On September 21, a New Jersey appellate court held in an unpublished opinion that the Division could apply the state’s unreasonable addback exception only to the extent of New Jersey taxes paid by the recipient of royalty payments.
During the 2002 to 2010 tax years at issue, New Jersey required the addback of royalty payments made to a related party. The Division’s regulation established that an addback is considered unreasonable when the taxpayer shows “the extent the related party pays tax in New Jersey on the income stream.” A New Jersey corporate business tax (CBT) form schedule allowed an exemption measured by the allocation factors of the payor and payee. The Division allowed the taxpayer in this case a partial refund measured by such allocation factors.
The court denied the taxpayer’s refund request for the remaining tax resulting from the addback, stating that 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.”
International Tax and Treasury