NJ Tax Court Orders Full Unreasonable Exception To Royalty Addback

Author:Mr Craig Fields and Mitchell A. Newmark
Profession:Morrison & Foerster LLP

The New Jersey Tax Court held yesterday in a precedential published opinion that a royalty payor was not required to add back any portion of the royalties that it paid to a related licensor under the unreasonable exception when the licensor filed New Jersey Corporation Business Tax (CBT) returns, included the royalties in its CBT income base, and allocated its income to New Jersey under its own allocation factor.

The Division had argued that the payor was only entitled to a partial exception because its allocation factor was greater than the licensor's allocation factor. However, the Tax Court agreed with us and ordered the Division to issue the remainder of the payor's refund, concluding that once the licensor filed CBT returns and reported the royalties paid to it by the payor, "the legislative concerns of income shifting/exporting machinations . . . are allayed," and a discrepancy in allocation factors, "without more," does not establish that...

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