SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-5735-14T3

MCI COMMUNICATION SERVICES,

INC.,

Plaintiff-Appellant,

v.

DIRECTOR, DIVISION OF

TAXATION,

Defendant-Respondent.

____________________________

Argued January 19, 2017 – Decided

Before Judges Fuentes, Simonelli and Gooden 

Brown. 

On appeal from the Tax Court of New Jersey, 

Docket No. 013905-2010.

Carley A. Roberts (Sutherland Asbill & Brennan 

LLP) of the California bar, admitted pro hac 

vice, argued the cause for appellant (Day 

Pitney LLP and Carley A. Roberts, attorneys; 

Michael James Guerriero, Carley A. Roberts, 

Eric S. Tresh (Sutherland Asbill & Brennan 

LLP) of the Georgia bar, admitted pro hac 

vice, and Maria E. Biava, Associate General 

Counsel for respondent Verizon Communications 

Inc., of the Michigan and Illinois bars, 

admitted pro hac vice, on the briefs).

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

This opinion shall not "constitute precedent or be binding upon any court." 

Although it is posted on the internet, this opinion is binding only on the 

parties in the case and its use in other cases is limited. R. 1:36-3.

June 15, 2018
2 A-5735-14T3

Michael J. Duffy, Deputy Attorney General, 

argued the cause for respondent (Christopher 

S. Porrino, Attorney General, attorney; 

Melissa H. Raksa, Assistant Attorney General, 

of counsel; Michael J. Duffy, on the brief).

The opinion of the court was delivered by

FUENTES, P.J.A.D.

In this appeal, we are asked to determine whether the New 

Jersey's Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40, 

permits a corporate taxpayer to reduce its New Jersey reported 

income by erasing a decision it made as a part of its federal tax 

strategy. The taxpayer here is MCI Communication Services, Inc. 

Plaintiff acquired cancellation of debt income (CODI) arising out 

of a Title 11 bankruptcy, which was pushed down to it by its parent 

company. The taxpayer only received this pushed-down CODI because 

it filed a consolidated tax return.

Pursuant to 26 U.S.C. § 108(a)(1)(A), plaintiff then excluded 

the CODI from its gross income on its federal consolidated tax 

return. However, 26 U.S.C. § 108(b) required the taxpayer to 

reduce its tax attributes to account for the exclusion, and 26 

U.S.C. § 108(b)(5) permitted the taxpayer to meet this requirement 

by decreasing its depreciation deductions by the amount of the 

exclusion. 

On its New Jersey separate tax return, the taxpayer asserted 

that the CODI was not taxable income under New Jersey law and 
3 A-5735-14T3

claimed a deduction that reduced its Entire Net Income by the 

amount of its forfeited depreciation deductions. The Director of 

the Division of Taxation denied the deduction, explaining New 

Jersey law does not sanction this arrangement. Plaintiff appealed 

the determination to the Tax Court and argued the Division erred 

because: (1) New Jersey calculates taxable income by looking to a 

taxpayer's federal tax return, N.J.S.A. 54:10A-4(k); (2) New 

Jersey law, specifically N.J.A.C. 18:7-11.15(b), forbids 

consolidated tax returns, so the taxpayer was required to report 

its income as if it had filed its federal return separately; (3) 

had the taxpayer filed a separate federal tax return, it would 

have neither received the pushed-down CODI nor reduced its 

depreciation deductions by that amount; and (4) treating the 

pushed-down CODI as taxable income amounts to creating and taxing 

phantom income. 

The Tax Court affirmed the Director's decision. Plaintiff 

now appeals. We affirm substantially for the reasons expressed 

by Judge Kathi F. Fiamingo in her letter opinion dated July 20, 

2015.

Affirmed.