as the survivor corporation. Following the merger, the leasing programs that Catena previously offered continued in the same manner under Auto City's leasing department.

In its 1986 Corporate Business Tax Return, Auto City claimed as a deduction the NOLs Catena had incurred during the tax years prior to the merger. By notice of assessment dated April 17, 1989, the Director of the Division of Taxation disallowed the deduction and assessed Auto City $88,517 in additional taxes. The Director found that the losses actually had not been incurred by Auto City's business operations, but rather the losses were sustained by the merged corporation that no longer existed. The Director based his determination on administrative regulation, N.J.A.C. 18:7-5.13(b). The Director also imposed a late payment penalty and interest charges through November 30, 1989. The Director's decision was reaffirmed by a final determination letter dated November 16, 1989, which reduced the penalty and interest charges to the statutory minimum.

Auto City filed a complaint with the Tax Court contesting the Director's final determination. The Tax Court granted the Director's cross-motion for summary judgment and dismissed Auto City's complaint. On appeal, the Appellate Division reversed and remanded the matter to the Tax Court for entry of judgment in favor of Auto City. The Appellate Division found that the administrative regulation was invalid because it was inconsistent with the enabling statute, went beyond the legislative scheme, and imposed a restriction that was neither intended or authorized.

The Supreme Court granted the Director's petition for certification.

HELD: Net-operating losses incurred in past tax years by a corporation that has been merged into a successor corporation are not permitted, under the Corporation Business Tax Act, to be carried over and deducted by the surviving corporation in a subsequent tax year.

1. Agency regulations are presumptively valid and should not be invalidated unless they violate the enabling act or frustrate express or implied legislative intent. Courts generally accord substantial deference to the agency's interpretation of the statute the agency is charged with enforcing. Nonetheless, an administrative agency cannot extend a statute to give it a greater effect than its language permits. (pp. 4-7)

2. The language of the critical provisions of the CBT is not clear and unambiguous, does not admit of only one interpretation, and does not plainly authorize a surviving corporation in a merger to use the NOL deductions of an acquired corporation. By its express terms, N.J.S.A. 54:10A-4(k)(6) does not address the treatment of NOLs in mergers and other corporate reorganizations. The Director's regulation comports with the basic meaning of the CBT. Nothing in the language of section 4(k)(6) permits one taxable entity to adopt the tax attributes of another entity alter a statutory merger. The language of the statute does not support the imputation of a legislative intent or the implication of statutory authority that would allow the transfer of tax deductions from an acquired corporation to the surviving corporation alter a merger. (pp 7-10)

3. A review of the legislative history of the CBT does not support the Conclusion that the Legislature intended to authorize the deduction of an NOL by a corporation that did not sustain the loss simply because it acquired through merger the corporation that incurred the loss. In addition, the Court cannot conclude that the 1939 Internal Revenue Code, as interpreted and applied, shaped the Legislature's purpose in providing for a net loss carryover deduction. (pp. 10-19)

4. There is no reason to read the New Jersey Corporation Business Act, specifically N.J.S.A. 14A:10.6 in pari materia (in conjunction) with the CBT, specifically section 4(k)(6). The two acts deal with different subjects (corporate law versus tax law), have different purposes, and are clearly not part of a single comprehensive plan. (pp. 19-23)

6. Auto City has failed to sustain its burden of proving that N.J.A.C. 18:7-5.13(b) is invalid. That regulation applies retroactively to the effective date of the CBT. Thus, the regulation applies, as the statute applies, to any taxable year ending alter June 30, 1984.

Judgment of the Appellate Division is REVERSED, and the order of the Tax Court, granting summary judgment in favor of the Director of the Division of Taxation, is REINSTATED.

CHIEF JUSTICE WILENTZ and JUSTICES POLLOCK, O'HERN, GARIBALDI, STEIN and COLEMAN join in JUSTICE HANDLER'S opinion.

HANDLER, J.

This appeal involves a conflict over the interpretation of provisions of the Corporation Business Tax Act that permit certain net-operating losses to be carried over and deducted in successive tax years. Specifically, at issue is whether those provisions permit the net-operating losses incurred in past tax years by a corporation that has been merged into a successor corporation to be carried over and deducted by the surviving corporation in a subsequent tax year.

In this case, the Director of the Division of Taxation disallowed the deduction by the surviving corporation because the losses had not actually been incurred by its business operations, but rather the losses were sustained by the merged corporation, which was no longer in existence. The Director's determination was based on an administrative regulation that was adopted to implement the net-operating loss carryover provisions of the tax statute. The issue involving the proper interpretation of the statute, therefore, necessarily involves the validity of the administrative regulation.

I

Richard's Auto City, Inc. ("Auto City"), a New Jersey corporation formed in 1973, sells automobiles from its dealership in Freehold Township. Catena, Inc. ("Catena") was the leasing company affiliated with Auto City, providing lease financing for Auto City's customers. Catena was incorporated and began operations in 1983, working from the same location as Auto City. Richard Catena was the sole stockholder of each corporation. In January 1984, Richard Catena transferred 100% of his shares in Catena to Auto City, making Catena a wholly-owned subsidiary of Auto City.

During the next several years, Catena incurred substantial net-operating losses, totaling $1,574,294 for the tax years ending December 31, 1984, December 31, 1985, and, October 31, 1986. Those losses were attributable primarily to the accelerated depreciation method then applicable to leased automobiles. Under the applicable depreciation schedule, in the earlier years of the lease terms, Catena deducted the cost of the leased automobiles prior to the receipt of all the corresponding lease income. Catena did not realize a substantial portion of the income from lease packages until the later years of the lease terms and/or the eventual sale of the automobiles. As a result, Catena sustained large net-operating losses during 1984, 1985, and 1986.

Pursuant to a plan of merger adopted on October 31, 1986, Catena merged into Auto City. A Certificate of Merger filed with the Secretary of State on December 19, 1986 identified Auto City as the survivor corporation. Following the merger, the leasing programs that Catena previously offered continued in the same manner under Auto City's leasing department.

On its 1986 Corporate Business Tax Return, Auto City claimed as a deduction the net-operating losses Catena had incurred as a result of depreciation during the tax years prior to the merger. By notice of assessment dated April 17, 1989, the Director of the Division of Taxation disallowed the deduction and assessed Auto City $88,517 in additional taxes. Further, the Director imposed a $4,426 late payment penalty and $43,643 in interest charges through November 30, 1989. That decision was reaffirmed by a final determination letter dated November 16, 1989, which reduced the penalty and interest to the statutory minimum.

Auto City filed a complaint with the Tax Court contesting the Director's final determination. Both parties stipulated to the foregoing facts. The Tax Court granted the Director's cross-motion for summary judgment, and dismissed Auto City's complaint. 12 L. Ed. 2d 619 (1992). The Appellate Division reversed the Tax Court's determination and remanded the matter to the Tax Court for entry of judgment in favor of Auto City. 270 N.J. Super. 92, 636 A.2d 572 (1994). The Director filed a petition for certification, which this Court granted. 137 N.J. 167 (1994).

II

This case focuses on the proper interpretation and application of provisions in the Corporation Business Tax Act ("CBT") for the carryover and deduction of net-operating losses ("NOLs"). Those provisions, N.J.S.A. 54:10A-4(k), state:

(6)(A) Net operating loss deduction. There shall be allowed as a deduction for the taxable year the net operating loss carryover to that year.

(B) Net operating loss carryover. A net operating loss for any taxable year ending after June 30, 1984 shall be a net operating loss carryover to each of the seven years following the year of the loss. The entire amount of the net operating loss for any taxable year (the "loss year") shall be carried to the earliest of the taxable years to which the loss may be carried. The portion of the loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of the loss over the sum of the entire net income, computed without the exclusions permitted in paragraphs (4) and (5) of this ...


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