
    CENTEX HOMES OF NEW JERSEY, INC., PLAINTIFF, v. DIRECTOR, DIVISION OF TAXATION, DEFENDANT.
    Tax Court of New Jersey
    June 29, 1989.
    
      Before Judges ANDREW, CRABTREE, HOPKINS, LARIO, LASSER & RIMM pursuant to R. 8:8-6.
    
      Keith A. Krauss for plaintiff (Connell, Foley & Geiser, attorneys; Janet Zaorski Kalapos on the brief).
    
      
      Jeanne E. Gorrissen for defendant (Peter N. Perretti, Jr., Attorney General of New Jersey, attorney).
   The opinion of the court was delivered by

ANDREW, J.T.C.

In this corporation business tax case plaintiff, Centex Homes of New Jersey, Inc. (hereinafter CNJ), challenges a determination by defendant, Director of the Division of Taxation that the indebtedness of CNJ to CNJ’s great-grandparent, Centex Corporation (hereinafter CC) was to be included as part of CNJ’s net worth tax base in the computation of CNJ’s franchise tax liability for the tax years at issue.

Plaintiff, CNJ, is a Nevada corporation which has been engaged in the acquisition, development and construction of both single-family and multi-family residences in the State of New Jersey since 1970. During the disputed tax years of 1979, 1980 and 1981, CNJ was one of approximately 60 to 65 active corporations that were under the aegis and control of Centex Corporation (CC), also a Nevada corporation. CC was and is a publicly-held corporation whose stock is traded on the New York Stock Exchange. The gross revenues of CC during the tax years were estimated to be “around a billion dollars,” while the gross revenues of plaintiff, CNJ, were approximately five to twenty million dollars.

As the controlling entity, CC exerts overall control and management of the corporate conglomerate through four major holding companies, one in each of the four industries in which it participates. In its home-building industry, CC utilized its wholly-owned subsidiary Centex International, Inc. (hereinafter Cl) as its holding company. In turn, Cl owned the stock of two corporations, one of which was responsible for home-building operations in Texas and a second, Centex Homes Corporation (hereinafter CH), which has the responsibility for home-building operations outside of Texas.

In turn, CH owned all of the stock of five major subsidiaries', one of which was plaintiff CNJ. In sum, during the relevant period, CC owned all of the stock of Cl which owned all of the stock of CH which, in turn, owned all of the stock of plaintiff, CNJ. Thus, in this four-corporation vertical structure which is schematically reflected below, CC is the great-grandparent of plaintiff, CNJ:

During the tax years at issue plaintiff, CNJ, borrowed funds directly from its great-grandparent, CC. These interest-bearing advances, evidenced by promissory notes, amounted to $13,323,973 in 1979, $10,432,191 in 1980 and $19,078,795 in 1981. Plaintiff, CNJ, asserts, and defendant does not dispute, that the funds which CNJ borrowed from CC came directly from CC and did not in any way originate with plaintiff-CNJ’s direct parent corporation CH nor with Cl, CH’s direct parent. In plaintiff’s words, “there is no evidence in the record whatsoever which connects the funds at issue to CH [plaintiff-CNJ’s direct parent].”

It was also noted at the trial, during the tax years in issue, that, in addition to the loans that had been made to CNJ by its great-grandparent, CC, plaintiff’s direct parent, CH, had also made loans that averaged approximately $20 million for each of the tax years at issue. In contrast to the loans made by CC to CNJ, the loans by CNJ’s direct parent to CNJ were not normally reflected by promissory notes nor were they interest bearing.

Eventually, the loan transactions between CNJ and its direct parent, CH, became an open working account which permitted plaintiff, CNJ, to borrow from its immediate parent for operating capital as the need arose. The indebtedness of CNJ to its direct parent CH was reported by CNJ as part of CNJ’s net worth for corporation business tax purposes pursuant to N.J. S.A. 54:10A-4(d)(5) (hereinafter § 4(d)(5)) during the tax years at issue.

In its corporation business tax returns for tax years 1979 and 1980 plaintiff, CNJ, did not include its indebtedness to its great-grandparent CC as part of its net worth tax base while, however, for the tax year of 1981 CNJ had included, apparently mistakenly or inadvertently, its indebtedness to CC as part of its net worth tax base.

Following an audit of plaintiff-CNJ’s corporation business tax returns for the tax years in issue, defendant, Director, Division of Taxation, by notice dated March 7, 1986 assessed a deficiency in tax and interest for tax years 1979 and 1980 based on plaintiff-CNJ’s failure to include its indebtedness to its great-grandparent CC in plaintiff’s net worth for corporation business tax purposes.

This determination did not extend to tax year 1981 because, as previously noted, plaintiff CNJ had included its indebtedness to CC as part of its net worth for that year. The Director, however, did make an adjustment, wholly unrelated to the issue of CNJ’s indebtedness to CC, for the 1981 tax year. Plaintiff claims a refund for that year based on its own mistake in including its indebtedness to CC as part of its net worth. The Director maintains, with regard to the 1981 tax year, that, not only was the indebtedness properly included in plaintiff's net worth, but plaintiff’s claim for a refund as to that year is untimely. The record demonstrates that plaintiff filed its 1981 corporation business tax return on January 3, 1983, but did not seek a refund until October 11, 1985, a date clearly beyond the two-year limitations period for refunds set forth in N.J.S.A. 54:49-14.

The contentions of the parties raise three separate issues. First, the Director maintains that plaintiff-CNJ’s indebtedness to its great-grandparent CC was properly includible in CNJ’s net worth tax base because CC was CNJ’s “common parent.” In response, plaintiff CNJ argues that inasmuch as the debts were not owed directly or indirectly to plaintiff-CNJ’s immediate or direct parent CH, but rather to its great-grandparent CC, they did not form part of CNJ’s net worth pursuant to § 4(d)(5).

Second, the Director argues that if the funds at issue are not includible in plaintiff’s net worth pursuant to § 4(d)(5), then they are includible in plaintiff’s net worth because they were, in fact, equity or capital contributions and were improperly characterized as loans by CNJ. Plaintiff’s response to this position is twofold. Plaintiff, first, contends that there is no statutory authority that permits the Director to engage in a factual debt-equity analysis to sustain his position. Second, plaintiff argues that, even if such an analysis were statutorily permitted, it is evident that the indebtedness of plaintiff-CNJ to its great-grandparent, CC, was, in fact, debt.

Third and last, the Director asserts that, even if his position as to the includability of CNJ’s indebtedness to CC is incorrect, GNJ’s refund claim with respect to tax year 1981 must be denied because it was untimely. In this regard, plaintiff contends that its claim for refund was timely. This is based on the fact that the Director had conducted an audit on September 25, 1985 for tax year 1981 and made an adjustment for that tax year. Despite the fact that the adjustment was with regard to an item that was wholly unrelated to the indebtedness at issue, plaintiff contends that the refund claim it filed with the Director less than a month later, on October 11, 1985, was timely.

I.

The New Jersey Corporation Business Tax Act (the act), N.J.S.A. 54:10A-1 et seq., imposes a franchise tax on every nonexempt foreign and domestic corporation for the privilege of having or exercising its corporate franchise in this State, or for the privilege of doing business, employing or owning capital or property, or maintaining an office, in this State. N.J.S.A. 54:10A-2. The tax is measured by adding together prescribed percentages of a net worth tax base and another, not implicated in this case, based on net income. While N.J.S.A. 54:10A-4(d) denotes those items that are to be included in the net worth base, it is § 4(d)(5) which is specifically pertinent to the issues in this proceeding.

“Net worth” shall mean the aggregate of the values disclosed by the books of the corporation for (1) issued and outstanding capital stock, (2) paid-in or capital surplus, (3) earned surplus and undivided profits (4) surplus reserves which can reasonably be expected to accrue to holders or owners of equitable shares, not including reasonable valuation reserves, such as reserves for depreciation or obsolescence or depletion, and (5) the amount of all indebtedness owing directly or indirectly to holders of 10% or more of the aggregate outstanding shares of the taxpayer’s capital stock of all classes, as of the close of a calendar or fiscal year. [N.J.S.A. 54:10A-4(d); emphasis supplied]

“Indebtedness owing directly or indirectly” has been defined in N.J.S.A. 54:10A-4(e) as follows:

“Indebtedness owing directly or indirectly” shall include, without limitation thereto, all indebtedness owing to any stockholder or shareholder and to members of his immediate family where a stockholder and members of his immediate family together or in the aggregate own 10% or more of the aggregate outstanding shares of the taxpayer’s capital stock of all classes.

Additionally, according to defendant’s brief, the Director has been interpreting these statutory provisions on a consistent basis in an expansive or broad manner. This continuous course of construction or policy adopted by the Director is reflected in a regulation that became effective March 2, 1987. This regulation, N.J.A.C. 18:7-4.5(f), insofar as it is relevant to this litigation, provides:

For the purpose of determining the degree of stock ownership of a corporate creditor all the shares of the taxpayer’s capital stock held by all corporations bearing the relationship of parent, subsidiary, or affiliate of the corporate creditor shall be aggregated.
Example 1: L Corporation owns 100 percent of the stock of M Corporation which in turn owns 100 percent of N Corporation. L Corporation made loans or otherwise provided funds directly to N Corporation. The indebtedness from N Corporation to L Corporation is indebtedness owing directly or indirectly to a 10 percent stockholder.

There is no dispute in this ease that the source of plaintiff-CNJ’s indebtedness is not CNJ’s direct parent CH. Instead, the record clearly shows that the source of CNJ’s indebtedness is its great-grandparent CC. CC, however, as plaintiff points out, does not “hold” any of the stock of plaintiff, CNJ. Thus, plaintiff, CNJ, contends that § 4(d)(5) does not apply and CNJ’s indebtedness to CC is not includible in its net worth tax base. On the other hand, the Director, as is reflected in his practice and regulation, has taken the position that the stock held by related corporations may be aggregated, and thus, the indebtedness of CNJ to its great-grandparent CC is indebtedness owing directly to a 10% shareholder and must be included in CNJ’s net worth computation.

In support of this position the Director relies upon: (A) the decisions of our Supreme Court in Fedders Financial Corp. v. Taxation Div. Dir., 96 N.J. 376, 476 A.2d 741 (1984) and its companion, Mobay Chemical Co. v. Taxation Div. Director, 96 N.J. 407, 476 A.2d 758 (1984) which construed § 4(d)(5), (B) the decision of the Supreme Court in Intern. Flavors & Frag. v. Director, Div. of Tax., 102 N.J 210, 507 A.2d 700 (1986) which permitted aggregating a corporate taxpayer’s stock with that of its totally-owned subsidiary in a third corporation, and (C) the Director’s regulation, N.J.A.C. 18:7 — 4.5(f), which merely recites what has been the Director’s practice and policy in his administration of the CBT.

A.

The Director explains that prior to the Fedders decision by our Supreme Court it had been the Division’s consistent position that all indebtedness owed by a taxpayer corporation to any affiliated corporation was to be included in the calculation of the taxpayer’s net worth if the taxpayer and the affiliated corporation were substantially owned or controlled by the same entity.

Fedders involved a three-corporation vertical structure (parent-taxpayer-subsidi&ry) in which the taxpayer, the middle corporation, was indebted, not to its parent corporation, but to its totally-owned subsidiary corporation. Since the parent controlled not only the taxpayer but the taxpayer’s totally-owned subsidiary, the creditor corporation, the Director required, in accordance with his existing policy, that the taxpayer’s indebtedness, not to its parent, but, to its subsidiary be included in the taxpayer’s net worth pursuant to § 4(d)(5). Adopting a test of “nexus and control” the Tax Court agreed with the Director’s conclusion and held that the taxpayer’s indebtedness, while directly owed to its own subsidiary, was indirectly owed to its parent. 3 N.J.Tax 576, 586 (Tax Ct.1981).

In reversing this determination a majority of the Supreme Court focused on the appropriate construction of the statutory phrase “indebtedness owing directly or indirectly” to stockholders holding 10% or more of the taxpayer’s capital stock. 96 N.J. at 388, 476 A.2d 741. The majority rejected any per se rule which would automatically include in a taxpayer’s net worth a loan from an affiliated corporation regardless of whether the loan emanated directly or indirectly from the parent. Id. at 392, 476 A.2d 741. First, the Court distinguished direct and indirect indebtedness and reaffirmed the principle that a debt owed directly to a parent company, regardless of the source of the funds loaned by the parent company, was to be included in the net worth of the subsidiary. Id. at 386-388, 476 A.2d 741. Funds borrowed by a taxpayer corporation from a nonparent affiliated corporation, however, are to be included in the net worth of the taxpayer only if the funds are indirectly owed to the parent of the taxpayer corporation.

Additionally, the Court concluded that there is a presumption that an indebtedness owed by a taxpayer to an affiliated corporation controlled by a common parent is indirectly owed to the parent, but that is not conclusive and the taxpayer may establish that the funds are not indirectly owed to the taxpayer’s parent, and therefore, would not be includible in the taxpayer’s net worth computation. Id. at 389, 476 A. 2d 741.

In Mobcty, the corporate setting was somewhat different and is reflected by the following schematic diagram.

The indebtedness at issue in Mobay was owed by Mobay Chemical Corporation to Baychem Funding, both effectively owned and controlled by Bayer A.G., the overall parent of a group of corporations. The Court held, relying on the principles enunciated in Fedders, that the indebtedness was not includible in Mobay Chemical Corporation’s net worth because it was neither directly or indirectly owed to its immediate parent, Rhinechem Corporation, nor was it owed directly or indirectly to its indirect parent, Bayer A.G. 96 N.J. at 412. In a footnote, however, the Court specifically observed that:

No issue has been raised as to whether Bayer A.G.’s indirect or equitable ownership of plaintiff’s stock brings it within the statutory classification as a “[holder] of 10% or more of the aggregate outstanding shares of the taxpayer’s [plaintiff’s] capital stock of all classes,” N.J.S.A. 54:10A-4(d), and we need not pass on the point. [Id. at 412, n. 2, 476 A.2d 758; emphasis supplied]

Thus, the precise issue raised in this case was not specifically considered by the Court. That is, whether the great-grandparent CC’s “indirect or equitable” ownership of CNJ’s stock brings it within the statutory classification as a “holder of 10% or more of [CNJ’s] capital stock.” N.J.S.A. 54:10A-4(d)(5); emphasis supplied.

It is uncontroverted that the debt was directly owed to CC, but what is not clear is whether CC can be considered a “holder” of CNJ’s stock pursuant to § 4(d)(5).

The Director, however, recites some of the language from the Mobay opinion to the effect that the Court was influenced in its holding by the fact that Mobay Chemical Corporation “was not directly or indirectly obligated to its indirect parent, Bayer A.G.,” 96 N.J. at 412, 476 A.2d 758, emphasis supplied, and therefore, if the taxpayer had been obligated to its indirect parent the Court would have required the inclusion of the indebtedness in the taxpayer’s net worth. The Director argues that “[i]t is explicit that if the Mobay taxpayer had been obligated to its common parent, the Supreme Court would have upheld the Director’s assessment ... [t]hus Mobay and Fedders support the Division’s position in this case.”

In response, plaintiff CNJ asserts that the Supreme Court specifically required a narrow interpretation of the language used in § 4(d)(5) rather than the expansive construction urged by the Director, and inasmuch as CC is not a legal or direct holder of any of CNJ’s stock, CNJ’s indebtedness to CC is not includible in CNJ’s net worth.

In Fedders the Supreme Court began its interpretive analysis of the phrase, “indebtedness owing directly or indirectly,” in § 4(d)(5) by reviewing some relevant principles of statutory construction. It noted that courts generally “should follow the clear import of statutory language.” Fedders, 96 N.J. at 884-385, 476 A.2d 741. In this regard the Court indicated that the Legislature must express its intention to tax in distinct and unambiguous language. Id. at 386, 476 A.2d 741.

While the Court noted that there has been some dissatisfaction with an interpretive principle enunciated by the United States Supreme Court in 1917, nevertheless, it reaffirmed its viability and quoted approvingly from the opinion in Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 53, 62 L.Ed. 211, 213 (1917).

In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government and in favor of the citizen. [96 N.J. at 385, 476 A.2d 741]

The Court supported its analysis in this regard by reviewing a number of New Jersey cases involving taxing statutes that all reached the conclusion that, absent some ambiguity, a literal reading of the taxing statute is required. Id. at 386-388, 476 A.2d 741.

An application of that principle in this case compels the conclusion that CC was not the “holder” of any of CNJ’s stock, and thus, the indebtedness owing to CC was not includible in CNJ’s net worth pursuant to § 4(d)(5).

The language of § 4(d)(5) specifically refers to “direct or indirect indebtedness” and thus a subjective inquiry may be required to determine the indirect source of the funds. Section 4(d)(5) does not, however, provide for debts owed to “indirect or equitable” holders of the taxpayers capital stock. To attribute stockholding in CNJ to CC requires adding to, or taking liberties with, the statutory language. In light of the fact that Legislature used the phrase “direct or indirect” in its consideration of the source of the funds, it is only reasonable to conclude that had it intended indebtedness to the “direct or indirect” holder of a taxpayer’s stock it would have explicitly so provided.

This conclusion finds additional support in the case of Kingsley v. Hawthorne Fabrics, Inc., 41 N.J. 521, 197 A.2d 673 (1964), in which the Supreme Court rejected a regulation of the Director that sought to broadly define the statutory term “immediate family” as it appears in N.J.S.A. 54:10A-4(e) and which permits the aggregation of stock ownership to a stockholder and “members of his immediate family.”

The Director’s definition, as expressed in the regulation, included not only related members of the stockholder’s household but certain related persons such as brothers whether they were members of the stockholder’s household or not. The Director argued that his broad interpretation of “immediate family” was consistent with the underlying purpose of the taxing provision, since deficit financing could be achieved by loans from brothers outside the stockholder’s household as well as by loans from members of the stockholder’s household.

The Court held that, even though the regulation might be in accord with overall policy, it exceeded the reach of the statute because the “[legislative body must express its intention to tax in distinct and unambiguous language.” Id. at 529-580, 197 A.2d 673. A brother living outside the stockholder’s household was not part of the stockholder’s “immediate family.” See also Werner Machine Co., Inc. v. Zink, 6 N.J.Super. 188, 194-195, 70 A.2d 774 (App.Div.1950) (Before an amendment to the indebtedness provision permitting aggregation of stockholding to a stockholder and “members of his immediate family,” the Appellate Division held that the indebtedness provision could not be extended to include loans made by members of a stockholder’s family).

B.

The Director also maintains that the Supreme Court’s decision in International Flavors, supra, supports his conclusion that an aggregation of stockholding under § 4(d)(5) was intended by the Legislature and must be permitted in this case. This position is hardly surprising in light of the fact that the dissenting opinion in International Flavors implies that the decision in Fedders is not totally consistent with the decision in International Flavors. As noted by Justice O’Hern, in dissent, the Court instructed the Director to apply the literal language of the taxing statute in Fedders, but to search for economic reality rather than literalness in International Flavors. Id., 102 N.J. at 210, 507 A.2d 700 (O’Hern, J., dissenting).

In International Flavors the Court was called upon to interpret certain statutory provisions dealing with the net income tax base component of the CBT. Specifically, N.J.S.A. 54:10A-4(k)(l) permitted the exclusion of 100% of the dividends received by a taxpayer corporation from its subsidiary from the taxpayer’s net income tax base provided the taxpayer had “80% or more ownership of investment” in the subsidiary. The phrase “ownership of investment” is described in the statutory section of the CBT dealing with the computation of the net worth tax base, N.J.S.A. 54:10A-4(d), which indicates that it is defined as “ownership ... of at least 80% of the total combined voting power of all classes of stock of the subsidiary.”

Prior to. International Flavors the Director had interpreted the phrases “80% or more ownership of investment” and “80% of the total combined voting power” to require the taxpayer corporation to directly own 80% or more of the subsidiary’s record stock. The Director did not permit indirect or equitable ownership of a subsidiary by a taxpayer corporation through another corporation, which the taxpayer directly owns or controls, to qualify for the 80% ownership test.

The taxpayer in International Flavors owned 30% of one subsidiary and 63% of a second subsidiary. The remaining shares of each subsidiary were owned by a third subsidiary the entire stock of which was owned by the taxpayer. Thus, the taxpayer maintained that, while it did not have direct record ownership, as required by the Director, the economic realities of the corporate world revealed that the taxpayer effectively owned not merely 80% but 100% of the “ownership of investment” of the dividend-paying subsidiaries.

The Court, after considering the specific language used by the Legislature and the legislative history, held that direct record ownership of 80% of the stock of the dividend-paying subsidiaries was not mandated by the language used nor by the history of the enactment. Thus, the Court permitted the taxpayer to “aggregate its ownership of stock in a dividend-paying subsidiary with the stock owned in such subsidiary by its wholly-owned subsidiary.” 102 N.J. at 221, 507 A.2d 700.

The Director contends that inasmuch as the aggregation of stock was permitted in International Flavors which was decided two years after Fedders and Mobay, “it is apparent that the Supreme Court has approved aggregating the stock owned by the parent and common parent of the taxpayer in ... [the] circumstances [of the present case].” In asserting this contention the Director maintains that International Flavors is not confined “to the area of dividends-received-deduction,” but must be looked upon broadly. Thus, in this case, as the argument proceeds, there should be an expansive application of the term “stockholder,” to include plaintiff-CNJ’s, great-grandparent, CC.

A fair reading of the majority opinion in International Flavors does not support the Director’s contention. In answer to the dissent offered by Justice O’Hern, the majority opinion specifically indicated that the International Flavors decision implicated a construction of the phrase “ownership of investment,” and that the language used and the legislative history of that provision permitted the aggregation of stock ownership in that case. There is nothing in the opinion that indicates that the liberal interpretation accorded the statutory words was to be extended to any other provision in the CBT.

Additionally, there is nothing in the International Flavors opinion that suggests that the literal interpretation principle and the Gould principle of statutory construction, relied upon in Fedders, are no longer favored by the Court. Lastly, there are different policy considerations involved in interpreting different sections of the CBT. The Legislature, motivated by these different considerations, may very well choose to require aggregation of stockholdings in one situation and not in another. Thus, if one views the Fedders and International Flavors decisions as not being entirely consistent that may very well be due to differing legislative policies, which the Legislature may legitimately follow.

C.

As final support for his position that stock of related corporations may be aggregated, and thus, the indebtedness at issue in this case must be included in plaintiff-CNJ’s net worth, the Director points to, not only the Division’s consistent construction of the taxing statute requiring aggregation, but also, the regulation adopted by the Director, N.J.A.C. 18:7-4.5(f), which is in accord with the practice and policy of the Division.

With regard to the Director’s argument that the Division’s policy and continuous course of practical construction in entitled to due deference, the Court in International Flavors noted that a court must consider an agency’s construction of a statute only when it is satisfied that legislative intent cannot be determined by a critical examination of the purposes, policies and language of the enactment. 102 N.J. at 218, 507 A.2d 700. The Division’s practice, however, cannot go beyond the legislative intent as expressed in the taxing statute. Ibid.

Likewise, the Director’s regulation cannot exceed the legislative intent as expressed in the statute. Fedders, supra, 96 N.J. at 392, 476 A.2d 741. As was observed in Kingsley v. Hawthorne Fabrics, supra, “[a]n administrative agency may not under the guise of interpretation extend a statute to include persons not intended, nor may it give the statute any greater effect than its language allows.” Id., 41 N.J. at 528, 197 A.2d 673; see also Fedders, supra, 96 N.J. at 392, 476 A.2d 741. As in Fedders, the Director has established a rule that exceeds the literal language of the taxing statute, and thus, to that extent is ultra vires.

11.

In the alternative, the Director contends that if the funds at issue are not includible in plaintiffs net worth pursuant to § 4(d)(5), then they are includible in plaintiffs net worth because they were, in fact, disguised equity contributions which were improperly characterized as loans by plaintiff.

In contrast, plaintiff asserts that the Director is presenting a basis for the imposition of taxation which has no foundation in the CBT, the decisional law of this State, nor in any regulations, practice or policy of the Division. Additionally, plaintiff argues that, even if a factual debt-equity analysis were statutorily permitted, the debt owed by CNJ to CC was, in fact, debt.

For the reasons hereinafter stated, we have concluded that plaintiffs first argument is correct, i.e., there does not appear to be any authority that permits the Director to engage in a subjective inquiry as to whether a loan is, in fact, a loan or a contribution to capital. In light of this, it is unnecessary to become enmeshed in the factual analysis suggested by the Director.

To begin with, there is nothing in the CBT as a whole, nor specifically in the definition of net worth in N.J.S.A. 54:10A-4(d), that even remotely authorizes the Director to recharacterize a loan as an equity contribution. There is, as noted by plaintiff, a provision in N.J.S.A. 54:10A-4(d) which permits the Director generally to redetermine the value of a corporation’s assets in accordance with sound accounting principles if he finds that the corporation’s books do not disclose fair valuations. This provision, however, which may have the effect of increasing a corporation’s net worth, does not permit the Director to change a liability as reflected on the books of the corporation to a capital contribution.

With respect to the first issue in this case as to the includability of the indebtedness at issue in plaintiff’s net worth pursuant to § 4(d)(5), the Director emphasized the Division’s policy, its practical administration of the CBT and its interpretive regulation in support of his construction of the CBT. The Director argued that the Division’s “continuous course of practical construction and application of a tax statute” is a potent consideration for the court.

Conspicuously absent from the Director’s argument on this issue of a subjective debt-equity inquiry is any reference to the fact that this analysis accords with the long-established practice or policy of the Division. Apparently, the Director’s position in this case on this issue has not been the Division’s practice. It is clear that the Director has not adopted any rule or regulation that is reflective of any Division policy with regard to this issue.

The Director acknowledges that there are no cases decided in this State which support the Division’s authority to recharacterize a liability into a capital contribution, but maintains that “it is certain ... federal concepts should apply.” That certainty, however, asserted by the Director is not expressly set forth in any provision of the CBT. The Director asserts that federal tax concepts are an inherent part of the CBT because the starting point in the calculation of entire net income, N.J.S.A. 54:10A-4(k), under the CBT is income reported for federal income tax purposes. Therefore, this court should adopt and incorporate federal tax principles. There is nothing in the CBT or its history that indicates that the Legislature intended the Director to become enmeshed in the complexities and administrative difficulties of the federal tax laws. See Amerada Hess Corp. v. Div. of Tax, 107 N.J. 307, 321-322, 526 A.2d 1029 (1987) (when the Legislature wanted to incorporate federal tax concepts it did so in clear terms); compare Smith v. Director, Div. of Taxation, 108 N.J. 19, 33, 527 A.2d 843 (1987) (In the Gross Income Tax Act when the Legislature intended to incorporate federal tax concepts, it did so explicitly).

Moreover, although the Director contends that “debt for net worth tax purposes is also defined with reference to the federal tax law,” there is no citation of authority to support the assertion. Our research has not revealed any. While the beginning point for entire net income may be income reported for federal income tax purposes, and arguably federal tax principles could be applicable, the measure of net worth in N.J.S.A. 54:10A-4(d) makes no reference either expressly or by implication to federal tax principles. As a matter of fact, the legislative history of the CBT and the net worth provisions adopted by the Legislature demonstrate just the opposite, i.e., there was no intent to authorize the Division to engage in a subjective factual analysis to recharacterize debt on a corporation’s books as an equity contribution.

This court in GATX Terminals Corp. v. Taxation Div. Director, 5 N.J.Tax 90 (Tax Ct.1982), aff’d o.b. per curiam 7 N.J.Tax 659 (App.Div.1985), certif. den. 102 N.J. 337, 508 A.2d 213 (1985), had the occasion to review the legislative history of the CBT. It was noted that the genesis of the indebtedness-to-the-10%-shareholder provision was the report of the Commission on Taxation of Intangible Personal Property (1945), which recommended enactment of a tax measured by net worth to replace a then existing tax on intangible personal property. 5 N.J. Tax at 96. It was anticipated that a net worth tax would be more equitable to the corporate taxpayer and easier for the Division to administer than the existing corporate tax. Ibid. The commission suggested that net worth include the amount of all indebtedness owed to holders of 10% or more of the taxpayer’s stock, as a special statutory classification, in order to effect an equal tax burden on all corporations whether operating on borrowed or equity capital. Id. at 97; see also Kingsley v. Hawthorne Fabrics, Inc., supra, 41 N.J. at 525-526, 197 A.2d 673.

This statutory classification was designed to avoid the factual inquiry of whether a loan was, in fact, a contribution to capital, and thus, the indebtedness provision conclusively presumed that a corporate indebtedness owed to a 10% stockholder was equity capital. Kingsley, supra at 525, 197 A.2d 673. All of the foregoing demonstrates that the Legislature sought to provide a relatively simple and administratively feasible methodology for measuring the value of the exercise of the corporate privilege in this State.

Lastly, “[the] legislative body must express its intention to tax in distinct and unambiguous language.” Id. at 529-530, 197 A.2d 673; see also Fedders, supra 96 N.J. at 385-388, 476 A.2d 741. The Director has failed to demonstrate an expression of that intention by the Legislature.

III.

The third and last issue in this case focuses on the timeliness of plaintiff-CNJ’s refund claim for tax year 1981. CNJ had included its indebtedness to its great-grandparent CC as part of its net worth for that tax year. CNJ claims a refund based on its mistake in so including that indebtedness as part of its net worth.

It is uncontroverted that CNJ filed its 1981 corporation business tax return and paid its tax on January 3, 1983. It is further undisputed that CNJ’s claim for refund was not filed until October 11,1985. The Director maintains that the claim is untimely because it was not filed “within two years after the payment” of the tax pursuant to N.J.S.A. 54:49-14, and therefore, the claim must be rejected.

In response, CNJ argues that on September 25, 1985 the Director had conducted an audit that required an adjustment to CNJ’s corporation business tax return and thus, CNJ’s refund claim is timely pursuant to N.J.S.A. 54:10A-19.2 because it was filed within a month of the Director’s audit adjustment, even though the audit adjustment was with regard to an item that was totally unrelated to the mistake for which CNJ sought the refund.

Plaintiff’s claim in this regard is clearly without substance. At the time that the Director conducted his audit, i.e., September 25, 1985, it was already too late for CNJ to claim a refund for 1981 because it was beyond the two-year refund period permitted under N.J.S.A. 54:49-14, inasmuch as CNJ had paid its tax on January 3, 1983. Thus its refund claim of October 11, 1985 was manifestly untimely. See Bristol-Myers Co. v. Taxation Div. Director, 3 N.J.Tax 451, 457 (Tax Ct.1981), aff’d 9 N.J.Tax 88 (App.Div.1986), certif. den. 107 N.J. 121, 526 A.2d 189 (1987).

Plaintiff’s argument that the audit adjustment of September 25, 1985, while not related to an item specified in its refund claim, did involve the same issue of intercorporate indebtedness with regard to another corporation in the Centex conglomerate, and therefore, the two-year refund period does not apply, is equally without substance.

Plaintiff’s challenge to the Director’s September 25, 1985 audit can only relate to those items changed by the Director. The audit does not reopen plaintiff’s tax return for all purposes and clearly does not extend the two-year refund period for items unaffected by the audit. Ibid.

IV.

In sum, we find that the Director’s deficiency assessment relating to plaintiff-CNJ’s indebtedness to its great-grandparent CC for tax years 1979 and 1980 was inappropriate. The Clerk of the Tax Court is directed to enter a judgment vacating defendant’s assessment as it relates to the indebtedness issue including any related interest for tax years 1979 and 1980. With regard to tax year 1981, defendant’s determination that plaintiff’s refund claim was untimely is affirmed.

RIMM, J.T.C.,

concurring.

I concur with the result in this case before the court for determination by the judges comprising the Tax Court in accordance with R. 8:8-6. The result reached, as expressed in the opinion of Judge Andrew, is dictated by the analysis of the Supreme Court in Fedders Financial Corp. v. Taxation Division Director, 96 N.J. 376, 476 A.2d 741 (1984). However, I am constrained to write this concurring opinion because, although trial court judges may not disregard appellate court determinations, they are free to disagree with them. Reinauer Realty Corp. v. Paramus, 34 N.J. 406, 415, 169 A.2d 814 (1961). I give voice to that disagreement now.

First, the principle that statutes levying taxes should be construed against the government in case of doubt, Gould v. Gould, 245 U.S. 151, 38 S.Ct. 53, 62 L.Ed. 211 (1917), embedded in our law by Kingsley v. Hawthorne Fabrics, 41 N.J. 521, 197 A.2d 673 (1964), should be rejected once and for all. In Endler v. U.S., 110 F.Supp. 945 (D.N.J.1953), referred to in a footnote in the majority opinion in the Fedders case, the district court noted that Gould is no longer the law. The court set forth the modern rule.

We are not impressed by the argument that, as the question here decided is doubtful, all doubts should be resolved in favor of the taxpayer. It is the function and duty of courts to resolve doubts. We know of no reason why that function should be abdicated in a tax case more than in any other where the rights of suitors turn on the construction of a statute and it is our duty to decide what the construction fairly should be. [Id. at 949 (quoting White v. U.S., 305 U.S. 281, 292, 59 S.Ct. 179, 184, 83 L.Ed. 172, 179 (1938))]

Beyond the court’s duty to decide what the construction fairly should be, it is as reasonable to resolve all doubts in tax cases in favor of the government as it is to resolve them against the government. As long as the legislation does not mislead the taxpayer, it should be interpreted in a manner by which, consistent with due process of law, it will raise the most revenue, not the least revenue. In adopting legislation the purpose of which is to raise revenue, the Legislature should be understood as intending to raise as much revenue as possible, not as little revenue as possible.

Second, the result in Fedders overlooks the economic and financial realities of related corporations. There is clearly no basis in the statute, nor in any legislative history, for limiting the definition of “holder” in N.J.S.A. 54:10A-4(d) in the manner in which Fedders did.

The parent, Fedders Corporation, by its holding of the stock of the taxpayer, Fedders Financial Corporation, is, by any realistic definition, also the holder of the stock of Fedders Capital N.V., the subsidiary/creditor of the taxpayer. The value of the assets of Fedders Corporation includes the value of the stock of Fedders Capital N.V., and no one can doubt that, by its control of Fedders Financial Corporation, Fedders Corporation also controls Fedders Capital N.V. Yet, the court defines “holder” as “stockholder,” meaning, of course, the actual registered owner of the stock on the stock register of the corporation. “It is the indebtedness of the taxpaying corporation that must be owed to the stockholder.” Fedders, supra 96 N.J. at 388, 476 A.2d 741; emphasis supplied. But “holder” should have a broad, not a narrow, definition. Debt which is owed in any manner to the controlling corporation should be includable in the tax base under N.J.S.A. 54:10A-4(d). There is no justification for permitting a method used to avoid federal taxes to be used to avoid state taxes.

The dissent in Fedders has the better of the argument. There is

a basic, historical legislative understanding that debts, and the interest paid on debts, between affiliated corporations should be disregarded as deductions in computing the net worth and net income tax bases____
This interpretation is further supported by reason and logic. Ultimate control of the indebtedness is the critical feature the Act is designed to address. Consequently, the provision should apply to debts between subsidiaries. From the standpoint of essential control of the obligation, debts between subsidiaries for these tax purposes are no different from debts between subsidiary and parent. In both instances the parent, through its ownership, can dominate the destiny of the debt within the corporate family regardless of the intercorporate arrangements, understanding, or operations. [Fedders, supra 96 N.J. at 401-402, 476 A.2d 741 (Handler, J., dissenting)]

Absent Fedders, I would include Centex’s obligations in its net worth, and I therefore reluctantly concur.

HOPKINS, J.T.C.,

dissenting.

I cannot agree with the majority since its opinion gives inappropriate weight to a quotation from Gould v. Gould, 245 U.S. 151, 153, 38 S.Ct. 53, 53, 62 L.Ed. 211 (1917), which is used in the opinion of Fedders Financial Corp. v. Taxation Div. Dir., 96 N.J. 376, 476 A.2d 741 (1984). In doing so, it unduly restricts interpretation of the statutory definition of “indebtedness owing directly or indirectly” to the record stockholder of a taxpayer corporation when the facts clearly show that such record stockholder is merely a proxy of the actual stockholder.

The issue is whether the phrase “indebtedness owing directly or indirectly,” as defined in N.J.S.A. 54:10A-4(e) of the Corporation Business Tax Act (CBT), is restricted to indebtedness owed to an immediate record parent when the taxpayer is a third-tier subsidiary of the lender. In so concluding, the majority fails to recognize the clear purport of the statute. Furthermore, even if such statute is unclear, the legislative history is not wanting. See Fedders, 96 N.J. 376, 386, 476 A.2d 741. That legislative history fully supports approximately 30 years of the Director’s considered regulations which hold that an indirect stockholder, such as here involved, is included in the definition of “stockholder.”

In concluding that the majority’s approach is too restrictive, the part of the CBT which defines “indebtedness owing directly or indirectly” should be reviewed. N.J.S.A. 54:10A-4(e) reads as follows:

“Indebtedness owing directly or indirectly”shall include, without limitation thereto, all indebtedness owing to any stockholder or shareholder and to members of his immediate family where a stockholder and members of his immediate family together or in the aggregate own 10% or more of the aggregate outstanding shares of the taxpayer's capital stock of all classes. [Emphasis supplied]

The term being defined is “indebtedness owing directly or indirectly____” The expansive portion of the definition, namely, “shall include, without limitation thereto, all indebtedness owing to any stockholder or shareholder,” emphasis supplied, expresses the desired extent of the legislation. In construing revenue legislation, it is the common and ordinary meaning of the words which is to be given effect. International Bus. Mach. Corp. v. State, 141 N.J.Super. 79, 84, 357 A.2d 292 (App.Div.1986). The definition of the word “holder,” in Webster’s New Collegiate Dictionary (1987), is:

1: A person that holds: a (1): owner (2): tenant b: a person in possession of and legally entitled to receive payment of a bill, note, or check [at 575]

Furthermore, the definition of stockholder, in the same publication, is “an owner of ... stock.” Id. at 1160. “Owner” requires a sense of possession of more than bare legal title.

If the definition of “holder,” under the above reasoning, is still considered unclear, then the quotation from Gould v. Gould, supra, which was contained in the Fedders opinion, must be read in the context of that case. The Sixteenth Amendment to the United States Constitution, authorizing income taxes without apportionment among the states, was ratified in February 1913. Congress passed a federal income tax law in October of that year. At issue in Gould was whether alimony was taxable income. Income had been defined as:

[G]ains, profits, and income derived from salaries wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any lawful business carried on for gain or profit, or gains or profits and income derived from any source whatever, including the income from but not the value of property acquired by gift, bequest, devise, or descent.... [245 U.S. at 152-153, 38 S.Ct. at 53; citation omitted]

This definition did not specifically include alimony.

In reaching its conclusion that alimony was not included in the definition of income, the Gould Court stated:

In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. In case of doubt they are construed most strongly against the government, and in favor of the citizen. [Id. at 153, 38 S.Ct. at 53]

Utilizing this principle, the Gould Court found that alimony paid to a divorced wife, under a decree of court, did not fall within the statutory definition of income. It noted that alimony flowed from a natural and legal duty of support to a wife and that the taxable income of the divorced husband was not decreased by this payment.

In adopting the Gould principle, the Fedders opinion stated:

We continue to adhere to the view that our task is to ascertain the legislative intent. When the statutory language is unclear and the legislative history is wanting, the doubt referred to in Gould exists and its principle is applicable. [96 N.J. at 385-386, 476 A.2d 741]

This shows that in order for Gould to be applicable, the language must be unclear and the legislative history wanting.

The rules of statutory construction are dispositive as to whether the language of the statute is unclear. The internal sense of the statute controls. Particular words in a statute are to be made responsive to the essential elements of the statute. Wollen v. Fort Lee, 27 N.J. 408, 418, 142 A.2d 881 (1958); McMenamy v. Taxation Div. Director, 3 N.J.Tax 356 (Tax.Ct. 1981). In analyzing the part played by the use of the words “stockholder or shareholder,” reference should also be made to the case of Kingsley v. Hawthorne Fabrics, Inc., 41 N.J. 521, 197 A.2d 673 (1964). That opinion, which was quoted by the majority as supportive of a strict construction principle, held that “family,” as used in the statute, should be given its primary dictionary definition, i.e., a “collective body of persons living together in one home, in a permanent and domestic character under one head or management.” Id. at 530, 197 A.2d 673. Using this as the appropriate definition of “immediate family,” it should logically follow that the statute, as a whole, was intended to encompass corporate taxpayers, under one head or management, in the same manner as natural parents. Such construction flows from the essential elements of the statute.

Assuming that the statutory language, as construed above, still does not support the Director’s position, then the legislative history of the CBT and the provision treating certain debt capital in the same manner as investment capital, should be examined. In considering a similar issue, our Supreme Court, in the case of Intern. Flavors & Frag. v. Director, Div. of Tax., 102 N.J. 210, 507 A.2d 700 (1986), which was decided subsequent to the Fedders case, utilized legislative history. That case involved interpretation of § 4(k) of the CBT, which defines “ownership of investment.” N.J.S.A. 54:10A-4(k). That section provided for an exclusion in the computation of taxable income of a corporation. The Court, consistent with Fedders, utilized legislative history, stating:

The critical question is whether the New Jersey Legislature intended to exclude from a corporation’s net income base 100% of the dividends that it received from an indirectly-owned subsidiary. We look first at the statutory language. It is a well-established principle of statutory construction that a court should follow the clear import of statutory language. Fedders Financial Corp. v. Director, Division of Taxation, 96 N.J., at 385, 476 A.2d 741. Neither N.J.S.A. 54:10A-4(k)(l) nor N.J.S.A. 54:10A-4(d) contains an express requirement of record ownership. Sec. 4(k)(l) refers to “ownership of investment” and Sec. 4(d)(1) speaks in terms of “total combined voting power.” Therefore, to aid in interpreting the statute, we look beyond its words to examine, first, the Legislature’s purpose in adopting the 80%-of-ownership-of-investment requirement, and second, the ordinary and well understood meaning of ownership in the corporate world. [102 N.J. at 214-215, 507 A.2d 700]

The Court, based upon legislative history, held that “ownership of investment,” as understood in the corporate world, included stock which was in the record name of a subsidiary. Consistency requires that stock, in the record name of a subsidiary, also be attributed to the parent for purposes of debt capital.

A review of the legislative history of N.J.S.A. 54:10-4(e), gives further support to the conclusion that the phrase “stockholder or shareholder” was intended to include the equitable owners of a taxpaying corporation when there is an intervening subsidiary as the holder of record.

Prior to enactment of the CBT, the State’s local taxing districts had the power to tax intangible personal property. Such taxation had fallen into ill repute, through the use of “tax lightning” by larger taxing districts in levying the tax on corporations headquartered in their area, with the ultimate resolution of many such disputes by agreements having no relationship to actual tax liability. Consequently, many large corporations moved their corporate headquarters to taxing districts which enjoyed lower property tax rates. That practice was the subject of a comment by Governor Walter E. Edge in his first annual message to the Legislature, on January 9, 1945. His statement, quoted in the preface of the Report of the Commission of Taxation of Intangible Personal Property, dated March 26, 1945, was as follows:

No state can afford to permit its tax structure to fall into the morass of inequities that marks the taxation of personal property in New Jersey. I am not in favor of new taxes. I am not in favor of unduly disturbing our business interests in these critical times. I wish to preserve any competitive advantages we may have in relation to other states. But I cannot countenance a condition that permits large blocks of personal property to escape supporting their fair share of the costs of government; or even worse, a condition that reduces our tax laws to a barter-and-sale agreement between taxpayer and public official, [at iii; citation omitted]

Joint Resolution No. 4, dated March 29, 1944, had created the Commission on Taxation of Intangible Personal Property. The commission’s 1945 report detailed its purpose:

The Commission’s purpose, therefore, has been two-fold: to remove the threat of what is commonly called “tax lightning” from intangible personal property; and to provide a sound base through which a substantial amount of this property, now legally taxable but untaxed, can be reached for tax purposes, [at XII]

The report recommended that a corporation business tax, measured by net worth, be implemented in lieu of the tax on corporate-held intangible personal property. In submitting the report recommending the CBT, the commission stated that “the proposed net worth tax, however, is intended to reflect a measure of the employment of capital in New Jersey____” Id. at 78. Also noted was an awareness that in removing the tax on intangible personal property, a source of revenue was being removed from municipalities which were sorely in need of it. Following the commission’s recommendations, the Legislature enacted the CBT. See L. 1945, c. 162. The corporation business tax was a tax on net worth only.

Subsequently, on March 24, 1947, the Second Report of the Commission on State Tax Policy was submitted to the Governor and to the Legislature. In addition to proposing changes in the taxation of tangible personal property, the commission also recommended a change in the CBT, stating:

Corporations which are largely or entirely financed by borrowed capital hold assets and conduct business in the same manner as do those financed largely or entirely by equity capital. Deficit corporations exercise the same privilege to do business in New Jersey and they require the same public services as do corporations which have few or no debts.
The Commission finds that the Corporation Business Tax Act should be adjusted to provide a more suitable tax base for corporations holding substantial assets but reporting little or no net worth. While provisions of the act requiring adjustment of net worth to include debts owed to holders of 10 per cent or more of the capital stock provide some correction for discrepancies of this kind, they do not in every instance result in a suitable tax base for corporations operating entirely upon borrowed capital.... [at 101]

Acting on this recommendation, the Legislature enacted L. 1947, c. 50. That law included the present definition of “indebtedness owing directly or indirectly.” The broad language of “without limitation thereto” was also prescribed at that time.

The next meaningful amendment to the CBT was in 1958, when an income base for corporate taxation was added. That base was the “entire net income” of a corporation. Such was deemed to be the income reported to the Internal Revenue Service, plus or minus certain adjustments. Among the adjustments was the disallowance of a deduction for 90% of the interest on indebtedness owing directly or indirectly to holders of 10% or more of the aggregate outstanding shares of the taxpayer’s capital stock of all classes, except to some extent not germane to this discussion. While the income feature of the CBT is not at issue in the subject case, for reasons unexplained in the record, it must be recognized that the definition of “stockholders or shareholders” will have much more impact on that feature of the CBT since, as noted in the majority opinion, the net worth basis of the CBT has been completely repealed for the privilege periods beginning after June 30, 1986. However, the income base feature of the CBT remains viable.

The history of the CBT reveals that it was initiated as a corporate tax reform measure intended to supplant the tax on intangible personal property which was being abused both in its enforcement and in the manner in which major corporations were relocating to taxing districts in New Jersey in order to take advantage of lower property tax rates. After it had been in effect for two years, the Commission on State Tax Policy realized that the method by which corporations were being taxed permitted the avoidance of corporate tax responsibility by corporations utilizing debt capital rather than equity capital. Accordingly, the subject provision was enacted. The basis for such enactment, together with the wording utilized in its enactment, is a clear indication that the Legislature was concerned with those corporations which were largely or entirely financed by borrowed capital and which were conducting business in the same manner as New Jersey corporations financed by equity capital. The former corporations were enjoying the same privileges in doing business in New Jersey, as well as enjoying the same public services as the other corporations. However, they were escaping their fair share of corporate taxation. In order to equalize the corporate tax burden, the provisions for including debt capital in net worth were enacted. These amendments included N.J.S.A. 54:10A-4, to ensure proper distribution of that tax burden.

The history of the CBT supports the proposition that “stockholder or shareholder,” as used in the definitional portion of the CBT, was never intended to be restricted to the legal title owner to the exclusion of an indirect title holder. Rather, the phrase “without limitation thereto” was used in defining indebtedness owing directly or indirectly in order to assure that corporations using debt capital properly assumed their corporate tax responsibility. Consequently, the definition of stockholder or shareholder should properly include the immediate grandparent of a third-tier subsidiary when it is the recognized controller and equitable owner of the stock interest in a corporation using debt capital in New Jersey in competition with other corporations utilizing investment capital.

In addition to the above, there exists a well-settled principle that an administrative construction of a statute with which the Legislature has not interfered over a period of time is proof that the administrative interpretation conforms with the legislative intent, and is thus accorded great weight. Body-Rite Repair Co. v. Taxation Div. Director, 89 N.J. 540, 545-546, 446 A.2d 515 (1982); Metromedia, Inc. v. Director, Div. of Taxation, 97 N.J. 313, 327, 478 A.2d 742 (1984). This principle is particularly applicable here, since Regulation 16:10-3.140, promulgated on January 1, 1959, specifically provided as follows:

In the case of a creditor, corporate or otherwise (other than an individual), including an estate, trust, or other entity, indebtedness, if not includable by reason of direct ownership of taxpayer’s stock by such creditor, shall be includable if both the taxpayer and the creditor are substantially owned or controlled directly or indirectly by the same interest____

That regulation, or successors to the same effect, have been in existence for nearly 30 years. During that time, the CBT has had at least 14 legislative amendments. See listing at the end of N.J.S.A. 54:10A-4.

I would find, based upon the required expansive wording of the definition of “indebtedness owing directly or indirectly,” the legislative history, as well as the period of time during which the Director has interpreted the words “stockholder or shareholder,” that such words include both corporate parents and grandparents when their subsidiaries are the record shareholders.

I would affirm the Director’s determination. 
      
      The Legislature has repealed subsection (5), L. 1982, c. 55, § 1, effective July 1, 1984, nevertheless, this provision is still relevant here because plaintiffs case involves tax years prior to the statute’s amendment.
     
      
      This position was reflected in the Director’s regulation, N.J.A.C. 18:7-4.5(d) which provided:
      In the case of a creditor, corporate or otherwise (other than an individual), including an estate, trust or other entity, indebtedness, if not includible by reason of direct ownership of taxpayer’s stock by such creditor, shall be includible if both the taxpayer and the creditor are substantially owned or controlled directly or indirectly by the same interests, or where the creditor is controlled directly or indirectly by the same interests, or where the creditor is controlled, directly or indirectly by interests, including members of the immediate family of stockholders, which in the aggregate hold ten percent or more of the taxpayer’s outstanding shares of capital stock of all classes. For the purpose of determining the degree of stock ownership of a corporate creditor, all the shares of the taxpayer's capital stock held by all corporations bearing the relationship of parent, subsidiary or affiliate of the corporate creditor shall be aggregated. [Emphasis supplied]
      This regulation was declared ultra vires by the Supreme Court in Fedders, supra, 96 N.J. at 392, 476 A.2d 741. The emphasized language in the rejected regulation, however, has been readopted by the Director as N.J.A.C. 18:7-4.-5(f), supra.
      
     
      
      Prior to the decisions of the Supreme Court in Fedders and Mobay on one hand.and International Flavors on the other, it is interesting to note that the Director’s position on the aggregation of stockholding was just as allegedly inconsistent as the decisions of the Supreme Court. Before Fedders, the Director was of the opinion that aggregation of stockholding was permissible and, in fact, mandated in the indebtedness cases. In contrast, before the decision in International Flavors, the Director’s position was that indirect or equitable ownership could not be aggregated with record ownership, i.e., direct record ownership was necessary in the dividend-paying-subsidiary situations.
     
      
      There is nothing in the record to indicate that the loans at issue were mere sham transactions designed solely to evade corporation business taxes, and therefore, we have not considered the effect of such a factual context. See Coppa v. Taxation Div. Director, 8 N.J.Tax 236 (Tax Ct.1986).
     
      
      While it is true that pending legislation does not constitute legislative history for an existing enactment, it is interesting to observe that there is a bill pending in the Legislature, Assembly Bill 4238 (1989), which will permit the Director to engage in a subjective debt-equity analysis in certain specified circumstances.
     
      
      
        N.J.S.A. 54:10A-19.2 provides as follows:
      Any aggrieved taxpayer may, within 90 days after any action of the director made pursuant to the provisions of this act, appeal therefrom to the tax court in accordance with the provisions of the State Tax Uniform Procedure Law, R.S. 54:48-1 ei seq.
      
     
      
      The importance of the subject issue in computing the income tax base is apparent when it is recognized that under similar factual circumstances, the majority opinion would permit the interest paid on the subject indebtedness to be fully deductible in computing the CBT income base. The grandparent herein is a Nevada corporation. Nevada is a state which has no corporate business income tax, thus, the ideal tax planner’s situation.
     