On appeal from the Tax Court of New Jersey.
Approved for Publication May 31, 1996.
Before Judges Michels, Baime and Villanueva. The opinion of the court was delivered by Michels, P.j.a.d.
The opinion of the court was delivered by: Michels
The opinion of the court was delivered by MICHELS, P.J.A.D.
We granted defendant Director, New Jersey Division of Taxation (Director), leave to appeal from an order of the Tax Court of New Jersey that declared a Corporate Business Tax (CBT) Assessment upon plaintiff Sutton Warehousing, Inc. null and void by virtue of the entire controversy doctrine. At issue is whether the entire controversy doctrine can be utilized to dictate the way in which the Director administers the tax laws of New Jersey. We hold that it cannot. The application of the doctrine in the circumstances of this case would improperly impede the Director's ability to administer his statutorily mandated responsibilities by vitiating the statutory provisions governing his authorization to issue CBT notices of assessment. We, therefore, reverse the order of the Tax Court and remand the matter for further proceedings.
Plaintiff, a New Jersey corporation, is engaged in the business of storing and distributing clothing products. In or about November 1989, plaintiff commenced the installation of a storage rack system and sprinkler system on its premises for the purpose of storing material which required the protection of fire sprinklers. The storage rack system, which was comprised of interconnected sections containing multiple shelving levels, was actually used to support and hang the sprinkler piping. The installation was completed in or about April, 1990.
The Director audited plaintiff in the Spring of 1992 for the return period from January 1989 through December 1991. As part of this audit, the Director audited plaintiff's CBT Returns for that audit period. On May 12, 1992, the Director issued a Notice of Assessment against plaintiff in regard to the construction and installation of the storage rack system, claiming that plaintiff was liable for $77,646.65 in outstanding sales and use tax, including penalties and interest. Plaintiff appealed from the Notice of Assessment and requested a hearing before the Conference Appeals Branch of the Division of Taxation. In its protest letter, plaintiff contended that the construction of the storage rack system constituted a capital improvement and, therefore, was exempt from taxation. The conference report concluded that the storage rack system was tangible personal property subject to sales tax. The Director issued a Final Determination Letter indicating that plaintiff was liable for $88,351.26, an amount which was later reduced by the Director to $64,888.03. Plaintiff then filed a complaint with the Tax Court, - contesting the Director's final determination.
As part of discovery in the sales and use tax matter, the Director requested copies of all of plaintiff's federal and state tax returns for the tax years including and subsequent to 1990, as well as all depreciation schedules attached to plaintiff's corporate tax returns. The Director requested the depreciation schedules in order to determine if plaintiff was depreciating its storage rack system as personal property or, as a capital improvement to real property. Depreciating the racks as personalty would be inconsistent with plaintiff's position before the Tax Court that the storage rack system constituted a capital improvement exempt from sales and use taxation.
Plaintiff's federal and state tax returns and the depreciation schedules attached to its New Jersey CBT returns revealed that the storage rack system was depreciated as personal property on a five-year schedule. The depreciation schedules further revealed that a certain sprinkler system (which was purchased at the same time as the storage rack system and installed with the storage rack system) was also depreciated as personal property on a five-year schedule. According to the Director, sprinkler systems, unlike storage rack systems, are generally treated as capital improvements, and thus, are depreciated over a period longer than five years.
At the Conclusion of the trial and before post-trial briefs were submitted, the Director, based on the material uncovered during discovery, issued a second Notice of Assessment against plaintiff. The Director determined that plaintiff's depreciation of the sprinkler system created tax liability in the amount of $30,227, which included interest for the period from 1989 through 1993.
Plaintiff filed a complaint and order to show cause, requesting that the assessment made against it as reflected by the 1995 Notice of Assessment be quashed and that it be awarded counsel fees and costs. However, in so doing, plaintiff failed to comply with certain procedural rules. First, plaintiff's complaint was filed directly with the Tax Court Judge even though Rule 8:3-1(a) provides that an action is commenced by filing a complaint with the Clerk of the Tax Court. Second, plaintiff's complaint was filed without payment of the $135 filing fee required by Rule 8:12(c)(3).
Notwithstanding the clear and unambiguous provisions of N.J.S.A. 22A:5-1c that no proceeding shall be heard by the Tax Court unless the proper filing fees have been paid, the Tax Court issued an order to show cause why the Notice of Assessment relating to the final order of determination issued against plaintiff should not be quashed. The Director moved to discharge the order, contending no authority existed for plaintiff to proceed in a summary manner and that the challenge to the CBT assessment should be handled pursuant to the rules governing the practice in the Tax Court.
On the return date of the order to show cause, the Tax Court raised, sua sponte and without notice to the Director, the possibility of converting plaintiff's complaint and order to show cause into a post-trial motion in the pending sales and use tax case. However, this conversion did not take place. Rather, the Tax Court entered an order denying the Director's motion to discharge the order to show cause and declared the CBT assessment null and void. The Tax Court held that the entire controversy doctrine precluded the Director, after the Conclusion of the sales and use tax case, from issuing the CBT assessment covering tax years 1989 through 1993. In so holding, the court reasoned that (1) the Director controls the timing of when an assessment issues; (2) the sprinkler system was intertwined with the purchase and installation of the storage rack system at issue in the sales and use tax case; and (3) the Director specifically examined plaintiff's CBT returns during its field audit of plaintiff and made depreciation an issue in the sales and use tax case. We granted the Director leave to appeal and we now reverse.
The objectives behind the entire controversy doctrine are (1) to encourage the comprehensive and conclusive determination of a legal controversy; (2) to achieve party fairness; and (3) to promote judicial economy and efficiency by avoiding fragmented, multiple and duplicative litigation. Mystic Isle Dev. Corp. v. Perskie & Nehmad, 142 N.J. 310, 322, 662 A.2d 523 (1995). The doctrine has evolved over time through the common law and requires a court to adjudicate both equitable and legal issues arising from one underlying transaction, id. at 322, and furthers the twin goals of efficient judicial administration and fairness to litigants. Busch v. Biggs, 264 N.J. Super. 385, 396, 624 A.2d 1017 (App. Div. 1993). However, while the doctrine was designed to promote "a judicial policy that when a matter is presented to a judicial forum, the litigants should not fractionalize their claims to the detriment of the system[,]" Crispin v. Volkswagenwerk. A.G., 96 N.J. 336, 349, 476 A.2d 250 ...