Client Alert

NJ Tax Court Orders Full Unreasonable Exception to Royalty Addback

28 Feb 2019

The New Jersey Tax Court held yesterday in a precedential published opinion that a royalty payor was not required to add back any portion of the royalties that it paid to a related licensor under the unreasonable exception when the licensor filed New Jersey Corporation Business Tax (CBT) returns, included the royalties in its CBT income base, and allocated its income to New Jersey under its own allocation factor.

The Division had argued that the payor was only entitled to a partial exception because its allocation factor was greater than the licensor’s allocation factor.  However, the Tax Court agreed with us and ordered the Division to issue the remainder of the payor’s refund, concluding that once the licensor filed CBT returns and reported the royalties paid to it by the payor, “the legislative concerns of income shifting/exporting machinations . . . are allayed,” and a discrepancy in allocation factors, “without more,” does not establish that the payor is only entitled to a partial exception to the addback statute.  As the Tax Court ruled for the payor on statutory grounds, it did not address our constitutional arguments.     

Lorillard Tobacco Co. v. Dir., Div. of Taxation, No. 008305-2007 (N.J. Tax Feb. 27, 2019). 

Morrison & Foerster LLP (Mitchell A. Newmark and Craig B. Fields) represented the company in this case. 

Read a copy of the decision.

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