Amerada Hess Corp. v. Director, Div. of Taxation

Decision Date22 June 1987
Citation526 A.2d 1029,107 N.J. 307
PartiesAMERADA HESS CORPORATION, Atlantic Richfield Company, Conoco Inc., Cities Service Company, Exxon Corporation, Phillips Petroleum Company, Chevron U.S.A. Inc., Mobil Oil Corporation, Union Oil Company of California, Gulf Oil Corporation, Shell Oil Company, Diamond Shamrock Corporation, Tenneco Oil Company, and Texaco, Inc., Plaintiffs-Respondents, v. DIRECTOR, DIVISION OF TAXATION, Defendant-Appellant.
CourtNew Jersey Supreme Court
Mary R. Hamill, Deputy Atty. Gen., for defendant-appellant (W. Cary Edwards, Atty. Gen., attorney; James J. Ciancia, Asst. Atty. Gen., Trenton, of counsel)

Entire net income is the base on which New Jersey's C.B.T. is assessed. The entire net income base for the C.B.T. is similar but not identical to the tax base used for federal corporate income tax purposes. Adjusted gross income for federal tax purposes is calculated by deducting certain federal and State taxes

paid by the corporation. New Jersey law specifically requires that certain amounts paid in federal taxes be added back into the tax base for calculation of the C.B.T. This is called the "add-back" provision. Thus, the base for federal corporate income tax is not identical to the "net income" base on which the C.B.T. is assessed. This difference is at the core of the dispute before us

The fourteen plaintiffs in this case are vertically integrated oil companies that engage in every aspect of the crude oil business, including exploration, development, refining, manufacturing and marketing. None of the plaintiffs has oil producing properties in New Jersey, but all conduct other aspects of their business within this State. In this case the oil companies urge that they can exclude the amount they paid in the Federal Windfall Profits Tax on Domestic Crude Oil (W.P.T.), I.R.C. §§ 4986 to 4998, from the calculation of their net taxable income for purposes of the New Jersey's Corporation Business Tax (C.B.T.), N.J.S.A. 54:10A-1 to -40. The Director of the Division of Taxation disagrees and argues that these payments are not excludable.

[526 A.2d 1032] The C.B.T. is a fairly allocated franchise or excise tax levied on business corporations for the privilege of "doing business, employing or owning capital or property, or maintaining an office" in New Jersey. N.J.S.A. 54:10A-2, 10A-8. The tax basis for the C.B.T. is "entire net income" which is defined in N.J.S.A. 54:10A-4(k) as

total net income from all sources, whether within or without the United States, and shall include the gain derived from the employment of capital or labor, or from both combined, as well as profit gained through a sale or conversion of capital assets. 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.

However, subsection (k) also provides that

(2) Entire net income shall be determined without the exclusion, deduction or credit of:

* * *

* * *

(C) Taxes paid or accrued to the United States on or measured by profits or income * * *.

[ N.J.S.A. 54:10A-4(k)(2)(C) (emphasis supplied).]

The crucial issue in this case is whether the W.P.T. is a tax "on or measured by profits or income" within the intent of N.J.S.A. 54:10A-4(k)(2)(C). If the W.P.T. is a tax "on or measured by profits or income" within the intent of the C.B.T., the Director was correct in disallowing its exclusion from the net income base for C.B.T. purposes. At the time the net income provision was added to the corporation business tax in 1958, L.1958, c. 63, the W.P.T. did not exist. F.W. Woolworth Co. v. Director, Div. of Taxation, 45 N.J. 466, 473, 213 A.2d 1 (1965). Therefore the drafters and adopters of this section of the C.B.T. could not have harbored any specific legislative intent on includability of the W.P.T., which became effective in 1980, in the tax base.

The federal "windfall profits tax on domestic crude oil," I.R.C. §§ 4986-4998 (1980), was imposed after President Carter announced that he would gradually decontrol domestic crude oil prices beginning in June 1979. The price controls originated with President Nixon's Wage and Price Controls in August 1971. The Energy Policy Act made them mandatory through May 1977 and gave the President discretion to remove them until 1981. See H.R.Rep. No. 304 96th Cong. 1st Sess. 1980 U.S.Code Cong. & Ad.News 1980, 410, 591. 42 U.S.C.A. § 6201, and scattered sections to § 6392. Because of the shortage of crude oil for American markets caused by supply cut-backs by Iran and other foreign producers, President Carter decided to exercise his authority and decontrol prices during 1979. The background of the W.P.T. was described by Justice Powell in United States v. Ptasynski, 462 U.S. 74, 76-77, 103 S.Ct. 2239, 2240, 2241, 76 L.Ed.2d 427 (1983).

In 1979, President Carter announced a program to remove price controls from domestic oil by September 30, 1981. [See H.R.Rep. No. 96-304, 5 (1979) reprinted in 1980 U.S.Cong. & Ad.News 593]. By eliminating price controls, the President sought to encourage exploration for new oil and to increase production of old oil from marginal economic operations. See H.R.Doc. No. 96-107, 2 (1979). He recognized, however, that deregulating oil prices would produce substantial gains (referred to as "windfalls) for some producers. The price of oil on the world market had risen markedly, and it was anticipated that deregulating the price of oil already in production would allow domestic producers to receive prices far in excess of their initial estimates. See ibid. Accordingly, the President proposed that Congress place an excise tax on the additional revenue resulting from decontrol.

Congress responded by enacting the Crude Oil Windfall Profit Tax Act of 1980, 94 Stat. 229, 26 U.S.C. § 4986 et seq. (1976 ed., Supp V) [I.R.C. §§ 4986 to 4998]. The Act divides domestic crude [526 A.2d 1033] oil into three tiers and establishes an adjusted base price and tax rate for each tier. See §§ 1986, 1989, and 4991. The base prices generally reflect the selling price of particular categories of oil under price controls, and the tax rates vary according to the vintages and types of oil included within each tier. See Joint Committee on Taxation, General Explanation of the Crude Oil Windfall Profit Tax Act of 1980, 96th Cong., 26-36 (Comm.Print 1981). The House Report explained that the Act is "designed to impose relatively high tax rates where production cannot be expected to respond very much to further increases in price and relatively low tax rates on oil whose production is likely to be responsive to price." H.R.Rep. No. 96-304, at 7 [reprinted in 1980 U.S.Cong. & Ad.News 594]; see S.Rep. No. 96-394, p. 6 (1979) [reprinted in 1980 U.S.Cong. & Ad.News 417]

Thus, the windfall tax was imposed on the incremental income attributable to decontrol of domestic oil prices. This incremental income was created by the cartel-generated international oil shortages, which had driven up foreign oil prices. It was attributable to world market conditions designed to limit supply and to raise prices; it was not generated by any infusions of capital or the expenditure of creative entrepreneurial energy by the domestic oil producers. Thus, there emerged the concept of taxing "windfall profits," or profits not earned by traditional economic activity as known to our economy. In mid-1979 just before the beginning of President Carter's decontrol of oil prices, the controlled price of "old" oil was $5.86 a barrel, the controlled price of "new" oil was $13.06 a barrel, and the uncontrolled world price was approaching $20 per barrel. The world price eventually reached $30 per barrel.

The W.P.T. differed from the regular federal corporate income tax as it was imposed on production at the wellhead rather than on these integrated domestic producers' overall net profits or income ultimately calculated from gross sales and net profits as measured at the pump. This method of taxation creates the dispute at hand--whether the W.P.T. is "on or

measured by profits or income" or is another species of tax. As noted, the basic measure of the windfall profit was the difference between the uncontrolled and controlled price of a barrel of crude oil at the point the oil was removed from the producing property. The actual tax rate varied from 30% to 70%, I.R.C. § 4987, and was determined by the length of time the property had been productive. Because oil from newly-productive property was taxed at a lower rate than oil from older wells, tax differentials motivated exploration for and discovery...

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