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The New Jersey Tax Court held that a parent corporation was not required to add back to its corporation business tax base any amount of royalty payments it made to a subsidiary. The parent company and subsidiary company each filed a New Jersey CBT return. The parent deducted the royalty payment, and the subsidiary included the royalty in its CBT base. New Jersey law generally requires taxpayers to add back federal deductions for royalties paid to related parties except in the case where the taxpayer can show by clear and convincing evidence as determined by the Division of Taxation that the addback is unreasonable. In this case, because the subsidiary’s allocation factor was lower than the parent’s, the Division of Taxation argued that the parent corporation was only entitled to a partial exception from the addback for royalties paid. The Tax Court disagreed and determined that the taxpayer was not required to add back any amount of royalties because the full amount of the royalties had been reported on the subsidiary’s CBT return, and the subsidiary paid tax on the royalties allocated to New Jersey. The court was “hard-pressed to accept Taxation’s argument that there was a mismatch of income and expense solely due to the difference in the unchallenged allocation factors of Parent and Subsidiary” and, accordingly, held that an addback of any amount on the parent’s return would be unreasonable.
Lorillard Tobacco Co. v. Dir., Div. of Taxation, No. 008305-2007 (NJ Tax Ct. Feb. 27, 2019).