In General Foods Credit Investors #3 Corp. v. Dir., Division of Taxation,1 the Court determined that the taxpayer should reduce its property and sales factor for purposes of determining the taxpayers New Jersey business income. In this case, the taxpayer entered into a sale-leaseback transaction with the New Jersey transit authority for more than 840 buses. The Internal Revenue Service (IRS) determined that the transaction was nothing more than a financing transaction and disallowed the depreciation deductions for the buses that the taxpayer had taken. The taxpayer reported the increase in income to the New Jersey Division of Taxation (“Division”) and also reduced its New Jersey sales and property factors accordingly. While the Division accepted the change to taxable income, it refused to accept the changes to the apportionment factors. The Division found that including the subject property and related receipts in the apportionment factors was in accordance with New Jersey regulatory authority. The years at issue may have had something to do with the Division’s determination, in that the statute of limitations was closed for those periods. Presumably only changes to federal taxable income could be made.
However, the Tax Court ruled that if the leases were nothing more than financing transactions, characterization must be maintained for all purposes. Therefore, the taxpayer was entitled to reduce its New Jersey apportionment factors to reflect the transaction as a financing transaction, not a sale-leaseback. In other words, the Division could not pick and choose when or when not to recognize the sale-leaseback transaction as a real lease of property.
1 Tax Court of New Jersey, docket no. 011330-2015, February 22, 2017.
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