On appeal from the Tax Court of New Jersey, 007867-2004, whose opinion is reported at 23 N.J. Tax 260 (Tax 2006).
The opinion of the court was delivered by: Lintner, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Lintner, Graves and Alvarez.
The Director of the Division of Taxation (Director or Division) appeals the Tax Court's reversal of a Corporation Business Tax (CBT) Act, N.J.S.A. 54:10A-1 to -41, assessment against Clorox Products Manufacturing Company (Taxpayer) in the amount of $84,924.43 for the years 1998, 1999, and 2000, including a five percent post-amnesty penalty under N.J.S.A. 54:53-18. Taxpayer sought CBT depreciation deductions taken for assets received in a 1996 stock-for-asset swap with its parent, The Clorox Company (Parent), by continuing to report the same straight-line depreciation basis used by its Parent. Disallowing the deduction, the Director determined that Taxpayer, as a separate and distinct corporation, erroneously continued to use and report the asset basis for the transferred property in the same manner as the Parent did, without taking into account the excess depreciation adjustment the Parent should have taken advantage of, but did not, at the time of the transfer.*fn1
Taxpayer filed a complaint in the Tax Court, seeking to reinstate the depreciation taken for the three years in question, and challenging the constitutionality of the post- amnesty penalty. Following a hearing on cross-motions for summary judgment, Judge Bianco issued a written opinion, finding that the applicable Administrative Code Regulation, N.J.A.C. 18:7-5.2(a)(2)(v), did not require the Parent to take the excess depreciation deduction when the assets were transferred and, therefore, Taxpayer could continue the straight-line depreciation schedule previously used by the Parent, taking advantage of the deduction afforded by that schedule. Clorox Prods. Mfg. Co. v. Dir., Div. of Taxation, 23 N.J. Tax 260, 274-75 (Tax 2006). Judge Bianco further determined that his decision rejecting the Division's assessment rendered Taxpayer's constitutional challenge to the post-amnesty penalty moot.
Ibid. The Division appeals. We now affirm Judge Bianco's order vacating the assessment, and dismiss Taxpayer's cross-appeal as moot.
To understand the issues raised in this appeal, we briefly describe the concept of "uncoupled" depreciation methodology before reciting the relevant undisputed facts. In 1981, the federal government enacted the Economic Recovery Tax Act, which permitted accelerated depreciation under the accelerated cost recovery system. Because our Legislature was concerned that accelerated depreciation would cause a significant loss of revenue to the State, it enacted legislation that required use of the slower straight-line depreciation method*fn2 for New Jersey CBT returns, thus "uncoupling" state and federal depreciation methods for determining net income. N.J.S.A. 54:10A-4(k)(2)(F)(i). Uncoupling lasted until July 1993 when the Legislature amended N.J.S.A. 54:10A-4(k)(2)(F)(i), to bring New Jersey into harmony with federal tax laws. Because the assets in question were used during the 1981 to 1993 time period, the uncoupling legislation applies here.
Taxpayer, a Delaware corporation, engages in the business of manufacturing laundry and cleaning products in New Jersey.
It is a wholly owned subsidiary of the Parent company. The Parent filed tax returns in New Jersey from 1973 to 1996, using the uncoupled straight-line method to compute the depreciation deductions on its post-1980 CBT returns. Thus, it took a lower depreciation deduction on its pre- and post-uncoupled CBT returns than the accelerated method permitted by the Internal Revenue Code (IRC) and reported a higher basis for its property.
On July 1, 1996, the Parent transferred its manufacturing operations and assets to Taxpayer in exchange for one hundred percent of Taxpayer's stock. The transfer qualified as a tax-free property-for-stock transaction under Internal Revenue Code (I.R.C.) § 351.*fn3 It consisted of operations and assets that qualified as "uncoupled property" placed in service between January 1, 1981 and July 7, 1993.
Taxpayer began to transact business in New Jersey on July 1, 1996, and filed its first CBT return for the fiscal year ending June 30, 1997, using the same straight-line depreciation method for the uncoupled assets formerly utilized by its Parent. It continued to depreciate the uncoupled property on the CBT returns for the fiscal years ending June 30, 1998, June 30, 1999, and June 30, 2000, using the straight-line method.
On March 5, 2002, the Division notified Taxpayer that it was conducting an audit of its returns, including the deductions taken for depreciation. On September 25, 2002, the Division informed Taxpayer that, based on the audit, it was adjusting Taxpayer's CBT returns for 1998, 1999, and 2000*fn4 to reflect a preliminary assessment of $74,858, based on disallowance of the amount of depreciation Taxpayer took relating to the tax-free transfer.*fn5
At the time the Parent filed its final CBT return in 1996, it did not take advantage of the accelerated depreciation deduction ...