The New Jersey Division of Taxation has revised TAM-13, originally issued February 24, 2011, to include a new example in the listed exceptions from the interest add-back requirement of the corporation business tax. Further, TAM-13R provides a list of five grounds for claiming that the disallowance of the deduction would be unreasonable. Generally, corporations are required to add-back interest expenses that are deducted as an expense and paid to a related member. However, in New Jersey there are three statutory exceptions to this requirement. Under one of these exceptions, the ‘”unreasonable” and “alternative apportionment method” exception’, a new example has been added. The new example stems from the 2014 decision in Morgan Stanley & Co. v. Director, Division of Taxation. In Morgan Stanley, the Division had denied the taxpayer’s claim for deduction of related party interest add-back under the corporation business tax on the basis that the “unreasonable exception” requires that the corporation pays tax on the interest income in another state. TAM-13R states that the court held the Division’s denial of the “unreasonable exception” on this basis alone, was not supported by the statute as the statute did not contain this requirement. Further, the court stated the Division had not adequately considered the totality of the taxpayer’s facts and circumstances in its analysis of the “unreasonable exception”.
The revised TAM also highlights that in Morgan Stanely the court noted that based upon the legislative intent in enacting the unreasonable exception, a taxpayer’s documentation of the below situations may provide the grounds for claiming that the disallowance of deduction would be unreasonable:
(1) Unfair duplicative taxation;
(2) A technical failure to qualify the transactions under the statutory exceptions;
(3) An inability or impediment to meet the requirements due to legal or financial constraints;
(4) An unconstitutional result;
(5) Transaction for all intents and purposes is an unrelated loan transaction.
Technical Advisory Memorandum TAM-13R, New Jersey Division of Taxation, February 2016