New Jersey Administrative Code › Title 18 - TREASURY - TAXATION › Chapter 7 - CORPORATION BUSINESS TAX ACT › Subchapter 5 - ENTIRE NET INCOME; DEFINITION, COMPONENTS AND RULES FOR COMPUTING › Section 18:7-5.10 - Right of Director to correct distortions of net income allocation factors; adjustments and redeterminations

Current through Register Vol. 56, No. 14, July 15, 2024
(a) Whenever it shall
				appear to the Director that any taxpayer fails to maintain its records in accordance
				with sound accounting principles or conducts its business or maintains its records
				in a manner so as either directly or indirectly to distort its true entire net
				income or the proportion thereof properly allocable to this State, or whenever any
				taxpayer maintains a place of business outside this State, or whenever any
				agreement, understanding or arrangement exists between a taxpayer and any other
				corporation or any person or firm, for the purpose of evading tax under the Act, or
				whereby the activity, business, receipts, expenses, assets, liabilities, or net
				income of the taxpayer are improperly or inaccurately reflected, the Director is
				authorized and empowered, in his or her discretion and in whatever manner he or she
				may determine, to adjust and redetermine such items, and to adjust items of gross
				receipts, tangible or intangible property and payrolls within and outside the State
				and the allocation of entire net income or to make any other adjustments in any tax
				report or tax return as may be necessary to make a fair and reasonable determination
				of the amount of tax payable under the Act.
1.
				Where any taxpayer conducts its activity or business under any agreement,
				arrangement, or understanding in such manner as either directly or indirectly to
				benefit its members or stockholders, or any of them, or any person or persons
				directly or indirectly interested in such activity or business, by entering into any
				transaction at more or less than a fair price which, but for such agreement,
				arrangement, or understanding, might have been paid or received therefor;
				or
2. Any taxpayer, a substantial
				portion of whose capital stock is owned either directly or indirectly by or through
				another corporation, enters into any transaction with such other corporation on such
				terms as to create an improper loss or net income, the Director may include in the
				entire net income of the taxpayer the fair profits which, but for such agreement,
				arrangement, or understanding, the taxpayer might have derived from the
				transaction.
3. For purposes of this
				section, "fair and reasonable tax" is the tax that would have been payable by a
				taxpayer reporting the same transaction(s) on a separate entity basis where the
				parties to the transaction(s) had independent economic interests.
4. For purposes of this section, "substantial
				portion of stock" is the direct or indirect ownership of 20 percent or more of the
				outstanding shares of any class of stock. For purposes of arriving at this level of
				ownership the stock attribution rules of I.R.C. § 318 will be used.
5. Under
				N.J.S.A.
				54:10A-10.b interest should be charged on loans or
				advances made by one related party to another from the day after the debt arises
				until the debt is satisfied. With respect to intercompany trade receivables of
				related taxpayers, interest is not required to be charged on an intercompany trade
				receivable before the first day of the third calendar month.
i. If the creditor is regularly engaged in the
				business of making loans or advances, the arm's length interest rate should be
				charged. Upon failure to do so, the Division of Taxation can determine what interest
				should have been charged. Where the creditor is not in the business of loaning money
				or making advances, either an arm's length rate based on the facts and circumstances
				or a safe haven rate is acceptable. However, the safe haven rule does not apply to
				any loan or advance in which the interest or principal amount is expressed in a
				currency other than U.S. dollars.
ii.
				For interest paid or accrued on a loan or advance, a safe haven rate is one that is
				between 100 percent and 130 percent of the Applicable Federal Rate (AFR) as
				determined under I.R.C. § 1274(d) in effect on the date that the loan or
				advance is made. Adjustments for inadequate interest would be made at 100 percent of
				the AFR and adjustments for excessive interest would be made at 130 percent of the
				AFR. In the case of a sale-leaseback transaction, the lower limit would be 110
				percent of the AFR. In determining the rate of interest actually charged on a
				written loan or advance, any original issue discount included in income by the
				lender or any bond premium deducted by the lender is to be taken into account.
6. Where a service by one
				member of a group to another member is rendered for less than an arm's length
				charge, the Division of Taxation may make appropriate allocations to reflect an
				arm's length charge for that service. The arm's length charge is equal to the costs
				or deductions incurred by the member performing the service, except in cases where
				the service is an integral part of the business activity of either member.
7. If tangible property is made available by one
				member of the group to another, the latter should be charged the arm's length rental
				charge.
8. Where one member of a group
				of controlled entities sells or otherwise disposes of tangible property to another
				at other than an arm's length price, a proper allocation will be made between the
				seller and the buyer using the following methods.
i. Comparable uncontrolled price method: This
				method must be used if there are comparable uncontrolled sales (sales between
				outsiders or a member and an outsider where the property sold and the circumstances
				involved are identical, or nearly identical, to those in the controlled sale). To
				the extent they are not identical, adjustments are made.
ii. Resale price method: If there are not
				comparable uncontrolled sales, the resale price method must be used if the standards
				for its application are met. A typical situation where this method is required is
				where a manufacturer sells products to a related distributor which, without further
				processing, resells the products to unrelated parties.
iii. Cost plus method: If the standards for
				application of the resale price method are not satisfied, either that method or the
				cost plus method is used, depending on which is more feasible and will produce a
				more accurate arm's length price. Normally, the cost plus method is appropriate
				where a manufacturer sells products to a related entity that performs substantial
				manufacturing, assembly, or other processing of the product or adds significant
				value by use of its intangible property (trademark, for example) before resale.
iv. Comparable profits method: In
				general, the comparable profits method evaluates whether the amount charged in a
				controlled transaction is arm's length based on objective measures of profitability
				(profit level indicators) derived from uncontrolled taxpayers that engage in similar
				business activities under similar instances.
v. Profit split method: In general, the profit
				split method evaluates whether the application of the combined operating profit or
				loss attributable to one or more controlled transactions is arm's length by
				reference to the relative value of each controlled taxpayer's contribution to that
				combined operating profit or loss. The combined operating profit or loss must be
				derived from the most narrowly identifiable business activity of the controlled
				taxpayers for which data is available that includes the controlled transactions
				(relevant business activity).
vi.
				Unspecified methods: In general, methods not specified in (a)8i, ii, iii, iv, and v
				above may be used to evaluate whether the amount charged in a controlled transaction
				is arm's length. Any method used under this paragraph should be applied in
				accordance with the provisions of U.S. Treas. Reg. § 1.482-1.
9. Under both the comparable
				uncontrolled price method and the resale price method, market conditions faced by
				the affiliate are taken into account. Thus, goods may be sold, for a period, at a
				price which is below the full cost of manufacture in order to establish or maintain
				a market.
i. Assuming that the requirements of one
				of the methods in (a)8 above are met, it must be used unless the taxpayer can show
				that some other method is clearly more appropriate. Where none of the first five
				methods listed can reasonably be applied, some other appropriate method can be
				used.
ii. Where a taxpayer makes
				controlled sales of many different products or many sales of the same product and it
				is impractical to calculate an arm's length price for each product or sale, it is
				permissible to apply the proper method of pricing to product lines or other
				groupings. Also, the Division of Taxation may use statistical sampling techniques to
				verify or determine the arm's length price of all sales to a related
				entity.
10. The Division will
				apply equitable principles to prevent unjust situations from occurring.