On February 27, the Tax Court of New Jersey held that a taxpayer could deduct the full amount of royalty payments paid to its intangible holding company subsidiary where the subsidiary filed Corporation Business Tax (CBT) returns and paid tax on the royalty payments, even if the subsidiary’s New Jersey allocation factor was lower than the taxpayer’s. The court invalidated application of the Schedule G-2 exception that limited the royalty addback exception depending on the different allocation factors of the royalty payor and payee. [Lorillard Tobacco Company v. Director, Division of Taxation, N.J. Tax Court No. 008305‒2007 (02/27/19)]
Lorillard makes clear that the Division’s limitation of the exception based solely on the Schedule G-2 formula is unreasonable. This decision should prompt taxpayers whose addback exceptions were limited by following the computation of Schedule G-2 to examine whether they may be entitled to a full deduction for royalty expenses, especially where the intangible holding company paid the CBT on the royalty payments.