NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE
TAX COURT COMMITTEE ON OPINIONS
TAX COURT OF NEW JERSEY
DOCKET NO. 002498-93
Texaco Inc., a Delaware :
Corporation,
:
Plaintiff, :
v. :
Director, Division of Taxation, :
Department of the Treasury,
:
Defendant. :
Decided: February 18, 1994
Laurence Reich (Carpenter, Bennett &
Morrissey, attorneys) and Fredric J.
Attermeier admitted pro hac vice, for
plaintiff.
Sarah T. Darrow, for defendant (Deborah T.
Poritz, Attorney General of New Jersey,
attorney).
LASSER, P.J.T.C.
Taxpayer seeks to set aside that portion of Director's final
determination of tax liability under the Corporation Business Tax
Act for calendar years 1973 through 1978, which imposes interest on
a tax deficiency of $578,394 for the period after April 15, 1981,
on the ground that Taxpayer's tax liability was fully satisfied by
an overpayment of $2,348,606 on April 15, 1981. Taxpayer and
Director have filed cross motions for summary judgment and partial
summary judgment, respectively.See footnote 1
The facts are not in issue. The legal issue is whether
Taxpayer is entitled to have its April 15, 1981 overpayment
credited against a deficiency assessment imposed for the years
1973-1978 to stop interest from running on the 1973-1978 deficiency
assessment on April 15, 1981.
Taxpayer's overpayment occurred with the filing of its 1980
corporation business tax return and payment of tax on April 15,
1981. Concurrently, Taxpayer filed a claim for refund for
$2,348,606 of the tax paid by reason of inclusion in adjusted
entire net income and adjusted entire net worth of a capital gain
realized by Taxpayer in 1980 on the sale of its Belridge Oil
Company stock.See footnote 2 Director denied the claim for refund and Taxpayer
filed a complaint in the Tax Court. On February 20, 1993, judgment
was entered reflecting Director's agreement that Taxpayer was
entitled to refund of the 1980 corporation business tax overpayment
in the amount of $2,348,606 (Belridge refund).
On October 17, 1991, Taxpayer settled certain federal income
tax matters with the Internal Revenue Service resulting in
additional payments due from Taxpayer for the years 1973-1978.
Taxpayer alleges that within the 90-day period allowed by N.J.S.A.
54:10A-13 and N.J.A.C. 18:7-11.8, Taxpayer notified Director by
letter dated December 20, 1991 of the adjustments made by the
Internal Revenue Service.
Based on the Internal Revenue Service adjustments, on November
26, 1992 Director determined that additional tax was due from
Taxpayer for the years 1973-1978 in the amount of $578,394 together
with interest.
Taxpayer contends that Director's assessments for the years
1973-1978 are erroneous and unlawful to the extent that they
purport to assess interest after April 15, 1981. Taxpayer contends
that the correct deficiency assessment for the period 1973-1978 is
$578,394 plus interest only to April 15, 1981.
On February 20, 1993, Director exercised her statutory
discretion to credit the refund due to Taxpayer against outstanding
1973-1978 tax liabilities, including penalty and accrued interest,
through February 20, 1993 rather than pay the refund to Taxpayer.
In following this procedure Director relies on N.J.S.A. 54:49-17
which provides:
Whenever any taxpayer shall be entitled to any
refund of taxes or to the repayment of any deposit, or to
both, under the provisions of any State tax law or of the
State Tax Uniform Procedure Law, and at the same time the
said taxpayer shall be indebted to the State for taxes,
penalties, interest or fees imposed for the cost of
collection under the provisions of any other State tax
law or of the State Tax Uniform Procedure Law, the
director may apply or cause to be applied the said refund
or deposit, or both, or so much of either or both as
shall be necessary, to the satisfaction of the said
indebtedness, so due from the taxpayer to the State,
before making or certifying such refund or repayment.
Director contends that she has the discretion under the
statute to apply the 1981 overpayment against the 1973-1978
deficiency as of February 20, 1993, following entry of judgment on
that date which entitled Taxpayer to the Belridge refund.
The positions of the parties are as follows:
Taxpayer's Director's
position position
N.J. tax owed on IRS adjust-
ments 1973-1978 $578,394 $ 578,394
Interest through 4/15/81 @
3/4%/mo. (9%/year) 191,690
Interest through 02/20/93; 1,526,737
@ 1½%/mo. through 9/15/87 and
thereafter @ 3 points above
prime plus 1976 penalty of
$6,559 ________ __________
Total due from Taxpayer $770,084 $2,105,131
I
N.J.S.A. 54:49-17 permits Director to apply overpayments to
amounts due to the State. The time set forth for this application
of funds is when a taxpayer is "entitled to any refund of taxes"
and "at the same time the said taxpayer shall be indebted to the
State." Director contends that neither the principle of "offset"
or "equitable recoupment" are applicable because in this case, the
1981 overpayment and 1973-1978 tax liability did not arise out of
the same transaction, citing Pantasote, Inc. v. Taxation Div.
Director, 8 N.J. Tax 160, 167 (Tax Ct. 1985); Superior Air Products
Int'l, Inc. v. Taxation Div. Director, 9 N.J. Tax 463, 474-76 (Tax
Ct. 1988), aff'd o.b., 10 N.J. Tax 238 (App. Div. 1988). These
cases involve equitable recoupment where timely filing of the
refund claim was an issue and are therefore inapposite. N.J.S.A.
54:49-17 does permit an offset and in this case, Director did
offset the timely claimed refund against a pending tax liability.
II
This is an unusual case. Taxpayer's claim for refund was
pending for 12 years. The delay in the resolution of the Belridge
refund claim from April 1981 to February 1993 was due to litigation
on the same issue in the case of Mobil Oil Corp., supra note 2.
The Mobil Oil case, also involving the corporation business tax on
the sale of Belridge Oil Company stock, was tried, decided in favor
of Mobil Oil, appealed by Director and affirmed by the Appellate
Division on March 4, 1992. Director filed a petition for
certification with the Supreme Court on March 25, 1992 which was
disposed of by a Stipulation of Settlement and Dismissal filed on
September 4, 1992 after the United States Supreme Court decision in
Allied-Signal, Inc., as Successor-in-Interest to The Bendix Corp.,
v Director, Division of Taxation, 504 U.S. ____ (1992).
Taxpayer's refund case was held pending a final determination
in Mobil Oil Corp. For 12 years, the State held the Belridge
refund monies with no obligation to pay interest to Taxpayer. The
State ultimately agreed to Taxpayer's claim for refund.
During the 12 year period following April 15, 1981, Taxpayer
owed $578,394 plus interest to the State while at the same time the
State held $2,348,606 of Taxpayer's money. Taxpayer correctly
contends that prior to enactment of the Taxpayer's Bill of Rights
(N.J.S.A. 54:49-15.1), effective January 1, 1994, there was no
statutory authority for the Director to pay interest on a
corporation business tax refund.
The issue thus is whether Taxpayer is entitled to the Belridge
refund on (1) April 15, 1981 when paid, or (2) on February 20,
1993, the date of judgment in favor of Taxpayer? Taxpayer argues
that the State should "be reimbursed only for the value of the
money it did not have from the Taxpayer" during the time tax
remained unpaid. It contends that it was "entitled" to the
Belridge refund on April 15, 1981. Taxpayer, citing Atlantic City
v. N.J. Economic Development Authority, 5 N.J. Tax 137, 141 (Tax
Ct. 1983), aff'd 6 N.J. Tax 344 (App. Div. 1984), argues that
interest is not penal, but is compensation for the loss of use of
tax revenue and to induce timely payment. Taxpayer also cites a
non-tax case for the proposition that interest on a note ceased at
the time damages on the claim of the debtor accrued in the debtor's
favor. Deerhurst Estates v. Meadow Homes Inc, 64 N.J. Super 134
(App. Div. 1960), cert. denied,
34 N.J 66 (1961). Taxpayer argues
that it should not be prejudiced because it had to pursue an action
in court to prove its entitlement to the refund. It asserts that
the State should not be rewarded for compelling the Taxpayer to
litigate over a long period of time for its refund. While it is
true that Taxpayer, during the period in question, was not entitled
to interest on a refund, Taxpayer is not claiming interest on the
refund. Taxpayer is claiming that interest should not be charged
on an existing tax liability for a period during which the State
held money to which it was entitled.
Director concedes that its authority under N.J.S.A. 54:49-17
is discretionary. Equitable principles and discretionary authority
should be compatible. Under the facts of this case, it is
difficult to justify holding money to which the Taxpayer is
entitled for a period of 12 years, while at the same time charging
Taxpayer interest, at high rates, on money owed to the State when
payment is delayed by reason of a lengthy federal audit. I find
that Director, in the reasonable exercise of her discretion under
the statute, should have applied the Belridge refund to amounts due
to the State as of the date of payment to the Director, April 15,
1981. Plaintiff's motion is granted.
The case will proceed on the 1976 penalty issue and the
interest rate differential issue.
Footnote: 1 Taxpayer has withdrawn from its motion issues relating to
a 1976 penalty and the applicable interest rate for the period
ending April 15, 1981.
Footnote: 2 See Mobil Oil Corp. v. Taxation Div. Director, 11 N.J.
Tax 344 (Tax Ct. 1990), aff'd o.b., 13 N.J. Tax 111 (App. Div.
1992) for related decision on non-taxability of capital gain on
sale of Belridge Oil Company stock.
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