*1 FRAGRANCES, INC., INTERNATIONAL FLAVORS & A NEW CORPORATION, PLAINTIFF-RESPONDENT, YORK v. DI- RECTOR, TAXATION, DIVISION OF DEPARTMENT OF TREA- SURY, JERSEY, OF NEW STATE DEFENDANT-APPELLANT. Argued April October 1985 Decided 1986. *2 General, Haushalter, Deputy Attorney argued Harry (Irwin Kimmelman, Attorney appellant I. General cause Poritz, Deputy Attorney Jersey, attorney; Deborah T. New General, counsel). Reich, respondent (Carpen argued the cause for
Laurence ter, Morrissey, attorneys). Bennett & was opinion
The of the Court delivered GARIBALDI, J. provisions of the New appeal requires interpret
This us to Corporation Act, Tax 54:10A-1 to -40. Jersey Business N.J.S.A. Act, by corporation’s net worth the tax is measured Under net case the calculation of and net income. This concerns (section 54:10A-4(k)(l) issue is Specifically, income. at that a 4(k)(l)), which that of the dividends provides .100% subsidiary by the from owned corporate taxpayer receives ownership of invest- taxpayer “to the extent of or more 80% net taxpayer’s from the income. ment” shall be excluded 4(k)(l) requires direct record question whether section critical is it is subsidiary’s stock or whether of a 80% taxpayer wholly-owned and its permissible for the they stock own the dividend- subsidiary aggregate that ownership test. satisfy in order to paying 80% I and Fra- stipulated. The facts International Flavors are (IFF), to do corporation Inc. New York authorized grances, subject Corpora- Jersey, Jersey to the New business New During years the tax Business Tax Act. 1975 and tion issue, capital IFF stock International owned 100% (IFF-Holland), (Nederland) Fragrances IFF B.V. Flavors & 30% IFF Fragrances Flavors & capital stock of International (IFF-France), (France) capital stock of S.A.R.L. (IFF-Brazil). Frangrancias Ltda. IFF’s whol- I.F.F. Essencia & remaining subsidiary IFF-Holland owned all of the ly-owned and IFF-France. stock of IFF-Brazil years 1975 and IFF received dividends During the tax that it included in its taxable from IFF-France and IFF-Brazil Jersey purposes. income-tax On its New income for federal return, IFF excluded from its entire business-tax of the dividends that received from net income-tax base 100% 4(k)(1).2 pursuant IFF-Brazil to section IFF-France and Depart- The Director of the New Division of (the Director), position Treasury ment of the took “80% *3 required that IFF or more of investment” be and IFF- of the stock of IFF-Brazil direct record owner interpretation, the Director issued France. Consistent with this underreported net in- a final determination that IFF had its it by failing come-tax to include of the dividends that base 50% during the tax had received from IFF-France and IFF-Brazil Code, and IFF-Brazil were deemed 1 Underthe Internal Revenue IFF-France (1982). foreign corporations § of IFF. See 26 For controlled U.S.C. foreign purposes, corporation is defined as: federal tax control over (1) person corporation person Control. —A is in control of a if such owns voting power possessing percent of the total combined stock more than 50 vote, percent of the total of all classes of stock entitled to or more than 50 stock, corporation. person value of of all classes of of a is shares If sentence) (within meaning preceding control of of voting percent which in turn owns more than 50 total combined of power corporation, all entitled to vote another or owns classes stock of of of percent all more than 50 the total value the shares classes stock of of of of person corporation, another then such shall be treated as in control such * * * corporation. other added).] (emphasis [26 § U.S.C. 6038 stipulated solely oversight, 2 Itis that because of an IFF did not exclude 50% of its in IFF-France and IFF-Brazil from its net worth base. «Such investment interpretation an exclusion would have been consistent with its of N.J.S.A. 54:10A-4(d). therefore, (cid:127) Director, additional assessed The years in issue.3 complaint with IFF filed a years. those and interest for taxes more Court, met the or contending that “80% the Tax IFF- by aggregating IFF and test ownership of investment” IFF- in IFF-France and ownership of stock direct Holland’s Thus, entitled to the argues IFF it was 100% Brazil. not the though it was net income even exclusion from dividend IFF- IFF-Brazil and the stock of record owner 80% corpora- those France, the stock of the remainder of because IFF-Holland, subsidiary. wholly-owned its was owned tions were and IFF-Brazil that IFF-France Tax held The Court 4(k)(1) there and IFF under section subsidiaries 80%-owned dividend exclusion. entitled to the fore IFF was opinion, the (1983). published per curiam In a N.J.Tax affirmed, essentially for the 7 N.J.Tax Appellate Division a brief addition opinion, with in the Tax Court’s reasons stated Director, Div. Taxa Corp. v. of Fedders Fin. al discussion tion, (1984), Corp. v. Mobay Chem. N.J. 376 (1984). 96 N.J. Div. of
II Act, Tax Corporation Business New pay corporation to -40, requires a enacted 54:10A-1 to exercising its having privilege tax “for a franchise doing State, privilege of or for the in this corporate franchise maintain property, or business, owning capital or employing or The tax 54:10A-2. office, in this State.” N.J.S.A. ing an *4 54:10A-5. income. N.J.S.A. entire net on the basis of assessed all net income from as total is defined Entire net income income the taxable equal to sources, prima and is deemed facie States report to the United required to taxpayer is that the dividends, source, N.J.S.A. 54:10A-4(k)(1) regardless provides all subject income. Dividends received automatic 50% exclusion from net are to an subsidiary more it has "80% or taxpayer in which by from subject a 100% exclusion. ownership are to of investment” exceptions pertinent Treasury Department, with that are not 54:10A-4(d), -4(b), provides -5. The Act for here. N.J.S.A. income. such ad adjustments certain to federal taxable One case, namely, 54:10A- justment is at issue this N.J.S.A. 4(k)(1), which states: of dividends which were included Entire net income shall exclude 100% computing the such taxable income for federal income tax purposes, paid extent of one or more subsidiaries owned the the taxpayer by taxpayer (d) investment described in subsection or more ownership 809? of of With to other entire net income shall not include dividends,
section. respect computing for federal income of the total included such taxable income 50% * * added.) (Emphasis *. tax purposes “Ownership of investment” is described in 54:10A- 4(d) (section 4(d)), provides in the net which for a reduction corporation. pertinent part, In it reads: worth of foregoing aggregate of values shall be reduced of the amount 50%by of for investment in the stock of disclosed books corporation' capital (1) subsidiaries, one or more which investment as at ownership of defined voting least the total combined all classes stock 80% power of of of of (2) total number entitled to vote and at least of of of nonvoting shares all other classes stock stock which is limited except of In the case of investment in an as to dividends. entity preferred organized foreign foregoing degree under the laws of a country, requisite like of such investment from net worth of shall effect a reduction foreign if the is considered a taxpayer, entity any purpose (but laws, under the United States federal income tax such as not by way examples) supplying foreign sole for the tax credits or purpose deemed-paid foreign (Emphasis for the of status as a controlled purpose corporation. added.) question Jersey Legislature The critical is whether the New corporation’s intended to exclude from a net income base 100% indirectly-owned of the dividends that it receives from an subsidiary. statutory language. at It We look first is a principle statutory that a court well-established construction import statutory language. should follow the clear Fedders Fin.Corp. Div. at 385. Nei 54:10A-(4)(d) 54:10A-4(k)(1) contains nor N.J.S.A. ther N.J.S.A. 4(k)(l) ownership. requirement of record Section express an 4(d)(1) “ownership speaks refers to of investment” and section Therefore, voting power.” terms of “total combined to aid in *5 statute, examine, beyond its words to we look interpreting adopting in first, Legislature’s purpose 80%-of-owner- second, ordinary and requirement, and ship-of-investment corporate in the world. meaning of well-understood Legislature intended that discloses that the an examination Such 80%-ownership aggregating test be satisfied a corporate subsidiary in wholly-owned of its taxpayer’s stock with that dividend-paying subsidiary.
First, Legislature terms used in N.J.S.A. 54:10A- 4(k)(1), 54:10A-4(d), pertinent part in the all objective. reflect the same objective, That revealed the first 4(k)(1), sentence of provide potential section is to relief from the double taxation that corporate inheres the taxation of divi corporate subsidiary. dends received from a The 1968 Corporation Act, amendments to the Business Tax 1968, 250, L. c. provide which for the exclusion of subsidi- ary 4(d) dividends and for the subsidiary, section definition of designed were implement the recommendations of the State Tax Policy (the Commission). Commission It is clear that a major concern of then-Governor Hughes Richard J. and the Commission was to impediments remove Jersey’s to New eco- growth. nomic Among impediments those was the treatment corporations “afforded which do Jersey business New but also have subsidiaries, substantial especially investment for- eign incorporated subsidiaries in foreign countries and in other states.” Commission on Policy, State Tax Report The 12th at (1968). By Toolan, XY letter to Senator Hughes Governor requested the study Commission to proposals, a number of including a proposal to eliminate the “taxation of dividends by parent received company from subsidiary company ...” Letter from Governor Hughes Richard J. to Senator John E. 25th, 1967), (May Toolan reprinted in Commission on Tax State Policy, Report Moreover, The 12th at 115. the Governor re- quested the “to Commission review the New structure, tax particular with reference to its effect on the *6 capital investment headquarters and their of
location Policy, the Commission on State Tax employment in state.” Report at 31. The Commission’s Report that The 12th found inequity corporate- in significant areas of the of the three two amendments, law, treatment prior to the were its tax as stood Id. subsidiary at 44. It subsidiary capital and dividends. of inequity negative to factors two areas of be considered those where to locate their head- corporations considered when Report stated: quarters. The Commission are an tax from such subsidiaries also factor. important Dividends received in tax tax such is included the base for the law subsidiary capital Under present of received the the net worth and the dividends tax, parent in the base the income The result the are included tax for tax. from disadvantage major locating their that will find serious tax corporations if do a national or New Jersey, especially they corporate headquarters form of business business in which subsidiaries are often worldwide required important can be a source econom- organization. same These corporations of (emphasis added.)] development, jobs tax the and base state. ic '[/A for amendment, accompanying the Gover- In the Press Release to Hughes proclaimed the revisions as essential the continu- nor relationship government equitable between and ation Accompanying Jersey commerce. New Press Release S. (1968). He stated: adjustments from of the State Tax Policy These derive recommendations to New is not left which was established insure that behind Commission, Jersey have taken into account the multi-state whose tax other states policies today’s big net so much business. The division of income and nature of taxing jurisdictions, legitimate among in a each with interest
worth several far-reaching one the and most concern, questions business presents complex change government law, resolve. We in New our Jersey, by which must and commerce no to derive from make clear our determination industry crystal added.) (Emphasis more of financial than a full fair share support. Hughes’ statement Report and Governor The Commission’s amendments reason for major that make it clear corporations to locate 4(k)(l) encourage to adopting section was tax on dividend income by removing the added Jersey in New and the subsidiary. Both the Commission received from a policy tax was Jersey’s corporate thought that New Governor respect with taxation invest- shortsighted, particularly from, in, large subsidiaries multi-nation- and dividends ments competitive with those corporations. To make New al adoption states, Commission recommended the other 4(k)(l). doing, In so and the Governor section Commission important corporations that would an strongly such be believed state, leading jobs to more growth boost to the economic solution that eventually to more taxes the state. The incentives Legislature chose—to offer tax to businesses in this not usual. encourage them to locate state —is order they benefit the do so because think Legislatures blood derive the infusion new economic entire state will from *7 temporary loss economy compensates any more into its than may that it incur. of tax revenue encourage objective to economic Legislature’s clear
Given the corporation by removing on the dividends that growth the tax that intended subsidiary, we do not believe receives from its second-tier subsidiaries. first-tier and to differentiate between subsidiary’s of a stock corporation directly owns Whether a 80% tier) subsidiary’s (first indirectly of the whether it owns 80% tier) (second is of no through wholly-owned stock hardly less deciding to locate is corporation where matter. A by subsidiary than one on its on by deterred a tax its second-tier subsidiaries, complex notwithstanding their IFF its first. and in- structure, Legislature that unity the retained the essential 54:10A-4(k)(l). by its tended to favor enactment of N.J.S.A. intent urges ignore Legislature’s the The Director that we statutory provisions on the basis interpret and the the enact practice. Since of Taxation’s administrative Division question, the statutory provisions Divi ment in 1968 consistently interpreted the term “subsidi sion of Taxation has 54:10A-4(d), and as used N.J.S.A. ary,” as defined 54:10A-9, 10A-4(k)(1), taxpay -4(d), require and 54: total er to have actual voting nonvoting and stock of another corporation, except non- voting preferred stock that is limited and as to dividends.4 cases,
Recently, specifically in two tax we addressed the given agency’s deference to be an administrative construction Director, Airwork Servs. Div. v. of a statute. In Div. of Taxation, 290, (1984), N.J. acknowledged we practical period administrative construction of a statute over a years given great weight by should be the courts. Neverthe- Airwork, less, as we stated in court will consider this factor when it is not satisfied that [t]he [sic] Legislature’s intent cannot otherwise be determined a critical examination of purposes, policies, language of the enactment. When such circumstanc- point strongly imputation intent, particular legislative they may es to the of a outweighed simply by countervailing not be or overcome administrative
practice. [Airwork, 97 atN.J. 298.] In agencies’ interpretations statutes, its deference to disregards dissent this clear admonition. Fin.Corp. Fedders Div. of
Likewise 96 N.J. (1985), we stated: regulatory authority go It is well established that the Director’s cannot beyond Legislature’s expressed intent as in the statute. As Justice (1976), Hyland, Clifford observed Service Armament Co. v. interpretation attempts something “an administrative which to add to a statute (Emphasis which is not there can furnish no sustenance to the enactment.” added.) statute, Deference an agency in its administration of a however, abundantly does not overcome the purpose clear legislation. legislative purpose Because the in this case is *8 apparent, so the Director’s reliance on the Division of Taxa- tion’s practice misplaced.5 administrative any ownership position his on record 4 The Director has not stated rulemaking requirements New regulation promulgated pursuant of the to Act, promul Jersey to -13. He has N.J.S.A.52:14B-1 Administrative Procedure 54:10A-4(d), 18:7-4.11, only interpret gated regulation, N.J.S.A. to one N.J.A.C. regulation than reiterate the statute. and that does no more 5 Equally general without rule that tax merit is the Director’s extension of the exemptions against taxpayer are as to be construed to what he characterizes preference". anywhere “an item of tax in the statute term not to be found —a general provide and for which the rule is Director does not a definition. That
219 III interpretation The Court’s of the statute accords not Legislature’s purpose the ordinary with the but also with and meaning ownership corporate well-understood in the world. examining statutory language, In we mindful are that in explicit special meaning, absence of an indication of a words given ordinary meaning. will be their and well-understood Ser- Hyland, 550, (1976). vice Armament Co. N.J. Clearly, possessed percent IFF one-hundred of “the owner IFF-Holland, ship through ownership of investment” its of IFF-Holland possessed ownership of the 100% invest Thus, ment in and IFF-Brazil. practical IFF-France all purposes intents and IFF owned of the investment 100% IFF-Brazil, IFF-France and as well as in IFF-Holland. Equal ly important, IFF voting owned the “total combined 100% power” of IFF-Brazil and IFF IFF-France because owned IFF-Holland, and therefore it to was able control the Thus, power voting effectively of IFF-Holland. IFF not owned merely ownership but of investment. Such a 80% 100% holding conforms with the economic realities world and with the statute.6 merely presumption. inquiry legislative remains Mac ultimate intent. Tax., aff'd, N.J.Super. (App.Div.1981),
Millan v. Div. J., (1982) (Pashman, dissenting). unpersuasive find the Director's on the We likewise reliance New Act, 14A:1-2(r), Corporation subsidiary Business which defines "to outstanding directly indirectly mean a whose shares are owned proof Legislature corporation,” incorporate as another knew how to ownership agree when it one. an indirect test desired We with the Tax Court Corporation language sensibly give Business Act’s that the cannot be used to meaning language Corporation to the Tax Act. 5 at N.J.Tax 626. holding corporate taxpayer 6 We wholly- limit cases where the and its subsidiary together ownership owned own 100% of direct of the stock of paying subsidiary. the dividend ownership We do not decide whether the parent may aggregated stock be less-than-wholly-owned with that of a satisfy in order the 80%-or-more test in a second subsidiary. *9 point. accept do the Director and the final We not One rejected precisely that we this sort of look contention dissent’s Corp. at reality economic Fedders Fin. Div. of (1984), Taxation, Mobay Corp. v. Di- and Chem. N.J. (1984), rector, and instead fo- Div. language pertinent the literal statutes. To the cused on majority and chose contrary, in those cases dissent between as to which economic factors most influ- their alternate views legislative intent. enced Fedders, entirely different issue. The
In we addressed an “ownership of that is central to this concept of investment” taxpayer never addressed. The Fedders Financial case was subsidiary corporate parent, wholly-owned its Corporation, N.V., Capital, Fedders from which it bor- created subsidiary in the sums that Eurodollar market. rowed raised legal issue was whether debt owed Fedders The narrow Capital, subsidiary, its an to Fedders constituted Financial “indirectly” by owed Fedders Financial that was indebtedness meaning parent, Corporation, Fedders within the to its own directly owing indirectly” under or “indebtedness 54:10A-4(e). held order to come within the This Court owing directly indirectly,” taxpay- phrase “indebtedness stockholder, to its and that loans between er must be indebted corporations parent presumed affiliated common are not conclusively to found the parent. be loans This Court approach question conclusively pre- per Director’s se — to be among parties common control tanta- suming loans under parent common be inconsistent with mount to loans to the —to approach per Such a se intent of statute. language and disregard reality. holding Our in total of economic would be emphasize Mobay holdings our Fedders here and In legislative intent. each of look at the statute and need to reality only to aid cases we considered economic those statute, judicial legis- will for interpreting the not to substitute lative enactment. *10 conclusion, Legislature
In we hold that the enacting in 4(k)(l) 80%-or-more-ownership-of-investment in section test corporate taxpayer a aggregate intended that could its owner in ship dividend-paying subsidiary of stock with the stock subsidiary by wholly-owned subsidiary. owned such its This holding strongly-expressed with the legislative conforms intent language and with statute.
Accordingly, judgment Appellate we affirm the Divi- sion.
CLIFFORD, J., concurring. My majority opinion vote with the is cast with the under- result, standing reaching that in its the Court does not at all extremely important intend to undermine an principle, one that for the among forms basis dissent: that the choice reason- interpretations delegate of statutes that able enforcement and rulemaking power agencies to administrative agen- is for those make, flip- 222-24. not for the courts. Post at cies to important: legisla- if proposition equally is side of tion, eye simply language when read with an fixed not on its underlying background history, suscep- but as well on its is meaning, contrary meaning tible of but one then a attributed to agency responsible the enactment the administrative for its disregarded. enforcement must be expressions tend to use familiar and We comfortable like “arbitrary” characterizing and “unreasonable” in administra- interpretation legislation tive that courts find is not in keeping “plain meaning” with the statute. What we are really driving agency interpreta- at is that there is no room for meaning, agency’s tion: the act can have one and the reading just plain wrong. me, quick acknowledge meaning
I am that for taxing always leap page statutes not off the with the same does as, (see pellucidity say, prohibiting driving an act careless 30:4-97). regrettable So much of the blame for that may repose my shortcomings own does not circumstance as subject. Tax is sometimes very in the nature law inhere elaborate, dealing it can become The statutes with arcane. Code, baroque not much Internal Revenue even —witness Judge hammock. And like quiet afternoon in the demand Rifkind, audacity to formu- “I would no more have Simon engage open heart my return than I would late own tax Madison, Township surgery.” at Inc. v. See Oakwood opinion) Madison, (1977) (concurring (quoting Courts?, Rifkind, Judge’s Asking Are Too Much Our We *11 (1976)). 43J. this I not the road to decision of although
So have found one, easy an I am that Justice Garibaldi’s appeal satisfied interpretation one opinion persuasively makes the case for but legislation we are on to examine. I therefore that called understanding are join opinion, again in that with the that we leaving principles beginning at the of this intact the set forth concurrence.
O’HERN, J., dissenting. disagree majority’s policy expressed not the tax as I do with disagree right that this case. But I their to choose with interpreta- in the face of the Commissioner’s reasonable policy the tion of act. definitive; is far language obviously
The of the statute from interpretation by one the lends itself to either advanced it —the being so, policy the That the taxpayer the one State. it agency long to the so as is not unreason- should be left choice able. “the flows from has been described as
This conclusion what orthodoxy” respect interpretation judicial with prevailing rulemaking power to delegate enforcement and of statutes Diver, Statutory agencies. Interpretation administrative State, 549, (1985). 562 133 Administrative U.Pa.L.Rev. plain that once is determined that the principle holds The
223 inquiry if the meaning the statute fails to solve —and legal authority and function are agency’s attributes grant agency. to the appropriate court should deference —a determining from whether the task is converted court’s it is interpretation determining is whether correct contested reasonable. Id. at 562. adopted just an Supreme has such
The United States Court interpreting law: approach in federal * * * thought as it best was not to the statute interpret the task for the Court [agency’s] construction was the narrower into whether but rather inquiry reviewing to be court. reasonable” accepted “sufficiently Campaign Comm., v. Democratic Senatorial Election Comm’n [Federal (citations omitted).] (1981) 70 L.Ed. 2d 38, 23, 27, 39, U.S. S.Ct. Homes, Inc., 474 Bay view v. Riverside See also United States (an (1985) 455, 461, —, —, L.Ed.2d U.S. S.Ct. enforcing charged it is with agency's construction of statute not conflict if it is reasonable and entitled to deference Congress). express intent of with plain meaning only not does I that the statute’s Since believe contrary, holding, and since suggest majority’s but not greatest expertise not of Taxation has the Division responsibility for primary area also the substantial but has as well extensive enforcing the act—and administering and *12 func powers attributes rulemaking and administrative —its of deference. principle of the application the tions warrant principle respect with recently reiterated Justice O’Connor interpreta among reasonable tax “the ‘choice to federal law: ” Commissioner, not the courts.’ Commission tions is for the 597, 206, 608, 224, 78 L.Ed.2d 464 104 v. S.Ct. Engle, er U.S. interpretation 420, (1984)(holding that IRS Commissioner’s deference) entitled to was and not in the matter unreasonable Ass’n, v. Inc. United (quoting National Dealers Muffler 519, 1312, 488, 1304, States, 472, 59 L.Ed.2d 99 S.Ct. 440 U.S. long followed in New (1979)). principles have been Similar Director, Div. Jersey. City Transp. Co. v. Atlantic of Taxa- tion, 130, (1953); 12 v. Div. Ridolfi (Tax Ct.1980). 1 N.J.Tax I.
Applying principles case, agree these of law to this I cannot imposed upon that the construction the the statute Director of the Division of Taxation contrary, is unreasonable. On if the we follow the most fundamental principles statutory con- struction, we should find the Director’s not construction reasonable, but one the that should best be made in accordance with law.
A. plain The statute’s language supports position the taken the Division of Hyland, Taxation. See Armament Service Co. (1976)(statutes 70 N.J. should be construed accord plain meaning). with their At issue in this case appropri is the ate criterion for determining investment-ownership require purposes ment subsidiary-dividend of the exclusion in N.J.S.A. 10A-4(k)(1). statutory not, 54: language critical is as focus, majority have phrase would us or more “80% investment”; rather, ownership of language critical is the phrase (d) definition as forth in set subsection of section 54:10A-4. That specifically subsection qualifying defines the investment as (1) voting of at least of the total 80% combined all classes power (2) of stock entitled to vote and of at least of the total 80% nonvoting
number of shares of all other of stock classes stock which is except added). (Emphasis limited and preferred as dividends. Thus, in plain language statute, accordance with the order to meet the parent test for exclusion the must “own” at subsidiary’s least voting on Nothing 80% stock. the face supports the statute majority’s contention that indirect control of at least subsidiary’s enough. stock IFF simply requisite percentage does not own of second-tier subsidiary stock.
225 structuring ignore might tempting It be reality corporate on operations in order to focus IFF’s ownership. But thereby equate and indirect with direct control generally speaking, taxpayers have not been allowed to disavow they have fashioned their own structures that one form of on the mere assertion business convenience functionally equivalent to organization is another. General 122, Director, Taxation, 83 136-37 v. Div. N.J. Trading Co. organizations to the (1980). consistently held business We have chosen, if for no other they have consequences of the structure if may well be too much burden reason than “the administrative corporate structures explore the ramifications of a state must ignoring corporate recognizing justice to determine the Fin.Corp. complex.” v. Household entities each factual 353, 363, dismissed, Taxation, appeal Director, 36 N.J. Div. of (1962). 41, 49 9 L.Ed.2d denied, S.Ct. U.S. cert. consequences of its to the held IFF be Accordingly, should form. chosen dividend plainly extend the does not
Given that statute of a with indirect control parent corporation exclusion to plau- subsidiary, should defer to the Director’s we second-tier parent applies exclusion interpretation that the sible subsidiary. ownership of the with direct
B. second rule of is buttressed position The Director’s provisions are to preference “tax be statutory construction construed, against claim ambiguities resolved those strictly Director, Div. exemption.” Body-Rite Repair v. ing Co. (citing Taxation, (1982) MacMillan 89 N.J. o.b., (App.Div.1981), Super. 180 N.J.
Div. aff'd plain meaning (1982)). If there doubt about statute, preference leads construction of then strict taxpayer simply does not “own” since the to the conclusion that *14 subsidiary, of of the the stock second-tier not entitled 80% to the dividend exclusion. Legislature well deal quite knows how to with the subsidiaries, directly indirectly
definition of whether or owned. defining subsidiary Corpo In a the under New Business Act, ration Legislature express 14A:1-1 to the N.J.S.A. :18 — “ ly ownership ‘Subsidiary’ included an indirect standard: foreign corporation means a domestic or outstanding whose directly indirectly by shares are owned or another domestic or foreign corporation in such number as to the holder entitle at the time a majority regard to elect of its directors without to voting power default, may upon which thereafter exist failure contingency.” 14A:1-2(r). or other N.J.S.A.
The absence of the term in “indirect” the definition of subsid- iary 54:10A-4(d) actual, under evidences that ownership by direct of taxpayer of the of another stock satisfies the test for the 100%-dividend Strictly construed, statutory exclusion. that is language. the
C. The majority has had to skirt its own recent decisions Corp. Fedders Fin. v. Div. 96 N.J. (1984), Corp. Director, Mobay Chem. Div. Taxa- tion, (1984), cases, to reach this N.J. result. In those the Court admonished Director reject concepts the to of eco- nomic reality and focus instead on the language literal pertinent statutory crucial, sections. It was the Court said in Mobay, directly Fedders and the debt be owed to the parent controlling for stockholders it to included in be the taxpayer’s Fedders, supra, tax base. at 388-89. Hav- ing been in Mobay expand told and Fedders that he not should concept subsidiary ownership incorporate to the economic reality evaluating corporate-debt control in struc- ture, expected be hardly anticipate being Director could faulted, context, tax-preference expand failing corporations to include the indirect- relationship between the aspects evaluating equity structure. noted, majority suggests concept As use “ownership investment” evidences consideration Legislature of the economic realities of the investment parents specific concern with the and subsidiaries rather than origin is held. But the manner which investment *15 phrase “ownership of is due to the fact generic investment” corporations variety security have a interests that ownership. represent varying degrees qualitative aspects Legislature, (d), in has made it clear that was subsection voting corporation. the primarily concerned with the stock of power. power clearly cannot it is is Yet What concerned about requirements the of the be unless we understand discerned incorporated. foreign are law under which IFF’s subsidiaries that a variety subsidiary into structures Excursions into invariably propel us corporation may domestic use will and international murky foreign corporation waters of laws high-finance, question in whether all order answer parent Jersey directors of the can dictate moves New subsidiary though or more levels foreign even removed one may, for Foreign structure. laws independent board example, require a to maintain an country inter- composed of nationals of that with of directors parental counter- markedly that differ from those their ests raised, we do not have a clear parts. Since the issue was never IFF showing purposes a robot of in that IFF-Holland for all voting IFF-France. In the shares of IFF-Brazil and analyzed cases, relationships have to careful- future will be circumstances, not rewrite the Under we should ly. such 54:10A-4(d) 4(k)(l) equate order language of sections ownership. direct indirect and imports
Finally, apparent in this case it is that the decision concepts relevant to the treatment our tax law into State corporations under the federal Inter parent-subsidiary afforded I.R.C., are corporations that nal Revenue Code. Under the group,” an as defined I.R.C. members of “affiliated 1504(a), returns, id. are entitled to file consolidated § § and, circumstances, adjusted may under deduct from certain gross income dividends received from other members 245(b). See, group. e.g., affiliated 243 and Such I.R.C. §§ concepts case. should not bear on the decision Consol Jersey, permitted idated returns have never been New Unit Corp. ed States Steel Div. (1962); 54:10A-4(k)(1) and to the extent section allows corporations,
certain tax-free between related distributions nothing suggests Legislature contemplated expan that our concept group” sive of the “affiliated embodied in federal law. treatment affording corporations The wisdom of similar under income, deduc state law—either exclusion from entire net tion, credit, or returns —is another the use of consolidated question entirely. aspects if tax laws are to But of our be image, remade in the federal to do so should the decision be Legislature, made in the not here.
II. construction, statutory beyond Above and all the canons of me, compelling why for reason a court should not choose among interpretations policy reasonable of tax is that when policy they only halfway. courts make can tax make it Courts only gets preference. decide who the tax We do not make the taxes, up hard choices about who will make the difference in cut, programs taxpayers what will be or what other will have pay up preferences additional taxes to make for the we have granted. majority Hughes’
The makes much of Governor letter to his Policy requested Tax he that State Commission which proposals eliminating for evaluate “taxation of dividends re- * * subsidiary company company from a by parent ceived majority’s discus- missing from the Noticeably Ante at 215. revenue-balancing underlie the considerations are sion commissions Tax-policy recommendations. the Commission’s revenue presentations to make clear the scrupulous in their are report The was recommendations. of their effects carefully-worded report of the Com- form. precisely gains its and losses of recommen- the revenue balanced mission in these words: dations problem A would meet the on a Alternative fourth alternative J: problem of but with more substantial relief directed to
narrower base corporate headquarters location. The Commission recommends:
Million dollars subsidiary capital in the net A. Include 50% of worth (after adjustment) allowing proportionate debt base— would, —which effect, tax rate this form reduce the effective on mill, capital resulting in reduction $1.5 to 1 an estimated revenue factor the net worth B. Eliminate total assets allocation from tax, 1.5 reduction with estimated revenue of.................... intercorporate income divi- Eliminate from the tax base C. subsidiaries, from owned with estimated received dends 4.5 loss of............................................ revenue $7.5 Net revenue loss................................. 3%%, increasing D. Increase income tax rate yield by........................................... $7.0 revenue 0.5 from E. Balance revenue loss General Fund.............. replacement........................ $7.5 Total revenue (1968).] Tax On State [Comm’n Policy, Report Twelfth (the 1 The 1972 of the New Tax Committee Cahill report Policy Commission), sweeping changes which laws, recommended in State tax con tained similar revenue item-by-item effects of its summary precise Comm., combined recommendations. See Tax Policy Summary: Report of *17 (1972). New Tax Comm. 53 Policy nothing There is evidence that the recommendations made contemplated interpretation 1968 Committee of section 54:10A-4(k)(1)today adopted by this Court. primary
Those responsibility determining who have State, policy Legislature Executive, the tax and the apparently have consistently question the statute in viewed as not excluding indirectly-owned from taxation from dividends majority subsidiaries. Yet the effect of the decision is to impose through a revenue an loss increase in the dividend exclusion without consideration of what that does to the other delicately-balanced side of a equation. tax the language Unless otherwise, clearly of the statute dictates such decisions are better left to budgeting experts, the tax and not the courts. judicial philosophy
The consistent of this State has been judges as judgment we should not substitute our in matters of policy tax judgments delegated for the of those the task legislative design. Restraint is essential in tax matters. As the particularly Court Supreme Ridgefield Bergen Park v. Bd. observed in N.J. Cty.
(1960), judiciary programs has no to devise tax or “[t]he power qualify existing legislative judge's just mandate with view of what private taxing government. sensible.” This is because of the role in essentiality [MacMillan Director, 89 at 178, supra, N.J.Super. o.b., 216.] aff'd In applying principles these government of the structure of case, to this it is at least reasonable to conclude that if the Legislature had intended to exclude from taxation all dividends received from directly subsidiaries either or indirectly owned 80%, to the extent of it would expressly. have said so It did Legislature not. The acquiesced has long- the Director’s standing and reasonable construction of the statute to the contrary, and under jurisprudential considerations, traditional we should defer to that Co., construction. Body-Rite Repair 545; supra, 89 Fender, N.J. at Malone v. 80 N.J.
(1979).
I believe that adherence to the time-tested role of courts in taxing authority government will, relation to the long *18 judgment run, I reverse the better. would serve State Appellate Division. POLLOCK, GARIBALDI, STEIN For affirmance —Justices CLIFFORD—4. and HANDLER—2. O’HERN For reversal—Justices OF THE NEW IN THE MATTER OF THE APPLICATION PUBLIC OF CERTIFIED JERSEY SOCIETY ACCOUNTANTS. 11, 10, 1984. Argued September 1984—Remanded October April 1986. Reargued November 1985 Decided