N.J.A.C. 18:7-21.1 - Definitions Relevant to Combined Returns

(a) The following words and terms, as used in this subchapter shall have the following meanings, unless the context clearly indicates otherwise:

1. "Affiliated group" means for purposes of section 23 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-4.11), an affiliated group as defined at I.R.C. § 1504, except such affiliated group shall include all U.S. domestic corporations that are commonly owned, directly or indirectly, by any member of such affiliated group, without regard to whether the affiliated group includes: (1) corporations included in more than one Federal consolidated return; (2) corporations engaged in one or more unitary businesses; or (3) corporations that are not engaged in a unitary business with any other member of the affiliated group.

As used in this definition, "U.S. domestic corporations" means: (1) business entities wherever incorporated or formed that are U.S. domestic corporations, are deemed to be, or are treated as U.S. domestic corporations pursuant to the provisions of the Internal Revenue Code; or (2) any entities incorporated or formed under the laws of a foreign nation that are required to file Federal tax returns if such entities have effectively connected income within the meaning of the Internal Revenue Code. "Commonly owned" means that more than 50 percent of the voting control of each member of an affiliated group is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, whether the owner or owners are members of the affiliated group. Whether voting control is indirectly owned shall be determined, in accordance with I.R.C. § 318.

In cases where the "commonly owned" ownership standard is met, a New Jersey affiliated group shall include: (1) business entities wherever incorporated or formed that are U.S. domestic corporations, that are deemed to be, or are treated as U.S. domestic corporations pursuant to the provisions of the Internal Revenue Code; or (2) any entities incorporated or formed under the laws of a foreign nation that are required to file Federal tax returns, if such entities have effectively connected income within the meaning of the Internal Revenue Code.

2. "Combinable captive insurance company" means an entity that is treated as an association taxable as a corporation under the Internal Revenue Code, where:

i. More than 50 percent of the voting stock of which is owned or controlled, directly or indirectly, by a single entity that is treated as an association taxable as a corporation pursuant to the Internal Revenue Code, and not exempt from Federal income tax;

ii. The entity is licensed as a captive insurance company pursuant to the laws of this State or another jurisdiction;

iii. The business includes providing, directly and indirectly, insurance or reinsurance covering the risks of its parent, members of its affiliated group, or both; and

iv. Fifty percent or less of whose gross receipts for the privilege period consist of premiums from arrangements that constitute insurance for Federal income tax purposes.

For purposes of this definition, "affiliated group" shall have the same meaning as that term is given at I.R.C. § 1504, except that the term "common parent corporation" as used at I.R.C. § 1504, shall mean any person, as defined at I.R.C. § 7701, and references to "at least 80 percent" at I.R.C. § 1504, shall be read as "50 percent or more." I.R.C. § 1504, shall be read without regard to the exclusions provided for at subsection (b) of that section. The affiliated group is also otherwise known as the commonly owned group. "Gross receipts" includes the amounts included in gross receipts for purposes of paragraph (15) of subsection (c) at § 501 of the Internal Revenue Code, 26 U.S.C. § 501(c)(15), except that those amounts also include all premiums. "Premiums" includes consideration for annuity contracts and excludes any part of the consideration for insurance, reinsurance, or annuity contracts that do not provide bona fide insurance, reinsurance, or annuity benefits. A combinable captive insurance company shall not be exempt pursuant to section 3 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-3). A captive insurance company that does not meet the definition of combinable captive insurance company will be excluded as provided in subsection k. of section 18 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-4.6) and is exempt pursuant to section 3 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-3).

3. "Combined group" means the group of all companies that have common ownership and are engaged in a unitary business, where at least one company is subject to tax pursuant to this chapter, and shall include all business entities, except as otherwise provided for under any section of the Corporation Business Tax Act, P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.).

A combined group shall be treated, for privilege periods ending on and after July 31, 2020, as one taxpayer for purposes of paragraph (1) of subsection (c) of section 5 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-5) and section 1 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-5.41) for the income derived from the unitary business; provided however, with regard to the surtax imposed pursuant to section 1 at P.L. 2018, c. 48 (N.J.S.A. 54:10A-5.41), and for that purpose only, the portion of income that is attributable to a member that is a public utility exempt from the surtax shall not be included when computing the surtax due.

i. The combined group shall consist of one or more taxable members of the group, irrespective of their place of incorporation or formation, and the additional non-taxable members of such group.

ii. In the case of an affiliated group election, the term "combined group" refers to the group to which the election applies, which may constitute more than one Federal affiliated group.

iii. The combined group shall consist of members irrespective of their place of incorporation and include businesses operating as a unitary business. The determination of whether a group of entities constitutes a combined group occurs prior to determining the method (water's-edge, worldwide, or affiliated group) of combined returns to file. However, a combined group will file on a water's-edge basis if no election to file a worldwide or affiliated group basis is made. See N.J.A.C. 18:7-21.15 for more information on determining which members are included on a water's-edge basis.

4. "Common ownership" means that more than 50 percent of the voting control of each member of a combined group is directly or indirectly owned by a common owner or owners, either corporate or non-corporate, whether the owner or owners are members of the combined group. Whether voting control is indirectly owned shall be determined in accordance with I.R.C. § 318.

i. Direct and indirect voting control, and tiered ownership. If the same person (and/or any related persons) holds directly or indirectly more than 50 percent of the voting control of a corporation (a parent corporation), that person shall be considered to hold indirectly any stock or other interest in ownership or control in a lower-tier corporation (a subsidiary corporation) that is directly or indirectly held by the parent corporation. Thus, by way of illustration, a parent corporation and any one or more corporations (whether in a direct chain) connected through direct or indirect stock ownership, where more than 50 percent of the voting control of each subsidiary corporation is directly or indirectly owned by a corporation (and/or any related persons), are treated as commonly owned or under common ownership, and subject to inclusion in a combined group.

Example 1. Corporation A, a widely-held, publicly traded corporation, owns 51 percent of the stock of Corporation B; Corporation B owns 51 percent of Corporation C; and Corporation C owns 60 percent of Corporation D. Corporations A, B, C, and D are all treated as commonly owned or under common ownership, and subject to inclusion in a combined group.

Example 2. Same facts as Example 1, except Corporation C owns 40 percent of Corporation D, with another 20 percent of Corporation D being owned by an individual who owns 100 percent of Corporation A. Corporations A, B, C, and D are all treated as commonly owned or under common ownership, and subject to inclusion in a combined group. Corporation D is treated as commonly owned through the aggregation of Corporation C's 40 percent ownership in Corporation D and the related individual's 20 percent ownership in Corporation D.

ii. Related versus unrelated owners. Two or more corporations, where stock representing more than 50 percent of the voting control of each corporation is owned directly or indirectly by the same person (and/or any related persons), whether corporate or non-corporate, are treated as commonly owned or under common ownership, and subject to inclusion in a combined group. A common owner or owners need not be members of the combined group.

Example 1. Individual (W) owns 51 percent of Corporation A, 60 percent of Corporation B, and 100 percent of Corporation C. Corporations A, B, and C are all treated as commonly owned or under common ownership, and subject to inclusion in a combined group. The same conclusion would be reached if W owned 35 percent of Corporation B and W's husband, a related person, owned 25 percent of Corporation B, so that together W and her husband owned 60 percent of Corporation B.

Example 2. Foreign corporation (F) owns 100 percent of the stock of Corporation A (organized in the U.S.) and of Corporation B (also organized in the U.S.). Corporations A and B each directly or indirectly own various corporate subsidiaries in separate chains leading up to Corporations A and B, where the voting control of each subsidiary is more than 50 percent owned by a higher-tier corporation in the chain. Corporations A and B, and all of their respective direct and indirect subsidiaries, are treated as commonly owned or under common ownership, and subject to inclusion in a single combined group.

(1) Two or more corporations shall not be treated as commonly owned or under common ownership, and subject to inclusion in a combined group, where aggregation of the ownership of such unrelated owners would be necessary in order to represent more than 50 percent of the voting control of any of such corporations.

Example 1. Individual I-1 owns stock representing 40 percent of the voting control of Corporation A and stock representing 20 percent of the voting control of Corporation B. Individual I-2 owns 30 percent of Corporation A and 45 percent of Corporation B. I-1 and I-2 are not related persons, and Corporations A and B are not otherwise related persons. Corporations A and B are not treated as commonly owned or under common ownership, and, thus, are not subject to inclusion in a combined group.

(2) In applying I.R.C. § 318 for determining whether indirect ownership exists, the beneficial and constructive ownership rules of Internal Revenue Code § 318 shall apply for the purposes of determining common ownership.

(3) Two or more corporations that are "stapled entities" are treated as commonly owned or under common ownership, and subject to inclusion in a combined group. Stapled entities are entities where, by reason of their form of ownership, or restrictions on transfer of ownership, or other terms or conditions (whether existing by operation of law, by written contract, or otherwise), in the case of a transfer of one or more ownership interests, more than 50 percent of the voting control of each entity is required to be transferred. See 26 CFR 1.269B-1 for additional information on stapled entities.

(4) A group of corporations under common ownership may be engaged in one or more unitary businesses.

(5) Related parties; constructive ownership. In determining whether a person is a related person or is considered to hold stock or other ownership or control interests in an entity that is directly held by another person, the constructive ownership rules described at I.R.C. § 318 shall generally apply, to the extent not inconsistent with the rules or requirements described in this definition or elsewhere in this chapter or at N.J.S.A. 54:10A-1 et seq., except that:

(A) In applying I.R.C. § 318(a)(2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of the voting control of a corporation, it shall be considered to own all of the stock or other ownership or control interests in such corporation; and

(B) If a person has an option to acquire stock or other ownership interests in an entity, such stock or other ownership interests shall be treated as owned by such person only to such extent as determined by the Director, as necessary, to prevent tax avoidance.

(6) In determining common ownership, the Director may take into account any plan or arrangement, whether existing by operation of law, by contract, or otherwise, for bestowing or shifting ownership or voting control, in addition to the terms of any actual stock ownership or control.

5. "Group privilege period" means, if two or more members in the combined group file in the same Federal consolidated tax return, the same income year as that used on the Federal consolidated tax return and, in all other cases, the privilege period of the managerial member.

6. "Managerial member" means, if the combined group has a common parent corporation and that common parent corporation is a taxable member, the managerial member shall be the common parent corporation. In other cases, the combined group shall select a taxable member as its managerial member or, in the discretion of the Director, or upon failure of the combined group to select its managerial member, the Director shall designate a taxable member of the combined group as managerial member.

7. "Member" means a business entity that is a part of a combined group.

i. A disregarded entity is not itself a member. See N.J.A.C. 18:7-21.3 for more information.

ii. A partnership is not a member of a combined group. See N.J.A.C. 18:7-21.3 for more information.

iii. A business entity that is treated as a corporation for either the purposes of the corporation business tax or for Federal purposes shall be a member of the combined group, unless some other exception or exclusion applies.

iv. A corporation exempt pursuant to section 3 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-3) from the tax imposed pursuant to P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.), shall not be a member of a combined group.

8. "Nontaxable member" means a member that is: not subject to tax pursuant to the Corporation Business Tax Act, P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.).

9. "Taxable member" means a member that is subject to tax pursuant to the Corporation Business Tax Act, P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.). A member shall be a taxable member even if such member only owes the minimum tax. A New Jersey S corporation shall only be included as a taxable member of a combined group filing a New Jersey combined return if the New Jersey S corporation elects to be included as a member and taxed at the same rate as the other members of the combined group. A New Jersey S corporation that does not elect to be included shall be excluded as a member of the combined return and shall file a separate return.

10. "Unitary business" means, for privilege periods ending before July 31, 2023, a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, and interrelated through their activities, so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts. For privilege periods ending on and after July 31, 2023, "unitary business" means a single economic enterprise that is made up either of separate parts of a single business entity or of a group of business entities under common ownership that are sufficiently interdependent, integrated, or interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value among the separate parts. "Unitary business" shall be construed to the broadest extent permitted pursuant to the Constitution of the United States. A business conducted by a partnership that is in a unitary business with the combined group shall be treated as the business of the partners that are members of the combined group, whether the partnership interest is held directly or indirectly through a series of partnerships, to the extent of a partner's distributive share of partnership income. The amount of partnership income to be included in the partner's entire net income shall be determined in accordance with subsection a. of section 3 at P.L. 2001, c. 136 (N.J.S.A. 54:10A-15.6) or subsection a. of section 4 at P.L. 2001, c. 136 (N.J.S.A. 54:10A-15.7), as applicable. A business conducted directly or indirectly by one corporation is unitary with that portion of a business conducted by another corporation through its direct or indirect interest in a partnership.

i. A group of corporations related by common ownership may be engaged in more than one unitary business.

ii. See N.J.A.C. 18:7-21.2 for more information on unitary business.

11. "World-wide basis" and "world-wide group" means, for privilege periods ending on and after July 31, 2022, for the purposes of N.J.S.A. 54:10A-4.6 through 54:10A-4.11 and for the purposes of combined reporting in general pursuant to the Corporation Business Tax Act (1945), P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.), that the combined group shall include all of the members of the combined group, wherever located or formed. For privilege periods ending on and after July 31, 2022, the combined group shall include all of the income and attributes of those members regardless of how or whether those members file Federal returns or report or include their income in Federal taxable income for Federal purposes, and without regard to any exemption or exclusion from Federal taxable income pursuant to the terms of a tax treaty; provided, however, any deductions that are allowed pursuant to the Federal Internal Revenue Code that are also allowable pursuant to the Corporation Business Tax Act (1945), P.L. 1945, c. 162 (N.J.S.A. 54:10A-1 et seq.), that would apply to a U.S. corporation, but that a non-U.S. corporation is prohibited from claiming for Federal corporation income tax purposes because the corporation's income was not included in Federal taxable income for any reason or because the corporation is a non-U.S. corporation shall be allowed for the non-U.S. corporation members of the combined group for New Jersey corporation business tax purposes as though those non-U.S. corporation members were U.S. corporations. For more information, see N.J.A.C. 18:7-21.7.

12. "Captive Real Estate Investment Trust" means, for privilege periods ending on and after July 31, 2023, a real estate investment trust that is not regularly traded on an established securities market and of which more than 50 percent of the voting stock is owned or controlled, directly or indirectly, by a single entity that is treated as an association taxable as a corporation pursuant to the Internal Revenue Code, is not exempt from Federal income tax, and is not a real estate investment trust. For purposes of this definition, a "Captive Real Estate Investment Trust" shall not include any Captive Real Estate Investment Trust of which at least 50 percent of the shares, by vote or value, is owned or controlled, directly or indirectly, by a state or Federally chartered bank, savings bank, or savings and loan association with assets that do not exceed $ 15 billion. For privilege periods ending on and after July 31, 2023, any voting stock in a real estate investment trust that is held in a segregated asset account of a life insurance corporation, as described at section 817 of the Internal Revenue Code (26 U.S.C. § 817), shall not be taken into account for purposes of determining whether a real estate investment trust is a Captive Real Estate Investment Trust. For purposes of this definition, an association taxable as a corporation shall not include any listed Australian property trust or any qualified foreign entity.

For privilege periods ending on and after July 31, 2023, a Captive Real Estate Investment Trust shall be taxed in the same manner as a C corporation, and subsection d. of section 5 at P.L. 1945, c. 162 (N.J.S.A. 54:10A-5(d)) shall not apply. A Captive Real Estate Investment Trust shall not be permitted to claim any deductions or expenses that were permitted for Federal purposes, solely as a result of the entity being a real estate investment trust, when computing Federal taxable net income. A Captive Real Estate Investment Trust shall be a member of a combined group and shall be included as a member on the combined return. For more information, see N.J.A.C. 18:7-21.3(g).

As used in this definition:

"Australian property trust" means an Australian unit trust that is registered as a managed investment scheme pursuant to the Australian Corporations Act, and in which the principal class of units is listed on a recognized stock exchange in Australia and is regularly traded on an established securities market; or an entity organized as a trust, provided that a listed Australian property trust owns or controls, directly or indirectly, 75 percent or more of the voting power or value of the beneficial interests of shares of the trust.

"Qualified foreign entity" means a corporation, trust, association, or partnership that is organized outside the laws of the United States and that satisfies the following criteria:

1. At least 75 percent of the entity's total asset value at the close of its taxable year is represented by real estate assets, as defined at subparagraph (B) of paragraph (5) of subsection (c) of section 856 of the Internal Revenue Code (26 U.S.C. § 856), including shares or certificates of beneficial interest in any real estate investment trust, cash and cash equivalents, and United States Government securities;

2. The entity is not subject to tax on amounts distributed to its beneficial owners, or is exempt from entity-level taxation;

3. The entity distributes, on an annual basis, at least 85 percent of its taxable income, as computed in the jurisdiction in which it is organized, to the holders of its shares or certificates of beneficial interest;

4. No more than 10 percent of the voting power or value in the entity is held directly, indirectly, or constructively by a single entity or individual, or the shares or certificates of beneficial interests of the entity are regularly traded on an established securities market; and

5. The entity is organized in a country that has a tax treaty with the United States.

6. "Captive regulated investment company" means, for privilege periods ending on and after July 31, 2023, a regulated investment company that is not regularly traded on an established securities market, and of which more than 50 percent of the voting stock is owned or controlled, directly or indirectly, by a single corporation, other than a regulated investment company, that is not exempt from Federal income tax. For purposes of this definition, a "captive regulated investment company" shall not include any captive regulated investment company of which at least 50 percent of the shares, by vote or value, is owned or controlled, directly or indirectly, by a state or Federally chartered bank, savings bank, or savings and loan association with assets that do not exceed $ 15 billion.

For privilege periods ending on and after July 31, 2023, any voting stock in a regulated investment company that is held in a segregated asset account of a life insurance corporation, as described at section 817 of the Internal Revenue Code (26 U.S.C. § 817), shall not be taken into account for purposes of determining whether a regulated investment company is a captive regulated investment company.

For privilege periods ending on and after July 31, 2023, a captive regulated investment company shall be taxed in the same manner as a C corporation and subsection d. of section 5 of P.L. 1945, c. 162 (N.J.S.A. 54:10A-5) shall not apply. A captive real estate investment company shall not be permitted to claim any deductions or expenses that were permitted for Federal purposes, solely as a result of the entity being a regulated investment company, when computing Federal taxable net income. A captive regulated investment company shall be a member of a combined group and shall be included as a member on the combined return. For more information, see N.J.A.C. 18:7-21.3(g).

14. "Captive investment company" means, for privilege periods ending on and after July 31, 2023, an investment company that is not regularly traded on an established securities market and of which more than 50 percent of the voting stock is owned or controlled, directly or indirectly, by a single corporation, other than an investment company, that is not exempt from Federal income tax. For purposes of this definition, a "captive investment company" shall not include any captive investment company of which at least 50 percent of the shares, by vote or value, is owned or controlled, directly or indirectly, by a state or Federally chartered bank, savings bank, or savings and loan association with assets that do not exceed $ 15 billion. For privilege periods ending on and after July 31, 2023, any voting stock in an investment company that is held in a segregated asset account of a life insurance corporation, as described at section 817 of the Internal Revenue Code, shall not be taken into account for purposes of determining whether an investment company is a captive regulated investment company.

For privilege periods ending on and after July 31, 2023, a captive investment company shall be taxed in the same manner as a C corporation, and subsection d. of section 5 of P.L. 1945, c. 162 (N.J.S.A. 54:10A-5) shall not apply. A captive investment company shall not be permitted to claim any deductions or expenses that were permitted for Federal purposes, solely as a result of the entity being an investment company, when computing Federal taxable net income. A captive investment company shall be a member of a combined group and shall be included as a member on the combined return. For more information, see N.J.A.C. 18:7-21.3(g).