At a Glance...
Today, in a corporation business tax case handled by Reed Smith, the Appellate Division affirmed a 2014 Tax Court decision finding that Toyota Motor Credit Corporation ("Toyota Credit") was entitled to recompute its tax by reducing gains on the sale of depreciated property. (A copy of the decision is available at the Appellate Division's website). It's unclear whether the Division of Taxation will seek review at the New Jersey Supreme Court.1
In a per curiam decision, the Appellate Division unanimously affirmed Tax Court Judge DeAlmeida's ruling that Toyota Credit was entitled to increase its tax basis in leased vehicles to the extent that prior-year depreciation deductions had not produced any tax benefit. In the years leading up to the tax years at issue, Toyota Credit had taken depreciation deductions on the leased vehicles. Those depreciation deductions had not reduced its actual New Jersey tax liability. Because Toyota Credit had been in a loss situation, the deductions merely compounded Toyota Credit's net operating losses for those years.
In 2003 and 2004, Toyota Credit sold the leased vehicles. Because Toyota Credit's tax basis in the vehicles had been reduced by depreciation deductions, it was less than the sale proceeds. So when Toyota Credit sold the vehicles, the depreciation recapture resulted in a significant gain for federal income tax purposes.
In support of Toyota Credit's position, Reed Smith lawyers cited the CBT definition of entire net income, which imposes tax only on transactions that result in actual "gain," "profit," and "net income." Reed Smith lawyers used New Jersey precedent prohibiting the assessment of New Jersey net income tax on "phantom income." The Division argued unsuccessfully that the precedent was inapplicable since it involved only individual taxpayers. The Appellate Division agreed with the Tax Court that the prohibition of tax on "phantom income" applied equally to the net income tax imposed on corporate taxpayers. This enabled Toyota Credit to increase its tax basis in the vehicles by the amount of the depreciation deductions that generated useless net operating losses, which reduced Toyota Credit's gains for New Jersey purposes.
If you have questions about the court's decision in Toyota Motor Credit Corporation, please contact one of the authors of this alert or the Reed Smith attorney with whom you usually work.
Footnote
1 In this case, the New Jersey Supreme Court's review is not "as of right." See New Jersey Ct. R. 2:2–1. The New Jersey Supreme Court would have to grant a petition for certification from the Division. See New Jersey Ct. R. 2:12–3. The New Jersey Supreme Court grants petitions for certification under limited circumstances. See New Jersey Ct. R. 2:12–4.
This article is presented for informational purposes only and is not intended to constitute legal advice.
