United States: NJ Tax Court: Foreign-Source Income Not Taxable

Last Updated: March 21 2018
Article by David J. Gutowski and Matthew L. Setzer

Background and Decision

Infosys is a multinational corporation headquartered and incorporated in India. It performed IT services in New Jersey and reported its CBT by including its worldwide income in the tax base. Infosys subsequently amended its CBT-100 returns to exclude its foreign-source income. (That income was not subject to federal income tax under the U.S.-India tax treaty.)

The starting point for computing a taxpayer's CBT is federal taxable income before the net operating loss deduction and special deductions. Last November, the Tax Court ruled that Infosys didn't have to include foreign-source income in its CBT base. The court reasoned that the starting point for computing CBT is the taxpayer's taxable income as reported on line 28 of its federal income tax return (or line 29 for a foreign corporation that files its federal income tax return on Form 1120-F) and that nothing in the statute requires the addition of foreign-source income in computing the CBT base.2 As a result, the court ordered the New Jersey Division of Taxation (the "Division") to issue Infosys a refund. (For more background on the prior decision, see our previous alert.)

The Division filed a motion for reconsideration. In today's decision, the court denied the motion, ruling again that the CBT statute didn't require the add-back of foreign-source income that is excluded from federal taxable income under the terms of a treaty.


There are several takeaways from the court's decision.

Additions to income narrowly construed. The court confirmed that a taxpayer's New Jersey net income is equal to the taxable income reported by the taxpayer on Line 28 (or Line 29 for foreign corporations) of its federal income tax return, unless a clear, specific statutory provision requires the taxpayer to adjust its entire net income. This is good news for taxpayers in light of federal tax reform. Unless the Legislature acts, the Division will have an uphill battle if it claims deductions available to taxpayers in computing federal taxable income under tax reform are not also available for CBT purposes.3

Treaties will not be set aside. The court acknowledged that the CBT tax base must be computed without the exclusion or deduction of "any specific exemption or credit allowed in any law of the United States" imposing any tax on income.4 But the court concluded that this add-back didn't apply to income that's covered by a treaty between the United States and another nation. In the court's view, a treaty is not a "law of the United States." Accordingly, New Jersey cannot set aside the benefits allowed under a treaty absent specific legislation.

More to come on "specific exemptions." The Division had argued that the exclusion of foreign-source income from federal taxable income was a "specific exemption," and as a result, had to be ignored under the statute in computing the CBT base.5 The taxpayer countered by arguing that a "specific exemption" is an exemption limited to a specific dollar amount. (For example, a specific exemption of $5,000 against a corporation's taxable income.) The court agreed that the federal limitations on taxing foreign-source income were not "specific exemptions" but provided little in the way of analysis. Therefore, expect to see more litigation on this issue going forward.

What about that refund? The court did revise its original decision concerning the timing of the refund payment. The court accepted the Division's argument that the factual record was insufficiently developed to compute the exact amount of the refund. But the court gave the parties only until July 30, 2018, to agree to a refund amount. This is a good sign for taxpayers. It means that if a taxpayer prevails at Tax Court, the court may not require the taxpayer to wait until all appeal rights are exhausted before receiving the refund.


1 Decision on Motion for Reconsideration, Docket No. 012060–2016 (N.J. Tax Mar. 19, 2018).

2 See Decision on Motion for Summary Judgment, Docket No. 012060–2016 (N.J. Tax Nov. 28, 2017).

3 See generally I.R.C. § 965(c).

4 N.J.S.A. 54:10A–4(k)(2)(A).

5 See generally I.R.C. §§ 11(d), 882(b), and 6114.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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