The only issue before the court was whether the Division of Taxation (the “Division”) properly added back interest that the taxpayer had paid to its corporate parent. The taxpayer’s position was that it qualified for the so-called “unreasonableness exception” to New Jersey’s related-party interest expense addback, because the interest paid by the taxpayer to its parent was effectively funding the parent’s third-party interest expense.2 At the trial court level, the Tax Court ruled in favor of the Division, reasoning that the taxpayer had not guaranteed the parent’s third-party debt. (For our analysis of the Tax Court’s decision, see our prior alert.) In today’s unpublished decision, the appellate court affirmed the Tax Court’s ruling without providing any further analysis of the issue.


Despite the appellate court’s decision, many taxpayers may still qualify for an exception to New Jersey’s related-party interest expense addback:

  • The New Jersey courts have now issued four decisions on interest addback cases: two taxpayer victories; and two taxpayer losses.3 Each decision is heavily dependent on the taxpayer’s particular facts and circumstances. If a taxpayer can distinguish itself from Kraft, they may be entitled to an exception.
  • It is important to recognize that there are four other addback exceptions besides the unreasonableness exception.4 Taxpayers should not overlook their right to relief based on those other exceptions.

If you have questions about whether your company should be adding back related-party interest expense, please contact one of the authors of this alert or the Reed Smith attorney with whom you usually work.