United Parcel Service Gen. Servs. Co. v. Director, Div. of Taxation, 220 N.J. 90 (2014). This per curiam decision of the Supreme Court today affirmed an Appellate Division decision, written by Judge Lihotz, in favor of the plaintiff taxpayers. Plaintiffs (collectively, “UPS”) filed corporate tax returns that ascribed no tax consequence to fund transfers among the affiliated plaintiff companies. The Division of Taxation audited UPS and determined that those inter-company fund transfers constituted loans as to which interest income should have been imputed. The Division then assessed unpaid taxes on the imputed income and imposed two different types of penalties (late payment penalties under N.J.S.A. 54:49-6(a) and amnesty penalties under N.J.S.A. 54:53-17 and 18) on UPS. UPS filed suit in the Tax Court to contest that result. The Tax Court agreed with the Division that the inter-company transfers resulted in imputed income. But the Tax Court concluded that the Division had improperly failed to grant UPS’s application for a waiver of late payment penalties and had wrongly imposed an amnesty penalty. The Division appealed, and the Appellate Division affirmed. 430 N.J. Super. 1 (App. Div. 2013). The Supreme Court granted review, and affirmed the Appellate Division substantially for the reasons that Judge Lihotz gave.
The Supreme Court began by “underscor[ing] the deference afforded to the determinations of the Division, whose expertise in the complex and specialized subject of tax law is entitled to great respects by the courts.” Here, however, the Division “improperly exercised” its discretion. There was “no directly pertinent legal authority then in existence” when the Division imposed the late payment penalty, and there was “reasonable cause” under the applicable statute and regulation for UPS to believe that its position was correct. Indeed, the Division had acknowledged in writing that one of plaintiff entities had shown “reasonable cause in this matter.” The Division has the power to waive late payment penalties in such circumstances, and the Court concluded that the Division had misapplied its discretion in failing to do so here.
The Court also agreed with UPS and the lower courts regarding the amnesty penalties. Both of the tax amnesty statutes require a penalty against “a taxayer who has failed to pay any State tax” on or before its due date. But “[n]either statute expressly indicates whether a taxpayer who timely files tax returns, pays all reported tax liabilities and is found to be liable for additional taxes following an audit, has ‘failed to pay’ New Jersey taxes, and therefore should be assessed a penalty.” Accordingly, the Court turned to legislative history, and cited testimony of the State Treasurer regarding one of the amnesty statutes to the effect that “the bill’s penalties will not be applied to deficiencies assessed pursuant to a question of law or fact uncovered through routine audits of taxpayers otherwise in compliance with filing and payment requirements of State taxes.” Since plaintiffs had timely filed their tax returns and had paid the taxes shown to be due in those returns, and since the obligation to pay additional tax on the inter-company transfers arose out of an audit of those returns, it was improper for the Division to assess amnesty penalties.