(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for
the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please
note that, in the interests of brevity, portions of any opinion may not have been summarized).
Argued January 17, 1995 -- Decided June 21, 1995
HANDLER, J., writing for a unanimous Court.
The issue on appeal is whether certain provisions of the Corporation Business Tax Act (CBT),
specifically N.J.S.A. 54:10A-4(k), permit the net-operating losses in past tax years by a corporation that has
been merged into a successor corporation to be carried over and deducted by the surviving corporation in a
subsequent tax year. Also implicated is the validity of N.J.A.C. 18:7-5.13(b), a regulation adopted by the
Director of the Division of Taxation to implement the NOL carryover provisions of the CBT.
Richard's Auto City, Inc. (Auto City), a New Jersey corporation formed in 1973, is an automobile
dealership in Freehold Township. Catena, Inc. (Catena), incorporated in 1983, was the leasing company
affiliated with Auto City, providing lease financing for Auto City's customers. Catena began its operations in
1983 at the Auto City location. Richard Catena was the sole stockholder of each corporation. In January
1984, Richard Catena transferred 100" of his shares of stock in Catena to Auto City, making Catena a
wholly-owned subsidiary of Auto City.
Over the next few years, Catena incurred substantial net-operating losses (NOLs), totalling
$1,574,294, for the 1984, 1985, and 1986 tax years. In late 1986, pursuant to a plan of merger, Catena
merged into Auto City. A Certificate of Merger filed with the Secretary of State on December 19, 1986
identified Auto City as the survivor corporation. Following the merger, the leasing programs that Catena
previously offered continued in the same manner under Auto City's leasing department.
In its 1986 Corporate Business Tax Return, Auto City claimed as a deduction the NOLs Catena had
incurred during the tax years prior to the merger. By notice of assessment dated April 17, 1989, the Director
of the Division of Taxation disallowed the deduction and assessed Auto City $88,517 in additional taxes. The
Director found that the losses actually had not been incurred by Auto City's business operations, but rather
the losses were sustained by the merged corporation that no longer existed. The Director based his
determination on administrative regulation, N.J.A.C. 18:7-5.13(b). The Director also imposed a late payment
penalty and interest charges through November 30, 1989. The Director's decision was reaffirmed by a final
determination letter dated November 16, 1989, which reduced the penalty and interest charges to the
statutory minimum.
Auto City filed a complaint with the Tax Court contesting the Director's final determination. The
Tax Court granted the Director's cross-motion for summary judgment and dismissed Auto City's complaint.
On appeal, the Appellate Division reversed and remanded the matter to the Tax Court for entry of judgment
in favor of Auto City. The Appellate Division found that the administrative regulation was invalid because it
was inconsistent with the enabling statute, went beyond the legislative scheme, and imposed a restriction that
was neither intended or authorized.
The Supreme Court granted the Director's petition for certification.
HELD: Net-operating losses incurred in past tax years by a corporation that has been merged into a
successor corporation are not permitted, under the Corporation Business Tax Act, to be carried over
and deducted by the surviving corporation in a subsequent tax year.
1. Agency regulations are presumptively valid and should not be invalidated unless they violate the enabling
act or frustrate express or implied legislative intent. Courts generally accord substantial deference to the
agency's interpretation of the statute the agency is charged with enforcing. Nonetheless, an administrative
agency cannot extend a statute to give it a greater effect than its language permits. (pp. 4-7)
2. The language of the critical provisions of the CBT is not clear and unambiguous, does not admit of only
one interpretation, and does not plainly authorize a surviving corporation in a merger to use the NOL
deductions of an acquired corporation. By its express terms, N.J.S.A. 54:10A-4(k)(6) does not address the
treatment of NOLs in mergers and other corporate reorganizations. The Director's regulation comports with
the basic meaning of the CBT. Nothing in the language of section 4(k)(6) permits one taxable entity to
adopt the tax attributes of another entity after a statutory merger. The language of the statute does not
support the imputation of a legislative intent or the implication of statutory authority that would allow the
transfer of tax deductions from an acquired corporation to the surviving corporation after a merger. (pp 7-10)
3. A review of the legislative history of the CBT does not support the conclusion that the Legislature
intended to authorize the deduction of an NOL by a corporation that did not sustain the loss simply because
it acquired through merger the corporation that incurred the loss. In addition, the Court cannot conclude
that the 1
939 Internal Rev.nue Code, as interpreted and applied, shaped the Legislature's purpose in
providing for a net loss carryover deduction. (pp. 10-19)
4. There is no reason to read the New Jersey Corporation Business Act, specifically N.J.S.A. 14A:10-6 in
pari materia (in conjunction) with the CBT, specifically section 4(k)(6). The two acts deal with different
subjects (corporate law versus tax law), have different purposes, and are clearly not part of a single
comprehensive plan. (pp. 19-23)
6. Auto City has failed to sustain its burden of proving that N.J.A.C. 18:7-5.13(b) is invalid. That regulation
applies retroactively to the effective date of the CBT. Thus, the regulation applies, as the statute applies, to
any taxable year ending after June 30, 1984.
Judgment of the Appellate Division is REVERSED, and the order of the Tax Court, granting
summary judgment in favor of the Director of the Division of Taxation, is REINSTATED.
CHIEF JUSTICE WILENTZ and JUSTICES POLLOCK, O'HERN, GARIBALDI, STEIN and
COLEMAN join in JUSTICE HANDLER'S opinion.
SUPREME COURT OF NEW JERSEY
A-
54 September Term 1994
RICHARD'S AUTO CITY, INC.,
Plaintiff-Respondent,
v.
DIRECTOR, DIVISION OF TAXATION,
Defendant-Appellant.
Argued January 17, 1995 -- Decided June 21, 1995
On certification to the Superior Court,
Appellate Division, whose opinion is reported
270 N.J. Super. 92 (1994).
Margaret A. Holland, Deputy Attorney General,
argued the cause for appellant (Deborah T.
Poritz, Attorney General of New Jersey,
attorney; Joseph L. Yannotti, Assistant
Attorney General, of counsel).
Robert J. Kipnees argued the cause for
respondent (Greenbaum, Rowe, Smith, Ravin &
Davis, attorneys; Mr. Kipnees and Thomas C.
Senter, of counsel and on the brief).
Michael A. Guariglia submitted a letter brief
on behalf of amici curiae Ernst & Young,
Coopers & Lybrand and Deloitte & Touche
(McCarter & English, attorneys).
The opinion of the Court was delivered by
HANDLER, J.
This appeal involves a conflict over the interpretation of provisions of the Corporation Business Tax Act that permit certain net-operating losses to be carried over and deducted in successive tax years. Specifically, at issue is whether those
provisions permit the net-operating losses incurred in past tax
years by a corporation that has been merged into a successor
corporation to be carried over and deducted by the surviving
corporation in a subsequent tax year.
In this case, the Director of the Division of Taxation
disallowed the deduction by the surviving corporation because the
losses had not actually been incurred by its business operations,
but rather the losses were sustained by the merged corporation,
which was no longer in existence. The Director's determination
was based on an administrative regulation that was adopted to
implement the net-operating loss carryover provisions of the tax
statute. The issue involving the proper interpretation of the
statute, therefore, necessarily involves the validity of the
administrative regulation.
During the next several years, Catena incurred substantial
net-operating losses, totaling $1,574,294 for the tax years
ending December 31, 1984, December 31, 1985, and, October 31,
1986. Those losses were attributable primarily to the
accelerated depreciation method then applicable to leased
automobiles. Under the applicable depreciation schedule, in the
earlier years of the lease terms, Catena deducted the cost of the
leased automobiles prior to the receipt of all the corresponding
lease income. Catena did not realize a substantial portion of
the income from lease packages until the later years of the lease
terms and/or the eventual sale of the automobiles. As a result,
Catena sustained large net-operating losses during 1984, 1985,
and 1986.
Pursuant to a plan of merger adopted on October 31, 1986,
Catena merged into Auto City. A Certificate of Merger filed with
the Secretary of State on December 19, 1986 identified Auto City
as the survivor corporation. Following the merger, the leasing
programs that Catena previously offered continued in the same
manner under Auto City's leasing department.
On its 1986 Corporate Business Tax Return, Auto City claimed
as a deduction the net-operating losses Catena had incurred as a
result of depreciation during the tax years prior to the merger.
By notice of assessment dated April 17, 1989, the Director of the
Division of Taxation disallowed the deduction and assessed Auto
City $88,517 in additional taxes. Further, the Director imposed
a $4,426 late payment penalty and $43,643 in interest charges
through November 30, 1989. That decision was reaffirmed by a
final determination letter dated November 16, 1989, which reduced
the penalty and interest to the statutory minimum.
Auto City filed a complaint with the Tax Court contesting
the Director's final determination. Both parties stipulated to
the foregoing facts. The Tax Court granted the Director's cross-motion for summary judgment, and dismissed Auto City's complaint.
12 N.J. Tax 619 (1992). The Appellate Division reversed the Tax
Court's determination and remanded the matter to the Tax Court
for entry of judgment in favor of Auto City.
270 N.J. Super. 92
(1994). The Director filed a petition for certification, which
this Court granted.
137 N.J. 167 (1994).
(B) Net operating loss carryover. A net operating loss for any taxable year ending after June 30, 1984 shall be a net operating loss carryover to each of the seven years following the year of the loss. The entire amount of the net operating loss for any taxable year (the "loss year") shall be carried to the earliest of the taxable years to which the loss may be carried. The portion of the loss which shall be carried to each of the other taxable years shall be the
excess, if any, of the amount of the loss
over the sum of the entire net income,
computed without the exclusions permitted in
paragraphs (4) and (5) of this subsection or
the net operating loss deduction provided by
subparagraph (A) of this paragraph, for each
of the prior taxable years to which the loss
may be carried.
(C) Net operating loss. For purposes of
this paragraph the term "net operating loss"
means the excess of the deductions over the
gross income used in computing entire net
income without the net operating loss
deduction provided for in subparagraph (A) of
this paragraph and the exclusions in
paragraphs (4) and (5) of this subsection.
(D) Change in ownership. Where there is a
change in 50" or more of the ownership of a
corporation because of redemption or sale of
stock and the corporation changes the trade
or business giving rise to the loss, no net
operating loss sustained before the changes
may be carried over to be deducted from
income earned after such changes. In
addition where the facts support the premise
that the corporation was acquired under any
circumstances for the primary purpose of the
use of its net operating loss carryover, the
director may disallow the carryover.
Following the Legislature's enactment of those provisions in
1985, the Director adopted N.J.A.C. 18:7-5.13(b), effective
February 3, 1986, to implement N.J.S.A. 54:10A-4(k)(6). The
regulation provides:
(b) The net operating loss may only be
carried over by the actual corporation that
sustained the loss. The net operating loss
may, however, be carried over by the
corporation that sustained the loss and which
is the surviving corporation of a statutory
merger. The net operating loss may not be
carried over by a taxpayer that changes its
state of incorporation or is a part of a
statutory consolidation. Section 4(k) of the
[CBT] Act defines entire net income in terms
of a specific corporate franchise.
The dispute between the parties centers on the Director's
regulation and its restriction of the net-operating loss
deduction to the corporation that actually sustained that loss
and whether that regulation expresses the authority intended to
be conferred by the enabling statute. Because the issue of
statutory interpretation implicates the validity of the
Director's regulation, our resolution properly commences with the
standards governing judicial review of administrative
regulations.
This Court has stated,
Agency regulations are presumptively valid
and should not be invalidated unless they
violate the enabling act or its express or
implied legislative policies. Generally,
courts accord substantial deference to the
interpretation an agency gives to a statute
that the agency is charged with enforcing.
[GE Solid State, Inc. v. Director,
Div. of Taxation,
132 N.J. 298, 306
(1993) (citations omitted).]
The standard of judicial review of regulations acknowledges
the very broad grant of authority to administrative agencies for
the purpose of adopting regulations. New Jersey Guild of Hearing
Aid Dispensers v. Long,
75 N.J. 544, 560-63 (1978). That
standard is fully applicable to administrative regulations
governing taxation. See Sorensen v. Director, Div. of Taxation,
184 N.J. Super. 393 (Tax 1981). We thus accept the strong
presumption in favor of the validity of the Director's
regulation, but recognize, nonetheless, that
an administrative agency may not, under the
guise of interpretation, extend a statute to
give it a greater effect than its language
permits. Accordingly, we have invalidated
regulations that flout the statutory language
and undermine the intent of the Legislature.
[GE Solid State, supra, 132 N.J. at
306-07(citations omitted).]
The Appellate Division determined that the Director's
regulation, N.J.A.C. 18:7-5.13(b), was invalid because it was
inconsistent with the enabling statute; it "goes beyond the
legislative scheme and imposes a restriction that is neither
intended nor authorized." 270 N.J. Super. at 103. The Tax Court
reached the opposite conclusion. 12 N.J. Tax at 640-42.
In the enterprise of statutory construction, the first step
is the examination of the provisions of the legislative enactment
to ascertain whether they are expressed in plain language that,
in accordance with ordinary meaning, clearly and unambiguously
yields only one interpretation. GE Solid State, supra, 132 N.J.
at 307 (citations omitted).
What is obvious from the examination of the tax statute in
this case is that the language of its critical provisions is not
clear and unambiguous; it does not admit of only one
interpretation; and it does not plainly authorize a surviving
corporation in a merger to use the NOL deductions of an acquired
corporation.
N.J.S.A. 54:10A-4(k)(6)(D) prohibits NOL deductions
[1] where there is a change in 50" or more of
the ownership of a corporation because of
redemption or sale of stock and the
corporation changes the trade or business
giving rise to the loss. . . [and]
[2] where the facts support the premise that
the corporation was acquired under any
circumstances for the primary purpose of the
use of its net operating loss carryover.
The "changes in ownership" specified in the statute do not
include those effectuated through mergers. N.J.S.A. 54:10A-4(k)(6), by its express terms, does not address the treatment of
NOLs in mergers and other corporate reorganizations.
Auto City asserts that the language of N.J.S.A. 54:10A-4(k)(6)(D) implicitly authorizes net-operating loss carryovers by
a surviving corporation in merger situations in that it expressly
bars an NOL deduction in only two situations, and those do not
involve a corporate merger. Therefore, it is claimed that, by
implication, the NOL carryover deduction is permitted in the case
of a corporate merger because it is not expressly prohibited.
That position, however, fails to take into account the
broader statutory context in which the NOL provisions of the CBT
must be assessed and fails to appreciate the overall intendment
of the CBT as one that applies to single corporate taxpayers.
The CBT does not recognize generally the financial status or
condition of any entity other than the individual corporate
taxpayer. Judge Andrew, thus, observed:
[T]he CBT act is a tax on a single entity and
that concept is reflected in N.J.S.A. 54:10A-4 which defines "entire net income" in terms
of a single "taxpayer's entire net income."
That is also reflected in the fact that
consolidated tax returns have never been
permitted under the CBT act. See N.J.A.C.
18:7-4.15, -11.15; United States Steel Corp.
v. Director, Div. of Tax.,
38 N.J. 533
(1962).
The flaw in Auto City's position is that it would, in
effect, give tax recognition to the losses of a non-taxpayer
corporation. "There is nothing," however, in the provisions
granting the net loss carryovers that permits "one taxable
entity" to assume the tax deductions "of another entity after a
statutory merger." Ibid. The Tax Court noted that N.J.S.A.
54:10A-4(k)(6)(A) and (B), "simply permit net-operating loss
carryovers," and that the carryover deduction "is limited to a
single taxpaying entity unless the authorizing statute expressly
and clearly extends the tax deduction to multiple corporations.
It does not." Id. at 636. It has long been understood that the
corporation franchise tax does not accommodate a non-taxpayer
corporation. See Household Finance Corp. v. Director of Div. of
Taxation,
36 N.J. 353, 362 (1962) (disallowing under Financial
Business Tax Act (repealed), which paralleled Corporation
Franchise Tax Act (repealed), claim of corporate taxpayer to tax
benefits derived from the financial condition of its wholly-owned
subsidiaries).
The Director's regulation comports with this basic meaning
of the CBT. It recognizes that "Section 4(k) of the [CBT]
defines entire net income in terms of a specific corporate
franchise." N.J.A.C. 18:7-5.13(b). Nothing in the language of
the CBT, more specifically in N.J.S.A. 54:10A-4(k)(6), permits
one taxable entity to adopt the tax attributes of another entity
after a statutory merger. The language of the statute does not
support the imputation of a legislative intent or the implication
of statutory authority that would allow the transfer of tax
deductions from an acquired corporation to the surviving
corporation after a merger.
Auto City further cites legislative history as support for
its position. We acknowledge that in determining the meaning to
be accorded the terms of a statute, "legislative purpose is the
key to the interpretation of any statute." GE Solid State,
supra, 132 N.J. at 308; see Donnelley Corp. v. Director, Div. of
Taxation,
128 N.J. 218, 227 (1992). The "examination of the
overall policy and purpose of the statute provides additional
assistance in its correct interpretation. The construction that
will best effectuate the statute's ultimate objectives is to be
preferred." Cedar Cove, Inc. v. Stanzione,
122 N.J. 202, 213
(1991) (citations omitted). A review of the legislative history
of the enactment does not support the conclusion that the
Legislature intended to authorize the deduction of a NOL by a
corporation that did not sustain the loss simply because it
acquired through merger the corporation that incurred the loss.
Prior to 1985, corporations were not permitted to carry
forward current net-operating losses to future tax years.
There was concern, therefore, that this practice discouraged
businesses from operating in New Jersey because businesses, which
often sustain operating losses, were not able to offset those
losses against future gains. See Report of the New Jersey Tax
Policy Committee (Part V, Non-Property Taxes in a Fair and
Equitable Tax System) (Feb. 23, 1972). Accordingly, businesses
were drawn to neighboring states offering more favorable tax
treatment. In response to that concern, the Legislature, in
1985, amended the CBT to permit corporations to carry forward
current net-operating losses to future tax years. L. 1985, c.
143 (effective April 22, 1985, now reflected in N.J.S.A. 54:10A-4(k)(6)).
Auto City refers to a comment of former Governor Thomas H.
Kean relating to the enactment of the net loss carryover
provisions to support its argument that the NOL deduction was
intended to be allowed to a corporation that survives a merger
even though it had not sustained the past operating losses. The
Governor stated that "the amendment [N.J.S.A. 54:10A-4(k)(6)] to
the corporation business tax act permitting a 'loss-carryfo[r]ward . . . puts New Jersey in a better competitive
position with our neighbor states in competing for new
businesses.'" 12 N.J. Tax at 628-29 (quoting Governor Kean).
Auto City construes that remark to relate specifically to the
existing New York statutes, see N.Y. Tax §§ 208(9)(f), (13),
(15), and (17) (1989), that allowed the NOL carryover deduction
to a surviving corporation. However, the Governor's actual
comment implies only that the amendment would improve New
Jersey's comparative competitive position; it in no way suggests
that the amendment was intended to deal only with competition
from New York or to equalize New Jersey's competitive position
with that of New York's by duplicating New York statutes. 12
N.J. Tax at 629; see Fields v. Hoffman,
105 N.J. 262, 270 (1987)
(observing that Governor's press release is not the most
authoritative legislative history).
Available legislative history suggests that the amendment
was enacted to improve the tax climate for business corporations
by allowing them to overcome fluctuating incomes. See Assembly
Revenue, Finance and Appropriations Committee, Statement to
Assembly Bill No. 2144, at 8 (1984) ("This exclusion from net
income allows a carryforward of net-operating losses incurred
during the early years of a corporation's business to offset the
profits in later years."). When enacted to permit such income
adjustment, N.J.S.A. 54:10A-4(k)(6) improved New Jersey's
competitive position with its neighbors by affording New Jersey
corporate taxpayers a benefit not theretofore allowed. It did so
by providing corporations the ability to carry forward and deduct
their own net-operating losses from future income.
The Appellate Division, in holding that N.J.S.A. 54:10A-4(k)(6) was intended to permit a corporation surviving a merger
to carryover and deduct losses sustained by the acquired
corporation, relied strongly on federal law. It found that
N.J.S.A. 54:10A-4(k)(6) and sections 23(s) and 122 of the 1
939
Internal Rev.nue Code ("I.R.C.") are comparable in that both
statutes define net-operating losses in almost the same way,
permit the carryover of those losses, and are silent as to
whether those losses may be carried over in a merger or
reorganization. 271 N.J. Super. at 97.
We acknowledge that it is often helpful to look to an
analogous federal statute when interpreting a New Jersey statute.
Galloway Township Bd. of Educ. v. Galloway Township Ass'n of
Educational Secretaries,
78 N.J. 1, 10 (1978). However, when the
Legislature intends to incorporate federal income tax provisions,
standards or concepts, it does so explicitly. Amerada Hess Corp.
v. Director, Div. of Taxation,
107 N.J. 307, 321 (1987), aff'd,
490 U.S. 66,
109 S. Ct. 1617,
104 L. Ed.2d 58 (1989); Smith v.
Director, Div. of Taxation,
108 N.J. 19, 33 (1987).
We are unable to conclude that the 1939 I.R.C., as
interpreted and applied, shaped the Legislature's purpose in
providing for a net loss carryover deduction. As pointed out by
Judge Andrew, the legislative history does not indicate that the
Legislature sought to incorporate or codify within N.J.S.A.
54:10A-4(k)(6), nearly fifty-year-old federal law. Rather,
the Legislature had to be acutely aware of
the fact that prior to the extensive revision
of the I.R.C. in 1954, the federal law
governing loss carryovers was rife with
flagrant abuses. It is difficult to believe
that the Legislature intended to perpetuate
an abusive program for loss carryovers by
silently adopting federal law predating the
1954 tax code revisions.
[12 N.J. Tax at 632 (citations
omitted).]
The Appellate Division, however, believed that federal decisional law interpreting the carry-back and carry-forward provisions of the 1939 I.R.C. influenced our Legislature's judgment in granting such a deduction in 1985. 270 N.J. Super. at 98-102. It refers to decisions that allowed such a deduction
by a corporation surviving a merger that had not itself sustained
the loss. That decisional law, however, is problematic as a
source for interpreting the meaning of the State's CBT primarily
because those decisions reflect principles of taxation that are
inconsistent with the policies incorporated in the CBT.
The Appellate Division focused on Helvering v. Metropolitan
Edison Co.,
306 U.S. 522,
59 S. Ct. 634,
83 L. Ed. 957 (1939), in
which the Supreme Court addressed the question whether, under the
Revenue Acts of 1926 and 1928, a Pennsylvania corporation was
permitted to deduct unamortized bond discount and expense of a
subsidiary whose assets it had previously acquired. The Supreme
Court reasoned "the corporate personality of the transferor is
drowned in that of the transferee" and the transferee would be
liable for the debts of the transferor. Id. at 529, 59 S. Ct. at
638, 83 L. Ed. at 964. Therefore, the Supreme Court concluded
that the successor corporation may deduct the unamortized bond
discount and expense. Ibid.
In Newmarket Manufacturing Co. v. United States,
233 F.2d 493 (1956), cert. denied,
353 U.S. 983,
77 S. Ct. 1279,
1 L. Ed.2d 1142 (1957), the First Circuit Court of Appeals relied on
Metropolitan Edison Co., supra, in analyzing the availability of
net-operating loss carryover deductions under sections 23(s) and
122 of the 1939 I.R.C. As noted by the Appellate Division:
The Newmarket court interpreted Metropolitan
Edison as meaning "the transferee in a
statutory merger should be deemed to be
continuing in itself the corporate life of
the now-defunct component, and that it
followed from this conceptual identity that
the two corporate entities were to be treated
for a substantive purpose in the income tax
as the same taxpayer." Newmarket, supra, 233
F.
2d at 499. The court pointed out that a
carryback privilege should not be lost in a
statutory merger which is merely a change in
identity or form and concluded that "the
principle of the Metropolitan Edison opinion
should be applied to a net operating loss
carry-back on the facts of the case at bar."
Id. at 498.
However, in a much earlier case, New Colonial Ice Co. v.
Helvering,
292 U.S. 435,
54 S. Ct. 788,
78 L. Ed. 1348 (1934),
the United States Supreme Court interpreted section 204(b) of the
Revenue Act of 1921. The Supreme Court adopted the so-called
"continuity of legal entity" rule, and affirmed the disallowance
of a loss carry-over where the assets of the loss-suffering
corporation were transferred to a newly created corporation in
exchange for the latter's stock. The Supreme Court ruled that
the new corporation was not the same taxpayer, in spite of the
fact that it carried on the same business, had the same
stockholders, and had substantially the same capital structure.
Because the loss-suffering corporation did not emerge as the
surviving corporation in the reorganization, the loss could not
be carried over.
In Libson Shops, Inc. v. Koehler,
353 U.S. 382,
77 S. Ct. 990,
1 L. Ed.2d 924 (1957), sixteen corporations, all
incorporated for the purpose of selling women's apparel, merged
into a seventeenth corporation, which provided management
services. The stock of all seventeen corporations was owned,
directly or indirectly, by the same individuals in the same
proportions. Prior to the merger, all corporations filed
individual tax returns. After the merger, pursuant to I.R.C.
sections 23(s) and 122, the surviving corporation sought to
deduct the net-operating losses sustained pre-merger by three of
the acquired corporations. The Supreme Court affirmed the Eighth
Circuit Court of Appeals, disallowing the deduction.
The Supreme Court in Libson noted that Newmarket involved a
Massachusetts corporation that created a Delaware corporation and
merged into it for the purpose of changing its domicile. In
Newmarket, the court allowed the deduction because "throughout
the whole period in question there was only one single business .
. . which had a profitable year followed by several bad ones,"
233 F.
2d at 497, and, as pointed out in Libson, "[b]ut for the
merger, the old corporation itself would have been entitled to a
carry-back." 353 U.S. at 388, 77 S. Ct. at 994, 1 L. Ed.
2d at
929. In Libson, however, the Court concluded that the taxpayer
was "not entitled to a carry-over since the income against which
the offset is claimed was not produced by substantially the same
businesses which incurred the losses." Id. at 390, 77 S. Ct. at
994, 1 L. Ed.
2d at 929.
The Appellate Division attempts to discredit Libson, noting
that other courts have rejected the "continuity of business test"
in favor of a "continuity of ownership test," citing Chilivis v.
Studebaker Worthington, Inc.,
223 S.E.2d 747, 750-51 (Ga. Ct.
App. 1976). 270 N.J. Super. at 100. We note, however, that in
adopting the "continuity of ownership" theory, Chilivis relied on
dictum from NordenKetay Corp. v. Commissioner of Internal
Revenue,
319 F.2d 902 (1963), a Second Circuit case, while two
additional Second Circuit cases rejected the "continuity of
ownership test," e.g., Allied Central Stores, Inc. v.
Commissioner of Internal Revenue,
339 F.2d 503 (1964); Julius
Garfinckel & Co. v. Commissioner of Internal Revenue,
335 F.2d 744 (1964)).
The Appellate Division's observation that Auto City and
Catena, unlike the corporations in Libson, conducted the "same
business" and filed consolidated federal tax returns is not
persuasive as a factor that would justify the recognition of the
tax status of the merged corporation. The corporations conducted
related but not identical businesses and, although the
corporations filed consolidated returns for federal income-tax
purposes, consolidated corporate filings are not permitted under
the CBT. See discussion supra at __ (slip op. at 8-9).
Auto City makes the further argument that the similarity of
the language of N.J.S.A. 54-10A-4(k)(6)(D) and
26 U.S.C.A.
§§269
and 382 of the 1954 I.R.C. is evidence of the Legislature's
intent to adopt the federal tax scheme, which provides for the
carryover of net-operating losses by the surviving corporation.
The Tax Court rejected that argument.
Although the language of N.J.S.A. 54:10A-4(k)(6)(D) is
similar to those provisions of the 1954 federal tax code, the
"language employed by the Legislature . . . does not suggest that
the Legislature intended to incorporate federal substantive rules
relating to loss carryovers after corporate acquisitions." 12
N.J. Tax at 634. As the Tax Court observed:
§ 172 of the [Internal Revenue] Code is the
operative provision which permits a taxpayer
to carry a loss back three years or forward
15 years from the year in which it occurs.
Although conferring greater tax benefits than
§§ 4(k)(6)(A) and (B), § 172 operates
somewhat in the same manner as does §§
4(k)(6)(A) and (B), that is, it confers a tax
benefit by permitting the loss carryover.
Section 172, like §§ 4(k)(6)(A) and (B) of
the CBT, is silent with respect to loss
carrybacks or carryovers in mergers,
consolidations or other corporate
reorganizations.
Section 381 of the Code is the provision
which sets forth the circumstances under
which loss carryovers in mergers,
consolations or other corporate
reorganizations will be permitted. This
section allows loss carryovers in five
specified types of corporate acquisitions or
reorganizations. There is no counterpart to
§ 381 in the CBT act.
(c) Such surviving or new corporation shall,
to the extent consistent with its certificate
of incorporation as amended or established by
the merger or consolidation, possess all the
rights, privileges, powers, immunities,
purposes and franchises, both public and
private, of each of the merging or
consolidating corporations.
(e) The surviving or new corporation shall
be liable for all the obligations and
liabilities of each of the corporations so
merged or consolidated; and any claim
existing or action or proceeding pending by
or against any of such corporations may be
enforced as if such merger or consolidation
had not taken place. Neither the rights of
creditors nor any liens upon, or security
interests in, the property of any of such
corporations shall be impaired by such merger
or consolidation.
In allowing Auto City to deduct the losses sustained by
Catena, the Appellate Division reasoned that
N.J.S.A. 14A:10-6 is akin to the holding of
Metropolitan Edison. Thus, the corporate
personality of the transferor is consumed by
that of the transferee and the transferee is
liable for the debts of the transferor.
Metropolitan Edison, supra, 306 U.S. at 529,
59 S. Ct. at 638, 83 L. Ed. at 964.
Therefore, it is not unreasonable to conclude
that the tax attributes of the predecessor
corporation actually become the tax
attributes of the surviving corporation.
Because Catena, Inc. merged with Auto City,
Auto City inherited the obligations and
liabilities of Catena, Inc. (N.J.S.A. 14A:10-6(e)) and should also inherit the rights and
privileges, such as the tax attributes.
N.J.S.A. 14A:10-6(c).
The Clarendon,
129 N.J. Super. 358, 368 (App. Div. 1974). The
purpose of the 1945 CBT, was to impose a privilege tax on certain
corporations in order to raise revenue for the State. See Report
of the New Jersey Tax Policy Committee, supra.
Aside from the clearly distinct purposes of the CBT and BCA,
the fact that the acts were not enacted during the same time and
make no specific reference to each other further indicates that
they were not intended to be read in pari materia.
The Court in International Flavors & Fragrances, Inc. v.
Director, Division of Taxation,
5 N.J. Tax 617 (Tax 1983), aff'd,
7 N.J. Tax 652 (App. Div. 1984), aff'd,
102 N.J. 210 (1986),
considered a corporation's challenge to the Division of
Taxation's calculation of its "entire net income" under the CBT.
In disputing the meaning of subsidiary for the purpose of
calculating income, the Director asked the Tax Court to determine
legislative intent by comparing the definition of "subsidiary" in
the BCA with its use in the CBT. The Tax Court determined that
the two enactments could not be read in pari materia. This Court
agreed, stating that
We likewise find unpersuasive the
Director's reliance on the New Jersey
Business Corporation Act, N.J.S.A. 14A:1-2(r)
. . . . We agree with the Tax Court that the
Business Corporation Act's language cannot
sensibly be used to give meaning to the
language of the Corporation Tax Act.
[Intern. Flavors, supra, 102 N.J.
at 219 n.5 (citation omitted).]
Cf. Newark Bldg. Assocs. v. Director, Div. of Taxation,
128 N.J.
Super. 535, 539-40 (App. Div. 1974) (ruling that Unincorporated
Business Tax Act, N.J.S.A. 54:11B-1 to -23 (repealed), and
Partnership Act, N.J.S.A. 42:1-1 to -43, are not in pari materia,
nor are they statutes on cognate subjects); Cooperstein v.
Director, Div. of Taxation,
13 N.J. Tax 68, 93 (Tax 1993)
(concluding that Sales and Use Tax Act, N.J.S.A. 54:32B-1 to -36,
and New Jersey Gross Income Tax Act, N.J.S.A. 54A:1-1 to 10-12,
are not treated in pari materia with BCA).
The Wisconsin Supreme Court reached a similar conclusion in
Fall River Canning Co. v. Wisconsin Department of Taxation,
89 N.W.2d 203 (1958). There several canning corporations merged
into a single surviving corporation, Fall River Canning
Corporation. That corporation sought to deduct the net-operating
losses of the acquired corporations. The court disallowed the
claimed deduction. Although section 71.06 of the Wisconsin
statutes limits the net loss carryover and deduction of net-operating losses to the taxpayer that sustained the loss, the
statute did not expressly preclude the deduction of a loss after
a merger by the surviving corporation when the acquired
corporations is the one that incurred the loss. The court found
the general grant of privileges to surviving corporations under
the statutory merger provisions of the general corporations
statute to be insufficient to convert by implication a specific
deduction authorized under the tax statute into a privilege to be
exercised by the surviving corporation. Rather, "[i]t would
require a specific and unambiguous provision to accomplish that
result." Fall River, supra, 89 N.W.
2d at 205 (citing Comet Co.
v. Wisconsin Dep't of Taxation,
9 N.W.2d 620 (Wis. 1943)).
We further agree with the court's observation in Fall River
that "one who claims an exemption must point to an express
provision granting such exemption by language which clearly
specifies the same, and thus bring himself clearly within the
terms thereof," 89 N.W.
2d at 206 (quoting Comet, supra, 9 N.W.
2d
at 623), and that the NOL carryover, as a statutory deduction, is
to be strictly construed. Our "courts have consistently
recognized that tax exemptions are to be strictly construed
against the claimant." GE Solid State, supra, 132 N.J. at 306
(citations omitted); see Fedders Financial Corp. v. Director,
Div. of Taxation,
96 N.J. 376, 386 (1984); Board of Nat'l
Missions v. Neeld,
9 N.J. 349, 353 (1952); Browning Ferris Indus.
v. Director, Div. of Taxation,
10 N.J. Tax 96, 101 (Tax 1988),
aff'd,
236 N.J Super. 521 (App. Div. 1989).
The Appellate Division also alluded to the taxpayer's
argument that the regulation is irrational because it permits the
carryover of NOLs only if the corporation sustaining the loss is
the survivor of a merger, but denies the loss carryover when the
entity sustaining the loss is the acquired corporation. 270 N.J.
Super. at 104. Auto City claims that the result of the merger is
the same regardless of which corporation is listed as the
survivor; therefore, the carryover and deduction should be
permitted irrespective of how the merger is executed.
Corporate mergers are regulated specifically and must be
effectuated in accordance with statutory authorization and with
results that are statutorily prescribed. See, e.g., N.J.S.A.
14A:10-1 to -13. The business decision to effectuate a corporate
merger must be undertaken within the statutory framework. The
State, in administering its tax laws, is entitled to assume that
"corporate lines are real." Household Finance Corp., supra, 36
N.J. at 363.
The taxpayer complains that the tax consequence resulting
from the manner in which the merger was executed is unfair and
unjust. However, as pointed out by the Tax Court: "[A] voluntary
business decision is to be given its tax effect in accord with
what actually occurred and not in accord with what might have
occurred." 12 N.J. Tax at 627 n.3 (quoting General Trading Co.
v. Director, Div. of Taxation,
83 N.J. 122, 136 (1980)); see
Mobay Chem. Corp. v. Director, Div. of Taxation,
96 N.J. 407,
416-17 (1984). As explained by Chief Justice Weintraub in
Household Finance, supra:
We are not told why Household employed
subsidiaries. A probable motivation was tax
advantage somewhere. The question is whether
a state must adjust its tax laws to avoid a
disadvantage a taxpayer may experience
because of its decision to incorporate a part
of its operation. As a general proposition,
the answer must be that it is for the
taxpayer to make its business decisions in
the light of tax statutes, rather than the
other way around.
[36 N.J. at 362 (citations
omitted).]
We conclude that Auto City has not sustained the burden of
proving that N.J.A.C. 18:7-5.13(b) is invalid.
We agree with the Tax Court and find that the regulation
applies retroactively to the effective date of the statute. As a
reasonable interpretation of the statute, the regulation applies
as the statute applies -- "[to] any taxable year ending after
June 30, 1984." N.J.S.A. 54:10A-4(k)(6)(B). As noted by the Tax
Court, "an administrative regulation 'does not, and could not,
alter the statute. It is no more retroactive in its operation
than is a judicial determination construing and applying a
statute to a case at hand.'" 12 N.J. Tax at 641 (quoting
Manhattan Gen. Equip. Co. v. Commissioner of Internal Revenue,
297 U.S. 129,
56 S. Ct. 397,
80 L. Ed. 528 (1936)).
The judgment of the Appellate Division is reversed, and the
order of the Tax Court, granting summary judgment in favor of the
Director of the Division of Taxation, is reinstated.
CHIEF JUSTICE WILENTZ and JUSTICES POLLOCK, O'HERN, GARIBALDI, STEIN and COLEMAN join in JUSTICE HANDLER'S opinion.
NO. A-54 SEPTEMBER TERM 1994
ON APPEAL FROM
ON CERTIFICATION TO Appellate Division, Superior Court
RICHARD'S AUTO CITY, INC.,
Plaintiff-Respondent,
v.
DIRECTOR, DIVISION OF TAXATION,
Defendant-Appellant.
DECIDED June 21, 1995
Chief Justice Wilentz PRESIDING
OPINION BY Justice Handler
CONCURRING OPINION BY
DISSENTING OPINION BY