The opinion of the Court was delivered by WILENTZ, C.J.
This extended controversy between the Director of the Division of Taxation ("Director") and respondent, General Trading Co., Inc. ("the taxpayer"), involves the effect on tax liability of a
General Trading Co., Inc., is a closely-held domestic corporation engaged in the wholesale distribution of food products. In April 1969 the company's authorized capital structure consisted of 5,000 shares of Class A stock and 1,000 shares of Class B stock. On April 28, the stockholders and board of directors held a special meeting at which they eliminated the two existing classes of stock and approved the preparation of a restated certificate of incorporation to authorize a single class of common stock consisting of ten million no par shares. The attorney who represented General Trading filed the restated certificate of incorporation with the Secretary of State on April 30, 1969, the final day of the taxpayer's fiscal year.
Under section 5 of the Tax Act, as it existed in 1969, the annual corporate franchise tax was determined in part from the taxpayer's net income during its preceding fiscal year. To this amount was added a figure taken either from a schedule based on the taxpayer's net worth or from a schedule based on the number of its authorized shares, whichever yielded the greater amount.
On June 19, 1969, while preparing the corporation business tax return, the taxpayer's accountant realized that by increasing the number of authorized shares to ten million on the last day of the fiscal year, the taxpayer had incurred a substantially greater tax liability than would have obtained under the net worth schedule. After he related this information to the taxpayer's attorney, another special meeting of the directors and shareholders was held and the certificate of incorporation was amended to reflect a reduced authorization of 100,000 shares.
On that same day, the taxpayer's attorney telephoned the supervisor of the Corporation Tax Bureau of the Division of Taxation. The attorney explained that the company had inadvertently increased its capitalization to ten million shares instead of to 100,000 shares and asked the supervisor how to proceed. He was advised to submit an affidavit explaining the error together with the company's tax return and a check for the amount due. Basing its calculations on the reduced authorization of 100,000 shares, the corporation computed its franchise tax at $13,553 and filed its return with the supervisor, together with the requested affidavit and a letter reminding him of the earlier telephone conversation.
There matters stood until September 1972, when the taxpayer received a letter from the Tax Division stating that additional taxes were owed based on the Director's finding that the taxpayer was authorized to issue ten million shares on the last day of its 1968 fiscal year.
Through testimony of the attorney who prepared the restated certificate of incorporation and the accountant who recommended the subsequent reduction in General Trading's authorized capitalization, the taxpayer attempted to show that there was no identifiable business purpose behind the initial decision to authorize ten million shares for this closely-held corporation. Characterizing the choice of a ten million share figure as arbitrary and inadvertent, the taxpayer argued that the restated certificate of incorporation should not result in additional tax liability but should be treated in the same manner as a clerical error appearing on a tax return. The judge of the Division of
The Appellate Division affirmed, in an unreported decision, reasoning that the record amply supported the tax judge's conclusion that the decision to authorize ten million shares was an honest mistake of judgment which should not result in additional tax liability.
We granted certification to determine whether liability under this statute may be avoided where a corporate taxpayer belatedly realizes the adverse tax consequences of its business decisions. Before turning to that issue we must consider whether taxpayer's failure to post security for the disputed tax deprived the Division of Tax Appeals of jurisdiction to hear this appeal, a contention raised by the Director, rejected by the Division of Tax Appeals, and not addressed by the Appellate Division.
We begin with the premise that "[t]he right of appeal to the Division of Tax Appeals is purely statutory and the appellant is required to comply with all applicable statutory requirements." Hackensack Water Co. v. Division of Tax Appeals, 2 N.J. 157, 164 (1949). See also City of Newark v. Fischer, 3 N.J. 488 (1950); Clairol, Inc. v. Kingsley, 109 N.J.Super. 22, 25 (App.Div. 1970), aff'd o.b., 57 N.J. 199 (1970), app. dism., 402 U.S. 902, 91 S.Ct. 1377, 28 L.Ed.2d 643 (1971). It does not
This aspect of the case, then, involves a two-step analysis. First it must be shown that the statute requires the taxpayer to post security in order to perfect an appeal. Only if that showing were made would it be necessary to consider whether the failure to post security deprived the Division of Tax Appeals of subject matter jurisdiction under the circumstances here presented. For the reasons stated below we conclude that the statute does not require the posting of security and we therefore need not reach the second question.
The statutory authority for an appeal under the corporate franchise tax is contained in N.J.S.A. 54:10A-19.2. Subsection (a) of that section provides as follows:
Standing alone, this provision lends support to the Director's contention that two requirements must be satisfied within the three month time limit: (1) the filing of a proper petition and
This subsection presumes that an appeal might be filed pursuant to subsection (a) without payment of the full tax or posting of security. In such a case, the State is authorized to enforce the disputed tax by entry of a judgment and an order to stay enforcement of the judgment may issue only after security has been approved and furnished to the commissioner. If posting security were a prerequisite for a timely appeal under subsection (a), the collection and enforcement remedy provided in subsection (b) would be surplusage. Such a construction should be avoided. See Toms River Water Co. v. New Jersey Board of Public Utility Commissioners, 82 N.J. 201, 211 (1980); Peper v. Princeton Univ. Bd. of Trustees, 77 N.J. 55, 68 (1978).
The Director contends, however, that the Legislature included the prepayment and security provisions in order to ensure that the State would not be deprived of substantial revenues pending the outcome of tax appeals. This argument is wide of the mark. We have no doubt that the Legislature may require a corporation "to pay taxes now and litigate later." N.Y. Susquehanna & W.R.R. v. Vermeulen, 44 N.J. 491, 501 (1965). Here, however, it has not done so. N.J.S.A. 54:10A-19.2 permits the taxpayer to post security as an alternative to prepayment of the tax or as a prerequisite for an order to stay collection of the tax. In neither case would the State be in receipt of funds until the final disposition of the appeal. Thus, it is reasonable to infer that the State's financial security is
Whatever ambiguity inheres in the statutory language is adequately resolved for present purposes by the Department's own rules which "[i]f valid, ... have the force and effect of law." Hackensack v. Rubinstein, supra, 37 N.J. at 45. N.J.A.C. 17:18-1.23 provides that appeals from the provisions of the Corporation Business Tax Act shall be filed within three months of the challenged decision "by filing a petition of appeal with the division ... and on giving security pursuant to the provisions of N.J.S.A. 54:10A-19.2 if it is desired that such appeal act as a stay to the collection of the tax." (Emphasis added). The plain import of this regulation is that a taxpayer's failure to post security for the amount of tax in dispute simply entitles the Director to pursue the collection and enforcement remedy provided in N.J.S.A. 54:10A-19.2(b).
Since the Director has not challenged the validity of this regulation, one which fully supports our analysis of the statutory language, we conclude that the security provisions of N.J.S.A. 54:10A-19.2 are not prerequisites to filing a proper appeal with the Division of Tax Appeals.
It is conceded that in this case the Director never sought to enforce the additional taxes under the very provision which, by providing for summary enforcement, facilitates their collection pending the outcome of an appeal. Even if the Director had pursued this remedy, however, the tax judge has no authority under N.J.S.A. 54:10A-19.2 to dismiss an appeal for failure to
On the merits, the question is whether an increase in the number of authorized shares sufficient to trigger N.J.S.A. 54:10A-5(e)(ii) may be accomplished on the final day of the taxpayer's fiscal year without incurring additional liability given the circumstances here involved. If the circumstances do not warrant a departure from the statutory scheme, then the Director's determination must be reinstated for it is undisputed that the deficiency assessment reflects a correct application of the schedule in N.J.S.A. 54:10A-5(e)(ii) to General Trading's authorization of ten million shares as of April 30, 1969.
The taxpayer, of course, takes a somewhat different view of the issue. General Trading points to the finding by the Division judge that the choice of ten million shares was a mistake resulting from inadvertence and neglect, and contends that this factual finding should not be disturbed unless it is unsupported by substantial evidence in the record. In our view, the decisive issue in this case involves a mixed question of law and fact relating to the nature of the alleged mistake. It is one thing to find that particular conduct resulted from inadvertence and neglect; it is quite another to conclude that corporate tax liability may be avoided simply by using such conclusory labels
In Farmingdale Realty Co. v. Borough of Farmingdale, 55 N.J. 103 (1969), for example, the taxpayer's right to a refund for excess taxes was based on N.J.S.A. 54:4-54 which explicitly provides for a refund where, by mistake, real or personal property has been twice entered and assessed on the tax duplicate. In that case the excess taxes had been paid as a result of a clerical error committed by the local assessor in computing the property owner's total assessment over a three-year period. The Court held that a taxpayer could demonstrate the existence of a clerical mistake under that section by comparing the figures on the tax duplicate with the raw assessment data which had been used by the local assessor but expressly declined to consider whether, in the absence of a statutory provision, similar relief from clerical assessment errors would be available on grounds of mutual mistake. Id. at 109-11. Since the municipality conceded the existence of a clerical error resulting in overassessment, the Court allowed recovery under the statute stating, "[i]t is only just that the municipality and not the wronged taxpayer should bear the burden of the unilateral clerical errors of an assessor resulting in the payment of taxes to which the municipality is not entitled." Id. at 111.
A somewhat different situation was involved in Mayor and Bd. of Aldermen of Dover v. Texlite, Inc., 113 N.J.Super. 315 (App.Div. 1971). There the taxpayer sought a reduction in the personal property taxes assessed against a recently acquired subsidiary on the ground that the taxable inventory figure on
An analogous situation might exist under the Corporation Business Tax Act if the taxpayer's return incorrectly reported an authorization of ten million shares. In that case, presumably, the taxpayer would be entitled to correct the return upon proof that its certificate of incorporation authorized the issuance of only one hundred thousand shares. Such proof would establish a material discrepancy between the true state of facts upon which the tax statute was meant to operate and the contrary "state of facts" set out in the return. In the absence of fraud or bad faith, nothing in the cases suggests that the availability of relief depends on a showing that the incorrect figure resulted from an inadvertent slip of the pen rather than an intentional but mistaken report of the facts.
Unlike the taxpayer in Farmingdale Realty, however, General Trading does not claim to be the victim of a governmental
That the stockholders and officers of General Trading may not have given a moment's thought to the tax consequences of this decision is irrelevant to the question of liability under the statute. Corporate officers make business and financial decisions daily which entail tax consequences under the Corporation Business Tax Act. Decisions to retain or to sell securities or other assets, for example, may affect net worth for the purposes of N.J.S.A. 54:10A-5(a). Doubtless many of these choices having
In Somerset Apts., Inc. v. Director, Division of Taxation, 134 N.J.Super. 550 (App.Div. 1975), seven partners formed a corporation simply to hold title to an apartment complex as their nominee so as to facilitate a loan transaction. The new corporation, however, did not include the land and buildings comprising the apartment complex among its assets in its Corporate Business Tax returns, apparently on the assumption that these assets remained attributable to the partnership. Thereafter, the Director imposed a deficiency assessment based on his determination that the apartment complex was an asset of the new corporation for the purposes of N.J.S.A. 54:10A-5. This assessment was vacated by the Division of Tax Appeals on the ground that the land and buildings were not assets of the corporation. The Appellate Division reversed and reinstated the assessment, holding that where the taxpayer voluntarily chooses to use the corporate structure to own property and conduct business, it cannot thereafter deny its existence in order to avoid the corporate franchise tax consequences of that decision. Id. at 555-56. If the partners had known that the corporate form would be recognized for state tax purposes notwithstanding the Internal Revenue Service decision to disregard the corporate
General Trading also contends that the terms of N.J.S.A. 54:10A-5(e)(ii) should not be applied because there was no ascertainable business purpose for its authorization of ten million shares.
The same rationale was expressed by this Court in Household Finance Corp., supra, 36 N.J. at 363:
To those who are not versed in tax counseling or administration, application of these principles may seem harsh. But we are persuaded that to adopt a contrary rule in this case would have unacceptable consequences. Such a rule would require the Director to determine in each case where the question is raised whether there existed a readily apparent business purpose for a particular corporate decision and whether the corporate officers or their advisors were aware of the tax consequences at the time such decision was made legally effective. To make taxation turn on the outcome of such burdensome inquiries into such subjective criteria (which are susceptible to rationalization after the fact) would be unwise in theory and unworkable in practice. For example, a question arises whether the rule would support an assessment based on the existence of a conceivable business purpose, or whether it would be necessary to find that the corporate action substantially furthered an important business purpose. Similar distinctions would be necessary to determine the degree of tax awareness sufficient to trigger liability. While there may be a few isolated situations in which the taxpayer's state of mind is a relevant tax factor (e.g., the former rules governing gifts in contemplation of death), we see no reason to adopt it as a general criterion.
Moreover, the burdens and benefits of the rule urged by General Trading would be inequitably distributed among two
By contrast, the principle that a business decision will be given its tax effect according to what actually occurred promotes the public interest in tax certainty and thereby conforms with general business expectations. Indeed, planning by individuals and businesses alike would be frustrated if courts failed to give predictable effect to formal legal documents — such as the restated certificate of incorporation here involved — simply because of an asserted ignorance of the law.
What we have said above is also sufficient answer to the Appellate Division's observation that if General Trading had accomplished the increase in its authorized shares a day later (i.e., by filing its restated certificate with the Secretary of State on the first day of its next fiscal year), there would have been no additional tax under N.J.S.A. 54:10A-5(e)(ii) for the year in question and, so long as the taxpayer had filed a formal reduction in the number of authorized shares before April 30, 1970, all liability under that subsection could have been avoided. It is not what might have happened nor what the taxpayer could have done but what actually occurred that determines tax consequences. It is not uncommon for tax consequences to vary with the effective date of an event's occurrence. The difference of a single day may be significant, especially when — as is the case here — the difference also separates two tax years. Many taxpayers who wished they had received funds on January 1 rather than on December 31 are well aware of the phenomenon. See U.S. Steel Corp., supra, 38 N.J. at 537-41, 547-48.
For reversal — Chief Justice WILENTZ and Justices SULLIVAN, PASHMAN, CLIFFORD, SCHREIBER, HANDLER and POLLOCK — 7.
For affirmance — None.