Taxpayer’s Addback Exception Upheld


On August 31, 2010, the New Jersey Tax Court upheld a taxpayer’s “unreasonable exception” from the New Jersey related party addback statute. With the growth of related party addback provisions (22 jurisdictions currently impose related party addback provisions), the ability to qualify for exceptions from addback requirements is growing in importance. While a few cases have been decided in other states, (e.g., VFJ Ventures, Inc. (Alabama) and Family Dollar Stores of Ohio, Inc. (Ohio)), Beneficial New Jersey, Inc. is the first New Jersey case to address the related party addback.

I. Background

Beneficial New Jersey, Inc. (BNJ) is a subsidiary of HSBC Finance Corp. (HSBC) and is primarily engaged in providing loans to customers. BNJ borrowed capital from HSBC to conduct its lending operations. The rate of interest charged from HSBC to BNJ for this intercompany loan was set at the maximum Applicable Federal Rate. BNJ and HSBC did not have a written loan agreement for the audit period of 2002-2004. Rather, BNJ and HSBC entered into a “Funding Agreement” dated December 30, 2005, and had an unwritten understanding prior to the execution of the Funding Agreement. BNJ deducted the interest paid to HSBC for New Jersey income tax purposes. The Director of the Division of Taxation (Director) disallowed these deductions. BNJ and HSBC filed cross motions for summary judgment.

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