On appeal from the Tax Court of New Jersey, Docket Nos. 7845-2004, 7879-2004, 7889-2004, 7890-2004, 7891-2004.
The opinion of the court was delivered by: Lihotz, J.A.D.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF APPELLATE DIVISION
Before Judges Messano, Lihotz, and Ostrer.
The opinion of the court was delivered by LIHOTZ, J.A.D.
The defendant Director of the New Jersey Division of Taxation (the Director) appeals from the final order of the Tax Court of New Jersey in these matters, consolidated for trial. Plaintiffs are five entities of the United Parcel Service group of companies (UPS Group), each of which is a subsidiary of United Parcel Service of America, Inc. (America), the parent corporation.*fn1 United Parcel Service General Services Co. (GS), UPS Telecommunications, Inc. (Telecom), UPS Worldwide Forwarding, Inc. (WWF), UPS Worldwide Forwarding, Inc. as successor in interest to UPS Air Forwarding, Inc. (AF), and United Parcel Service Co. (UPSCO) filed separate complaints in the Tax Court, contesting the Division's assessment of corporate business tax (CBT), pursuant to New Jersey's Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -41, following an audit.
Following a seven-day trial, Judge Harold A. Kuskin rendered his opinion, which included comprehensive findings of fact and conclusions of law. See United Parcel Serv. Gen. Servs. Co. v. Dir., Div. of Taxation, 25 N.J. Tax 1 (Tax 2009). A final judgment was entered on September 9, 2010.
Following the filing of this appeal, several issues were resolved in extensive discussions between the parties. On appeal, the Director seeks reversal of the abatement of late payment and tax amnesty penalties the Director had imposed. The Director argues the imposition of these penalties is mandatory; because the assessments were upheld, the penalties attach. Consequently, the Director argues waiver of these penalties and assessments was legal error. We disagree and affirm.
We need not fully recite the facts and myriad issues presented to the Tax Court, as Judge Kuskin's opinion details the nature of the controversy giving rise to this appeal, which is generally accepted as undisputed. Id. at 8-12. Suffice it to say, the main controversy centered on the tax consequences of the UPS Group's daily, inter-company transfers in operating its corporate cash management system, which we will describe.
GS contractually provided various centralized management services, including the cash management system, to members of the UPS Group. The system was designed to ensure all subsidiaries had access to cash for their daily operations, and to maximize the return received by America on its overall cash reserves. Daily cash sweeps were made from subsidiaries' bank accounts and placed in one bank account controlled by America, which was used to pay expenses submitted by members of the UPS Group, including plaintiffs, as needed. Any cash in America's account not immediately needed to pay subsidiary expenses was in turn deposited for short-term investment.
The funds provided by America for payment of a particular subsidiary's expenses or obligations may have been less than, equal to, or more than the cash swept into America's account from that subsidiary. America treated the cash sweeps as fungible among the subsidiaries, so that cash from one subsidiary could be used to pay the expense or obligation of another. Other than in connection with payment of their respective expenses, the subsidiaries had no right to obtain the return of funds swept from their bank accounts into America's account, and had no interest in, or right to receive, any of the investment returns generated by UPICO.*fn2
. . . The procedures for the sweeping of funds from a subsidiary's bank account to America's bank account apparently were undocumented other than by the appropriate banking entries. No promissory notes or other evidences of indebtedness were signed by America with respect to the funds swept into its account, no repayment schedules were established, no interest payments were required from or made by America, and America provided no collateral to any of the subsidiaries. [Id. at 15-16.]
The second type of inter-company transfer at issue related to an agreement between America and GS, requiring America to provide monthly payments to GS for the centralized services provided to the subsidiaries. Although payable monthly, payment was not made every month, and GS reported the accrued but unpaid fees on its tax return.
The Division audited plaintiffs, focusing on, among other things, these two types of inter-company cash transfers. On their corporate tax returns, plaintiffs noted the cash sweep transfers as negative receivables and ascribed no tax consequence to them. On audit, pursuant to N.J.S.A. 54:10A-10 and N.J.A.C. 18:7-5.10(a)5, the Division imputed interest income on the inter-company transfers it deemed were loans, and assessed unpaid taxes, statutory interest, and late payment penalties, see N.J.S.A. 54:49-6a. The monies due GS from America were also characterized as loans. Interest income was imputed on these loan advances between related parties. Ibid. Finally, Tax Amnesty penalties, pursuant to N.J.S.A. 54:53-17 and N.J.S.A. 54:53-18, were imposed on taxes due from the unreported income.
During trial, factual and expert testimony was presented regarding the treatment of the inter-company transfers. Judge Kuskin concluded the facts supported the Division's characterization of the transfers as loans for tax purposes, and affirmed the Director's imputation of interest income. However, he also found plaintiffs had demonstrated reasonable cause to believe their reporting position was correct regarding the treatment of the cash management system transfers and the business service fees due GS, even though disallowed by the Division following an audit. United Parcel Serv., supra, 25 N.J. Tax at 50. Concluding the proper tax treatment was not clearly discernable under reported authority, Judge Kuskin found plaintiffs satisfied the requirements justifying waiver of ...