On May 27, the New Jersey Tax Court held that the New Jersey Division of Taxation could not eliminate a taxpayer’s net operating losses generated during years beyond the statute of limitations. The division’s proposed reduction was based on a transfer pricing adjustment between related entities for years never audited by the division and otherwise closed under the applicable statute of limitations. The court held that although the division had broad authority to determine the proper tax amount due from available information, this mandate did not permit the division to audit closed years to reduce a NOL carryforward.
The court noted that the statute of limitations protection for NOLs or other permitted carryforwards would be illusory under the corporate business tax if the division could change the components of the carryforward at any time simply because it was not imposing an additional assessment of tax in the closed years.
The court held that permitting division to audit and adjust the taxpayer’s NOL carryforward from these closed years would be tantamount to an adjustment of the income reported in those years and thus constitutes an impermissible audit of closed years under N.J.S.A. 54:49-6. “The court finds that auditing a closed year and applying the revisions from that closed year in the open year of audit is doing indirectly what the statute does not permit directly: bypassing the four year statute of limitations.”