Court Opinion

ID: 4654526
Source: CourtListenerOpinion
Date Created: 2021-01-26 15:07:57.634917+00
Date Added: 2024-06-11T07:58:44.467591
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NOT FOR PUBLICATION WITHOUT THE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-4962-18T2

ELAN PHARMACEUTICALS,
INC.,

          Plaintiff-Appellant,

v.

DIRECTOR, DIVISION OF
TAXATION,

     Defendant-Respondent.
____________________________

                   Argued November 12, 2020 – Decided January 26, 2021

                   Before Judges Alvarez and Geiger.

                   On appeal from the Tax Court of New Jersey, Docket
                   No. 10589-2010.

                   Alysse McLoughlin, argued the cause for appellant
                   (McDermott Will & Emery LLP, and Charles J. Moll
                   III, (McDermott Will & Emery LLP) of the California
                   Bar, admitted pro hac vice, attorneys; Charles J. Moll
                   III, of counsel; Alysse McLoughlin, on the briefs).

                   Michael J. Duffy, Deputy Attorney General, argued the
                   cause for respondent (Gurbir S. Grewal, Attorney
                   General, attorney; Melissa H. Raksa, Assistant
            Attorney General, of counsel; Michael J. Duffy, on the
            brief).

PER CURIAM

      Plaintiff Elan Pharmaceuticals, Inc. (Elan), appeals from a May 2, 2014

Tax Court order and June 6, 2019 final judgment determining: (1) the Director

of the Division of Taxation (Division) properly reclassified the gain from Elan's

sale of its ABELCET and PERMAX assets from non-operational income to

taxable apportionable operational income; and (2) that Elan owed $966,127.38

in corporate taxes for tax year 2002, a $96,612.74 penalty, and $2,291,918.08 in

interest.1 Elan contends that the Tax Court erred in determining that the business

liquidation doctrine did not apply to the gain from the sale of the ABELCET and

PERMAX assets. In the alternative, Elan argues this matter should be remanded

to the Tax Court for further fact-finding on this issue. We affirm.

      Because this case was decided "on cross-motions for summary judgment,

we will rely on the core material facts that informed the Tax Court's decision."

McKesson Water Prods. Co. v. Dir., Div. of Taxation, 408 N.J. Super. 213, 215

(App. Div. 2009).

1
  The Tax Court also found that the Division improperly excluded receipts from
Elan's 2002 fractional denominator but that finding was not appealed.
                                                                          A-4962-18T2
                                        2
      In 2002, Elan was a Delaware company with its corporate headquarters

and principal place of business in California. Elan was wholly owned by Athena

Neurosciences, Inc. (Athena). Athena was wholly owned by Elan Holdings.

Ltd., which in turn was wholly owned by Elan Corporation, PLC (Elan PLC), a

multi-national pharmaceutical company with its principal place of business in

Ireland.    A document titled "Certain Material Transactions Elan PLC and

affiliates 1996-2005" lists more than fifty acquisitions, divestments, and other

transactions undertaken by Elan PLC between 1996 and 2005.

      Elan PLC executive William Daniel described Elan as "a neuroscience-

based technology company . . . divided into three separate business segments:

neurology, autoimmune disease and severe pain management." (Pa46). Daniel

explained    that "[e]ach segment focused on discovering, developing,

manufacturing and marketing advanced therapies in its respective field."

      In May 2000, Elan PLC acquired The Liposome Company (TLC), a

Delaware corporation with its principal place of business in New Jersey. At

some point after the acquisition, Elan PLC merged TLC into Elan.            The

acquisition of TLC marked Elan PLC's entry into the field of oncology, with

TLC and its subsidiaries producing ABELCET and MYOCET, which Daniel

characterized as oncology drugs. It also developed several other oncology

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                                       3
drugs. A power point presentation prepared for Elan PLC’s board of directors

stated that ABELCET is used to treat "severe systemic fungal infection." The

presentation’s overview asserted that ABELCET can be used to treat patients

with cancer, AIDS, or those who have received organ transplants. 2

      As a result of the merger, Elan acquired the TLC subsidiary which

manufactured ABELCET and MYOCET, and renamed it Elan Operations, Inc.

Elan Operations was headquartered in Indiana. Elan also acquired the TLC

subsidiary which held the license to sell ABELCET in Canada (Canada

ABELCET Business) and renamed it Elan Canada, Inc. Elan conducted the sale

of ABELCET in the United States (U.S. ABELCET Business), while the rights

to sell ABELCET and MYOCET in the European Union (EU ABELCET

Business) and the rights to sell ABELCET in Asia (Asia ABELCET Business)

were transferred to Elan Pharma International Ltd. (EPIL), an Elan PLC

subsidiary and foreign corporation with no business dealings in the United

States.

      Daniel certified that following TLC's acquisition, its senior management

in New Jersey "departed Elan’s employ and were replaced with Elan [PLC] and

2
  In contrast, the drugs characterized in the power point presentation as in the
pipeline were exclusively for cancer patients.
                                                                        A-4962-18T2
                                       4
Elan management personnel" from the companies’ respective headquarters in

California and Ireland. However, following Elan’s sale of the U.S. ABELCET

Business, an interim services agreement provided that access to Elan’s facility

in Princeton would be provided "as reasonably requested."

      According to Daniel, Elan PLC suffered financial distress in 2002 and

adopted a plan "to shed non-core businesses, and to raise money to reduce debt

owed to its outside lenders.” While the U.S. and Canada ABELCET Businesses

were profitable, the EU ABELCET Business was not, and Elan PLC was advised

to sell the U.S. and Canada ABELCET Businesses separately from the EU

ABELCET Business "[t]o avoid delay." The Division points out an offering

memorandum prepared by Morgan Stanley that states "Elan prefers to sell the

U.S. and Canadian rights to [ABELCET]. . . [but] plans to retain the rights to

[ABELCET] outside of the U.S. and Canada."

      In November 2002, Elan, Elan Canada, and Elan Operations sold the U.S.

and Canada ABELCET Businesses to Enzon Pharmaceuticals (Enzon) for $360

million (the Enzon transaction). The Enzon transaction included the sale of

"business operations, including manufacturing, commercial infrastructure, sales

force, intellectual property and clinical studies." Elan PLC's 2002 annual report

describes the Enzon transaction as also including "any Japanese rights to

                                                                         A-4962-18T2
                                       5
[ABELCET]." The report states "Elan retains its existing rights to market

[ABELCET] in territories outside of the United States, Canada and Japan."

      The Enzon transaction also included an interim services agreement

between Elan, Elan Canada and Enzon, which, among other terms, allowed for

the continued sale of MYOCET in Canada, with Elan and Enzon to share in the

revenue. Under a license agreement between Enzon and Elan, Elan retained

intellectual property rights to ABELCET but granted Enzon a license to use

ABELCET’s intellectual property "to develop, . . . market, sell, . . . and import"

the drug. The parties also exchanged reciprocal licenses to use ABELCET in

connection with clinical trial and research and development activities

"undertaken or to be undertaken" by either party in their respective territories.

Elan maintains it did not retain intellectual property rights to ABELCET,

pointing to Daniel’s certification.

      Enzon thereafter entered into a long-term agreement with EPIL to supply

it with ABELCET while it was still operating the EU ABELCET Business. This

agreement resulted in more than $16 million in revenue during 2003.

Eventually, in February 2004, the EU and Asia ABELCET Businesses, along

with the rights to sell MYOCET in the EU, were sold to Medeus UK Ltd. (the

Medeus transaction). The Medeus transaction also included shares of subsidiary

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                                        6
businesses licensed to sell ABELCET and MYOCET in individual European

countries.

      Daniel certified that the proceeds from the Enzon transaction were

distributed to Athena Neurosciences in three payments: $155 million in

December 2002; $183 million on June 2003; $22 million on November 2003.

Athena Neurosciences then transferred the proceeds to Elan PLC to reduce

corporate debt.    An unidentified ledger reflected that $338,208,000 of

ABELCET proceeds were received on November 22, 2002, the date of the Enzon

transaction. The ledger also shows a $12,657,287 "[i]ntercompany payment"

was made to EIS on November 26, 2002. A $760,000 "[i]ntercompany payment"

was made to Athlone on December 9, 2002. Other December intercompany

payments include approximately $14.8 million paid to ETT, approximately

$20.8 million paid to EPIL, and approximately $131.3 million paid to EPIL "(on

behalf of ANI)."

      The ledger further shows a February 2003 "[i]ntercompany payment" of

approximately $96.4 million "from EPIL out of [ABELCET] proceeds." March

2003 transactions included an "[i]ntercompany payment to ETT" of

approximately $6 million, an "[i]ntercompany payment to EPIL" of

approximately $8.5 million, a "[r]etrospective reimbursement of qualifying

                                                                      A-4962-18T2
                                      7
spend by [Elan]" of approximately $7 million, a "loan repayment to ANI/EPIL"

of approximately $22.2 million, and a "[r]etrospective reimbursement of [Elan]

qualifying reinvestments" of approximately $27.1 million. The ledger shows

more transactions in June and November 2003, with $0 "ABELCET cash left in

[Elan]" by December 31. A summary of spending reflects approximately $88.8

million spent by Elan directly and approximately $249.4 million "paid to other

group companies."

      In 2003, Elan PLC and its affiliates earned approximately $16 million

attributable to ABELCET in Europe and Asia. This was in addition to its

earnings attributable to MYOCET. Despite these earnings, Elan PLC continued

with its recovery plan. As part of its plan, the Elan Group was reorganized into

Core Elan and Elan Enterprises, with Core Elan engaging in commercial

activities related to neurology, pain management, and infectious diseases, and

Elan Enterprises attempting to liquidate the drug delivery ventures and non-core

pharmaceutical products. Elan claimed that each of its "core" operations of

neurology, autoimmune diseases, and severe pain management constituted a

distinct business segment, with minimal interaction between each.

      Elan's 2002 annual statement listed ABELCET as one of the products

"divested" from its infectious disease operation.      Also sold was Athena

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                                       8
Diagnostics, Inc., one of Elan's subsidiaries that focused on neurological

diagnostics.

      In December 2003, Elan PLC, Elan, Epil, and other entities entered into

an agreement to sell "the European Specialities Pharmaceutical Business of

Elan" to Medeus UK Ltd.        The products sold included ABELCET and

MYOCET. Also included were the intellectual property rights with license

agreements and contracts acquired by Elan when Elan PLC purchased

Liposome; "the October 2002 ABELCET purchase agreement; the November

2002 Supply Agreements; and the November 2002 License Agreement." The

trademarks for ABELCET were, however, subject to a license back to Elan

Group to continue labeling and packaging ABELCET. Moreover, Elan was

identified as the "proprietor" of the intellectual property rights in ABELCET

and MYOCET.

      On its 2002 corporation business tax (CBT) return, Elan reduced its

taxable federal net income, including the gain from the Enzon sale, by

$340,332,168, reporting it as nonoperational income.     In contrast, Athena

reported about 26% of this income as apportionable, operational income on its

consolidated California corporate income tax return.

                                                                      A-4962-18T2
                                      9
      The Division's audit determined that the gain from the Enzon sale was

apportionable, taxable income since Elan did not allocate the entire income to

California and the sale did not "meet the criteria allowing for the business

liquidation exception." The Director upheld the audit results and noted that if a

court determined the gain was nonoperational income, Elan would be assessed

for "recapture [of] prior expenses on disposed assets."

      On July 6, 2010, Elan initiated this action challenging the $1,560,546.50

tax assessment imposed by the Division following its audit of Elan's 2002 CBT

return, and an April 8, 2010 final determination that Elan misclassified the gain

from the sale of its ABELCET and PERMAX drug businesses. The complaint

also contested an audit adjustment relating to Elan's sales in "states in which

Elan was not taxable."

      Following the completion of discovery, the parties cross-moved for partial

summary judgment regarding the Director's reclassification of the gain from the

sale of ABELCET (the ABELCET gain) as apportionable operational income.

      Although Elan claimed it did not retain any portion of the sale proceeds

or use the proceeds for payment of its business operations, the Director pointed

to a document titled "[ABELCET] Proceeds received November 22, 2002," that

Elan provided during discovery, as evidence that Elan distributed a portion of

                                                                         A-4962-18T2
                                      10
the proceeds to the group's affiliates other than Athena. Elan contended the

document was irrelevant and, in any case, merely demonstrated that it

distributed the ABELCET sale proceeds.

      The court issued a May 2, 2014 order and twenty-seven-page letter

opinion granting partial summary judgment to the Director and denying partial

summary judgment to Elan, finding the Director correctly reclassified the

ABELCET gain as operational income under N.J.S.A. 54:10A-6.1(a).

      The court made the following findings. ABELCET is a proprietary drug

"marketed world-wide for treating severe, systemic fungal infections in cancer,

AIDS or transplants patients who were intolerant to conventional therapy."

"Enzon paid about $360 million (adjusted) in cash for the purchase of the

ABELCET product line. For purposes of tax reporting[,] . . . $338 million was

allocated to [Elan,] representing payments for intellectual property and

personnel and $22 million was allocated to Elan Operations, Inc., representing

payments for real/personnel property including inventory. No portion of the

proceeds was allocated to Elan Canada, Inc." (Footnote omitted).

      The court determined that the issue was "whether the gain of about $360

million from the sale of the U.S. and Canadian markets for . . . ABELCET,

administered primarily to cancer patients, along with the drug's New Jersey

                                                                       A-4962-18T2
                                     11
manufacturing facility, is operational income subject to apportionment and to

[CBT] in New Jersey." The court found that "[t]he material facts as to the

acquisition and disposition of the U.S. and Canadian ABELCET business lines

are undisputed." Therefore, summary judgment was appropriate since only legal

issues remained.

     The court noted that N.J.S.A. 54:10A-6.1(a) was amended effective

January 1, 2002, to heighten the taxpayer's burden of proof to clear and

convincing evidence and to avoid "a significant part of the nonoperational

income of New Jersey headquartered companies [escaping] taxation." Assembly

Budget Comm. Statement to A. 2501 4-5 (June 27, 2002). As amended, N.J.S.A.

54:10A-6.1(a) defines "operational income" as follows:

           "Operational income" subject to allocation to New
           Jersey means income from tangible and intangible
           property if the acquisition, management, or disposition
           of the property constitutes an integral part of the
           taxpayer's regular trade or business operations and
           includes investment income serving an operational
           function.

The statute then defines "nonoperational income" by way of exclusion:

           Income that a taxpayer demonstrates with clear and
           convincing evidence is not operational income is
           classified as nonoperational income, and the
           nonoperational income of taxpayers is not subject to
           allocation but shall be specifically assigned; provided,
           that 100% of the nonoperational income of a taxpayer

                                                                        A-4962-18T2
                                     12
            that has its principal place from which the trade or
            business of the taxpayer is directed or managed in this
            State shall be specifically assigned to this State to the
            extent permitted under the Constitution and statutes of
            the United States.

            [N.J.S.A. 54:10A-6.1(a).]

      The court then discussed the liquidation exception. "Where the sales have

constituted liquidations or partial liquidations of a business, and the sale

proceeds have not been reinvested in the business, the courts [other than in in

California] uniformly have held . . . that the sale proceeds were nonbusiness

income." McKesson Water Prods. Co. v. Dir., Div. of Taxation, 23 N.J. Tax
449, 457 (Tax 2007), aff'd, 408 N.J. Super. 213 (App. Div. 2009). The court

distinguished McKesson, noting:

            Here, neither party contends that there are factual issues
            as to whether the Elan Group, including [Elan], was
            engaged in a unitary business. Neither party [had]
            argued that the U.S. and Canadian ABELCET business
            line is not unitary. Thus, the "property" sold, here the
            tangible and intangible assets associated with the
            ABELCET product line, is the property or assets
            employed in a unitary business, part of which was
            operating in New Jersey.

The court also stated that "this case does not involve an [Internal Revenue Code]

§ 338(h)(l0) sale" and, "in McKesson, the [p]arent [company] was involved in

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                                        13
one business line (pharmaceutical) and its subsidiary was involved in a

completely distinct business (selling bottled water)."

      The court then engaged in the following analysis of the facts under the

functional test imposed by N.J.S.A. 54:10A-6.l(a):

            ABELCET and its intellectual property rights were
            tangible and intangible property; the same were
            acquired, managed, employed by, and integral to,
            [Elan's] and the corporate group's regular trade or
            business of being a world-wide fully integrated
            pharmaceutical company; and the same earned
            significant income in the course of [Elan's] and Elan
            group's regular trade or business as a world-wide fully
            integrated pharmaceutical corporation.

                  It would logically follow that the disposition of
            the tangible properly (inventory of ABELCET and its
            raw materials; the machinery/equipment in Indiana
            which made ABELCET) and intangible property
            (patents, know-how, trade-marks, distribution rights,
            licenses, all of which were treated as income generating
            capital assets) should produce operational income.
            This is especially true where it is undisputed that the
            reason for the sale of ABELCET was so that the Elan
            group would reduce its debt, thus, allow it to continue
            to remain in business which was facing a downturn.
            ABELCET, as the most profitable drug in the most
            viable commercial market (the U.S.), with an assured
            market due to increasing number of patients with
            compromised or weakened immune systems (such as
            AIDS or cancer patients), would raise the maximal and
            quickest revenue. Thus, the sale of the U.S. and
            Canadian ABELCET markets was clearly for the
            benefit of the Elan group, including [Elan], and for their
            continuance, in and of, their unitary business.

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                                       14
      In accordance with McKesson, the court held that "income from

disposition of a capital asset is not apportionable if it is earned in a liquidation

context." It is only when there is "a complete 'cessation of' the subsidiary's

business due to the sale of all of its stock/assets . . . [that] the resultant income

is not operational especially where the sale proceeds were not re-invested in a

'similar business.'"   (quoting McKesson, 23 N.J. Tax at 465).            The court

concluded that the liquidation exception is to be narrowly construed and must

be "carefully scrutinized when being applied to the sale of capital assets which

were unquestionably acquired and employed by the taxpayer such that the

asset[s] were 'integral parts of the taxpayer's regular trade or business

operations.'" (quoting McKesson, 23 N.J. Tax at 465).

      Applying those principles, the court found:

             [N]either [Elan] nor the Elan group completely ceased
             doing its pharmaceutical business after the November
             2002 sale of the U.S./Canadian markets for the
             ABELCET product line. Neither [Elan] nor any of its
             or [Elan PLC's] subsidiaries closed their respective
             shutters. Indeed, they continued as before, except that
             as to the ABELCET product line, their world-wide
             pharmaceutical business continued outside of the
             geographical areas of U.S. and Canada. However, even
             as to these two geographical areas, [Elan] retained the
             rights to use ABELCET or its improvements in
             connection with any R&D activities conducted by
             [Elan] or its affiliates under a license agreement with

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                                        15
Enzon. Although [Elan] claims that it had nothing to
do with EPIL's sales of ABELCET abroad, the
undisputed fact is that [Elan] continued to be the legal
owner of the drug and the intellectual property rights in
the drug. The business reasons (cost/time savings) for
providing only distribution rights to EPIL cannot
subvert the fact, and thus, the conclusion, that [Elan]
continued to operate its pharmaceutical business,
including the ABELCET product line outside the U.S.
and in a restricted manner within the U.S.

       Further, several agreements were effectuated
with Enzon which allowed [Elan] and the Elan group to
continue to benefit from, and use, the ABELCET
product and assets. This was in contrast to another
2002 divested product line, [PERMAX], which [Elan]
sold to an unrelated company as part of its recovery
plan, and as to which there were no supply agreements
or other business arrangements since the group
"divested . . . interest completely and retained no role
or interest in the drug going forward," per [Elan PLC's]
employee's deposition.

       The above reasons also render unpersuasive
[Elan's] arguments that it was liquidating its and [Elan
PLC's] (or [Elan PLC's] group's) "oncology" line of
business. While ABELCET was directed to a market
comprising of physicians or surgeons, and/or hospitals
for ultimate use by mostly cancer patients, it was also
targeted to similarly vulnerable patients such as those
with AIDS. ABELCET was also viewed as used in the
therapeutic areas of "infectious diseases" such as
"fungal infections" as described in [Elan PLC's] 2003
annual report. Nonetheless, whether ABELCET was
viewed as a cancer or oncology drug or an anti-fungal
medication, the above facts show that the sale of its
U.S. and Canadian market was not a final closure or
liquidation of [Elan] or [Elan PLC's] "oncology

                                                            A-4962-18T2
                          16
             business." [Elan] and [Elan PLC's] affiliates continued
             to research[,] develop, manufacture, market, license,
             and/or distribute MYOCET, which had as its target
             audience, patients with metastatic breast cancer. The
             group also continued to enter into joint ventures with
             other corporate entities in the cancer treatment area,
             such as . . . Chemagenix Therapeutics, Inc.

             [(footnote omitted).]

      The court rejected Elan's contention that the sale of ABELCET, its "most

profitable revenue source," to reduce Elan group's debt, "require[d] a conclusion

that the group ended its oncology business for purposes of applying the

liquidation exception of the functional test." The court was also unpersuaded

by Elan's "claims that because [Elan PLC] separated its business activities into

two distinct groups, and further identified three or four distinct therapeutic areas,

each area was a distinct business division or segment for purposes of applying

the liquidation exception." The court concluded that dividing operations into

different divisions or segments "does not alter the fact that [Elan PLC] with its

group held itself out to be a fully integrated, world-wide pharmaceutical

company in the business of providing various medications, whether through its

own R&D efforts, or by acquisition of other similar companies with established

medical drug products and markets."

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                                        17
      The court likewise rejected Elan's contention that McKesson applies

because it "sold a geographic segment of a product line."               The court

distinguished the out-of-state cases cited by McKesson on several grounds. In

particular, the court noted:

             Further, the sale involved an anti-competition
             undertaking whereby the Elan group (including [Elan])
             and buyer agreed not to sell, market, or distribute
             ABELCET outside of their respective permitted
             geographical regions for a [ten]-year period. Such
             clause would appear to acknowledge that Plaintiff,
             [Elan PLC] and the Elan group continued in the same
             competitive pharmaceutical market with ABELCET is
             one of the primary products over, and as to which the
             Elan group still had rights, thus, belying a "complete"
             liquidation of [Elan], [Elan PLC's,] or the Elan group's
             trade or business.

      The court also found that Elan's 2002 CBT return does not reflect that "the

sale proceeds were fully distributed by [Elan] to Athena, its sole stockholder."

Nor does the return reflect that "the $155 million approved to be paid as

dividends" were distributed to Athena. On the contrary, Schedule C-1 of the

return "showed zero distributions."

      The court also rejected Elan's claim that it made installment distributions

to maintain adequate cash reserves to address any indemnification obligations

owed to Enzon, noting its 2002 CBT did not reflect any "appropriated retained

earnings."

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                                       18
      Finally, the court was not persuaded by "[Elan's] claim that it used the sale

proceeds to pay monies on behalf of Athena." The court found that "EPIL, one

of the recipients of the ABELCET sale proceeds, was neither [Elan's] nor

Athena's subsidiary or stockholder. EPIL was not a party to the October 2002

Asset Agreement yet paid [Elan] about $96 million 'out of the ABELCET[]

proceeds.'" In addition, Elan "did not designate the payment of about $15

million to EPIL as being made 'on behalf of' Athena."

      Elan then moved for reconsideration on three grounds. First, it claimed

that the court erred by assuming that Elan's business and operations were unitary

with its Irish parent company, and if it did, an evidentiary hearing was required.

Second, it claimed the court misapplied the holding in McKesson that cessation

of a line of business is non-operational income. Third, it claimed that the use of

the sale proceeds was irrelevant as a matter of law.

      The court issued an October 3, 2014 order and eleven-page letter opinion

denying reconsideration and "affirming" its prior order. The court explained:

                  The CBT taxes operational income[,] . . .
            includ[ing] income "from tangible and intangible
            property if the acquisition, management, and
            disposition of the property constitute integral parts of
            the taxpayer's regular trade or business operations and
            includes investment income serving an operational
            function." N.J.S.A. 54:10A-6.1(a). A taxpayer is
            required to demonstrate by "clear and convincing"

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                                       19
             evidence that income is "nonoperational." Ibid.
             However, if a taxpayer's principal place [of busines]s
             from which it directs or manages its trade or business
             is New Jersey, then 100% of such nonoperational
             income is allocable to, and thus taxed by, New Jersey
             (subject to the Constitution or federal laws).

      The court rejected Elan's contention that it had improperly distinguished

McKesson, noting that the sale of the ABELCET line of business was not the

same as [the] complete liquidation of the subsidiary in McKesson. Further,

"[w]hen [Elan] (along with its parent and subsidiaries) sold the proprietary rights

in and to ABELCET (for the U.S. and Canadian markets)," the stock did not

cease to exist. "[T]he transaction in McKesson ended the subsidiary's existence

whereas here, no corporate extinction took place."

      The court also rejected the premise that a partial liquidation mandates

application of the liquidation exception. It also found that the cases relied upon

by Elan, which "did not involve or contemplate the sale of intangible intellectual

property or a seller's post-sale retention of those rights," were inapplicable to

the facts in this case.

      The court noted that the "material facts as to the acquisition and

disposition of the U.S. and Canadian ABELCET business lines were

undisputed." The court thus found "the legal standards for analysis of a unitary

business were not relevant and[,] therefore, not discussed or applied." The court

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                                       20
recognized that it erred when it stated that ABELCET was manufactured in New

Jersey but concluded the error was harmless since "the correct location of the

manufacturing facility was recited in the factual and analytical portions of the

opinion."

      The court rejected Elan's claim that it misinterpreted the facts.       The

opinion "recited that EPIL was licensed [by Elan] to sell ABELCET abroad";

"the European subsidiaries were created by [Elan PLC] to market/ sell

ABELCET abroad but were reflected as [Elan's] subsidiaries in a corporate chart

provided by [Elan]; and EPIL distributed/sold ABELCET to those subsidiaries."

"Further, the court noted that [Elan] always remained the owner and proprietor

of ABELCET, even when sold in the European markets, a fact borne by the

documents submitted by [Elan] in support of its summary judgment motion."

      Elan also argued that the court erred by stating that its subsidiary, Elan

Canada, Inc., "did not exit the [ABELCET] market." Elan argued that the

interim sales agreement did not evidence Elan's continued operations; rather it

showed only a continuation of "administrative activities" by a liquidating

taxpayer. The court disagreed, noting that its recitation of the facts relating to

the sale to Enzon correctly pointed out "that Elan Canada, Inc. was a party to

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                                       21
the transaction and that Enzon purchased the ABELCET assets (drug

manufacturing plus intangible rights) in the Canadian market."

      Last, Elan argued the court should have denied summary judgment

because its findings regarding distribution of the ABELCET sale proceeds were

based upon "an undated worksheet, prepared by an unknown author." The

worksheet was produced by Elan in response to the Division's discovery

requests. Moreover, Elan's position was belied by its 2002 CBT returns. In any

event, the court decided "that the sale of the U.S. and Canadian markets for

ABELCET did not merit a liquidation exception based on the facts." Therefore,

"an analysis of the distribution of the sale proceeds [was] unnecessary."

      At some point not disclosed by the record, the parties cross-moved for

partial summary judgment regarding the sales fraction denominator exclusion

issue, and the court granted partial summary judgment in favor of Elan. The

Division has not appealed that decision.

      On June 6, 2019, the court issued a final judgment declaring that the gain

recognized by Elan in 2002 from the sale of its PERMAX drug assets (the

PERMAX gain) also constituted operational income under N.J.S.A. 54:10A-

6.1(a). The judgment noted that the parties stipulated to the following facts:

               a) [PERMAX] was a drug in [p]laintiff's therapeutic
                  area of neurology;

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                                      22
               b) Plaintiff sold its [PERMAX] product line as part
                  of the 2002 recovery plan;

               c) Plaintiff continued in the pharmaceutical
                  business following the [PERMAX] sale, and
                  continued in the therapeutic area of neurology;
                  and

               d) With respect to determining whether the
                  [PERMAX]        Gain   is    operational     or
                  nonoperational income, all other relevant facts
                  concerning the [PERMAX] Issue are the same as
                  the relevant facts concerning the ABELCET
                  Issue[.]

Accordingly, the Tax Court found the gain from the sale of the ABELCET and

PERMAX assets presented an identical legal issue.

      The judgment fixed Elan's 2002 outstanding corporate tax liability at

$3,354,658.20, including interest and penalty. The Tax Court stayed its order

pending appeal but noted that interest continued to accrue at the rate specified

in N.J.S.A. 54:49-3. This appeal followed.

      Elan focuses its arguments on its sale of the ABELCET assets and raises

the following points for our consideration:

            POINT I

            THE TAX COURT'S DETERMINATION THAT THE
            ELAN [ABELCET] DISPOSITION RESULTED IN
            OPERATIONAL INCOME IS REVERSIBLE ERROR.

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                                      23
A. The Elan [ABELCET] Disposition Satisfies the
Business Liquidation Doctrine and is, accordingly,
Nonoperational Income.

     1. The Elan [ABELCET] Disposition is the
     Liquidation of a Separate and Distinct Business
     Segment.

           i. The Elan [ABELCET] Disposition is the
           Liquidation of Elan's Entire Oncology
           Business Segment.

           ii. Alternatively, the Elan [ABELCET]
           Disposition is the Partial Liquidation of a
           Geographic Segment of a Worldwide
           Oncology Business.

     2. The Tax Court's Errors in Determining that the
     Elan [ABELCET] Disposition Did Not
     Constitute a Liquidation for Purposes of the
     Business Liquidation Doctrine.

           i. That the Elan [ABELCET] Disposition
           Included the Sale of Intangible Intellectual
           Property is Irrelevant.

           ii. The Post-Sale Retention of the EU
           [ABELCET] Distribution Rights by Elan's
           Affiliates is Also Irrelevant Here.

     3. The Proceeds from the Elan [ABELCET]
     Disposition Were Distributed to Elan's Parent
     and Not Invested in the Same Type of Business
     as Had Been Sold.

B. Any Implication That Plaintiff Was Involved in the
Conduct of a Unitary Business with Respect to its

                                                          A-4962-18T2
                        24
Operation of the [U.S.] [ABELCET] Business Is
Irrelevant.

C. The Court Erroneously Concluded That Plaintiff's
Sale of [ABELCET] Did Not Satisfy the Business
Liquidation Doctrine Based on the Fact that the Assets
Sold Were Used in the Business.

D. It is Irrelevant Whether Elan was Engaged in a
Different Line of Business Than its Affiliates.

POINT II

ALTERNATIVELY, MATERIAL ISSUES OF FACT
PRECLUDE THE ISSUANCE OF PARTIAL
SUMMARY JUDGMENT FOR DEFENDANT AND
REQUIRE THAT THIS COURT REMAND THIS
CASE FOR ADDITIONAL FACT FINDING.

A. The Errors to be Corrected.

      1. Elan's [U.S.] [ABELCET] Business
      Operations Were Not Part of a Unitary Business
      with Other Operations Conducted by Elan or Any
      of Its Affiliates.

      2. [ABELCET] Did Not Operate as a Separate
      and Independent Oncology Business Segment.

      3. Elan Liquidated Its [ABELCET] Oncology
      Business Segment in the 2002 Sale to Enzon
      Pharmaceuticals.

      4. The [ABELCET] Business Was Not Integrated
      with Elan's Severe Pain Management Business.

                                                         A-4962-18T2
                         25
                   5. Elan's Proceeds from the 2002 Liquidation of
                   the [U.S.] [ABELCET] Business Was Distributed
                   by Elan to [Elan PLC].

                   6. The EU [ABELCET] Business Was Unrelated
                   to Plaintiff, and Was Operated by EPIL.

                   7. The [U.S.] [ABELCET] Business Was
                   Managed Outside of New Jersey.

                   8. Both the United States and Canada
                   [ABELCET] Businesses Were Terminated in
                   2002.

             B. The Contested Factors Listed Above Preclude
             Granting of Summary Judgment for Defendant.

      We begin by recognizing several well-established principles. "A taxpayer

challenging the Director's determination bears the burden of proof." UPSCO v.

Dir., Div. of Taxation, 430 N.J. Super. 1, 8 (App. Div. 2013) (citing Atl. City

Transp. Co. v. Dir., Div. of Taxation, 12 N.J. 130, 146 (1953)).

      We apply "a presumption of correctness" to the Director's decision "in light

of the Director's expertise." Est. of Taylor v. Dir., Div. of Taxation, 422 N.J.

Super. 336, 341 (App. Div. 2011) (citation omitted). "That is particularly true

when the Director's expertise is exercised in the 'specialized and complex area '

of the tax statutes." Ibid. (quoting Metromedia v. Dir., Div. of Taxation, 97 N.J.
313, 327 (1984)). Where the issue is strictly legal, we afford no deference to the

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                                       26
Director's statutory interpretations and review de novo. Amer. Fire & Cas. Co.

v. Dir., Div. of Taxation, 189 N.J. 65, 79 (2006).

       In turn, our scope of review of a decision by the Tax Court is limited and

deferential. Est. of Taylor, 422 N.J. Super. at 341. Because the Tax Court has

"special expertise," its findings will not be disturbed unless they are arbitrary or

lack substantial evidential support in the record. Yilmaz, Inc. v. Dir., Div. of

Taxation, 390 N.J. Super. 435, 443 (App. Div. 2007). We review the Tax Court's

legal determinations de novo. Alcatel-Lucent USA Inc. v. Twp. of Berkeley

Heights, 460 N.J. Super. 243, 249 (App. Div. 2019).

      We review the Director's motion for partial summary judgment using the

same standard applied by the Tax Court—"whether, after reviewing 'the

competent evidential materials submitted by the parties' in the light most

favorable to [plaintiff], 'there are genuine issues of material fact and, if not,

whether the moving party is entitled to summary judgment as a matter of law.'"

Grande v. Saint Clare's Health Sys., 230 N.J. 1, 23-24 (2017) (quoting Bhagat v.

Bhagat, 217 N.J. 22, 38 (2014)). Because we review the Tax Court's grant of

partial summary judgment to the Division, our review is de novo. Waksal v. Dir.,

Div. of Taxation, 215 N.J. 224, 231-32 (2013).

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                                        27
      Applying these principles, we affirm substantially for the reasons

expressed by Tax Court Judge Mala Sundar in her comprehensive and well-

reasoned May 2 and October 3, 2014 letter opinions. We add the following

comments.

      "The definitions of operational and nonoperational income in N.J.S.A.

54:10A-6.1 appear to have been derived from" the definition of "business" and

"nonbusiness" income found in the Uniform Division of Income for Tax Purposes

Act, 7 U.L.A. 331 (1985 and 1997 Supp.), commonly referred to as "the

functional test." McKesson, 23 N.J. Tax at 454.

      McKesson adopted a liquidation exception to the functional test. Id. at

464-65.   Under that exception, the gain realized from the sale of assets is

nonoperational income where: (1) the sale constitutes a liquidation or partial

liquidation of a business ; and (2) the sale proceeds are distributed to shareholders

and not reinvested in in the business. See id. at 457.

      We agree with the Director's position that Elan's sale of certain ABELCET

rights to Enzon in 2002 did not constitute a complete or partial liquidati on of

Elan's oncology business. Elan continued to own other oncology patents and

trademarks following the consummation of the Enzon transaction, including

foreign ABELCET patents and trademarks until the 2004 Medeus transaction.

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                                         28
      In addition, following the Liposome merger, Elan acquired patents and

trademarks to numerous other oncology drugs, including MYOCET.              Elan's

oncology medication business was clearly comprised of more than just

ABELCET.      The Enzon transaction did not liquidate Elan's oncology drug

business.   Instead, the transaction was limited to the sale of its rights to

ABELCET in three markets and certain related assets to Enzon. However, "Elan

retain[ed] its existing rights to market [ABELCET] in territories outside of the

United States, Canada and Japan." Elan PLC continued to earn income from

ABELCET after the transaction, earning more than $16 million from ABELCET

sales in Europe and Asia in 2003. Moreover, "Elan and Enzon entered into a

long-term manufacturing and supply agreement whereby Enzon will continue to

manufacture Elan's requirements for" ABELCET and MYOCET. (PA317-18).

As accurately observed by the court, Elan and Elan PLC's affiliates "continued

to research, develop, manufacture, market, license, and/or distribute MYOCET,

which had as its target audience, patients with metastatic breast cancer. The

group also continued to enter into joint ventures with other corporate entiti es in

the cancer treatment area . . . ."    Elan did not sell its remaining rights to

ABELCET until 2004.

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                                       29
      We concur with Judge Sundar's conclusion that the revision of Elan group's

business strategy to effectuate an increase in revenue by taking steps that

included reducing its debt load "by selling a portion of the ABELCET business

line, which had been integral to, and regularly employed in[, Elan's] and the Elan

group's trade or business, but with retention of some economically valuable

intangible rights, thus ensuring continued income to, and corporate presence of,

the Elan group," does not mandate an expansive interpretation of the liquidation

exception adopted in McKesson.

      We are satisfied that Elan did not meet its burden of demonstrating that the

gain derived from the sale of the U.S. and Canadian markets for ABELCET was

nonoperational income as defined in N.J.S.A. 54:10A-6.1(a). On the contrary,

the record amply supports Judge Sundar's analysis and determination that the

gain from those sales was taxable operational income.

      Lastly, Elan's activities did not fall within the liquidation exception since

the 2002 sale proceeds were reinvested in the business rather than being

distributed to shareholders. The record demonstrates that the majority of the

Enzon transaction proceeds were used to reimburse reinvestment expenditures

and to repay a loan owed to Athena and an affiliate. The remainder of the

proceeds were paid to other Elan group companies. Gains realized from a sale

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                                       30
constitute operational income if reinvested in the business or used to repay

outstanding debt. See Texaco Cities Serv. Pipeline Co. v. McGraw, 695 N.E.2d
481, 486-87 (Ill. 1998) (sale of unused pipeline was business income because

company remained primarily a pipeline transportation business and the sale

proceeds were reinvested in the business); Welded Tube Co. of Am. v.

Commonwealth, 515 A.2d 988, 994 (Pa. Cmmw. Ct. 1986) (proceeds from sale

of manufacturing facility for use in debt repayment and expansion as part of

reorganization were apportionable business income).

      In sum, our careful review of the record reveals that, when viewed in the

light most favorable to Elan, the undisputed material facts demonstrate that the

Director was entitled to partial summary judgment as a matter of law. See R.

4:46-2(c). Judge Sundar's findings are fully supported by substantial credible

evidence in the record. Her legal conclusions are sound and consistent with

applicable law. Accordingly, we discern no basis to disturb the partial summary

judgment granted to the Director.

      To the extent we have not specifically addressed any of defendant's

remaining arguments, we conclude they lack sufficient merit to warrant further

discussion in a written opinion. R. 2:11-3(e)(1)(E).

      Affirmed.

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