September 1, 2010
PRAXAIR TECHNOLOGY, INC., A DELAWARE CORPORATION, PLAINTIFF-APPELLANT,
DIRECTOR, DIVISION OF TAXATION, DEFENDANT-RESPONDENT.
On appeal from the Tax Court of New Jersey, Docket No. 7445-05.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued September 24, 2008
Decided December 15, 2008
Remanded by Supreme Court December 15, 2009
Resubmitted June 7, 2010
Before Judges A. A. Rodríguez, Kestin and Newman.
This matter is now before us on remand from the Supreme Court. See Praxair Tech., Inc. v. Director, Div. of Taxation, 201 N.J. 126 (2009), rev'g 404 N.J. Super. 287 (App. Div. 2008). The Supreme Court has held that plaintiff was subject to the Corporation Business Tax (CBT), N.J.S.A. 54:10A-1 to -41, for the 1994-96 tax years. The issues and the factual and procedural background are set out in the Supreme Court's decision and ours, and need not be rehearsed here.
By reason of our decision that plaintiff was not subject to the tax, we concluded that it "cannot be liable for the penalties associated with those years." Praxair, supra, 404 N.J. Super. at 295. The Supreme Court, in reversing, has directed us to engage in "plenary consideration of plaintiff's challenges to the imposition of the late filing and post-tax amnesty penalties under N.J.S.A. 54:49-4 and N.J.S.A. 54:53-18(b), respectively." Praxair, supra, 201 N.J. at 140-41.
In addressing the late filing penalty, the Tax Court judge quoted N.J.S.A. 54:49-4, which mandates that the Director impose penalties of up to twenty-five percent of the tax liability due upon a taxpayer who fails to file a tax return on a timely basis, as well as an additional five percent per month "[u]nless any part of any underpayment... is shown to be due to reasonable cause[.]" Ibid. The judge noted that
The Director may abate, waive, or remit the late filing penalty. N.J.S.A. 54:49-11(a). "If the failure to pay any such tax when due is explained to the satisfaction of the director, he may remit or waive the payment of the whole or any part of any penalty...." Id. The standard for such a waiver or remittance requires "a reasonable cause for delay and... absence of willful neglect determined to be reasonable cause." N.J.A.C. 18:2-2.7.
The language of this statutory section is clearly permissive. The director "may" waive or remit a penalty if there is a showing of reasonable cause. The statute does not require the director to waive or remit a penalty under any and all circumstances. The director has the discretion to take such action as is reasonabl[y] required under the fact[s] of the particular case.
[Plaintiff] argues that it had reasonable cause not to file tax returns for the years 1994-1999. This argument is based on [its]... contention that [plaintiff] had no nexus with the [S]tate that would require taxation. At the very least, [plaintiff] feels it had reasonable cause not to pay taxes prior to the addition of the contested example in 1996, if not until the ultimate Lanco decision.
The Tax Court held that plaintiff "had no reasonable cause to not file tax returns for the years in question."
[T]he long-standing language of N.J.S.A. 54:10A-2 applies directly to [plaintiff] as a foreign corporation deriving income from New Jersey sources. [Plaintiff] is licensing intellectual property to [its p]arent [corporation] for exploitation in New Jersey under the purview of this statute.
The judge did "not deem it 'reasonable'" for a sophisticated and "complex" taxpayer as plaintiff "to fail to recognize" the nuances in tax law and distinctions between applicable concepts from time to time as case law developed. In respect of the late filing penalty, the judge concluded, therefore, that "the Director [had] acted appropriately and within his discretion when imposing the late filing penalties upon [plaintiff]."
The judge's letter opinion then turned to the post-amnesty penalty, describing it as follows:
N.J.S.A. 54:53-18 established a [S]tate tax amnesty period in the spring of 2002. The period was to be no more than 60 days and run no later than June 10, 2002. During the amnesty period[,] all taxpayers with outstanding tax liability could pay the princip[al] owed without interest, costs, and civil or criminal penalties. N.J.S.A. 54:53-18a.
Under the statute, the failure to take advantage of the amnesty provision resulted in the addition of [a] 5% penalty to the taxpayer's total liability: "There shall be imposed a 5% penalty, which shall not be subject to waiver or abatement, in addition to all other penalties, interest, or costs of collection otherwise authorized by law, upon any State tax liabilities eligible to be satisfied during the period established pursuant to subsection a. of this section that are not satisfied during the amnesty period." N.J.S.A. 54:53-18b. The section explicitly forbids the Director to waive or abate the post-amnesty penalty.
The judge noted plaintiff's two arguments that the post-amnesty penalty was unconstitutional on due process grounds. He evaluated the first argument, lack of notice, as meritless for two reasons: first, because all taxpayers are "charge[d] with general notice of the tax law" and plaintiff as a sophisticated taxpayer could not reasonably argue otherwise; and second, because "prior to the expiration of the amnesty period, the Director unnecessarily gave [plaintiff] specific notice of its amnesty option." He then continued, addressing the second argument of unconstitutionality, that plaintiff had "had no opportunity to be heard regarding the deprivation of a significant property interest":
[Plaintiff's] argument that it had no opportunity to be heard as to the amnesty penalty likewise fails. The Tax Court of New Jersey is a competent court to hear [plaintiff's] claim, both as to the substantive assessment of tax by the [S]tate as well as any interest and penalties imposed. This court has the authority to uphold, waive, or mitigate [plaintiff's] tax liability including the post-amnesty penalty. [Plaintiff] had an outstanding tax liability eligible for the amnesty program. [Plaintiff] chose to risk additional penalty by not availing itself of this program. The proceedings before this court give [plaintiff] the opportunity to be heard "at a meaningful time and in a meaningful manner" as required by the United States Supreme Court. See Matthews v. Eldridge, 424 U.S. 319, 333, 96 S.Ct. 893, 902, 47 L.Ed. 2d 18, 32 (1976).....
[Plaintiff] chose not to avail itself of this amnesty option and assumed the risk of the post-amnesty penalty if this appeal was unsuccessful. [Plaintiff] has been assessed this penalty and, along with the other liabilities, penalties, and interest, it [is] yet to pay any of it to the [S]tate.
This case determines what, if anything[,] is owed. Therefore, [plaintiff] had notice of the amnesty program and thereafter a meaningful opportunity to be heard on the appropriateness of the penalty. [Plaintiff']s due process rights are met.
On the foregoing bases, with respect to the late filing and post-amnesty penalties, the Tax Court upheld the Director's assessments, concluding that "the... penalties imposed by the Director... fall within the fair contemplation of their respective enabl[ing] statutes[,]" and that the Director did not "act in a manner that was arbitrary, capricious, or unreasonable in determining [plaintiff's] tax liability and penalties."
In its brief on remand, plaintiff frames two arguments:
THE TAX COURT ERRED WHEN IT UPHELD THE DIRECTOR'S FAILURE TO WAIVE AND ABATE PENALTIES AGAINST [PLAINTIFF] BECAUSE THE FAILURE CONTRAVENES NEW JERSEY STATUTES AND REGULATIONS AND IS A FAILURE TO TURN SQUARE CORNERS.
THE POST-AMNESTY PENALTY IS UNCONSTITUTIONAL, MANIFESTLY UNJUST, AND VIOLATES THE REQUIREMENT THAT THE STATE MUST TURN SQUARE CORNERS AND THEREFORE IT SHOULD BE STRICKEN AND ABATED.
In ruling on these questions of law, we give no deference to the legal decisions of the Director, see American Fire & Cas. Co. v. Division of Taxation, 189 N.J. 65, 79 (2006), or those of the Tax Court, see Manalapan Realty, L.P. v. Township Comm. of Manalapan, 140 N.J. 366, 378 (1995). We are bound, however, to accord appropriate respect to the discretionary determinations reposed by statute in the administrative agency charged with authority for supervising an area, see Greenwood v. State Police Training Ctr., 127 N.J. 500, 513 (1992), and to the insights of a court with subject matter expertise, see Glenpointe Assocs. v. Township of Teaneck, 241 N.J. Super. 37, 46 (App. Div.), certif. denied, 122 N.J. 391 (1990).
N.J.S.A. 54:49-4, which is the basis for the penalty assessments in this case, is framed in mandatory terms. A lenity provision in N.J.S.A. 54:49-11a, however, permits remission or waiver, in whole or in part, of any penalty or interest charge "[i]f the failure to pay any such tax when due is explained to the satisfaction of the director[.]" Plaintiff asserts that the Director should have applied the latter statute to remit the penalty charges in this case.
The clear purport of N.J.S.A. 54:49-11a is that the decision whether to remit or waive a penalty or interest charge is discretionary with the Director. An administrative officer's discretionary authority is not unbounded. See Berardi v. Rutter, 42 N.J. Super. 39, 46-47 (App. Div. 1956), aff'd sub. nom., In re Berardi, 23 N.J. 485 (1957). It is controlled by the classic standard that requires administrative action to be reasonable, free of arbitrariness or caprice, and consistent with the Legislature's intent and the scope of its delegation of authority to the agency. See Cooper Univ. Hosp. v. Jacobs, 191 N.J. 125, 143-44 (2007). "[A] court should not substitute its discretion for that of the Director, unless the Director's determination is manifestly arbitrary or unreasonable." Tozour Energy Sys., Inc. v. Director, Div. of Taxation, 23 N.J. Tax 341, 360-61 (Tax 2007). See, e.g., United Parcel Serv. Gen. Servs. Co. v. Director, Div. of Taxation, 25 N.J. Tax 1, 48-51 (Tax 2009).
Plaintiff in this matter seeks to persuade us that only one course of action -- forgiveness -- was open to the Director here, that the decision to enforce the mandatory penalties was unreasonable, and that the decision of the Tax Court affirming the Director's determination should be reversed. That argument is based upon the pendency of another case in one court or another, at various stages throughout the history of this matter, that dealt with some of the concepts at issue here, including those of "nexus" with and "doing business" in the State, Lanco, Inc. v. Director, Div. of Taxation, 188 N.J. 380 (2006), aff'g 379 N.J. Super. 562 (App. Div. 2005), rev'g 21 N.J. Tax 200 (Tax 2003), cert. denied, 551 U.S. 1131, 127 S.Ct. 2974, 168 L.Ed. 2d 702 (2007). Plaintiff argues that the Tax Court's 2003 decision in Lanco, favoring the taxpayer --notwithstanding an ultimate reversal by this court, affirmed by the Supreme Court of New Jersey -- coupled with a respectable at-large understanding, at the time, that physical presence in the taxing jurisdiction was a necessary prerequisite for "nexus", see, e.g., Quill Corp. v. North Dakota, 504 U.S. 298, 112 S.Ct. 1904, 119 L.Ed. 2d 91 (1992); Geoffrey, Inc. v. South Carolina Tax Comm'n, 437 S.E.2d 13 (S.C.), cert. denied, 510 U.S. 992, 114 S.Ct. 550, 126 L.Ed. 2d 451 (1993), created an adequate basis for the non-tax-liability position plaintiff took, requiring its good faith to be recognized by the Director's discretionary abatement of the penalties assessed.
In rejecting this argument, the Tax Court held that plaintiff had no reasonable cause to not file tax returns for the years in question....
[T]he long-standing language of N.J.S.A. 54:10A-2 applies directly to [plaintiff] as a foreign corporation deriving income from New Jersey sources. [Plaintiff] is licensing intellectual property to [its parent corporation] for exploitation in New Jersey under the purview of this statute. The court does not deem it "reasonable" for a taxpayer, particularly a complex taxpayer employing an "Assistant Tax Director State Tax and Senior Tax Counsel," (footnote omitted) to fail to recognize the distinction between the established law regarding sales tax from Quill and before, and the established law regarding income tax from the New Jersey statute and buffered by Geoffrey and now Lanco. Neither the 1996 regulatory example nor the Lanco decisions were in play when [plaintiff] made its decisions as to its tax liabilities under the pre-existing and still unchallenged statute and regulation.
Therefore, the Director acted appropriately and within his discretion when imposing the late filing penalties upon [plaintiff]. In addition, to this point, no penalty, like the princip[al] tax liability itself, has been paid by [plaintiff] before this appeal under the clear and unchallenged statute. The penalty is inchoate until after [plaintiff] has exercised its right of appeal.
We are in substantial agreement with the Tax Court's rationale. Although, plaintiff may have had some basis in an arguably unsettled state of the law for its position negating its amenability to the CBT, it was obliged to accord greater respect than it did to the position of the Division in this regard. It would have avoided penalties and interest by filing a return and paying the tax assessed, under protest, and otherwise dealing more constructively with the Division than it did. Plaintiff is, of course, entitled to challenge its tax liability. In electing to do so by the course of action it chose, rather than filing and paying the tax assessed under protest, it must be taken to have assumed the risk of not succeeding in its challenge. The consequence of that business decision may reasonably be viewed as subjecting plaintiff to the penalties prescribed by statute. See General Trading Co., Inc. v. Director, Div. of Taxation, 83 N.J. 122 (1980). Thus, the Director's decision to enforce the terms of the penalty statute cannot be regarded as arbitrary, capricious or unreasonable.
We also reject plaintiff's contention that the Director's decision not to implement the lenity provision of N.J.S.A. 54:49-11a violated the "square corners doctrine." See F.M.C. Stores Co. v. Borough of Morris Plains, 100 N.J. 418, 426-27 (1985); New Concepts for Living, Inc. v. City of Hackensack, 376 N.J. Super. 394, 401-04 (App. Div. 2005). In determining not to remit or waive the statutorily mandated penalties, the Director cannot be seen to have sought "to achieve or preserve any kind of bargaining or litgational advantage over the [taxpayer]," F.M.C., supra, 100 N.J. at 427. Rather, the Director was merely applying settled policy requiring an objecting taxpayer to meet its fiscal obligations in a timely fashion while it litigated its position that it was not subject to a particular tax for special reasons.
In respect of plaintiff's challenge to the post-amnesty penalty on constitutional grounds, we are also in substantial agreement with the Tax Court. Plaintiff has, thus far, not been deprived of a significant property interest at all, let alone on a basis that violates the "some kind of hearing" standard, i.e., a proceeding "'appropriate to the nature of the case' before the [deprivation] becomes effective." Board of Regents of State Colleges v. Roth, 408 U.S. 564, 570 n.7, 92 S.Ct. 2701, 2705 n.7, 33 L.Ed. 2d 548, 556 n.7 (1972) (quoting Bell v. Burson, 402 U.S. 535, 542, 91 S.Ct. 1586, 1591, 29 L.Ed. 2d 90, 96 (1971)); see Henry J. Friendly, Some Kind of Hearing, 123 U. Pa. L. Rev. 1267 (1975). Although the Division has taken the position that plaintiff is amenable to the post-amnesty penalty, plaintiff has not paid the assessment because it has been litigating its liability for that penalty. As far as we can tell, plaintiff has never disputed the amount of the penalty, only its liability under the terms of the amnesty statute, N.J.S.A. 54:53-18. The Tax Court's consideration of that question -- and ours -- must be seen as having afforded plaintiff "[t]he fundamental... opportunity to be heard 'at a meaningful time and in a meaningful manner.'" Mathews v. Eldrige, 424 U.S. 319, 333, 96 S.Ct. 893, 902, 47 L.Ed. 2d 18, 32 (1976) (quoting Armstrong v. Manzo, 380 U.S. 545, 552, 85 S.Ct. 1187, 1191, 14 L.Ed. 2d 682, 66 (1965)). We conclude in respect of the post-amnesty penalty that plaintiff has received all the process it was due.
We have been given no reason to view tax amnesty provisions as lacking general validity, or to see the eligibility standards they embody as needing to be evaluated by other than ordinary rational basis tests. See, e.g., Snappy Car Rental, Chi., Inc. v. Department of Revenue, 497 N.E.2d 840 (Ill. App. Ct. 1986); State of N.M. ex rel. Shell W. E & P, Inc. v. Chavez, 38 P.3d 886 (N.M. Ct. App.), cert. denied, 40 P.3d 1008 (N.M. 2002).
Plaintiff, by direct communication from the Division, received adequate notice of the tax amnesty established in N.J.S.A. 54:53-18. The amnesty period of sixty days was to expire by June 10, 1992. As noted by the Tax Court, during the amnesty period, "all taxpayers with outstanding tax liability could pay the princip[al] owed without interest, costs, and civil or criminal penalties.... [F]ailure to take advantage of the amnesty provision resulted in the addition of 5% penalty to the taxpayer's total liability." Here, too, plaintiff had a full opportunity to minimize its liability, but chose a different course of conduct. To subject it to the prescribed cost of that choice is not manifestly unjust, as plaintiff contends. We reject plaintiff's "square corners" argument in respect of the post-amnesty penalty for the reasons we have stated in upholding the late filing penalty assessments.
We affirm the decision of the Tax Court in respect of the late filing and post-amnesty penalties. Because the Tax Court's consideration of the matter arose on cross-motions for partial summary judgment, its disposition having been a grant of the Director's motion and a denial of plaintiff's motion, we remand for such further proceedings as may be required to conclude the matter. We do not retain jurisdiction.
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