RICHARD'S AUTO CITY, INC.VS. DIRECTOR, DIV. OF TAX'T'N,12 N.J. Tax 619 (1992) (Tax Court of New Jersey)
N/AOUTCOME: Judgment affirming the determination of the Director of the Division of Taxation
the issue is whether the net operating losses generated by one corporation for one tax year may be claimed as a legitimate corporation business tax deduction in a subsequent tax year by a second corpor ... ation after the loss-generating or first corporation has merged into the second or surviving corporation. Plaintiff, Richard's Auto City, Inc., the surviving corporation, suggests that the New Jersey Corporation Business Tax Act (CBT act), N.J.S.A. 54:10A-1 to -40, specifically, § 4(k)(6), permits the loss carryover deduction while defendant, the Director of the Division of Taxation, 622*622 relying upon a regulation at N.J.A.C. 18:7-5.13(b), asserts that the claimed deduction is not allowable. the Legislature had to be acutely aware of the fact that prior to the extensive revision of the I.R.C. in 1954, the federal law governing loss carryovers was rife with flagrant abuses. See Comment, The Loss Carryover Deduction and Changes in Corporate Structure, 66 Colum.L.Rev. 338, 342-43 (1966); Comment, Net Operating Loss Carryovers and Corporate Adjustments, 69 Yale L.J. 1201, 1209-11 (1960). See also B.T. Arnett, State and Federal NOLD Differences Following Changes in Ownership, 11 Journal of State Taxation 71, 75 (Summer 1992). In § 269 of the Code, Congress imposed an additional limitation upon the availability of corporate loss carryovers permitted under § 381. Section 269 permits the disallowance of a loss carryover in a corporate acquisition if the principal purpose of the acquisition is federal tax avoidance. This provision in § 269 is also somewhat similar to that found in § 4(k)(6)(D) of the CBT act.Section § 4(k)(6)(D) is merely a limitation to the right of a net-operating-loss carryover by a single corporate entity. If there is a change in 50% or more of the ownership of a corporation and that same corporation changes the business giving rise to the loss, that corporation will lose its right to carryover its net operating losses.
