International Flavors & Fragrances, Inc. v. Director, Div. of Taxation, Dept. of Treasury

Decision Date10 April 1986
Citation507 A.2d 700,102 N.J. 210
PartiesINTERNATIONAL FLAVORS & FRAGRANCES, INC., a New York corporation, Plaintiff- Respondent, v. DIRECTOR, DIVISION OF TAXATION, DEPARTMENT OF TREASURY, State of New Jersey, Defendant-Appellant.
CourtNew Jersey Supreme Court

Harry Haushalter, Deputy Atty. Gen., for defendant-appellant (Irwin I. Kimmelman, Atty. Gen., attorney; Deborah T. Poritz, Deputy Atty. Gen., of counsel).

Laurence Reich, Newark, for plaintiff-respondent (Carpenter, Bennett & Morrissey, Newark, attorneys).

The opinion of the Court was delivered by

GARIBALDI, J.

This appeal requires us to interpret provisions of the New Jersey Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40. Under the Act, the tax is measured by a corporation's net worth and net income. This case concerns the calculation of net income. Specifically, at issue is N.J.S.A. 54:10A-4(k)(1) (section 4(k)(1)), which provides that 100% of the dividends that a corporate taxpayer receives from a subsidiary owned by the taxpayer "to the extent of 80% or more ownership of investment" shall be excluded from the taxpayer's net income. The critical question is whether section 4(k)(1) requires direct record ownership of 80% of a subsidiary's stock or whether it is permissible for the corporate taxpayer and its wholly-owned subsidiary to aggregate the stock that they own in the dividend-paying subsidiary in order to satisfy the 80% ownership test.

I

The facts are stipulated. International Flavors and Fragrances, Inc. (IFF), a New York corporation authorized to do business in New Jersey, is subject to the New Jersey Corporation Business Tax Act. During 1975 and 1976, the tax years in issue, IFF owned 100% of the capital stock of International Flavors &Fragrances IFF (Nederland) B.V. (IFF-Holland), 30% of the capital stock of International Flavors & Fragrances IFF (France) S.A.R.L. (IFF-France), and 63% of the capital stock of I.F.F. Essencia & Frangrancias Ltda. (IFF-Brazil). IFF's wholly-owned subsidiary IFF-Holland owned all of the remaining stock of IFF-Brazil and IFF-France.

During the tax years 1975 and 1976, IFF received dividends from IFF-France and IFF-Brazil that it included in its taxable income for federal income-tax purposes. 1 On its New Jersey corporation business-tax return, IFF excluded from its entire net income-tax base 100% of the dividends that it received from IFF-France and IFF-Brazil pursuant to section 4(k)(1). 2

The Director of the New Jersey Division of Taxation, Department of the Treasury (the Director), took the position that "80% or more ownership of investment" required that IFF be the direct record owner of the stock of IFF-Brazil and IFF-France. Consistent with this interpretation, the Director issued a final determination that IFF had underreported its net income-tax base by failing to include 50% of the dividends that it had received from IFF-France and IFF-Brazil during the tax years in issue. 3 The Director, therefore, assessed additional taxes and interest for those years. IFF filed a complaint with the Tax Court, contending that it met the "80% or more ownership of investment" test by aggregating IFF and IFF-Holland's direct ownership of stock in IFF-France and IFF-Brazil. Thus, IFF argues that it was entitled to the 100% dividend exclusion from net income even though it was not the record owner of 80% of the stock of IFF-Brazil and IFF-France, because the remainder of the stock of those corporations was owned by IFF-Holland, its wholly-owned subsidiary.

The Tax Court held that IFF-France and IFF-Brazil were 80%-owned subsidiaries of IFF under section 4(k)(1) and therefore IFF was entitled to the 100% dividend exclusion. 5 N.J.Tax 617 (1983). In a published per curiam opinion, the Appellate Division affirmed, 7 N.J.Tax 652, essentially for the reasons stated in the Tax Court's opinion, with a brief additional discussion of Fedders Fin.Corp. v. Director, Div. of Taxation, 96 N.J. 376, 476 A.2d 741 (1984), and Mobay Chem. Corp. v. Director, Div. of Taxation, 96 N.J. 407, 476 A.2d 758 (1984).

II

The New Jersey Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40, enacted in 1945, requires a corporation to pay a franchise tax "for the privilege of having or exercising its corporate franchise in this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State." N.J.S.A. 54:10A-2. The tax is assessed on the basis of entire net income. N.J.S.A. 54:10A-5.

Entire net income is defined as total net income from all sources, and is deemed prima facie equal to the taxable income that the taxpayer is required to report to the United States Treasury Department, with exceptions that are not pertinent here. N.J.S.A. 54:10A-4(d), -4(b), -5. The Act provides for certain adjustments to federal taxable income. One such adjustment is at issue in this case, namely, N.J.S.A. 54:10A-4(k)(1), which states:

Entire net income shall exclude 100% of dividends which were included in computing such taxable income for federal income tax purposes, paid to the taxpayer by one or more subsidiaries owned by the taxpayer to the extent of the 80% or more ownership of investment described in subsection (d) of this section. With respect to other dividends, entire net income shall not include 50% of the total included in computing such taxable income for federal income tax purposes * * *. (Emphasis added.)

"Ownership of investment" is described in N.J.S.A. 54:10A-4(d) (section 4(d)), which provides for a reduction in the net worth of a corporation. In pertinent part, it reads:

The foregoing aggregate of values shall be reduced by 50% of the amount disclosed by the books of the corporation for investment in the capital stock of one or more subsidiaries, which investment is defined as ownership (1) of at least 80% of the total combined voting power of all classes of stock of the subsidiary entitled to vote and (2) of at least 80% of the total number of shares of all other classes of stock except nonvoting stock which is limited and preferred as to dividends. In the case of investment in an entity organized under the laws of a foreign country, the foregoing requisite degree of ownership shall effect a like reduction of such investment from net worth of the taxpayer, if the foreign entity is considered a corporation for any purpose under the United States federal income tax laws, such as (but not by way of sole examples) for the purpose of supplying deemed-paid foreign tax credits or for the purpose of status as a controlled foreign corporation. (Emphasis added.)

The critical question is whether the New Jersey Legislature intended to exclude from a corporation's net income base 100% of the dividends that it receives from an indirectly-owned subsidiary. We look first at the statutory language. It is a well-established principle of statutory construction that a court should follow the clear import of statutory language. Fedders Fin.Corp. v. Director, Div. of Taxation, 96 N.J. at 385, 476 A.2d 741. Neither N.J.S.A. 54:10A-4(k)(1) nor N.J.S.A. 54:10A-(4)(d) contains an express requirement of record ownership. Section 4(k)(1) refers to "ownership of investment" and section 4(d)(1) speaks in terms of "total combined voting power." Therefore, to aid in interpreting the statute, we look beyond the plain words of the statute to examine, first, the Legislature's purpose in adopting the 80%-of-ownership-of-investment requirement, and second, the ordinary and well-understood meaning of ownership in the corporate world. Such an examination discloses that the Legislature intended that the 80%-ownership test be satisfied by aggregating a corporate taxpayer's stock with that of its wholly-owned subsidiary in a dividend-paying subsidiary.

First, the terms used by the Legislature in N.J.S.A. 54:10A-4(k)(1), and in the pertinent part of N.J.S.A. 54:10A-4(d), all reflect the same objective. That objective, revealed in the first sentence of section 4(k)(1), is to provide relief from the potential double taxation that inheres in the taxation of corporate dividends received from a corporate subsidiary.

The 1968 amendments to the Corporation Business Tax Act, L. 1968, c. 250, which provide for the 100% exclusion of subsidiary dividends and for the section 4(d) definition of subsidiary, were designed to implement the recommendations of the State Tax Policy Commission (the Commission). It is clear that a major concern of then-Governor Richard J. Hughes and the Commission was to remove impediments to New Jersey's economic growth. Among those impediments was the treatment "afforded corporations which do business in New Jersey but also have substantial investment in subsidiaries, especially foreign subsidiaries incorporated in foreign countries and in other states." Commission on State Tax Policy, The 12th Report at XV (1968). By letter to Senator Toolan, Governor Hughes requested the Commission to study a number of proposals, including a proposal to eliminate the "taxation of dividends received by a parent company from a subsidiary company ..." Letter from Governor Richard J. Hughes to Senator John E. Toolan (May 25th, 1967), reprinted in Commission on State Tax Policy, The 12th Report at 115. Moreover, the Governor requested the Commissioner "to review the New Jersey corporate tax structure, with particular reference to its effect on the location of corporate headquarters and their capital investment employment in the state." Commission on State Tax Policy, The 12th Report at 31. The Commission's Report found that two of the three significant areas of inequity in the corporate-tax law, as it stood prior to the amendments, were its treatment of subsidiary capital and subsidiary dividends. Id. at 44. It considered those two areas of inequity to be negative factors when corporations considered where to locate their headquarters. The Commission...

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