The opinion of the court was delivered by: Small
Plaintiff, Sharps, Pixley, Inc. ("SPI"), contests the June 3, 1994 denial by the defendant, Director, Division of Taxation, ("Director") of a claim for refund of taxes paid under the Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40. The matter is before the court on a stipulated record pursuant to R. 8:8-1(b).
There is no dispute that for the tax years 1980, 1981, 1983 and 1984, SPI overpaid its corporation business tax ("CBT"). There is also no dispute as to the amount of those overpayments. The Director has denied the refunds on the grounds that SPI failed to file a timely report of federal changes as required by the statute and the Director's regulations. There are three issues for determination: (1) Did SPI timely file its report of federal changes with the Director? (2) If SPI failed to timely file the report, is the Director's regulation requiring that the report of federal changes be filed within 90 days a valid precondition for the filing of a claim for refund? (3) If the refunds are barred by the statute and regulation, may SPI offset its 1978 tax liability against its 1980 tax overpayment, pursuant to N.J.S.A. 54:49-16 b.?
History of Federal and New Jersey Filings
SPI is a non-resident dealer in precious metals whose New Jersey CBT liabilities arise out of its maintenance of a warehouse and inventory in Carteret, New Jersey. SPI is the wholly-owned subsidiary of Kleinwort Benson Holdings, Inc. ("KBHI") which files a consolidated federal corporation income tax return.
On or about August 1, 1980, KBHI filed an amended 1978 federal tax return to reflect changes in certain accounting and inventory pricing practices. Consistent with its amended federal income tax filing, on or about December 1, 1980 SPI filed an amended 1978 New Jersey CBT return reflecting the changes made on the federal return. The filing of the amended federal return triggered an audit by the Internal Revenue Service ("IRS") of KBHI's consolidated returns for the tax years 1975-1979. That audit ultimately resulted in net federal refunds and a 1978 New Jersey CBT deficiency which was assessed by the Director on June 25, 1981. On October 13, 1987, Coopers & Lybrand, KBHI's accountants for its federal returns, forwarded an undated Revenue Agent Report (RAR) to its client reflecting the IRS examiner's adjustments to KBHI's federal returns. *fn1
The proposed adjustments in the RAR were used by the IRS to prepare its report to the Joint Committee on Taxation under Section 6405(a) of the Internal Revenue Code of 1986 to request refunds for KBHI for the 1975-1979 audit period. *fn2 By letters dated December 7, 1988, the IRS informed KBHI and SPI that the report to the Joint Committee required by Section 6405(a) was being prepared and that a request to process refunds for 1978 and 1979 had been made. By letter dated January 13, 1989, the IRS informed KBHI that the Joint Committee had taken "no exception" to the processing of the 1978 and 1979 refunds, but that such letter was not a final notification of the IRS Conclusions regarding the amended returns for those years. By letters dated February 27 and 28, 1989, the IRS informed KBHI and SPI, respectively, that the report required by Section 6405(a) was being forwarded to the Joint Committee, and enclosed a copy of the February 22, 1988 RAR which was the basis for the report. On July 26, 1990, the IRS and KBHI entered into a Closing Agreement for tax years 1978 through 1988 with respect to accounting methods and the treatment of certain bullion transactions. By letter dated October 16, 1990, the IRS informed KBHI that the Joint Committee "has taken no exception to the Conclusions the Internal Revenue Service reached in your income tax case for the [1976, 1977 and 1979 tax years]."
Some time after the filing of KBHI's 1988 consolidated federal income tax return, the IRS initiated an audit of KBHI's 1980 through 1988 tax returns. By undated letter, the IRS sent KBHI a September 26, 1991 RAR with respect to the 1980-1988 audit period, and stated that the Section 6405(a) report to the Joint Committee had not yet been prepared, but that a request to process net refunds provided in the RAR had been made. By letter dated December 3 or 8, 1991, the IRS repeated its prior communication to KBHI, stating that the Section 6405(a) report to the Joint Committee had not yet been prepared, but that permission to process the refunds provided in the RAR for tax years 1984, 1987 and 1988 had been made. By letter dated January 13, 1992, the IRS informed KBHI that the Joint Committee had taken "no exception" to the processing of refunds for the 1984, 1987 and 1988 tax years, and that the letter was not a final notification of the IRS Conclusions for the those years. Checks dated March 16 and 17, 1992 from the United States Treasury Department reflecting payment of refund and interest were issued to KBHI for the 1980-1988 audit period. By letter dated May 5, 1992, the IRS informed KBHI that the Joint Committee "has taken no exception to the Conclusions the Internal Revenue Service reached in your income tax case for the [1980-1988 tax years]."
C. Correspondence With IRS After May 5, 1992
Beginning in June 1992, KBHI and its accountants were engaged in extensive Discussions with the IRS regarding the correct interest calculation on the refunds paid for the 1980-1988 audit period. This issue was separate and apart from the IRS adjustments to KBHI's consolidated federal income tax return, and was resolved in May 1994.
By letter dated November 3, 1992, Coopers & Lybrand, acting on behalf of KBHI, inquired of the IRS concerning when KBHI may expect to receive final RARs for the 1980-1988 audit period, and a final notice concluding the audit. In response, by letter dated December 8, 1992, the IRS advised Coopers & Lybrand that "the final letter dated May 5, 1992 states that the Joint Committee on Taxation has taken no exception to the Internal Revenue Service Conclusions. The [Internal Revenue] Manual requires no further communication. In short, the examination has been completed; no further Internal Revenue Service action is contemplated and the refund already made under the expedite [sic] refund procedures has been concurred by the Joint Committee."
D. Refund Request from New Jersey
By letter dated January 21, 1993, which was received by the New Jersey Division of Taxation on January 25, 1993, SPI filed forms IRA-100 for the tax years 1978 through 1988 reflecting the adjustments to the CBT and the refunds owed as a result. *fn3
By letter dated February 25, 1993, the Division advised SPI (i) that its refund claims for 1980, 1981, 1983 and 1984 were denied as untimely pursuant to N.J.A.C. 18:7-13.8(d), (ii) that its request to offset its 1978 CBT liability against its 1980 CBT overpayment was denied because the 1978 liability was part of a separate federal audit from the 1980 overpayment, and (iii) that its request to offset its 1985 CBT liability against a portion of its 1980 overpayment was allowed because they were part of the same federal audit. By letter dated March 26, 1993, SPI protested these preliminary determinations by the Division. By letter dated June 3, 1994, the Division issued its revised determinations in which it affirmed the denials of SPI's refund claims for 1980, 1981, 1983 and 1984, and assessed a CBT deficiency for the 1978 tax year in the amount of $68,973, which was later reduced to $30,270.
SPI filed this action in the Tax Court challenging the authority of the Director to promulgate a regulation under the Corporation Business Tax Act which bars the filing of refund claims if the reports of federal changes are not filed within 90 days of the final determination of the IRS. SPI also asserts that regardless of such authority, SPI timely filed its report of federal changes with the Division because it did not receive a final determination letter from the IRS until December 8, 1992. Finally, SPI claims that it may offset its 1978 deficiency against its 1980 overpayment because both tax years, although in different federal audits, involved the same accounting issues which were part of a single Closing Agreement with the IRS.
The Statutory and Regulatory Framework
The State Tax Uniform Procedure Law, N.J.S.A. 54:48-1 to :50-28, authorizes the Director to grant refunds of overpaid taxes. N.J.S.A. 54:49-14, in effect during the relevant time periods in this matter, provided:
Any taxpayer, at any time within two years [since amended by L. 1992, c. 175, § 5 (effective July 1, 1993) to provide for a four-year statute of limitations period from the date the tax was paid] after the payment of any original or additional tax assessed against him, unless a shorter time is fixed by the law imposing the tax may file with the commissioner a claim under oath for refund, in such form as the commissioner may prescribe, stating the grounds therefor, but no claim for refund shall be required or permitted to be filed with respect to tax paid, after protest has been filed with the commissioner or after proceedings on appeal have been commenced as provided in this subtitle, until such protest or appeal has been finally determined.
If a corporate taxpayer undergoes a federal audit that results in adjustments to its New Jersey CBT liabilities, including adjustments that result in refunds, the CBT requires notification to the Division of Taxation of such changes. N.J.S.A. 54:10A-13, in effect during the relevant time periods in this matter, provides:
If the amount of taxable income for any year of any taxpayer as returned to the United States Treasury Department is changed or corrected by the Commissioner of Internal Revenue or other officer of the United States or other competent authority, or where a renegotiation of a contract or subcontract with the United States results in a change in said taxable income, or where a recovery of a war loss results in a computation or recomputation of any tax imposed by the United States, such taxpayer shall report such changed or corrected taxable income, or the results of such renegotiation, or such computation or recomputation, within 90 days after the final determination of such change or correction or renegotiation, or such computation or recomputation, or as required by the commissioner, and shall concede the accuracy of such determination or state where it is erroneous. Any taxpayer filing an amended return with such department shall also file within 90 days thereafter an amended report with the commissioner. *fn4
Prior to July 1, 1993, N.J.S.A. 54:49-14 did not expressly provide for refund claims after the two-year period following the payment of the tax, even following a federal adjustment as the result of an audit. However, prior to the July 1993 amendment to N.J.S.A. 54:49-14, on October 2, 1989 the Director had amended his regulations on refund claims to reflect his interpretation that N.J.S.A. 54:49-14 and N.J.S.A. 54:10A-13, when read together, provide for an extension of the statute of limitations for refunds for two years on the condition that the report of federal changes is filed with the Division of Taxation within 90 days of the final determination of the IRS. N.J.A.C. 18:7-13.8(d), as of December 20, 1993, read:
Where a taxpayer files a Report of Changes in Corporate Taxable Net Income by the U.S. Internal Revenue Service pursuant to N.J.A.C. 18:7-11.8(a) [requiring the report of changes to be filed with the Division within 90 days] that results in a diminution of entire net income for any year, the two year limitation period for filing a claim for refund based on that diminution for the return year at issue begins on the date that the timely filed Form IRA-100 is filed with the Division. For reports filed on or after July 1, 1993, the limitation period is four years. Unless the IRA-100 or CBT-100-X is filed in timely fashion under N.J.A.C. 18:7-11.8(a), the refund claim will not be considered.