New Jersey Tax Court Refuses to Tax Foreign Income: IBM v. Director

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On January 26, 2011, the New Jersey Tax Court agreed with IBM that foreign source income excluded from federal taxable income is also excluded from New Jersey entire net income. Taxpayers should consider filing refund claims.

On January 26, 2011, the New Jersey Tax Court issued a consolidated decision in favor of International Business Machines Inc. (IBM), represented by McDermott Will & Emery, and Crestron Electronics Inc., agreeing with the taxpayers that certain foreign income should not be included in New Jersey taxable income. The decision provides clear guidance for companies that included foreign income that was excluded from federal taxable income under former Internal Revenue Code Section 114 on their New Jersey Corporation Business Tax returns (or that were forced to do so upon audit) and raises potential refund opportunities for companies that included other types of foreign source income in New Jersey entire net income.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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