Opinion
DOCKET NO. 019335-2010
03-22-2016
FLAGSTAR BANK, FSB, Plaintiff, v. DIRECTOR, DIVISION OF TAXATION, Defendant.
Michael A. Guariglia and David J. Shipley for plaintiff (McCarter & English, LLP, attorneys). Michael J. Duffy for defendant (John J. Hoffman, Acting Attorney General of New Jersey, attorney).
NOT FOR PUBLICATION WITHOUT APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
Corrected 3/28/2016 - citations pgs. 10 & 29 Michael A. Guariglia and David J. Shipley for plaintiff (McCarter & English, LLP, attorneys). Michael J. Duffy for defendant (John J. Hoffman, Acting Attorney General of New Jersey, attorney). FIAMINGO, J.T.C.
This is the court's opinion after trial in the above-referenced matter. At issue is the imposition of the New Jersey Corporate Business Tax ("NJ CBT" or "CBT") on a foreign multi-state banking institution that originates and acquires mortgage loans made to New Jersey borrowers. Specifically, the taxpayer contests (1) the inclusion of the interest income, proceeds of sale, origination fee income and mortgage servicing fees in the numerator of the receipts factor; (2) the application of the Throw-Out Rule; (3) the imposition of the underpayment penalty; and (4) the imposition of the amnesty penalty.
The court finds that (1) the interest income, origination fee income and gross proceeds of sale attributed to mortgage loans to New Jersey borrowers, whether originated or acquired by plaintiff, constitute other business income earned within the State for the purposes of N.J.S.A. 54:10A-6(B)(6); (2) neither the mortgage service fee income nor the income on the sale of mortgage servicing rights is subject to CBT; (3) the Throw-Out Rule is inapplicable; (4) the Director did not abuse his discretion in refusing to abate underpayment penalties; and (5) the imposition of the amnesty penalty was improper.
Accordingly, the assessments are affirmed in part and rejected in part.
I. Facts and Procedural History
Plaintiff is a federally chartered stock savings bank headquartered and commercially domiciled in Michigan. During the calendar years 2002, 2003 and 2004, plaintiff operated eighty-six retail banking centers located throughout Michigan and Indiana where it conducted business activities typically associated with banking institutions. During this time, plaintiff was also engaged in the mortgage lending business throughout the United States, including the operation of lending offices within the State of New Jersey. Additionally, plaintiff acquired mortgage loans through its association with independent mortgage brokers and correspondent lenders throughout the United States, including New Jersey.
In 2002 plaintiff operated loan centers in Hackensack and Sparta, at which thirteen people were employed. In 2003, there were seventeen employees at six centers in Hackensack, Hamburg, Marlton, Morristown, Sparta and Toms River. In 2004 there was a single loan center in Sparta that employed sixty employees.
The employees at the lending offices dealt directly with borrowers who were seeking loans to be secured by their New Jersey real property. Business was generated through the employees' development of relationships with realtors, builders and other referral sources in their local communities. Loan applications were taken directly from the borrowers at the New Jersey loan centers and submitted to plaintiff's corporate headquarters in Michigan for underwriting and approval. If approved, closings on the loans would take place at offices of closing agents located in New Jersey and the funding was provided directly by plaintiff. The mortgage documents were prepared by plaintiff at its Michigan headquarters. Plaintiff referred to the business generated by its loan centers as its "retail mortgage lending business."
Plaintiff also acquired mortgages through what it termed its "wholesale mortgage operations." The wholesale operations differed from the retail side in that plaintiff did not originate any of the loans; instead it purchased loans originated by independent mortgage brokers and correspondent lenders. Plaintiff's employees at the retail loan centers were not involved in the wholesale operations. Instead, plaintiff employed account executives throughout the country whose duties were to develop relationships with independent mortgage brokers and correspondent lenders for the purposes of soliciting them to sell mortgage loans to plaintiff. From 2002 through 2004, plaintiff employed three account executives in New Jersey for this purpose.
In order to do business with plaintiff, mortgage brokers were required to go through an approval process. Prospective mortgage brokers were required to submit a "Brokerage Lending Application," which was reviewed by plaintiff's personnel who conducted background research and performed other due diligence to determine the broker's acceptability. If the application was approved, plaintiff and the approved broker entered into a "Wholesale Lending Broker Agreement." This agreement did not obligate the broker to sell any specific loans, or any particular number or amount of loans to plaintiff. Similarly, plaintiff was not obligated to purchase any loans unless (a) it had issued a commitment to purchase a particular loan; (b) both the Broker and the loan conformed to the terms of the commitment and the Lending Agreement; (c) the loan was saleable to the Federal National Mortgage Corporation, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association (collectively "Government Sponsored Entities" or "GSEs"); and (d) all mortgage documents were complete and acceptable to plaintiff.
Approved brokers were provided access to plaintiff's "Seller's Guide," which contained product descriptions, underwriting guidelines, delivery guidelines and certain forms. They also were provided with on-site training for the use of plaintiff's website as well as access to the website in order to conduct business with plaintiff.
A broker would take the mortgage application directly from the prospective borrower and then "shop" the application to one or more lenders, including plaintiff. Once the broker decided to work with plaintiff, the mortgage application was submitted to plaintiff for underwriting. Plaintiff performed all of the underwriting for loans purchased from mortgage brokers and all mortgage documents were prepared by plaintiff at its Michigan headquarters. The actual loan closing however, took place in New Jersey with a closing agent. In many cases the broker was identified as the lender in the closing documents. In all broker-originated loans plaintiff sent the loan proceeds directly to the closing agent for disbursement on the closing date and the loan was assigned to plaintiff at closing. The plaintiff funded all mortgage loans acquired from mortgage brokers, even when it was not identified as the lender in the mortgage documents.
During the years under review, plaintiff maintained relationships with approximately 200 New Jersey mortgage brokers, and approximately two-thirds of the New Jersey mortgages purchased by plaintiff in its wholesale mortgage operations were originated by those mortgage brokers.
Other mortgage loans were acquired by plaintiff from "correspondent lenders." A correspondent lender is an independent mortgage banker, bank or credit union. Correspondent lenders originated, closed and funded the mortgage loans and ultimately sold the loan. Like mortgage brokers, correspondent lenders generally did business with a number of different financial institutions and did not necessarily commit themselves to sell loans to any particular institution.
In a process similar to that for mortgage brokers, correspondent lenders were required to gain approval to do business with plaintiff and enter into a "Correspondent Lending Agreement," the terms of which were similar to the "Wholesale Lending Broker Agreement." During the years under review, plaintiff had relationships with approximately 100 New Jersey correspondent lenders with whom it did business.
A correspondent lender would take the application directly from the prospective borrower. In approximately 80-90% of the situations in which the correspondent lender sold a loan to plaintiff, plaintiff performed the underwriting. In the other cases, underwriting was performed by the correspondent lender based on guidelines established by plaintiff. In correspondent loan closings, the closing documents were prepared by either the correspondent lender or by plaintiff at its Michigan headquarters. Unlike mortgage broker loans, the correspondent lender funded all loans at the closing table either from its own funds or through warehouse lines of credit. After the closing, the loan documents would be sent to plaintiff for a post-closing review to determine compliance with plaintiff's underwriting requirements. If plaintiff performed the underwriting for the loan, this review was cursory. Within approximately fifteen days of receipt of the executed closing documents, plaintiff would complete its review and purchase of the loan.
As explained by plaintiff's witness, a warehouse line of credit is essentially a commercial loan or a commercial line of credit. A correspondent lender dealing with plaintiff might utilize a warehouse line of credit established with plaintiff or some other financial institution when funding a loan ultimately sold to plaintiff.
Mortgage brokers and correspondent lenders were each compensated by a percentage of the loan amount based on the interest rate. Correspondent lenders also received a bonus based on the volume of loans placed with plaintiff.
All of plaintiff's underwriting activities took place at its corporate headquarters in Michigan or in other regional wholesale lending offices, none of which were located in New Jersey. Underwriting services consisted of reviewing loan applications and supporting documents to ensure the loans met plaintiff's guidelines. When a correspondent lender assumed the underwriting of loans, plaintiff would perform its own post-closing review (in Michigan) prior to purchasing the mortgage loan.
If plaintiff prepared the loan closing documents, those activities were also conducted by plaintiff in its offices in Michigan, as were all activities relating to the scheduling of the broker loan closings. The actual closings, however, occurred at the offices of various closing agents, all of which were located in New Jersey.
After a closing, all closing documents, with the exception of the mortgage document, were sent to plaintiff at its Michigan offices. The mortgage document was sent to the appropriate recording officer and once recorded, it was then sent to plaintiff in Michigan. All post-closing review activities also occurred in plaintiff's Michigan offices.
The vast majority (90%-95%) of plaintiff's mortgage loans (retail and wholesale) were acquired for the purpose of selling them to GSEs in exchange for mortgage-backed securities. Plaintiff's guidelines for loan approvals mirrored those of the GSEs to assure that the loans would be saleable to the GSEs in the secondary market.
Plaintiff would determine the loans to be "pooled" and sold to GSEs based on "orders" placed by broker-dealers for mortgage-backed securities in pre-arranged, forward commitment arrangements. Broker-dealers would first identify the quantity and quality of the mortgage-backed securities it wanted to purchase from plaintiff and then plaintiff would identify and package the necessary loans to sell to the GSEs to obtain the desired securities. While the sale to the GSEs in exchange for securities and the sale of the securities to the broker-dealers were technically two separate transactions, plaintiff's representative testified that they occurred virtually simultaneously. In any event, it is clear that the value of what was received by plaintiff in exchange for the mortgage loans was equal to the sales price it received from the broker-dealers for the mortgage-backed securities.
Plaintiff's senior vice president of mortgage banking described a forward commitment in this manner: "So that's where we, you know, would go out to a broker-dealer and take down a commitment that says, yes, I'm going to deliver $100 million worth of Fannie fours into, you know, this by June 30th and so we're taking down the commitment that we then need to fill with loans." Thus, plaintiff would arrange for the sale to the broker-dealers first and then satisfy that transaction by bundling loans it had closed or acquired.
The proceeds from the sale of the mortgage loans/mortgage-backed securities made by plaintiff during the years in question were as follows:
| New Jersey Loans | Everywhere Loans | |||
|---|---|---|---|---|
| Year | Retail | Wholesale | Retail | Wholesale |
| 2002 | $79,367,414 | $643,536,496 | $3,825,074,444 | $36,467,252,482 |
| 2003 | $163,223,199 | $1,048,210,629 | $5,589,037,777 | $46,289,100,138 |
| 2004 | $121,731,121 | $461,503,997 | $3,271,690,581 | $25,486,100,321 |
Generally, the lapse of time between the acquisition of the loan (in either the retail or wholesale setting) and transfer to a GSE was approximately fifteen days. During that interim period, if plaintiff was the lender it was entitled to receive the interest accruing on the loan. Interest earned on loans during the years in question was as follows:
| New Jersey Loans | Everywhere Loans | |||
|---|---|---|---|---|
| Year | Retail | Wholesale | Retail | Wholesale |
| 2002 | $609,993 | $4,885,443 | $58,370,799 | $329,707,461 |
| 2003 | $1,130,242 | $7,241,919 | $78,697,790 | $382,079,851 |
| 2004 | $1,913,728 | $11,953,865 | $88,770,080 | $446,684,500 |
Other fees were earned on mortgage loans originated or purchased by plaintiff. An origination fee could be charged with respect to mortgage loans. However, the testimony did not specify whether plaintiff received origination fees solely with respect to mortgage loans placed in the retail operations (and therefore originated by plaintiff), or whether plaintiff also received origination fees from mortgages purchased from brokers and correspondent lenders. Regardless, plaintiff and defendant agreed that the amount of the origination fees at issue during the years in question was as follows:
| Year | New Jersey Loans | Everywhere Loans |
|---|---|---|
| 2002 | $367,968 | $135,925,443 |
| 2003 | $963,743 | $210,293,755 |
| 2004 | $367,978 | $169,674,002 |
Upon the sale of the loans to the GSEs, plaintiff would retain the right to service the loan—that is, to collect and disburse the monthly payments. Mortgage servicing includes the collection of loan and escrow payments, the payment of escrow expenses, such as real estate taxes and insurance charges, and the performance of collection activities for delinquent loans, including the initiation of foreclosure proceedings, if necessary. After paying the escrow expenses and deducting its fees, a mortgage servicer would then turn over the balance of the loan payment to the new mortgage owner. All of the services related to the mortgage servicing business were performed at plaintiff's Michigan headquarters. The mortgage service income generated on mortgage servicing rights during the years in question were as follows:
| Year | New Jersey Loans | Everywhere Loans |
|---|---|---|
| 2002 | $940,912 | $53,104,537 |
| 2003 | $2,190,550 | $93,808,012 |
| 2004 | $2,932,471 | $95,480,011 |
Although plaintiff generally retained the mortgage servicing rights for the loans it sold, it would occasionally package those rights on a number of loans and sell the package to another service provider. During the years in question, the amount at issue with respect to the sale of mortgage servicing rights realized by plaintiff was as follows:
| Year | New Jersey Loans | Everywhere Loans |
|---|---|---|
| 2002 | $6,214,494 | $350,742,455 |
| 2003 | $9,337,522 | $399,867,704 |
| 2004 | $12,333,146 | $401,562,436 |
Plaintiff entered into a Voluntary Disclosure Agreement with the Director on August 28, 2006 and submitted Form BFC-1-R (Corporation Business Tax Return for Banking and Financial Corporations) for calendar years 2002, 2003 and 2004. Plaintiff included only the interest income earned on New Jersey loans originated by plaintiff through its retail lending offices in the sales factor numerator. It did not include the interest earned on any of the loans acquired through mortgage brokers or correspondent lenders, nor did plaintiff include any income from origination fees or mortgage servicing. Additionally, plaintiff did not include the gross proceeds on the sale of loans or mortgage backed securities received from the GSEs or on the sale of its mortgage servicing rights.
On audit the Division determined that (a) the denominator of the receipts fraction should be adjusted to include the gross proceeds from the sale of mortgage loans (rather than net gains); (b) the numerator of the receipts fraction should be adjusted to include the interest income, service fees, origination fees and the gross proceeds from the sale of mortgages and mortgage servicing rights on all loans secured by New Jersey real property, regardless of whether they were acquired through the wholesale or retail operations; and (3) the denominator should be adjusted to exclude all non-sourced receipts in accordance with the now repealed Throw-Out Rule of N.J.S.A. 54:10A-6(B)(6).
Certain other adjustments were also made, which are not the subject of this appeal.
A Notice of Assessment dated September 21, 2009 was issued for additional tax, penalties (including the amnesty penalty) and interest in the amount of $1,445,958.00. Plaintiff filed a timely protest and request for hearing. On or about August 13, 2010, a Final Determination upholding the Notice of Assessment was issued, stating that:
this determination is based upon N.J.S.A. (sic) 18:7-8.12(d) and (e), that the interest income and gain on the sale of the intangible is linked to NJ by securitizing the loan with the property that is located in NJ; and consequently, the intangible assets held by the taxpayer is integrated with NJ. The gross proceeds attributable to the sale of intangibles are taxable in NJ to the extent they are integrated with business carried on in this State. The determination has been further expanded to include as non-sourced receipts the gross proceeds attributable to the sale of intangibles to the extent that they are integrated with business carried on in states in which the taxpayer is not subject to a tax on or measured by profits or income or business presence or business activity shall be excluded from the denominator of the sales fraction.Plaintiff timely filed the within complaint in the Tax Court appealing the assessment.
A trial of all issues was held before this court on April 21 and April 22, 2015. Thereafter, the parties submitted post-trial and reply briefs on the issues. Prior to the issuance of the court's decision, the Appellate Division issued a decision in Lorillard Licensing Co. LLC v. Director, Division of Taxation, 2015 N.J. Tax LEXIS 19 (App. Div. Dec. 4, 2016), affirming Presiding Tax Court Judge DeAlmeida's opinion reported at 28 N.J. Tax 590 (Tax 2015), which illuminated the application of the Throw-Out Rule. The plaintiff and defendant were granted an opportunity to address the application of the decision in Lorillard. This opinion follows.
A petition for certification to the New Jersey Supreme Court was filed by the Director, Division of Taxation regarding Lorillard on December 22, 2015. As of the date of this opinion, that petition is pending.
II. Legal Issues and Analysis
A. Standard of Review
The review of this matter begins with the presumption that determinations made by the Director are valid. See Campo Jersey, Inc. v. Director, Div. of Taxation, 390 N.J. Super. 366, 383 (App. Div.), certif. denied, 190 N.J. 395 (2007); L&L Oil Service, Inc. v. Director, Div. of Taxation, 340 N.J. Super. 173, 183 (App. Div. 2001); Atlantic City Transp. Co. v. Director, Div. of Taxation, 12 N.J. 130, 146 (1953). "New Jersey Courts generally defer to the interpretation that an agency gives to a statute [when] that agency is charged with enforc[ement.]" Koch v. Director, Div. of Taxation, 157 N.J. 1, 8 (1999) (citing Smith v. Director, Div. of Taxation 108 N.J. 19, 25 (1987)). Determinations by the Director are afforded a presumption of correctness because "[c]ourts have recognized the Director's expertise in the highly specialized and technical area of taxation." Aetna Burglar & Fire Alarm Co. v. Director, Div. of Taxation, 16 N.J. Tax 584, 589 (Tax 1997) (citing Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327 (1984)). The Supreme Court has directed courts to accord "great respect" to the Director's application of tax statutes, "so long as it is not plainly unreasonable." Metromedia v. Director, Div. of Taxation, supra, 97 N.J. at 327. However, where the interpretation of an administrative agency is plainly at odds with a statute, that interpretation will not be upheld. See Oberhand v. Director, Div. of Taxation, 193 N.J. 558, 568 (2008) (citing GE Solid State Inc. v. Director, Div. of Taxation, 132 N.J. 298, 306 (1993)).
B. Discussion
All banking corporations must pay an annual franchise tax for the privilege of having or exercising its corporate franchise in New Jersey, or for the privilege of doing business, employing or owning capital or property, or maintaining an office in the State. N.J.S.A. 54:10A-34.
"Doing business" under the CBT Act is intended to be interpreted expansively. As
the Supreme Court explained over forty years ago, the "basis of the tax is a broad one and . . . [i]t was certainly intended to reach foreign corporations . . . as far as could constitutionally be done, and its disjunctive recital of the various privileges must be considered with the intended overall coverage in mind."
[Lorillard Licensing Co., LLC. v. Director, Div. of Taxation, 28 N.J. Tax 590, 598 (Tax 2015); aff'd ___ N.J. Tax ___ (2016), 2015 N.J. Tax LEXIS 19 (App. Div. Dec. 4, 2015) certif. pending (citing Roadway Express, Inc. v. Director, Div. of Taxation, 50 N.J. 471, 483 (1967)); see also N.J.A.C. 18:7-1.6(b) ("A taxpayer's exercise of its franchise in this State is subject to taxation in this State if the taxpayer's business activity in this State is sufficient to give this State jurisdiction to impose the tax under the Constitution and statutes of the United States.")].
Once a taxpayer is deemed subject to tax in New Jersey, the next necessary step is to determine the appropriate portion of plaintiff's income that is subject to tax. Avco Fin. Servs. Consumer Discount Co. One, Inc. v. Director, Div. of Taxation, 193 N.J. Super. 503 (App. Div. 1984), aff'd 100 N.J. 27 (1985). The allocation factor set forth in N.J.S.A. 54:10A-6 is employed to determine that appropriate portion.
A foreign corporation that maintains a regular place of business outside of the State "is obligated to pay tax only on that portion of its entire net income which is allocable to this State." Stryker Corp. v. Director, Division of Taxation, 18 N.J. Tax 270, 272-73 (Tax 1999), aff'd, 333 N.J. Super. 413 (App. Div. 2000), aff'd 168 N.J. 138 (2001) (citing N.J.S.A. 54:10A-6); see also Telebright Corp., Inc. v. Director, Div. of Taxation, 25 N.J. Tax 333, 352 (Tax 2010), aff'd, 424 N.J. Super. 384 (App. Div. 2012). To determine the amount of income subject to tax in the state, an allocation factor is applied against the corporation's overall net income. N.J.S.A. 54:10A-6. Application of the allocation factor is intended to limit taxation under the CBT to only that income that has a sufficient nexus to New Jersey to satisfy constitutional constraints on State taxation. Central National-Gottesman, Inc. v. Director, Div. of Taxation, 14 N.J. Tax 545, 552 (Tax 1995), aff'd, 291 N.J. Super. 277 (App. Div.), certif. denied, 146 N.J. 569 (1996) (citing Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983)). Use of formula apportionment to derive taxable income has long been established. Container Corp. of Am. v. Franchise Tax Bd., supra, 463 U.S. at 165.
Operational income, which includes "income from tangible and intangible property if the acquisition, management, and disposition of the property constitutes an integral part of the taxpayer's regular trade or business operations," is subject to allocation to New Jersey. N.J.S.A. 54:10A-6.1. For the years under review, the allocation factor used to determine the appropriate amount of a foreign corporation's income subject to NJ CBT consisted of "the property fraction, plus twice the sales fraction, plus the payroll fraction," divided by four. N.J.S.A. 54:10A-6.
The CBT apportionment factor changed as a result of legislative action in 2011. Beginning January 1, 2014, the formula converted to a single sales fraction formula following a three-year phase that began January 1, 2012. L. 2011, c. 59, §1 (codified at N.J.S.A. 54:10A-6).
The three-factor formula employed in N.J.S.A. 54:10A-6, also known as the Massachusetts Formula, is the standard method for apportioning income of a multi-state business. Avco Fin. Servs. v. Dir., Div. of Taxation, supra, 193 N.J. Super. at 507-09; Silent Hoist & Crane Co., Inc. v. Director, Div. of Taxation, 9 N.J. Tax 178, 187-88 (Tax 1987). It has been viewed as the "benchmark against which other apportionment formulas are judged." Container Corp. of Am. v. Franchise Tax Bd., supra, 463 U.S. at 170. "[E]ven though it does not provide mathematically precise territorial allocations of value, the legislatively designated three-factor formula has received judicial approval." Hess Realty Corp. v. Director, Div. of Taxation, 10 N.J Tax 63, 86-87 (Tax 1988) (quoting F.W. Woolworth Co. v. Dir., Div. of Taxation, supra, 45 N.J. at 496). The "average of the three [factors] is ordinarily a fair measure of the proportion of corporate activity within a particular jurisdiction, even though it does not fit perfectly in every situation." Ibid.
The property fraction is determined with reference to the value of the taxpayer's real and personal property within the State divided by all such property of the taxpayer. N.J.S.A. 54:10A- 6(A). The payroll fraction is determined with reference to the total wages, salaries and other personal service compensation paid to employees within the State divided by all such wages, salaries and compensation. N.J.S.A. 54:10A-6(C). Neither the property fraction nor the payroll fraction are at issue in this matter.
The sales fraction is the aggregate of certain enumerated receipts and "all other business receipts . . . earned within the State" divided by the total amount of receipts, similarly determined, whether within or without the state. N.J.S.A. 54:10A-6(B). During the years in question, if the receipts would be assigned to a jurisdiction "in which the taxpayer is not subject to a tax . . . then the receipts [were to] be excluded from the denominator of the sales fraction." (the so-called "Throw-Out Rule"). N.J.S.A. 54:10A-6(B) (2002) (amended 2008). The parties dispute the amount includable in the numerator of the sales fraction as well as the application of the Throw-Out Rule.
N.J.S.A. 54:10A-6(B)(1) through (5) list the categories of income to be included in the numerator of the receipts factor, specifically including sales of tangible personal property, services performed within the State, rentals of certain property and royalties from patents and copyrights. N.J.S.A. 54:10A-6(B)(6) contains a catchall provision to include "all other business receipts . . . earned within the State."
The income at issue here includes interest and origination fee income on mortgage loans owned by the plaintiff, proceeds from the sale of such loans, mortgage servicing fees and proceeds of sale of mortgage servicing rights. The Director has posited that all such income represents receipts from an intangible (the mortgage loan), which is includable pursuant to the catch-all provision of N.J.S.A. 54:10A-6(B)(6), and that regulation N.J.A.C. 18:7-8.12(e) issued thereunder should be read to require that all of the income at issue be included in the New Jersey allocation factor. Plaintiff argues that the Director's determination that "income and gain on sale of [ ] intangible[s] is linked to NJ by securitizing the loan with the property that is located in NJ," as set forth in the Final Determination, is an invalid interpretation of both the statute and the Director's own regulation and should therefore be rejected. Plaintiff also argues that some of the income the Director attempts to include in the New Jersey allocation factor is income arising from services properly allocable to the location where those services were rendered and not to New Jersey.
1. Inclusion of Income
N.J.A.C. 18:7-8.12(e) provides:
Intangible income not apportioned by other provisions of these rules is included in the numerator of the receipts fraction where the taxable situs of the intangible is in this State. The taxable situs of an intangible is the commercial domicile of the owner or creditor unless the intangible has been integrated with a business carried on in another state. Notwithstanding that the commercial domicile is outside this State, the taxable situs is in New Jersey to the extent that the intangible has been integrated with a business carried on in this State.
Example: Taxpayer has its domicile outside this State. It is in the business of lending money, some of which is loaned to New Jersey residents. Interest income recognized from such loans is income derived from sources within this State and, as such, is earned in New Jersey. That interest income is includable in the numerator of the receipts fraction.
Plaintiff concedes that the interest income attributable to mortgage loans made in its retail loan operations is includable because it conducted a retail mortgage lending business in New Jersey, but denies that any other income attributable to such loans should be similarly treated. Further, plaintiff contends that all income associated with mortgage loans it acquired from mortgage brokers and correspondent lenders is distinguishable because those loans were not made by plaintiff, they were simply acquired by it. Thus, plaintiff maintains that such loans are not integrated with the business carried on in this State and the income attributable thereto is not includable.
The taxable situs of intangibles "depends upon whether or not they are integral parts of the business conducted by their owner in the State." J.B. Williams Co. v. Glaser, 114 N.J. Super. 156, 161 (App. Div. 1971) (internal citations omitted). "The key language of [N.J.A.C. 18:7-8.12(e)] states that '[t]he taxable situs of an intangible is the commercial domicile of the owner or creditor unless the intangible has been integrated with a business carried on in another state.'" Mayer & Schweitzer, Inc. v. Director, Div. of Taxation, 20 N.J. Tax 217, 226 (Tax 2002); accord Avco Fin. Servs. v. Dir., Div. of Taxation, supra, 100 N.J. at 36-37; Tuition Plan of N.H. v Director, Div. of Taxation, 4 N.J. Tax 470, 482 (Tax 1982); Chem. Realty Corp. v. Director, Div. of Taxation, 5 N.J. Tax 581, 598 (Tax 1983); aff'd o.b., 6 N.J. Tax 448 (App. Div. 1984).
With respect to receipts falling under N.J.S.A. 54:10A-6(B)(6), "[t]he issue is solely whether the receipt was 'earned by the taxpayer within New Jersey.'" Stryker Corp. v. Director, Div. of Taxation, 18 N.J. Tax 270, 286 (1999), aff'd, 19 N.J. Tax 115 (App. Div. 2000), aff'd, 168 N.J. 138 (2001). Unless income from intangibles earned by a New Jersey company is integrated with a business conducted outside of New Jersey, those receipts are New Jersey receipts. Mayer & Schweitzer v. Dir., Div. of Taxation, supra, 20 N.J. Tax at 226. Thus, the extensive activities within New Jersey by a foreign corporation in the business of making tuition loans subjected the income on those loans made to New Jersey borrowers to the CBT. See, e.g., Tuition Plan of N.H. v. Dir., Div. of Taxation, supra, 4 N.J. Tax 470.
To determine whether the income associated with the mortgage loans acquired by plaintiff in its wholesale mortgage operations is includable in the numerator of the sales fraction depends on whether those loans are integrated with a business conducted in New Jersey by plaintiff. In this regard, plaintiff maintains that with respect to its wholesale mortgage operations, all of its business activities are conducted elsewhere and therefore the acquisition of mortgage loans is not a business conducted within the state. That contention is not supported by the facts.
In Tuition Plan, supra, 4 N.J. Tax 470, the taxpayer was a New Hampshire corporation whose sole activity was the making of unsecured tuition loans. Some of the loans were made to parents of New Jersey students. The loan application was completed by the prospective borrower and sent to taxpayer at its place of business in New Hampshire, where it was reviewed. If approved, loan documents were sent to the borrower directly by the taxpayer, who would sign and return them to the taxpayer. The loan proceeds were then sent directly by the taxpayer to the borrower.
The taxpayer in that case employed district managers who would meet with school administrators, financial officers and business administrators to explain the program and solicit participation, explain changes in the sales brochure to existing participants, arrange for the review and approval of the announcement letter accompanying the brochures mailed to prospective borrowers, coordinate the printing of the taxpayer's materials and answer any questions the school officials might have. The district managers did not meet with students or parents and no student or parent communicated with a district manager. Neither the taxpayer nor the district managers had offices in New Jersey and none of the district managers resided in New Jersey; however, at least one of the district managers assigned to New Jersey spent approximately 20% of his time in the State. The court held that the loans acquired an independent situs in New Jersey as a result of the activities of the taxpayer in the State. Id. at 482.
The activities of plaintiff's wholesale account executives are quite similar to those of the district managers referenced in Tuition Plan. Plaintiff's account executives' responsibilities were to build and develop relationships with local brokers and correspondents, provide them with information about plaintiff's products and rates and to solicit such brokers and lenders to sell mortgage loans to plaintiff. Plaintiff's account executives assisted the brokers and correspondent lenders with obtaining approval from plaintiff to initiate the relationship and, in the case of correspondent lenders, to obtain approval for warehouse loans. While those account executives did not maintain an office in New Jersey, they were residents of New Jersey and performed substantially all (if not all) of their duties in this State.
The court also notes that there is not much difference between the activities by plaintiff with respect to the mortgage loans originated by it and those acquired by it from mortgage brokers. With the exception of taking the original application from the borrower, there was no difference in the process undertaken by plaintiff whether a loan originated in its retail lending offices or through mortgage brokers and correspondent lenders. In both cases plaintiff availed itself of the New Jersey market to conduct its mortgage acquisition business.
Once plaintiff acquired the mortgage loans (whether through its retail arm or its wholesale arm), it sold them to the GSEs in exchange for mortgage-backed securities, which were sold, virtually simultaneously, to broker-dealers located outside the state. With respect to these sales, plaintiff maintained first that all activities regarding the creation and sale of the mortgage backed securities were conducted in Michigan and second that the payors of the receipts (the GSEs) were located outside the state. Plaintiff argued that Mayer & Schweitzer, Inc. v. Dir., Div. of Taxation, supra, and Stryker v. Dir., Div. of Taxation, supra, mandate that the payor of the receipt also be located in New Jersey in order to subject those receipts to tax in New Jersey.
Plaintiff made an identical argument with respect to the creation and sale of the mortgage servicing rights (MSRs) related to the mortgage loans, which is addressed below.
In Stryker, the Supreme Court held that neither N.J.S.A. 54:10A-6(B)(1) nor N.J.S.A. 54:10A-6(B)(2)
should be interpreted as a limitation on the Division's right to include Stryker's receipts in the allocation factor. Rather, the catch-all provision under [N.J.S.A.
54:10A-6(B)(6)] should be interpreted to allow the Division to plug loopholes in the [Corporate Business Tax Act], such as here in which a tangible product is manufactured and sold in New Jersey to a New Jersey corporation and yet does not fall under one of the enumerated provisions.
[Stryker v. Dir., Div. of Taxation, supra, 168 N.J. 138, at 158-59].
To the extent Stryker, which involved the taxation of the drop shipment of tangible personal property, can be applied to the sale of an intangible, plaintiff's restrictive interpretation of the holding in that case is inapposite. To the contrary, Stryker stands for the proposition that regardless of the ultimate destination of the tangible, an examination of what is actually being done in New Jersey should be undertaken in order to determine receipts. Id. at 160. The Supreme Court made clear that "[t]he issue is solely whether the receipt was 'earned by the taxpayer within New Jersey.'" Id. at 158 (citing decision below). Plaintiff's attempt to graft on to the clear language of N.J.S.A. 54:10A-6(B)(6) the additional requirement that the payor of the receipt also be located in New Jersey would distort the Supreme Court's expansive interpretation of (B)(6) as "allow[ing] the Division to plug loopholes in the [Corporate Business Tax Act]" to one in which the referenced section was more restrictive. Id. at 159.
Plaintiff further contends that the facts of this case are more akin to those of Mayer & Schweitzer, supra, 20 N.J. Tax 217. There the court found that receipts from sales made by the New Jersey sited employees of a domestic securities trader to customers located outside the state were earned at the location of the customers where, as here, the taxpayer conducted business throughout the United States. Although all activities relating to the sales were conducted inside the State of New Jersey, the court found that the sales to non-New Jersey customers were integrated with the taxpayers' business conducted outside the State. In the instant case, plaintiff maintains that the customers were the GSEs and/or broker-dealers who were all located outside the State of New Jersey and that all activities relating to the sale of the loans to the GSEs and the mortgage- backed securities took place at its headquarters in Michigan.
As noted by Judge Small in Mayer & Schweitzer, the determination of what is and what is not integrated with a business carried on in the State is fact-specific and must be made on a case-by-case basis. The court concludes that based on the facts before it, plaintiff's business activities in the State of New Jersey included not only the origination of mortgage loans to New Jersey borrowers, but the acquisition of mortgage loans made to New Jersey borrowers by New Jersey mortgage brokers and correspondent lenders, with the purpose of generating income on such loans. The court finds that the distinction drawn by plaintiff between the origination of loans to New Jersey borrowers on the one hand, and the purchase of mortgage loans from New Jersey mortgage brokers and correspondent lenders on the other, is of no consequence.
Based on the facts established in this case, it is clear that plaintiff's business conducted in the State of New Jersey includes both the origination and acquisition of mortgage loans to New Jersey borrowers. The court finds no difference whether the loan is acquired in a situation where plaintiff solicited the loan directly from the borrower or from an intermediary broker or lender. In both cases, plaintiff has intentionally entered into the New Jersey marketplace not simply to sell its loans, but to acquire mortgages. Thus, under the facts of this case, the taxable situs of the New Jersey mortgage loans originated and acquired by plaintiff was in this State because they were integrated with a business carried on in this State. The income attributable to those intangibles is includable in the numerator of the sales fraction in accordance with N.J.S.A. 54:10A-6(B)(6).
The interest income accruing on the loans and the gross proceeds of sale of the mortgage loans/mortgage-backed securities are business receipts includable in the numerator. The court finds that the transfer of mortgage loans in exchange for mortgage-backed securities and the virtual simultaneous sale of those securities are so inextricably intertwined as to make them the same transaction. Thus, the proceeds from the sale of mortgage-backed securities constitutes the proceeds of sale from the mortgage loan and is New Jersey income subject to CBT.
Similarly, much like interest income, the income attributable to origination fees with respect to the New Jersey mortgage loans is includable as income derived not from services, as claimed by plaintiff, but from the intangible much like interest income. Plaintiff argues that the income from origination fees represents income from services which are only includable in the numerator if they are performed in New Jersey. N.J.S.A. 54:10A-6(B)(4). Plaintiff maintains that all such services were performed outside the State of New Jersey and are not includable in the numerator.
An "origination fee" is defined as "a fee charged by a lender for preparing and processing a loan" and a "loan origination fee" is a "fee charged by a lender to cover the administrative costs of making a loan." BLACK'S LAW DICTIONARY (10th ed. 2014).
The U.S. Department of Housing and Urban Development (HUD) describes the term in reference to the settlement costs generally associated with the purchase of a home as follows:
Loan Origination: This fee is usually known as a loan origination fee but sometimes is called a "point" or "points." It covers the lender's administrative costs in processing the loan. Often expressed as a percentage of the loan, the fee will vary among lenders. Generally, the buyer pays the fee, unless otherwise negotiated.
[U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, Your Settlement Costs (2016), http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/ramh/res/sc3secta (last visited January 4, 2016)].
Plaintiff provided no evidence tending to support the position that the origination fees were based on services performed. The court concludes that an origination fee is not a fee for services and is not within the income contemplated by N.J.S.A.54:10A-6(B)(4). It is more akin to a charge for interest and is includable in the numerator for the same reasons expressed above.
Mortgage servicing fees, however, are based on services performed and are within the classification of income includable where the services are performed. All evidence adduced at trial clearly showed that the mortgage servicing was performed at plaintiff's offices outside New Jersey and are therefore not includable in the numerator.
The final category of income to be addressed is that earned upon the sale of mortgage servicing rights to other mortgage service providers. Plaintiff makes a persuasive argument that the mortgage servicing right is an intangible in and of itself and does not exist at the time that the mortgage loan is created. Thus, it is only after the mortgage loan is sold or otherwise transferred that a "new" asset, known as the mortgage servicing right, is created. The Director argues that but for the mortgage loan, the mortgage servicing right would not exist and therefore it represents income from the intangible mortgage loan subject to CBT.
The court is persuaded that the mortgage servicing right is at best inchoate at the time a mortgage loan is originated or acquired. A mortgage loan owner does not "service" a loan that it owns, it collects its income and pays out whatever escrow expenses may be associated with the loan. It is only upon the sale of the mortgage loan that the right to service the loan, and collect a fee therefor, accrues. The court finds that the subsequent sale of that right to another service provider does not produce income attributable to the original intangible and is not subject to CBT.
The Final Determination issued by the Director stated that the income and gain on the intangibles was "linked to NJ by securitizing the loan with the property that is located in NJ; and consequently, the intangible asset held by the taxpayer is integrated with NJ." In support of that assertion, the Director cited regulation N.J.A.C. 18:7-8.12(d) and (e). Neither the cited regulation nor the example under subsection (e) supports the Director's position. Subsection (e) of the regulation references intangibles whose taxable situs is in New Jersey "to the extent that the intangible has been integrated with a business carried on in this State." Id. The example provides that interest income recognized on loans made by a foreign taxpayer to New Jersey residents is "income derived from sources within this State and, as such, is earned in New Jersey." Id. Neither the regulation nor the example supports the proposition that the location of the collateral for a loan is the sole criterion for its taxable situs. Furthermore, neither the statute nor the case law interpreting the statute supports such a conclusion. To the contrary, N.J.S.A. 54:10A-6(B)(6) mandates inclusion in the numerator of the sales fraction only if the receipts are "earned within the State" and N.J.A.C. 18:7-8.12(e) provides that the taxable situs of intangible income is "in New Jersey to the extent that the intangible has been integrated with a business carried on in this State."
The Director's reference to N.J.S.A. 18:7-8.12(d) is also distinguishable. That subsection provides that "[r]eceipts from the sale of real property situated in New Jersey are earned in New Jersey." The sale of a mortgage loan secured by New Jersey real estate is not a sale of the underlying realty and thus, the location of the realty securing the mortgage loan does not rule the taxable situs of the intangible mortgage loan.
If the issue was the sale of the secured property as a result of the foreclosure of the intangible loan, the location of the secured property would be determinative. That is not the case in this matter.
That is not to say that the Director's Final Determination is invalid. As demonstrated herein, there is more than sufficient support for the Director's Determination, including the reference in the Final Determination that the gross proceeds of sale were taxable "to the extent they are integrated with business carried on in this State." In this regard, plaintiff suggests that the phrase "to the extent" means that the measurement of the amount of the income associated with the intangible should be based on the "cost of performance" within the State. That is, plaintiff argues that prior to being included in the numerator of the receipts fraction, the income associated with the intangible should first be adjusted by a fraction that takes into account its payroll and property within New Jersey, divided by such payroll and property without New Jersey. This is the very test applied by the statutory allocation formula. A second application of proportionality would unfairly distort the determination of the income allocable to the State. Plaintiff misreads the Director's regulation and its interpretation is rejected as unreasonable.
2. Application of N.J.S.A. 54:10A-6(B) - Throw-Out Rule
For each of the years under review, the final paragraph of N.J.S.A. 54:10A-6(B), which defines the denominator of the sales fraction, reads as follows:
divided by the total amount of the taxpayer's receipts, similarly computed, arising during such period from all sales of its tangible personal property, services, rentals, royalties and all other business receipts, whether within or without the State; provided however, that if receipts would be assigned to a state, a possession or territory of the United States or the District of Columbia or to any foreign country in which the taxpayer is not subject to a tax on or measured by profits or income, or business presence or business activity, then the receipts shall be excluded from the denominator of the sales fraction.
The italicized language was later deleted from the statute by legislative action in 2008. L. 2008, c. 120 §2.
[N.J.S.A. 54:10A-6(B) (2002) (amended 2008)].
The italicized language is commonly referred to as the "Throw-Out Rule." As explained by the Supreme Court in Whirlpool Properties, Inc. v. Director, Div. of Taxation, 208 N.J. 141, 155 (2011),
With the enactment of the Throw-Out Rule, the sales fraction was transformed; formerly a ratio of New Jersey receipts to total receipts, it became a ratio of New Jersey receipts to taxed receipts. When a receipt is thrown-out, the sales fraction always increases, causing the apportionment formula and the resultant CBT liability to increase.
In order to withstand the attack on the Rule's constitutionality, in Whirlpool the Supreme Court interpreted it as follows:
The Throw-Out Rule operates constitutionally when the category of receipts that may be thrown out is limited to receipts that are not taxed by another state because the taxpayer does not have the requisite constitutional contacts with the state or because of congressional action such as P.L. 86-272. Although the Throw-Out
Rule clearly operates in a constitutional manner in that situation, it does not in the situation of receipts that are not taxed by another state because the state chooses not to impose an income tax. Faced with a tax formula that predictably operates unconstitutionally in some circumstances, we will interpret the statute narrowly so that it generally operates constitutionally.
86 P.L. 272 (1958), U.S. Act "relating to the power of the States to impose net income taxes on income derived from interstate commerce." This position is not implicated here. --------
[Id. at 172-73].
The Court maintained the facial constitutionality of the Throw-Out Rule by limiting its application "to receipts that are not taxed because the other state lacks jurisdiction to tax." Id. at 173.
The holding in Whirlpool was thereafter applied in Lorillard, supra, 28 N.J. Tax 590 where Judge DeAlmeida determined that the Throw-Out Rule was inapplicable to a foreign corporation whose subjectability to the CBT was based on the Supreme Court's decision in Lanco, Inc. v. Director, Div. of Taxation, 188 N.J. 380 (2006), certif. denied 551 U.S. 1131 (2007). In Lanco, the Supreme Court ruled that a foreign corporation could be constitutionally subject to the CBT based on economic presence only. Id. at 383.
In Lorillard, supra, 28 N.J. Tax at 604, the Tax Court stated that
In Lanco, the Court held that a State has the authority to tax a trademark holding company with no physical presence in the State based on the company's receipt of royalty payments from sales in the State by a trademark licensee. The Court held that this activity is sufficient nexus to permit taxation under the United States Constitution. It is precisely this inquiry — whether a taxpayer has "the requisite constitutional contacts with a state" — that is the lynchpin of the Court's analysis in Whirlpool. 208 N.J. at 168. Where a taxpayer has "the requisite constitutional contacts with a State" to authorize taxation under the United States Constitution, receipts from that State cannot be removed from the denominator of the receipts fraction under the Throw-Out Rule.
Thus, it matters not that the corporations in Whirlpool, Lanco and Lorillard were intellectual property holding companies as maintained by the Director. The inquiry is whether the foreign corporation has "the requisite constitutional contacts with a state," and not the type of entity or income being reviewed. Ibid. (citing Whirlpool v. Dir., Div. of Taxation, supra, 208 N.J. at 168). If plaintiff has the requisite constitutional contacts with a State or United States possession to authorize the state or possession to tax its receipts, those receipts cannot be thrown-out of the denominator for the purposes of the CBT receipt fraction. Ibid. This is because that same nexus would be applicable in each of the other states and possessions and would therefore be "subject to tax" in each such other state, whether actually taxed or not. See generally id.
Accordingly, the Throw-Out Rule cannot be applied to eliminate income from the denominator of the sales fraction in this matter.
6. Application of Underpayment and Amnesty Penalties
Plaintiff maintains that any underpayment penalty should be abated because there was reasonable cause for the underpayment of tax. In this regard, plaintiff relies on its interpretation of the Director's determination that the income was subject to CBT because the collateral securing the loans was New Jersey real property.
N.J.S.A. 54:49-4(a) provides for the imposition of penalty on an underpayment "[u]nless any part of any underpayment of tax required to be shown on a return or report is due to reasonable cause." "If the failure to pay any such tax when due is explained to the satisfaction of the Director, he may remit or waive the payment of the whole or any part of any penalty . . . including any such penalty . . . with respect to deficiency assessments made pursuant to [N.J.S.A.] 54:49-6." N.J.S.A. 54:49-11(a). "The Director's exercise of discretion in granting or denying waiver should not be disturbed unless found to be manifestly arbitrary or unreasonable." United Parcel Service General Services Co., v. Director, Div. of Taxation, 430 N.J. Super. 1, 10 (App. Div. 2013), aff'd, 220 N.J. 90 (2014) (citations omitted).
Regulations issued by the Director at N.J.A.C. 18:2-2.7(b) contain the parameters for when sufficient grounds will be deemed established for reasonable cause, including examples. Plaintiff maintains that it had reasonable cause for the underpayment/non-payment of tax because the Division's Final Determination stated that the location of the collateral was the basis for the assessment. Plaintiff contends that this position is neither supported by any published authority or by the Director's own regulations and, therefore, plaintiff should be excused from the failure to pay the tax.
In United Parcel Service, supra, 430 N.J. Super. at 12, the Appellate Division noted that the issue before the Tax Court was one of first impression in New Jersey. The court found that the Tax Court judge's decision regarding the Director's refusal to waive the penalties was unreasonable to the extent of the tax imposed upon the income arising from the unsettled issue. Id. at 14-15.
The court has found that the income taxable in this matter is not based upon the location of the securing collateral, but instead based on the fact that the intangible asset from which the income arises is integrated with plaintiff's business in the State. The basis for the taxability of such income has long been established. E.g., Mayer & Schweitzer v. Dir., Div. of Taxation, supra, 20 N.J. Tax 217; Tuition Plan of N.H. v. Dir., Div. of Taxation, supra, 4 N.J. Tax 470. Furthermore, while the Final Determination relies in part on the location of the collateral, it also references "[t]he gross proceeds attributable to the sale of intangibles [ ] taxable in NJ to the extent that they are integrated with business carried on in this State."
"The determination of whether plaintiffs established reasonable cause [ ] turns on the facts." United Parcel Service v. Dir., Div. of Taxation, supra, 430 N.J. Super. at 11. The court finds there was not reasonable cause for the plaintiff's failure to include income arising from the intangibles integrated with plaintiff's business carried on in the State. The Director's decision not to waive penalties is not unreasonable.
With respect to the Tax Amnesty Penalty, plaintiff argues that during the 2009 amnesty period, which ran from May 4, 2009 through June 15, 2009, "there was no liability that was eligible to be satisfied because there was no calculated amount of unpaid taxes owed to the Division." In support thereof, plaintiff points to the fact that the Notice of Assessment Related to Final Audit Determination was not issued until September 21, 2009, after the amnesty period had ended.
The amnesty statute in question is N.J.S.A. 54:53-19(a), which states:
In addition to the powers of the Director of the Division of Taxation prescribed under the State Uniform Tax Procedure Law, R.S. 54:48-1 et seq., and notwithstanding the provision of any other law to the contrary, the director shall establish a period not to exceed 45 days in duration, which period shall end no later than June 15, 2009, during which a taxpayer who has failed to pay any State tax on or before the day on which the tax is required to be paid may pay to the director on or before the last day of the period established by the director the amount of that tax and one-half of the balance of interest that is due as of May 1, 2009, but without the remaining one-half of the balance of interest that is due as of May 1, 2009, without the recovery fee as set forth in section 2 of P.L.1992, c.172 [(codified at N.J.S.A. 54:49-12.3)] that may otherwise be due, and without the imposition of any civil or criminal penalties arising out of an obligation imposed under any State tax law. This section shall apply only to State tax liabilities for tax returns due on or after January 1, 2002 and prior to February 1, 2009 and shall not extend to any taxpayer who at the time of payment is under criminal investigation or charge for any State tax matter, as certified by a county prosecutor or the Attorney General to the director.
Further, N.J.S.A. 54:53-19(b) states:
There shall be imposed a 5% penalty, which shall not be subject to waiver or abatement, in addition to all other penalties, interest, or costs of collection otherwise authorized by law, upon any State tax liabilities eligible to be satisfied during the period established pursuant to subsection a. of this section that are not satisfied during the amnesty period.
It is the penalty under subsection (b) that plaintiff maintains it cannot be liable for because it could not have paid any amount due by the June 15, 2009 due date since the Final Determination was not issued until September 2009.
A review of the exhibits provided demonstrate that a Notice of Assessment Related to Final Audit Determination was first issued on September 21, 2009. That Notice of Assessment included the imposition of the proposed Amnesty Penalty. Plaintiff filed a Protest of the Assessment on or about December 22, 2009, objecting to the entire amount of the assessment. In that Protest, plaintiff made good faith arguments that it was not liable for the tax that was the subject to this appeal.
Nearly one year later on August 13, 2010, a Final Determination was issued. That Final Determination included the amnesty penalty. The court has nothing before it to determine when any other assessment against the plaintiff may have been made. The court finds it unreasonable to assess the amnesty penalty on an assessment that was not made until after the amnesty period had ended.
Conclusion
The Director's assessment is affirmed in part and denied in part. The parties are to submit computations in accordance with the foregoing decision pursuant to R. 8:9-3 within thirty days of the date hereof.