Perspectives

New Jersey court permits adjustments to federal basis

Multistate tax alert | October 28, 2014

​The Tax Court of New Jersey recently rendered decisions in favor of taxpayers in two separate cases that addressed the question of whether a taxpayer may for New Jersey Corporation Business Tax (“CBT”) purposes adjust the federal basis in its property to account for depreciation deductions for which it received no CBT benefit.

Two New Jersey Tax Court decisions

The Tax Court of New Jersey recently rendered decisions in favor of taxpayers in two separate cases that addressed the question of whether a taxpayer may for New Jersey Corporation Business Tax (“CBT”) purposes adjust the federal basis in its property to account for depreciation deductions for which it received no CBT benefit.

In Toyota Motor Credit Corporation v. Director, Division of Taxation1 and in Ford Motor Credit Company v. Director, Division of Taxation2 the Tax Court ruled that when calculating the net gain from the sale of their respective capital assets, the taxpayers could increase the federal basis in the property they sold during the years at issue by the amount of depreciation that was unused for CBT purposes. Thus, the taxpayers were allowed to depart from the federal adjusted basis in calculating the gain to account for the combined effect of New Jersey’s federal bonus depreciation decoupling and temporary net operating loss (“NOL”) suspension, resulting in reduced entire net income subject to the CBT.

In rendering its decisions, the Tax Court reasoned that the New Jersey Division of Taxation (“Division”) cannot tax the “fictitious income” that was attributable to depreciation deductions taken by the taxpayers for federal income tax purposes but that provided no benefit for CBT purposes.

The Tax Court in Toyota Motor Credit Corporation also addressed two additional issues:

  • Whether New Jersey’s 2002 federal bonus depreciation decoupling statute3 includes all assets acquired after September 10, 2001, rather than only assets that were acquired starting from the first taxable year beginning on or after January 1, 2002
  • Whether it was erroneous for the Division to remove (under New Jersey's former "throw out rule") the taxpayer's receipts sourced to Nevada, South Dakota, and Wyoming from the denominator of the receipts fraction used to determine CBT liability 

Although the Division has not appealed either decision, the appeal period remains open. Accordingly, these cases are not yet final. In this tax alert we summarize the two Tax Court decisions and offer some taxpayer considerations.

1Toyota Motor Credit Corporation v. Director, Division of Taxation, Tax Court of New Jersey, Dkt. No. 002021-2010, 2014 N.J. Tax LEXIS 19 (August 1, 2014).

2Ford Motor Credit Company v. Director Division of Taxation, Tax Court of New Jersey, Dkt No. 015751-2009 (August 5, 2014).

3Ch. 40 (A.B. 2501), Laws 2002, amending N.J. REV. STAT. § 54:10A-4(k)(12)(A).

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