New Jersey – No addback for worldwide income; treaty protections respected

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December 2017


On November 28, 2017, the New Jersey Tax Court held in a summary judgment action that the Division of Taxation could not require a foreign corporation to include worldwide income in its corporate tax base. A New Jersey statute provides that the corporate income tax is measured by federal taxable income before net operating loss carryovers and special deductions, which is reflected on Line 29 of the federal Form 1120-F for foreign taxpayers. Taxpayer’s Line 29 did not include its worldwide income, and there was no New Jersey statute that would have allowed an addition modification for this taxpayer’s worldwide income. As a result, the court held the taxpayer’s tax base should match the federal taxable income indicated on Line 29 of its federal Form 1120-F.

Additionally, the court rejected the Division’s argument that it should be able to “pierce the protection provided to the taxpayer through” an international tax treaty.

The takeaway

This is another in a series of cases which addresses New Jersey’s conformity to federal taxable income as the starting point for computing entire net income under the CBT. The court in Infosys holds that this conformity extends to the computation of federal taxable income under tax treaties.

In light of this established conformity to federal taxable income, the Division’s regulations which tax the worldwide income of non- U.S. corporations has been invalided by the tax court in both IBM and Infosys. While it is not known at present whether the Division will appeal Infosys, non- U.S. corporations which have filed CBT returns based on worldwide income should evaluate their CBT filing position in light of the Infosys decision and consider filing refund claims.

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Peter Michalowski

Peter Michalowski

State and Local Tax Leader, PwC US

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