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NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
TAX COURT OF NEW JERSEY
DOCKET NO. 003621-92CB
X
:
CORPORATE PROPERTY INVESTORS, :
:
Plaintiff,:
:
v. :
:
DIRECTOR, DIVISION OF TAXATION, :
:
Defendant.:
:
X
Decided April 20, 1994
Michael A. Guariglia for plaintiff (McCarter & English,
attorneys; Susan A. Feeney and John K. Bradley, on the
brief).
Joseph Fogelson for defendant (Robert J. DelTufo, Attorney
General of New Jersey, attorney).
CRABTREE, J.T.C.
Plaintiff seeks review of defendant's determinations
denying plaintiff's claims for refunds of New Jersey Corporation
Business Tax (CBT) for 1987, 1988 and 1989 aggregating $722,543 and
assessing additional CBT of $534,798, plus interest and penalty for
the years 1985 through 1989. Both parties have moved for summary
judgment and, as there are no material facts in dispute, the case
is ripe for adjudication.
The only issues remaining are (1) whether plaintiff,
having duly elected treatment as a Real Estate Investment Trust
(REIT) for federal income tax purposes pursuant to section 856 of
the Internal Revenue Code for the years 1985 through 1989, may
deduct dividends paid to its investors in computing its entire net
income for CBT purposes for the years 1987, 1988 and 1989 and (2)
whether, having elected to report as a REIT for CBT purposes for
1987, 1988 and 1989 pursuant to N.J.S.A. 54:10A-5(d), plaintiff is
required to pay tax on 4" of its entire net income, even if such
income is calculated without the deduction for dividends paid to
plaintiff's shareholders.See footnote 1 (Plaintiff contends that, if such
deduction is denied, it may determine its New Jersey tax base in
accordance with the three-factor formula of N.J.S.A. 54:10A-6.)
The second issue disappears if the first issue is resolved in
plaintiff's favor.
Plaintiff is a voluntary association established under
Massachusetts law by a Declaration of Trust dated June 24, 1971.
Its principal place of business is
305 East 47th Street, New York,
New York. Plaintiff's business consists of real estate
investments. At all times pertinent hereto plaintiff owned real
estate and conducted business in New Jersey.See footnote 2
For the years 1985 through 1989, plaintiff elected to be
treated as a REIT for federal income tax purposes. A REIT is a
corporation, trust or association which complies with the
provisions of sections 856 through 860 of the Internal Revenue
Code. Qualifying REITs provide a conduit through which income from
equity and mortgage investments in real estate is distributed to
investors without the REIT being subject to federal income tax at
the entity level. Section 857 of the Code allows a qualifying
REIT, in computing its federal taxable income, to deduct dividends
paid to its shareholders provided the REIT complies with certain
record-keeping requirements and the REIT's distribution to
shareholders satisfy certain minimum distribution requirements.
Plaintiff, at all times pertinent hereto, qualified as a REIT for
federal income tax purposes.
In filing its New Jersey Corporation Business Tax returns
for the years 1985 through 1989, plaintiff originally elected not
to be taxed as a REIT for New Jersey Tax purposes. Subsequently,
plaintiff filed amended CBT returns for 1987, 1988 and 1989 in
which it (1) elected under N.J.S.A. 54:10A-5(d) to be taxed as a
REIT for CBT purposes and (2) deducted the dividends paid to its
shareholders in computing its entire net income for CBT purposes.
By a final determination letter of November 18, 1991
defendant (a) denied the refunds sought on the amended returns and
(b) assessed additional tax, interest and penalties for the years
1985 through 1989.
The CBT is assessed on the basis of entire net income.See footnote 3
N.J.S.A. 54:10A-5. Entire net income is defined in N.J.S.A.
54:10A-4(k), to the extent pertinent to this proceeding, as
follows:
"entire net income" shall mean total income
from all sources, whether within or without
the United States.... For the purpose of this
act, the amount of a taxpayer's entire net
income shall be deemed prima facie to be equal
in amount to the taxable income, before net
operating loss deduction and special
deductions which the taxpayer is required to
report to the United States Treasury
Department for the purpose of computing its
federal income tax.... (Emphasis supplied)
Plaintiff contends that the deduction for dividends paid
to its shareholders is not a special deduction under N.J.S.A.
54:10A-4(k) and, thus, that entire net income for CBT purposes is
synonymous with federal taxable income, which is determined after
deducting distributions to plaintiff's shareholders pursuant to
section 857(b)(2)(B) of the Code.
Defendant argues that the deduction for dividends paid to
REIT shareholders authorized by section 857(b)(2)(B) of the Code is
a "special deduction" for purposes of N.J.S.A. 54:10A-4(k) and thus
must be added back to plaintiff's income in determining entire net
income for CBT purposes. Defendant argues, further, that federal
taxable income, in any event, is calculated before the deduction
for dividends paid to shareholders.
Finally, defendant argues that, irrespective of the
treatment of dividend distributions, plaintiff's election to be
treated as a REIT for CBT purposes pursuant to N.J.S.A. 54:10A-5(d)
compels use of the 4" allocation factor set forth in that section
in determining plaintiff's New Jersey tax base. Plaintiff
responds that, if, notwithstanding the REIT election under N.J.S.A.
54:10A-5(d), the court should conclude that plaintiff's net income
is determinable without regard to dividends paid to shareholders,
plaintiff is entitled to use the three-part allocation factor of
N.J.S.A. 54:10A-6, applicable to regular corporations, in
determining its New Jersey tax base. Resolution of the primary
issue in plaintiff's favor renders the allocation issue moot.
The resolution of the issues in this case turns upon the
definition of two terms of art, both of which are precisely limned
in the federal Internal Revenue Code. Those terms are "special
deductions" and "taxable income." While the CBT Act, specifically,
N.J.S.A. 54:10A-4(k), defines "entire net income" as prima facie
equal in amount to federal taxable income before net operating loss
deduction and "special deductions," neither the CBT Act nor
regulations promulgated thereunder purport to define those terms of
art.
Both the term "special deductions" and "taxable income"
are defined in the federal Internal Revenue Code. Since the New
Jersey Legislature borrowed from the operative terminology of the
federal Internal Revenue Code in defining the New Jersey tax base
of "entire net income" in N.J.S.A. 54:10A-4(k), this court may look
to the Internal Revenue Code for guidance in defining those
critical terms. Galloway Tp. Bd. of Ed. v. Galloway Tp. Ass'n of
Ed. Sec.,
78 N.J. 1 (1978); GATX Terminals Corporation v. New
Jersey Dep't of Environmental Protection,
86 N.J. 46 (1981).
Accordingly, the terms "special deductions" and "taxable
income" will be given the same meaning in N.J.S.A. 54:10A-4(k) as
ascribed to those phrases in the Internal Revenue Code.
"Special deductions" are defined in Subtitle A,
Subchapter B, Part VIII of the Internal Revenue Code, specifically
in sections 241 through 249. These sections include:
1. dividends received by corporations
(section 243);
2. dividends received on certain preferred
stock (section 244);
3. dividends received from certain foreign
corporations (section 245);
4. dividends received where portfolio stock
is debt financed (section 246A);
5. dividends paid on certain preferred stock
of public utilities (section 247);
6. organizational expenditures (section 248);
and
7. limitation on deduction of bond premium on
repurchase (section 249).
The foregoing is a complete list of special deductions
allowed to corporations under the Internal Revenue Code. The
deduction for dividends paid to shareholders, authorized by section
857(b)(2)(B), is not on the list.
Furthermore, the provisions of the Code dealing with the
dividends paid deduction make it clear that the latter is not a
"special deduction." The dividends paid deduction is defined in
Code section 561 and is made available to REITs through section
857(b)(2). The latter section defines the term "real estate
investment trust taxable income" in the following manner:
(A) The deductions for corporations provided
in Part VIII (except section 248) of
subchapter B (section 241 and following,
relating to the deduction for dividends
received etc.) shall not be allowed.
(B) The deduction for dividends paid (as
defined in section 561) shall be allowed, but
shall be computed without regard to that
portion of such deduction which is
attributable to the amount excluded under
subparagraph (D).
(C) The taxable income shall be computed
without regard to section 443(b) (relating to
computation of tax on change of annual
accounting period).
(D) There shall be excluded an amount equal
to net income from foreclosure property.
(E) There shall be excluded an amount equal
to the tax imposed by paragraph (5) for the
taxable year.
(F) There shall be excluded an amount equal
to any net income derived from prohibited
transactions.
It will be noted that subsection (A) of section 857(b)(2)
quoted above, specifically denies any deduction for "special
deductions" for REITs under the Code. However, subsection (B),
quoted above, expressly authorizes the dividends paid deduction in
computing REIT taxable income under the Code.
In summary, then, a REIT, in calculating its federal
taxable income may deduct dividends paid to its investors, but may
not take any special deductions, i.e., those deductions enumerated
in Code sections 243 through 249. The conclusion is inescapable
from the foregoing analysis that the deduction for dividends paid
by a REIT to its investors is not a special deduction.
The phrase "taxable income" appears in section 63 of the
Code. That section, which is found in Chapter One of the Code,
defines taxable income to mean "gross income minus the deductions
allowed by this chapter [§§1-1399] (other than the standard
deduction)." Taxable income is thus accurately and completely
calculated only if all of the deductions allowed by Chapter One of
the Code are taken into account. Section 857(b)(2)(B) of the Code,
which authorizes a REIT to deduct dividends paid to its investors,
is included in Chapter One. Thus, under N.J.S.A. 54:10A-4(k),
taxable income of a REIT is correctly calculated only by including
the deduction for dividends paid to its shareholders pursuant to
section 857(b)(2)(B). Thus, under the CBT, a REIT calculates its
entire net income by including the dividends paid deduction.
This conclusion is reinforced by the analysis of the
Internal Revenue Service, the agency charged with construing the
federal tax laws, in Rev. Rul. 72-383, CB 1972-2, 442. That Ruling
involved the definition of the term "taxable income" for purposes
of the limitations of Code §904(a) as applied to a regulated
investment company (RIC). The tax treatment of a RIC is
indistinguishable from that of a REIT, i.e., dividends paid to
shareholders are deductible in arriving at taxable income.
The Internal Revenue Service held that the term "taxable
income" as used in section 904(a) means "the income upon which the
taxpayer bears the burden of Federal income tax." The Service
continued:
With respect to a regulated investment
company, the income upon which the taxpayer
bears the burden of Federal income tax is the
sum of (1) the investment company taxable
income, (2) the retained capital gains....
Accordingly, in the instant case, for purposes
of the limitations set forth in section 904(a)
of the Code, the term "taxable income" means
the sum of the investment company taxable
income as defined in section 852(b)(2) of the
Code, and the excess of capital gains as
computed under section 852(b)(3)(A) of the
Code.... CB 1972-2 at 443.
Significantly, the term "investment company taxable
income" is defined in section 852(b)(2) in a manner identical to
the definition of real estate investment trust taxable income found
in section 857(b)(2), namely, taxable income after deduction for
dividends paid to shareholders. Compare section 852(b)(2)(D) with
section 857(b)(2)(B).
The same result has been reached by the courts of New
York and New Hampshire. In Dreyfus Special Income Fund, Inc. v.
New York State Tax Comm'n,
126 A.D.2d 368, 514 N.Y.S2d 130 (App.
Div. 1987), aff'd
72 N.Y.2d 874,
532 N.Y.S.2d 356 (1988) the New
York Appellate Division, citing Rev. Rul. 72-383, held that the
taxable income of a RIC was calculated by including the deduction
for dividends paid to shareholders and, as taxable income was
equated with entire net income under Tax Law §208(9), the same rule
applied for New York corporate franchise tax purposes.
In Bradley Real Estate Trust v. Taylor,
515 A.2d 1212
(New Hampshire Sup. Ct. 1986), a case involving a REIT, the court
held that dividends paid to a REIT's investors were deductible in
the determination of "gross business profits" under the New
Hampshire business profits tax statute. The statute equated gross
business profits with federal taxable income before net operating
loss deduction and special deductions.
Defendant relies on legislative history to support her
argument that federal taxable income, for purposes of N.J.S.A.
54:10A-4(k), means income before the deduction for dividends paid
to shareholders. One looks in vain at the relevant statements
accompanying amendments to N.J.S.A. 54:10A-5(d) providing for flat
allocations of 25" of entire net income for a RIC and 4" of entire
net income for a REIT for any indication that federal taxable
income, for purposes of N.J.S.A. 54:10A-4(k), must be calculated
without adjustment for dividends paid to shareholders. Defendant's
argument in this regard is a non sequitur.
In any event, resort to legislative history is
inappropriate where, as here, the statutory language is clear and
unambiguous. Velis v. Kardanis,
949 F.2d 78 (CA 3rd 1991); State
v. Churchdale Leasing, Inc.,
115 N.J. 83 (1989); Dep't of
Environmental Protection v. Franklin Tp., 3 N.J. Tax 105 (Tax
1981), aff'd o.b. per curiam 5 N.J. Tax 476 (App. Div. 1983).
In view of the foregoing, the court concludes that
plaintiff's entire net income for the years 1987, 1988 and 1989
must be calculated by deducting the dividends paid to its
shareholders. The issue pertaining to the correct allocation
factor is moot.
In the light of concessions by both parties on other
issues, judgment will be entered pursuant to R. 8:9-3.
Footnote: 1Mutual concessions by the parties have disposed of other
issues, except for penalty and interest assessed in connection with
the 1989 deficiency. That issue becomes moot if the court decides
the main issue in plaintiff's favor.
Footnote: 2REITs, along with all other business entities having the
essential attributes of a corporation, have long been taxable as
corporations under the New Jersey Corporation Business Tax Act.
Thomas, Ltd. v. Dep't of the Treasury of N.J., 121 N.J. Super. 577
(App. Div. 1972).
Footnote: 3Prior to July 1, 1986, the tax was assessed on the basis of
entire net worth as well as entire net income. The net worth tax
was phased out and is not applicable to accounting periods
beginning on or after July 1, 1986.
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