July 10, 2008
CHEMICAL NEW JERSEY HOLDINGS, INC., PLAINTIFF-APPELLANT,
DIRECTOR, NEW JERSEY DIVISION OF TAXATION, DEFENDANT-RESPONDENT.
On appeal from Tax Court of New Jersey, Docket No. 000213-2001.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued December 3, 2007
Before Judges Parrillo and Graves.
At all times relevant to this appeal, plaintiff Chemical New Jersey Holdings*fn1 (plaintiff or Chemical Holdings) was the parent corporation of Chemical Bank of New Jersey (Chemical NJ), and Chemical Holdings was the wholly-owned subsidiary of Chemical Banking Corporation (Chemical Corp.), a New York corporation. Plaintiff, a bank holding company domiciled and with its principal offices in New Jersey, held stock in Chemical NJ along with notes on outstanding loans made to Chemical NJ as its primary asset. The loans plaintiff issued to Chemical NJ totaled $75,000,000 and were derived from monies plaintiff had borrowed from its parent, Chemical Corp.
Plaintiff filed its 1992 and 1993 Corporation Business TaX (CBT) returns on September 23, 1993, and October 13, 1994, respectively. For both years, plaintiff claimed status as an "investment company," which is defined in N.J.S.A. 54:10A-4(f) as "any corporation whose business during the period covered by its report consisted, to the extent of at least 90% thereof of holding, investing and reinvesting in stocks, bonds, notes, mortgages, debentures, patents, patent rights and other securities for its own account." Based upon its claimed status as an investment company, and pursuant to then in effect N.J.S.A. 54:10A-5(d), plaintiff calculated its tax liability for 1992 and 1993 as $1,630,171--its net income for those two years ($6,520,684) multiplied by twenty-five percent.
Chemical Holdings's financial records for the years 1992 through 1995 were audited in late 1997 or early 1998, and on February 11, 1999, the Director of the New Jersey Division of Taxation (Director) issued a "Notice of Assessment Related to Final Audit Determination," in which Chemical Holdings was assessed additional taxes in the amount of $1,197,372.23 for the years 1992, 1993, and 1994. The assessment was based upon the Director's determination that "[t]he corporation's Investment Co[.] election has been denied. The corporation is the creator of loans. See N.J.S.A. 54:10A-4(f). N.J.A.C. 18:7-1.15."
Plaintiff contested the Director's determination, and in a "Corrected Final Determination" letter dated November 21, 2000, the Director concluded that while plaintiff qualified as an investment company in 1994, it failed to meet the investment company test in 1992 and 1993:
After giving careful consideration to the information revealed in the course of the audit of Chemical New Jersey Holdings, Inc. . . . it has been determined that the Taxpayer was a direct party in the notes and not an investor in the notes issued to its subsidiaries. When the interest income and loan balance are removed from investment activities, the Taxpayer fails to meet the Investment Company test on the 1992 and 1993 New Jersey Corporation Business Tax returns. . . . The following liabilities are due as set forth on the enclosed schedule totaling $962,639.74.
On February 15, 2001, Chemical Holdings appealed the Director's determination to the Tax Court, alleging the Director improperly denied its status as an investment company for tax years 1992 and 1993. Chemical Holdings amended its complaint on February 6, 2002, abandoning its claim to investment company status, and arguing that during 1992 and 1993 it was a financial business corporation (FBC) under N.J.S.A. 54:10A-4(m).*fn2 In a published decision on April 25, 2003, the Tax Court granted the Director's motion for summary judgment:
To claim a changed filing status is not simply to assert an alternative legal theory. A taxpayer's election of filing status controls the entire taxing process. Filing status dictates the law and methodology to be employed by a taxpayer in determining tax liability, the reporting form to be used, the information to be provided, and the procedures to be followed and law to be applied in any audit by the Director. A taxpayer's decision as to filing status, therefore . . . is binding on the taxpayer, and may not be disregarded or revoked in the context of tax appeal proceedings.
[Chem. N.J. Holdings, Inc. v. Dir., Div. Of Taxation (Chemical I), 20 N.J. Tax 547, 555-56 (Tax 2003), rev'd, 22 N.J. Tax 606 (App. Div. 2004) (Chemical II).]
Chemical Holdings appealed the Tax Court's decision to this court, and we reversed and remanded in a published opinion dated December 17, 2004:
[A]t the trial of plaintiff's appeal from the Division's denial of its qualification as an investment company, the question before the Tax Court was the propriety of the Director's assessment. To resolve the issue, plaintiff's actual corporate status in tax years 1992 and 1993 necessarily had to be established in light of the Director's rejection of plaintiff's original claim. Following this rejection, but relying on all of the information it originally reported, plaintiff argued it should have been taxed as a financial business corporation. The issue of whether plaintiff actually qualified for such treatment, therefore, was correctly before the court, and a determination on this issue should have been made.
In sum, plaintiff's initial good faith tax filing was a business decision, but because it was rejected by the Division well after a timely amended return could have been filed, we hold that the business decision rule does not operate to bind plaintiff to its original filing. In such an instance, the taxpayer must not be precluded from advocating and proving an alternative basis of tax liability before the Tax Court on appeal.
[Chemical II, supra, 22 N.J. Tax at 615-16.]
On remand, the Tax Court found Chemical Holdings "presented no proof that national banks would have made loans that were subordinated, unsecured, and not repayable without the approval of the Comptroller," and therefore it was not "in substantial competition with the business of national banks," as required for FBC status under N.J.S.A. 54:10A-4(m). Chem. N.J. Holdings, Inc. v. Dir., Div. of Taxation (Chemical III), 23 N.J. Tax 212, 222-24 (Tax 2006). Thus, the Tax Court concluded "plaintiff did not qualify for taxation as a financial business corporation for tax years 1992 and 1993." Id. at 224.
On appeal, plaintiff raises the following issues:
THE TAX COURT ERRED IN DISREGARDING THE TESTIMONY OF THE DEFENDANT'S WITNESS.
THE TAX COURT ERRED IN HOLDING THAT THE PLAINTIFF MUST SHOW A NATIONAL BANK WOULD HAVE MADE A SIMILAR LOAN.
After considering these contentions in light of the record, the applicable law, and the arguments of counsel, we conclude that plaintiff's contentions are without sufficient merit to warrant extended discussion in a written opinion. R. 2:11-3(e)(1)(E).
New Jersey courts grant substantial deference to the decisions of an agency charged with enforcing the statute at issue, Aqua Beach Condo. Ass'n v. Dep't of Cmty. Affairs, 186 N.J. 5, 15-16 (2006), and the Director of the Division of Taxation's interpretation of a taxation statute will prevail "'as long as it is not plainly unreasonable.'" Koch v. Dir., Div. of Taxation, 157 N.J. 1, 8 (1999) (quoting Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313, 327 (1984)). Moreover, our courts consistently recognize "'the judges assigned to the New Jersey Tax Court have special expertise,'" and we therefore refuse to "'disturb their findings unless they are plainly arbitrary or there is a lack of substantial evidence to support them.'" NYT Cable TV v. Borough of Audubon, 230 N.J. Super. 530, 534 (App. Div.) (quoting Kearny Leasing Corp. v. Town of Kearny, 7 N.J. Tax 665, 667 (App. Div.), certif. denied, 102 N.J. 340 (1985)), certif. denied, 117 N.J. 646 (1989).
In the present matter, the Tax Court's factual findings are firmly supported by substantial credible evidence in the record, and the court's legal conclusions predicated on those findings are sound. R. 2:11-3(e)(1)(A). We therefore affirm substantially for the reasons expressed by Judge Kuskin in his comprehensive written decision reported at 23 N.J. Tax 212 (Tax 2006).