Chemical New Jersey Holdings, Inc. v. Director, Division of Taxation, No. 000213-2001 (N.J. Tax 7/31/2006)
| Decision Date | 31 July 2006 |
| Docket Number | No. 000213-2001,000213-2001 |
| Parties | CHEMICAL NEW JERSEY HOLDINGS, INC., Approved for Publication Plaintiff, v. DIRECTOR, DIVISION OF TAXATION, Defendant. |
| Court | New Jersey Tax Court |
For tax years 1992 and 1993, plaintiff Chemical New Jersey Holdings, Inc. filed its corporation business tax ("CBT") return as an investment company. See N.J.S.A. 54:10A-4(f), a provision of the Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -41 (the "CBT Act"). Defendant, Director of the New Jersey Division of Taxation ("Director"), determined that plaintiff did not satisfy the statutory requirements for taxation as an investment company and assessed tax accordingly. The amount of tax and interest assessed was $962,639.74. Plaintiff paid the assessment and appealed.
Approximately one year after the appeal was filed, plaintiff abandoned its contention that *
it was an investment company and asserted that it should have been taxed as a financial business corporation as defined in N.J.S.A. 54:10A-4(m). In Chemical New Jersey Holdings, Inc. v. Director, Division of Taxation, 20 N.J. Tax 547 (Tax 2003), I held that plaintiff's effort to change the basis on which it sought to be taxed was not timely and denied plaintiff's appeal. The Appellate Division reversed in Chemical New Jersey Holdings, Inc. v. Director, Division of Taxation, 22 N.J. Tax 606 (App. Div. 2004) and remanded the matter for determination as to whether plaintiff was entitled to be taxed as a financial business corporation. Pursuant to the remand, the parties submitted a joint stipulation of facts and briefs, and a hearing was conducted at which both parties presented testimony. This opinion relates to the remand proceedings.
If plaintiff qualified for treatment as a financial business corporation for tax years 1992 and 1993, then, under the provisions of N.J.S.A. 54:10A-4(k)(2)(E)(iii) as in effect for those years (this statutory provision was deleted by L. 1995, c. 418), plaintiff's entire net income as defined in N.J.S.A. 54:10A-4(f) would have been a negative amount, and plaintiff would have been required to pay only the minimum CBT of $25 per year. N.J.S.A. 54:10A-5(e). For the reasons set forth below, I hold that plaintiff failed to prove that it satisfied the statutory requirements for qualification as a financial business corporation during the years in question, and I affirm the Director's assessment.
The definition of a financial business corporation in the CBT Act is, in pertinent part, as follows:
"Financial business corporation" shall mean any corporate enterprise which is (1) in substantial competition with the business of national banks and which (2) employs moneyed capital with the object of making profit by its use as money, through . . . making of or dealing in secured or unsecured loans and discounts . . . . This shall include, without limitation of the foregoing, business commonly known as industrial banks, dealers in commercial paper and acceptances, sales finance, personal finance, small loan and mortgage financing businesses, as well as any other enterprise employing moneyed capital coming into competition with the business of national banks; . . . .
[N.J.S.A. 54:10A-4(m).]
By regulation, the Director has provided the following definition:
"Financial business corporation" means a corporation that is, in fact, in substantial competition with the business of national banks, and which also employs moneyed capital with the object of making profit by its use as money through any of the following:
. . . .
Making of or dealing in secured or unsecured loans and discounts . . . .
[N.J.A.C. 18:7-1.16(a).]
Plaintiff contends that it satisfied the statutory and regulatory criteria because, during 1992 and 1993, an interest-bearing loan it had made in 1990 to its wholly-owned subsidiary, Chemical Bank New Jersey, N.A. ("Chemical NJ") remained unpaid. Plaintiff previously had made loans to three other subsidiaries, only one of which (a $300,000 loan to Chemical Pennsylvania Corporation) was outstanding as of 1992 and 1993. Plaintiff provided no information as to the interest rate or other terms of these loans, and, therefore, cannot (and, apparently, does not) rely on them as supporting plaintiff's claim that it qualified for taxation as a financial business corporation.
The loan to Chemical NJ was a subordinated loan in the aggregate principal amount of $75,000,000, consisting of $50,000,000 lent on December 28, 1990, and an additional $25,000,000 lent on July 31, 1991.1 The nature of the subordination was not established at the hearing but is indicated by a January 1990 Consent in Lieu of Directors Meeting, signed by plaintiff's directors, authorizing a $3,000,000 loan to plaintiff's subsidiary Princeton Trust Company, National Association and requiring the loan to be "subordinated to the claims of other creditors." Plaintiff borrowed from Chemical Banking Corporation (plaintiff's parent corporation) the funds used to make the loan to Chemical NJ. The interest rate on the loan to Chemical NJ was 10.25% per annum, approximately 2% in excess of the interest rates plaintiff paid to Chemical Banking Corporation for those years, resulting in a "profit" to plaintiff.
For 1992, plaintiff's CBT return reflected that approximately 88% of its total investment income consisted of the interest paid on the Chemical NJ loan. The balance consisted of interest on temporary cash investments (approximately 4%) and the proceeds of the sale of another subsidiary (approximately 8%). For tax year 1993, interest on the Chemical NJ loan represented approximately 86% of plaintiff's total investment income, interest from temporary cash investments represented approximately 3%, and approximately 11% was a dividend from Princeton Trust.
Plaintiff's loan to Chemical NJ was made in order to satisfy a request from the Office of the Comptroller of the Currency (the "Comptroller") that Chemical NJ receive additional capital to satisfy regulatory minimums as to capital ratios. The reasons for this request and the loan from plaintiff are reflected in the minutes of a December 18, 1990 Chemical NJ Board of Directors meeting which described a "continued erosion of capital" and anticipated a "capital infusion" from plaintiff of approximately $ 180,000,000, up to $100,000,000 of which was to be in the form of loans. The $75,000,000 loan from plaintiff to Chemical NJ constituted the loan portion of the capital infusion. The Comptroller treated the loan as primary capital of Chemical NJ for purposes of satisfying capital ratio requirements.
In a letter dated November 7, 1994, Chemical NJ requested approval from the Comptroller "to prepay [to plaintiff] . . . subordinated debt" totaling $75,000,000. A "pro forma" capital ratio computation was enclosed with the letter. A letter from plaintiff to the New Jersey Division of Taxation dated November 1, 2000, in support of the contention then being made by plaintiff that it was an investment company, contained the following paragraph describing the November 7, 1994 letter:
This is a letter from Chemical Bank New Jersey NA to the Office of the Comptroller of the Currency by the bank's chief financial officer. It is notifying them that the bank is asking for permission to pay off the two subordinated notes totaling $ 75M to its parent, Chemical New Jersey Holdings, Inc. The attached document on page 3 shows that the Office of the Comptroller of the Currency considers these notes as Primary Capital. Therefore, this is not a loan but is a capital contribution and should be considered investment assets.
By letter dated December 5, 1994, the Comptroller of the Currency granted approval to Chemical NJ "to prepay $75 million in subordinated debt as outlined in your letter dated November 7, 1994 and received by this office November 8, 1994," and, within a few days thereafter, Chemical NJ repaid the $75,000,000 to plaintiff.
Plaintiff presented only one witness, a vice-president in the state and local tax group in the corporate tax department of J.P. Morgan Chase (the successor by merger to plaintiff and other Chemical Bank entities). This witness identified the business office of plaintiff during 1992 and 1993 as being located at the same address and in the same physical quarters as the main office of Chemical NJ. Plaintiff had its own officers but they were unpaid, and its payroll was $24,000 for 1992 and approximately $26,000 for 1993. The witness testified that plaintiff had made interest-bearing loans to subsidiaries other than Chemical NJ and all but one of which had been repaid before 1992. The witness provided no information as to the interest rates or other terms applicable to those loans.
The witness further testified that more than 75% of plaintiff's income for each of the years under appeal was from the loan to Chemical NJ, and that, in making the loan, plaintiff was in competition with the business of national banks. The witness was unable to locate the subordinated notes described in the November 7, 1994 letter from Chemical NJ to the Comptroller discussed above, did not know to what the loan from plaintiff to Chemical NJ was subordinated, did not know the due date or dates of the loan, and could not explain why the payment of the loan in December 1994 constituted prepayment.2 The witness testified that the Comptroller's approval was a prerequisite to any repayment because the Comptroller had to be satisfied that the financial condition of Chemical NJ was strong enough to allow a reduction of its capital.
Both plaintiff and the Director cite three decisions of the New Jersey courts. In all three, the taxpayers unsuccessfully sought to avoid taxation as a financial business or a financial business corporation. The first decision is ...
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