Court Opinion

ID: 4912597
Source: CourtListenerOpinion
Date Created: 2021-09-21 14:11:27.738401+00
Date Added: 2024-06-11T08:13:41.643464
License: Public Domain

NOT FOR PUBLICATION WITHOUT THE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.

                                                        SUPERIOR COURT OF NEW JERSEY
                                                        APPELLATE DIVISION
                                                        DOCKET NO. A-3444-18
                                                                   A-0002-19

LORILLARD TOBACCO
COMPANY,

          Plaintiff-Respondent/
          Cross-Appellant,

v.

DIRECTOR, DIVISION OF
TAXATION,

     Defendant-Appellant/
     Cross-Respondent.
_______________________

                   Argued December 14, 2020 – Decided September 21, 2021

                   Before Judges Messano, Hoffman and Suter.

                   On appeal from the Tax Court of New Jersey, Docket
                   Nos. 008305-2007 and 014043-2012, whose opinion is
                   reported at 31 N.J. Tax 153 (Tax 2019).

                   Jamie M. Zug, Deputy Attorney General, argued the
                   cause for appellant/cross-respondent (Gurbir S.
                   Grewal, Attorney General, attorney; Melissa H. Raksa,
                   Assistant Attorney General, of counsel; Jamie M. Zug
              and Joseph A. Palumbo, Deputy Attorney General, on
              the briefs).

              Mitchell A. Newmark argued the cause for
              respondent/cross-appellant (Blank Rome, LLP,
              attorneys; Mitchell A. Newmark and Craig B. Fields
              (Blank Rome, LLP) of the New York bar, admitted pro
              hac vice, of counsel and on the briefs).

       The opinion of the court was delivered by

SUTER, J.A.D.

       In A-3444-18, the Director of the Division of Taxation (defendant)

appeals the February 28, 2019 order granting summary judgment to plaintiff

Lorillard Tobacco Company (Lorillard). The order required the Division of

Taxation (Taxation) to pay the remainder of Lorillard's refund claims for tax

years 2002 through 2005 with statutory interest. Lorillard cross-appeals the

same order to the extent it did not address the constitutional issues it raised. In

A-0002-19, defendant appeals the July 19, 2019 order granting judgment to

Lorillard. A-0002-19 is consolidated with A-3444-18 because it raises the same

issues, although for tax years 2007 through 2010. 1 Lorillard also cross-appealed

this order.

1
    The appeals were consolidated on November 15, 2019.
                                                                             A-3444-18
                                        2
      For reasons that follow, we reverse the Tax Court orders because

defendant's application of N.J.A.C. 18:7-5.18(b)(3) and accompanying schedule

was an appropriate exercise of discretion, entitled to deference by the Tax Court,

and was consistent with implementing legislation. We remand the case to the

Tax Court for consideration of the constitutional issues Lorillard has raised.

                                        I.

                                        A.

      Lorillard is a Delaware corporation with its headquarters in North

Carolina. Lorillard Tobacco Co. v. Dir., Div. of Tax'n, 31 N.J. Tax 153, 158

(Tax 2019). It "manufactures, markets, distributes, and sells cigarettes" in New

Jersey and other states. Ibid. Lorillard owns Lorillard Licensing Company,

LLC, (Subsidiary), which is a North Carolina company with offices in that state.

      In 1999, Lorillard assigned its intellectual property to Subsidiary. Ibid.

Subsidiary licenses the use of this intellectual property to Lorillard. These

licenses — which are "perpetual in term" — include the use of trademarks. Ibid.

Lorillard pays Subsidiary royalties to use this intellectual property. Ibid.

      Subsidiary alleged that it did not have offices, employees or property in

New Jersey. It did not file corporation business tax (CBT) returns in New

Jersey, claiming it had no "nexus" to the State. In 2006, Taxation audited

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                                        3
Subsidiary, claiming the company did have a nexus to New Jersey and that

Subsidiary owed CBT for tax years ending in 1999 through 2004. Taxation

assessed Subsidiary for the payment of taxes, penalties and interest. Taxation

included the royalties that Subsidiary received from Lorillard in determining the

amounts owed. Subsidiary appealed to the Tax Court claiming it did not owe

CBT, but this argument was rejected. See Lorillard Licensing Co., LLC v. Dir.,

Div. of Tax'n (Lorillard I), 28 N.J. Tax 590 (Tax 2014), aff'd, 29 N.J. Tax 275,

277-78 (App. Div. 2015).

      Lorillard filed CBT returns in New Jersey. Lorillard, 31 N.J. Tax at 158.

It was required by N.J.S.A. 54:10A-4.4(b) to "add back" to its "earned net

income" royalty payments it made to related members, such as Subsidiary.

While Lorillard I was pending, Lorillard filed an amended CBT return for 2007,

requesting a refund of $4,297,701 for the CBT it paid attributable to royalties to

Subsidiary from 2002 through 2005. In April 2007, defendant denied this

request because Lorillard I was still pending. Ibid.

      In July 2007, Lorillard filed a complaint in the Tax Court against

defendant.   Count One claims that N.J.S.A. 54:10A-4.4(b) (the Add Back

statute) is unconstitutional on its face.    Count Two alleges the statute is

unconstitutional as applied. Count Three alleges that it was an error to deny

                                                                            A-3444-18
                                        4
Lorillard's request for a refund because the Add Back statute and its

implementing regulation are unreasonable. Count Four alleges that defendant

abused his discretion by denying Lorillard's refund. Count Five alleges that

defendant's denial of its refund claim is unconstitutional. Count Six alleges that

defendant's denial "violated the square corners doctrine." Lorillard filed a

motion for summary judgment in 2008.

      Subsidiary changed course in 2009 by filing CBT returns under the 2009

Tax Amnesty program for tax years 1999 through 2004. Lorillard requested an

expedited refund of the CBT it had paid on royalties to Subsidiary. Taxation

issued refunds to Lorillard in 2010, but only for a portion of what Lorillard

requested. The amount that was not refunded, and which remains in dispute for

tax years 2002 through 2005, is $1,495,424.

      Once it was resolved that Subsidiary was to file CBT returns, the parties

filed additional briefs regarding Lorillard's summary judgment motion, and the

Tax Court heard oral argument. On February 28, 2019, it issued an order

granting summary judgment and published its decision. See Lorillard, 31 N.J.

Tax at 153-74. Lorillard was granted a full refund of CBT attributable to the

royalties it paid to Subsidiary for tax years 2002 through 2005. Defendant

appealed the summary judgment order.

                                                                            A-3444-18
                                        5
        Lorillard filed a new claim seeking a refund of $2,196,0242 in corporate

taxes for tax years 2007 through 2010 based on the same reasons. Defendant

denied this request. Lorillard filed a complaint in the Tax Court. On July 19,

2019, the Tax Court entered an order and final judgment, disposing of the case

on the same bases as the February 28, 2019 summary judgment order because

"all material relevant facts concerning the issue of the extent of royalty

deduction to be added back are materially similar to the facts in the instant

matter." Defendant appealed the order and Lorillard cross-appealed.

                                          B.

        The Corporate Business Tax Act (CBTA), N.J.S.A. 54:10A-1 to -40,

imposes a CBT on non-exempt domestic or foreign corporations that have a

nexus with New Jersey. N.J.S.A. 54:10A-2. The CBT "is assessed based on a

corporation's entire net worth and entire net income." Whirlpool Props., Inc. v.

Dir., Div. of Tax'n, 208 N.J. 141, 153 (2011). A corporation pays CBT based

on its allocation factor that is determined by taking into consideration its New

Jersey payroll, property and sales. N.J.S.A. 54:10A-6. "The purpose of the

allocation factor is to limit application of the [CBTA] to only that income that

has a sufficient nexus to New Jersey to satisfy constitutional constraints on State

2
    We use the figure set forth in Lorillard's brief.
                                                                             A-3444-18
                                           6
taxation." Lorillard I, 28 N.J. Tax at 599. N.J.S.A. 54:10A-8 (Section Eight)

"authorizes [defendant] to exercise discretion to adjust a taxpayer's

apportionment formula." Whirlpool, 208 N.J. at 145.

      The starting point in the calculation is the corporation's "entire net

income" as defined in N.J.S.A. 54:10A-4(k). This is deemed by the CBTA to

be "equal in amount to the taxable income, before net operating loss deduction

and special deductions, which the taxpayer is required to report. . . ." Whirlpool,

208 N.J. at 155.

      In 2002, the Business Tax Reform Act (BTRA) amended the CBTA. L.

2002, c. 40; see Lorillard, 31 N.J. Tax at 164. The sponsor's statement for the

Senate bill stated it "revises and updates the corporation business tax to close a

number of loopholes and limit certain tax benefits." Sponsor's Statement to S.

1556 51 (May 30, 2002). It was critical of tax loopholes which do not allow the

CBT to "reach some out-of-state companies that do business here," and permit

"multi-state corporations to transfer their profits to related out-of-State and

offshore companies" and "reduce their net income to little or nothing, thus

avoiding the New Jersey taxation." The purpose was to provide "a level playing

field for all businesses, large and small, that invest in New Jersey, employ our

                                                                             A-3444-18
                                        7
citizens and do business here." The sponsor's statement for the Assembly bill

expressed similar objectives. Sponsor's Statement to A. 2501 51 (June 6, 2002).

      The Senate Budget and Appropriations Committee's statement noted that

one of the loopholes to be closed by the legislation was a deduction for "royalties

and other intangible expenses and costs . . . when paid to affiliates." S. Budget

& Approps. Comm. Statement to S. 1556 2 (June 27, 2002). They would remain

permissible "in areas that are established as 'non-tax avoidance' situations."

Ibid. To close loopholes, the legislation included language "limit[ing] the ability

of a taxpayer to deduct royalties . . . when paid to affiliates." Lorillard, 31 N.J.

Tax at 164 (quoting from Assembly Budget Comm. Statement to A. 2501 2 (June

27, 2002)). The Director "would have the 'authority to determine . . . whether a

taxpayer has met its evidentiary burden of establishing by clear and convincing

evidence that the addback of an expense is unreasonable.'" Ibid. The Director

also could determine "that it is appropriate to enter into agreements or

compromises with the taxpayer to produce an equitable level of taxation." Ibid.

      The CBTA defines "intangible expenses and costs" to include royalties.

N.J.S.A. 54:10A-4.4(a). Effective in July 2002, the CBTA was amended by the

BTRA to provide that

            [f]or purposes of computing its [ENI] . . . , a taxpayer
            shall add back otherwise deductible . . . intangible

                                                                              A-3444-18
                                         8
             expenses and costs directly or indirectly paid, accrued
             or incurred to, or in connection directly or indirectly
             with one or more direct or indirect transactions with,
             one or more related members.

             [N.J.S.A. 54:10A-4.4(b) (the Add Back statute).]

      There are three exceptions to the Add Back statute. Relevant here, the

add backs required in subsection b "shall not apply if . . . the taxpayer establishes

by clear and convincing evidence, as determined by the director, that the

adjustments are unreasonable . . . ." N.J.S.A. 54:10A-4.4(c)(1)(b). Thus, the

add back can be reduced for amounts that are "unreasonable." Ibid.

      Defendant promulgated regulations in 2003 to address the CBTA's

exception for unreasonableness in related party transactions. See N.J.A.C. 18:7-

5.18(b). "The purpose of the . . . regulation is avoidance of double taxation."

Lorillard, 31 N.J. Tax at 168. The regulation restates the statutory criteria.

N.J.A.C. 18:7-5.18(a)(1).      N.J.A.C. 18:7-5.18(b) provides that "intangible

expenses and costs directly or indirectly paid . . . in connection with a transaction

with one or more related members shall not be deducted in calculating [ENI]"

with certain exceptions.     The add back is not required "[i]f the taxpayer

establishes, to the satisfaction of the [d]irector, that the disallowance of a

deduction is unreasonable by showing the extent the related party pays tax in

                                                                               A-3444-18
                                         9
New Jersey on the income stream."          N.J.A.C. 18:7-5.18(b)(3).3   Thus, as

defendant argued, "clear and convincing evidence" as referenced in the Add

Back statute could be shown to "the extent that a related-entity payee pays tax

in New Jersey on the royalties." Defendant argues the regulation was to prevent

multi-entity businesses from reducing the amount of their CBT by artificially

3
 This regulation was amended effective April 8, 2020. Currently, the add back
may not be required,

            [i]f the taxpayer establishes, to the satisfaction of the
            [d]irector, that the adjustments are unreasonable by
            clear and convincing evidence, and any one of the
            following circumstances applies:

                  i. Unfair duplicate taxation;

                  ii. A technical failure to qualify the
                  transactions under     the   statutory
                  exceptions;

                  iii. An inability or impediment to meet the
                  requirements due to legal or financial
                  constraints;

                  iv. An unconstitutional result; or

                  v. The transaction is equivalent to an
                  unrelated loan transaction;

            [N.J.A.C. 18:7-5.18(b)(3).]
                                                                          A-3444-18
                                      10
shifting income from a higher allocation factor company to a related company

with a lower allocation factor.

      Taxation developed a new tax reporting schedule in connection with

promulgation of the regulation. Schedule G-2 measures the "extent that the

payee pays tax" to avoid double taxation by providing a formula that "can

determine whether or not certain related party transactions, in fact, do qualify

for deductibility as exceptions to the addback rule." 35 N.J.R. 1573(a) (April 7,

2003).

      Schedule G-2 calculates the "unreasonableness exception" for the payor

— in this case, Lorillard — based on the allocation factors of the payor and

payee. The payor can take exception as unreasonable from the add back to the

extent the payee paid tax to New Jersey on the royalty income. See N.J.A.C.

18:7-5.18(b)(3). If the payor and payee have the same allocation factors, then

the payor can take exception to the add back. If the payor's allocation factor is

larger than the payee, then the payor will only have a partial exception to the

addback based on the payee's taxes. Lorillard, 31 N.J. Tax at 161. Here,

Lorillard claimed a refund for tax years 2002 through 2005 of $4,297,701 but

was refunded $2,802,277 because Subsidiary had a lower allocation factor than

Lorillard. Lorillard, 31 N.J. Tax at 162-63.

                                                                           A-3444-18
                                      11
                                        C.

      The Tax Court granted Lorillard's motion for summary judgment.

Lorillard, 31 N.J. Tax at 174. In reaching its decision, the Tax Court found that

it was not "realistic" for a parent and a subsidiary to have the same allocation

factors. Lorillard, 31 N.J. Tax at 172. The Tax Court found that BTRA's goals

were not "frustrated because Subsidiary's allocated royalty income does not

match [Lorillard's] royalty deduction solely due to the difference in their

respective allocation factors . . . ." Ibid. However, it found this was not a reason

to allow only a portion of the royalty deduction to be added back. Ibid.

      The Tax Court was critical of Taxation for not explaining why the

difference between the allocation factors raised concerns under the BTRA. It

found "absent" certain allegations and claims such as that Subsidiary's

"reporting and tax payments on the royalty deduction" in other states was not

"clear and convincing evidence"; that what Subsidiary paid in CBT was

irrelevant to any inquiry about unreasonableness; or that Lorillard must provide

some clear and convincing evidence. Ibid. In the absence of these, the Tax

Court found that Taxation's "determination to deny a portion of [Lorillard's]

refund claims [was] not well-founded. " Ibid.

                                                                              A-3444-18
                                        12
      The Tax Court found that Subsidiary paid CBT to New Jersey using its

allocation factor based on the royalty payments from Lorillard.          Because

defendant was not arguing that Subsidiary's allocation factor did not "properly

represent its allocable income to New Jersey," the Tax Court rejected

defendant's argument that "there was a mismatch of income and expense solely

due to the difference in the unchallenged allocation factors of [Lorillard] and

Subsidiary." Ibid. The Tax Court concluded defendant did not "exercise its

discretion fairly by deeming only a portion of the royalties paid by [Lorillard]

to Subsidiary as excepted from addback." Ibid.

      On February 28, 2019, the Tax Court granted summary judgment to

Lorillard requiring defendant to refund the remainder of Lorillard's claim for tax

years 2002 through 2005. On July 19, 2019, the Tax Court entered an order and

final judgment in Lorillard's favor for tax years 2007 through 2010 based on its

reasoning in Lorillard. 31 N.J. Tax at 166-74.

                                     D.

      Defendant appeals the Tax Court orders raising these issues:

            POINT I

            THE TAX COURT INCORRECTLY INTERPRETED
            THE STATUTE AND TAXATION’S REGULATION
            AND GAVE INSUFFICIENT DEFERENCE TO
            TAXATION.

                                                                            A-3444-18
                                       13
             A. The Tax Court Misinterpreted the Plain Language
                of the Statute and Regulation.

             B. The Tax Court Accorded Taxation Insufficient
                Deference.

             POINT II

             THE TAX COURT’S HOLDING UNDERMINES THE
             PURPOSE OF THE BTRA TO PREVENT SHIFTING
             INCOME AWAY FROM NEW JERSEY THROUGH
             RELATED-ENTITY ROYALTY PAYMENTS.

      Lorillard files a cross-appeal from the Tax Court orders because they do

not address the constitutional issues it raised in the summary judgment motion.

It argues:

             POINT I

             THE STANDARD OF REVIEW IS DE NOVO

             A. The Review of a Summary Judgment Order Is a
             Legal Question.

             B. The Standard of Review Is De Novo and the Tax
             Court Is Entitled to Deference on Questions of Law.

             C. Defendant's Interpretation of Tax Statutes Is Not
             Binding as Ruled in the Supreme Court's Decisions.
             POINT II

             DEFENDANT'S REGULATION AND SCHEDULE
             G-2 ARE NOT REASONABLE INTERPRETATIONS
             OF    THE    ADDBACK    STATUTE    AND

                                                                         A-3444-18
                                     14
UNLAWFULLY NARROW THE UNREASONABLE
EXCEPTION AS APPLIED TO LORILLARD

POINT III

THE TAX COURT CORRECTLY INTERPRETED
THE UNREASONABLE EXCEPTION IN THE
ADDBACK STATUTE.

A. The Tax Court Did Not Endorse an "All-or-
Nothing" Unreasonable Exception.

B. Though Defendant Received Deference from the
Tax Court, Defendant's Position Was Not a Fair
Exercise of Its Discretion.

C. The Tax Court's Proper Interpretation of the
Addback Statute Does Not Undermine the Purpose of
the BTRA.

POINT IV

ALTERNATIVELY, LORILLARD'S REMAINING
REFUND CLAIMS SHOULD BE GRANTED
BECAUSE DEFENDANT'S REGULATION AND
SCHEDULE G-2 ARE UNCONSTITUTIONAL

A. Defendant's Regulation and Schedule G-2 Are
Unconstitutional Because They Are Discriminatory

B. Defendant's Regulation and Schedule G-2 Are
Unconstitutional Because They Indirectly Tax the Out-
of-State Activities of Licensing that New Jersey Cannot
Tax Directly.

C. Defendant's Regulation and Schedule G-2 Are
Unconstitutional Because They Result in Gross

                                                          A-3444-18
                         15
            Distortion and Taxation that Is Out of All Appropriate
            Proportion to Lorillard's Activities in New Jersey.

            POINT V

            DEFENDANT'S    CONTINUED   DENIAL  OF
            LORILLARD'S REMAINING REFUND CLAIMS IS
            A FAILURE TO TURN SQUARE CORNERS.

                                       II.

      We review a court's grant of summary judgment de novo, applying the

same standard as the trial court. Conley v. Guerrero, 228 N.J. 339, 346 (2017).

Summary judgment must be granted if "the pleadings, depositions, answers to

interrogatories and admissions on file, together with the affidavits, if any, show

that there is no genuine issue as to any material fact challenged and that the

moving party is entitled to a judgment or order as a matter of law." Templo

Fuente De Vida Corp. v. Nat'l Union Fire Ins. Co. of Pittsburgh, 224 N.J. 189,

199 (2016) (quoting R. 4:46-2(c)).           We do not defer to a trial court's

"interpretation of the law and the legal consequences that flow from established

facts." State v. Harris, 181 N.J. 391, 419 (2004) (quoting Manalapan Realty v.

Twp. Comm. of Manalapan, 140 N.J. 366, 378 (1995)).

      The starting place is the BTRA. It was "enacted to address declining

revenues despite economic expansion based on 'evidence that large corporations

with apparently substantial economic activity in this State and substantial profit

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                                       16
have managed to avoid having any of this income become taxable by New

Jersey.'" Springs Licensing Grp., Inc. v. Dir., Div. of Tax'n, 29 N.J. Tax 1, 8-9

(Tax 2015) (quoting Statement to Assembly No. 2501).            The BTRA was

intended to close loopholes.

      One such closure was "limit[ing] the ability of a taxpayer to deduct

royalties . . . when paid to affiliates." Ibid. The Add Back statute requires a

taxpayer to "add back" to its earned net income the royalties that it paid to a

related entity. N.J.S.A. 54:10A-4.4(b). However, because New Jersey is a

"separate entity state," the royalty income received by the related entity payee

also is taxed. Springs Licensing, 29 N.J. Tax at 12. "[T]he Legislature's

response to the specter of double taxation [was] the ability of the payor to claim

an exception to the add-back as being 'unreasonable.'" The statute permits a

taxpayer to reduce the add back by amounts, which are "unreasonable," but the

Legislature did not define what type or amount of an add back was unreasonable.

      "When an administrative agency that is charged with enforcing a statute

interprets that statute, we give substantial deference to the agency's

interpretation." Oberhand v. Dir., Div. of Tax'n, 193 N.J. 558, 568 (2008). This

applies "when the Director's expertise is exercised in the 'specialized and

complex area' of the tax statutes." Taylor v. Dir., Div. of Tax'n, 422 N.J. Super.

                                                                            A-3444-18
                                       17
336, 341 (App. Div. 2011) (quoting Metromedia v. Dir., Div. of Tax'n, 97 N.J.

313, 327 (1984)). However, an agency cannot interpret a statute to extend it

beyond that permitted by the language of the statute. Oberhand, 193 N.J. at 568.

"Thus, if the agency interpretation of a statute is plainly at odds with the plain

meaning of the statute, the agency interpretation will be set aside." Ibid. Where

the agency's interpretation "is consistent with a plain reading of the statute," the

reviewing court should "give deference to the [agency]'s interpretation of the"

statute and "accept that interpretation as the one intended by the Legislature."

Id. at 569.

      Defendant promulgated regulations to implement the Add Back statute's

exception for amounts that are "unreasonable." Lorillard argues defendant's

regulations and tax form Schedule G-2 are not reasonable interpretations of the

statute.

      Regulations that are "consistent with statutory authority are presumptively

valid and should also receive deference." United Parcel Gen. Servs. Co. v. Dir.,

Div. of Tax'n, 430 N.J. Super. 1, 8 (App. Div. 2013). The presumptive validity

of administrative actions means that "the burden of proving otherwise is on those

challenging such action." Hills Dev. Co. v. Twp. of Bernards, 103 N.J. 1, 45

(1986).    However, "an administrative agency may not, under the guise of

                                                                              A-3444-18
                                        18
interpretation, extend a statute to give it a greater effect than its language

permits." GE Solid State v. Dir., Div. of Tax'n, 132 N.J. 298, 306 (1993). Nor

may an agency issue a regulation that is outside "the fair contemplation of the

delegation of the enabling statute." N.J. State League of Mun. v. Dep't of Cmty.

Affs., 158 N.J. 211, 222 (1999) (quoting N.J. Guild of Hearing Aid Dispensers

v. Long, 75 N.J. 544, 561 (1978)).

      Applying these standards, we conclude the Tax Court erred by granting

summary judgment to Lorillard. There is nothing unreasonable about allowing

an exception to the add back to the extent the related party paid taxes in New

Jersey to avoid possible double taxation. Defendant's regulation defines one

means by which the add back is unreasonable, e.g., to the extent the related

entity paid New Jersey taxes. Defendant granted Lorillard's refund request,

corresponding to Subsidiary's CBT payments, by using a comparison of the

allocation factors between the payor (Lorillard) and payee (Subsidiary). As the

State described it, "Taxation granted parent a refund for those amounts

corresponding to [S]ubsidiary's CBT payments because Taxation determined,

using Schedule G-2, that it would be unreasonable for parent to pay CBT on

income paid to [S]ubsidiary as royalties to the extent that the [S]ubsidiary paid

CBT on the royalties." The tax on Lorillard's add back that was not excepted as

                                                                           A-3444-18
                                      19
unreasonable was related to its activity in New Jersey based on its allocation

factor.

      The purpose of the BTRA — as the Tax Court acknowledged — was to

close a loophole on tax avoidance. There was nothing unreasonable about

defendant's decision to grant the exception only to the extent of the New Jersey

taxes paid by Subsidiary. This was a balanced approach. It considered the need

to achieve the intent of the BTRA to close loopholes and the need by the filer to

avoid an unreasonable add back. Lorillard is not precluded from showing that

it is unreasonable in some manner not to refund the balance of the remaining

add back based on facts special to its situation.

      The Tax Court appeared to shift the burden from Lorillard to defendant.

The statutes give the taxpayer the burden of establishing an exception to the

disallowance of deductions: "adjustments . . . shall not apply if . . . the taxpayer

establishes by clear and convincing evidence, as determined by the director, that

the adjustments are unreasonable. . . ." N.J.S.A. 54:10A-4.4(c)(1)(b). If further

adjustment was needed, Lorillard was not precluded from requesting this.

      Lorillard claims that Schedule G-2, which is a tax form referenced in the

rule proposal, should have been promulgated as a regulation because of its

reference to and then application of allocation factors. See 35 N.J.R. 1573, 1575

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                                        20
(April 7, 2003) (providing with reference to subsection "(b)3" of the N.J.A.C.

18:7-5.18 that this subsection "allows the deduction of costs if disallowance

would be unreasonable since the payee paid tax to New Jersey on the same

income stream," citing "Schedule G-2, Part II, Exception 2"). We disagree. It

could be fairly inferable from the Add Back statute that the amount up to the tax

paid by a related party payee might be considered as unreasonable and subject

to exception, and thus that a regulation was not needed to allow an exception for

this amount.    See Metromedia, 97 N.J. at 329 (providing that rulemaking

generally is not necessary for "[a]n agency determination that is . . . obviously

inferable from the specific language of the enabling statute"). Lorillard obtained

a refund for the amount of tax that was paid by its related party. What is in

dispute is the amount of a refund beyond this amount.

      The Tax Court never reached the constitutional issues because of its

determination that defendant did not exercise appropriate discretion. Lorillard,

31 N.J. Tax at 174. In light of our decision, these constitutional issues require

consideration. The Tax Court should decide them in the first instance. We

decline to exercise our original jurisdiction to decide the constitutional questions

that were raised. We have determined to return the cases to the Tax Court for

consideration of these issues because its familiarity with the tax issues in this

                                                                              A-3444-18
                                        21
context will be helpful. Given the amendment of N.J.A.C. 18:7-5.18 in the

interim, we also are unable to determine on this record if the constitutional issues

are now moot.

      Reversed and remanded for further proceedings.            We do not retain

jurisdiction.

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                                        22