Fund transfers between business subsidiaries could be considered interest-generating loans under New Jersey tax law, according to a series of court cases culminating in a decision by the New Jersey Supreme Court. The shipping company United Parcel Service (UPS) appealed the assessment of late fees and penalties against five of its subsidiaries by the New Jersey Division of Taxation (NJDOT). The New Jersey Tax Court affirmed the NJDOT’s findings regarding imputation of interest income, but it held that the late fees and penalties were in error. UPS v. Dir., Div. of Taxation (“UPS I“), 25 N.J. Tax 1 (2009). The Superior Court, Appellate Division and the Supreme Court of New Jersey affirmed the Tax Court’s ruling. UPS v. Dir., Div. of Taxation (“UPS II“), 61 A.3d 160 (N.J. App. Div. 2013); UPS v. Dir., Div. of Taxation (“UPS III“), No. A-16/17, Sep. Term 2013 072421, opinion (N.J., Dec. 4, 2014).
The plaintiffs belonged to two groups of UPS subsidiaries: a group consisting of “internal service companies” that support other subsidiaries, and a group of companies “that transported packages and documents.” UPS I, 25 N.J. Tax at 11. The UPS parent company maintained a “cash management system” for its subsidiaries that involved transferring all cash received by the subsidiaries into a bank account maintained by the parent company on a daily basis. Id. at 14-15.
The NJDOT treated these transfers as loans from the subsidiaries to the parent company and imputed interest income to the subsidiaries that was not reported. It assessed late payment penalties and five-percent amnesty penalties, N.J. Rev. Stat. §§ 54:53-17, 54:53-18, against the subsidiaries. UPS appealed these actions.
The Tax Court held that the NJDOT reasonably concluded that the cash management system and other types of regular fund transfers should be treated as loans for tax purposes. With regard to the cash management transactions, the court noted that the subsidiaries chose “to structure their relationships as separate corporations doing business with each other,” rather than as divisions of the parent company, UPS I at 24, and that imputation of interest was the tax consequence of that decision. It also held, however, that the NJDOT improperly assessed amnesty penalties, and that it should have granted waivers of late penalties under N.J. Rev. Stat. § 54:49-11(a).
The NJDOT appealed the Tax Court’s rulings with regard to the late fees and amnesty penalties. New Jersey appellate courts generally have limited jurisdiction to review Tax Court decisions. UPS II, 61 A.3d at 164, citing Estate of Taylor v. Dir. Div. of Taxation, 422 N.J. Super. 336, 341 (App. Div. 2011). They also give considerable deference to the NJDOT’s findings because of the uniquely complicated nature of tax law. UPS II at 164, UPS III at 3, citing Metromedia, Inc. v. Dir., Div. of Taxation, 97 N.J. 313, 327 (1984). Both courts, however, affirmed the Tax Court’s findings that the NDOT’s exercise of discretion regarding penalties was improper.
Business law attorney Samuel C. Berger represents entrepreneurs and businesses in the New York City and Northern New Jersey areas. We offer fixed-fee legal-service packages covering a variety of legal matters. Contact us today online or at (212) 380-8117 to schedule a confidential consultation with a dedicated business legal advocate.
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