NEW YORK (January 27, 2011) — On January 26, 2011, the New Jersey Tax Court issued a 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, or income from a source outside the United States, 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 taxable income.
“Taxpayers that added foreign income on their New Jersey corporation business tax returns, or that were forced to upon audit, should consider filing refund claims for any years for which the statute of limitations remains open,” said Peter Faber, partner at McDermott Will & Emery representing IBM.
Leah Robinson, partner in the Firm’s State & Local Tax Practice Group, added, “Even companies that did not have IRC section 114 foreign income, but that had other income from foreign sources, should consider refund claims.”
The New Jersey statute expressly indicates that the starting point in calculating New Jersey taxable income is federal taxable income and then provides specific modifications (additions and subtractions) that are required to reach New Jersey taxable income.
During the years at issue, Internal Revenue Code Section 114 provided an exclusion from federal taxable income for certain foreign income. The Tax Court held that New Jersey could not tax this income and that a New Jersey Tax Department regulation that did so was invalid.
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