The New Jersey Tax Court has issued a ruling for Reed Smith's client, the Equipment Leasing & Finance Association ("ELFA"), that on one hand restricts the use of alterative minimum assessment ("AMA") credits, but on the other hand, potentially opens up opportunities for some taxpayers.1

Who is affected, and what should companies do?

The ELFA issue is relevant for any taxpayer that paid AMA and that also generated incentive credits, like research credits, manufacturing credits, and investment credits. Those taxpayers should now consider:

  • Filing a refund claim to apply incentive credits against their AMA liability for open years. (For most taxpayers, 2004, 2005, and 2006 are still open.) Most taxpayers did not apply incentive credits against the AMA in these years,
  • Filing a protective refund claim and taking a return position that the 50 percent cap on AMA credits applies only to tax left over after applying any incentive credits. Under this position, a taxpayer can reduce its tax by up to 75 percent using AMA credits and other credits. These refund claims would be filed pending the outcome of any appeal of the ELFA case or any follow-on litigation.


The specific issue before the court was whether a taxpayer that hits the 50 percent cap on incentive credits can further reduce its tax on account of the AMA credit. That is, can a taxpayer reduce its tax by up to 50 percent on account of incentive credits, and then reduce the remaining tax by another 50 percent on account of the AMA credit?

In 2002, New Jersey enacted a number of revenue-raising measures, including the AMA.2 The AMA expired for most taxpayers in 2006.3 While it was in effect, taxpayers paid the greater of the AMA or New Jersey's corporate income tax (the corporation business tax or "CBT"). A taxpayer received a dollar-for-dollar credit to the extent that its AMA exceeded its CBT.4 The statute provided three limits on the use of AMA credits. In any single year, the allowable AMA credit could not reduce the tax otherwise due: (1) below the AMA; (2) by more than 50 percent of tax otherwise due; or (3) below the statutory minimum.5 These were the only limitations provided by the statute, and the regulations issued by the Division of Taxation (the "Division") mirrored the statute—at least until 2007.6

In 2007, the Division amended its credit-ordering regulation, N.J.A.C. 18:7-3.17, to impose additional limitations on the use of AMA credits.7 As a result, the AMA credit became aggregated with 17 incentive credits and subjected to a single 50 percent cap. The amendment also set the priority for claiming the AMA credit relative to the 17 incentive credits. As amended, the regulation requires a taxpayer to apply 14 incentive credits (including the research credit and investment tax credit) before applying the AMA credit. Therefore, if a taxpayer has higher-priority incentive credits that are sufficient to reduce its tax by 50 percent, the taxpayer is precluded by the regulation from using any of its available AMA credits. Under the regulation, a taxpayer that conducts significant research or that makes significant investments in New Jersey might never get to use its AMA credits because it will already hit the 50 percent cap on account of its incentive credits.

Aggregating the AMA credit with incentive credits substantially restricts the use of the AMA credit and adds a condition not contained in the statute. The AMA statute (unlike all of the other credits covered by the regulation) says nothing about aggregating the AMA credit with incentive credits. Rather, under the plain language of the AMA statute, there is a separate 50 percent cap on the AMA credit that is based on the regular CBT computed after the application of incentive credits. So a taxpayer should be able to first reduce its CBT by up to 50 percent on account of incentive credits, and then reduce the remaining amount by up to 50 percent on account of the AMA credit.

Because of the inconsistency between the statute and the regulation, Reed Smith, on behalf of the ELFA, filed a complaint in the New Jersey Tax Court to challenge the Division's regulation. (ELFA is the trade association representing financial services companies and manufacturers engaged in financing the utilization and investment in capital goods. Its members include many of the nation's largest financial services companies and manufacturers, as well as regional and community banks, and independent medium and small finance companies throughout the country.)

The Tax Court's Decision

The court upheld the Division's regulation. In his decision, Judge Harold Kuskin reasoned that the purpose of the AMA was to generate additional revenue and that ELFA's position would have resulted in some taxpayers paying less tax. Of course, this doesn't address the fact that only the AMA credit provisions were at issue and, by definition, those provisions were intended to provide taxpayers with a way to recoup their prior AMA payments. Under Judge Kuskin's ruling, certain taxpayers may never get to use their AMA credits. In any case, even if the legislature intended to raise revenue, this is the intent of most tax legislation. Surely a taxpayer's position can't be rejected simply because it might result in the payment of less tax.

In further support of his ruling, Judge Kuskin relied on a novel interpretation of the statute. The statute limits the AMA credit to 50 percent of the "tax otherwise due." Common sense dictates that "tax otherwise due" for purposes of computing the allowable AMA credit should mean the CBT that would be due but for the AMA credit. And the "tax otherwise due" but for the AMA credit is the CBT after the application of any allowable incentive credits. As a result, the 50 percent cap on the AMA credit should be computed based on the CBT that remains after the application of any incentive credits. But Judge Kuskin interpreted the phrase "tax otherwise due" to mean the CBT before any credits—not just the AMA credit. Not even the Division itself had advocated for this interpretation. In effect, this interpretation aggregates the AMA credit with higher-priority incentive credits and subjects all credits to a single 50 percent cap.

Finally, Judge Kuskin rejected the argument that the Division's regulation should be applied prospectively only. The court reasoned that the 2007 amendment did not reflect a change of policy. But Judge Kuskin's ruling did not address the fact that prior to the 2007 amendment, the Division's regulation did not require the AMA credit to be aggregated with incentive credits for purposes of computing the allowable AMA credit.

At this point, it is unclear whether an appeal will be filed. If no appeal is filed, the court's ruling will not preclude another company from re-litigating the issue as a refund claim if the issue is important to it. Keep in mind that a ruling by one tax court judge is not binding on other tax court judges.8 Also keep in mind that any follow-up case will likely be heard by a different tax court judge because Judge Kuskin is planning to retire this spring. At any rate, even if other tax court judges follow Judge Kuskin's logic, a taxpayer would have a right to appeal to the appellate division, which has shown a willingness to take a fresh look at tax issues that get appealed from the tax court.