N.J.A.C. 18:7-21.3 - Entities Included and Excluded From a Combined Return

Section 18:7-21.3 - Entities Included and Excluded From a Combined Return
Section 18:7-21.2 - Unitary BusinessSection 18:7-21.4 - Mandatory Combined Returns for Unitary Combined Groups

(a) For the purposes of the corporation business tax, the following business entity types must be included as members of the combined group filing a New Jersey combined return:

  1. Corporations;

  2. Combinable captive insurance companies;

  3. Banking corporations and financial corporations;

  4. Limited liability companies (taxed as corporations);

  5. Foreign limited liability companies (taxed as corporations);

  6. S corporations, except as provided at (b) below;

  7. Casino licensees;

  8. Qualified Subchapter S Subsidiaries that have elected to be taxed as a C corporation for New Jersey purposes;

  9. Qualified Subchapter S Subsidiaries that elected to be included in the combined group;

  10. Business entities that are treated as corporations for Federal purposes;

  11. Professional corporations;

  12. Business entities included in the combined group include entities incorporated pursuant to the laws of a foreign country as business entities that would be corporations if such entities had been incorporated pursuant to the laws of the United States;

  13. Public utilities, as defined at N.J.S.A. 54:10A-4(q), that are not excluded pursuant to N.J.S.A. 54:10A-4.6(k);

  14. Captive investment companies;

  15. Captive regulated investment companies; and

  16. Captive real estate investment trusts.

(b) For the purposes of the corporation business tax, the following business entity types are excluded as members of the combined group filing a New Jersey combined return:

  1. Public utility companies that are excluded pursuant to N.J.S.A. 54:10A-4.6(k) are not included in the combined group reporting on the combined return. Such public utility companies shall file separate returns, but are permitted to petition for inclusion pursuant to (f) below;

  2. An S corporation that does not elect to be included as part of the combined group reported on the combined return either pursuant to N.J.S.A. 54:10A-4(ff) or as a result of electing C corporation status pursuant to N.J.S.A. 54:10A-5.22(d). Such S corporations shall file separate returns. S corporations that do elect to be taxed as a C corporation and included as a member of a combined group as a result of N.J.S.A. 54:10A-4(ff) or 54:10A-5.22(d) are subject to the rules of combined reporting;

  3. Insurance companies that are not combinable captive insurance companies are excluded from the combined group reported on the combined return, except that dividends from the insurance companies may be included in the income reported by the combined group members pursuant to N.J.S.A. 54:10A-4.6(k)(1);

  4. A business entity that is treated as a disregarded entity for Federal income tax purposes;

  5. Partnerships, limited partnerships, or limited liability companies treated as partnerships for Federal purposes; and

  6. Corporations exempt from the corporation business tax pursuant to N.J.S.A. 54:10A-3.

(c) A business entity that is treated as a disregarded entity for Federal income tax purposes is also treated as a disregarded entity for New Jersey corporation business tax purposes pursuant to N.J.S.A. 42:2C-92. Disregarded entities also include legal partnerships that are disregarded entities for Federal purposes.

  1. While a disregarded entity itself is not a member of a combined group, the tax attributes of a disregarded entity are reported by a member of a combined group when the member owns the disregarded entity. The attributes of a disregarded entity owned by a member of a combined group are included in the income and allocation factor of that member and the combined group. In making a determination of which members are included in a water's-edge combined group pursuant to N.J.S.A. 54:10A-4.11, the disregarded entity's attributes shall be used by the member that owns the disregarded entity. A disregarded entity is not subject to the $ 2,000 minimum tax as a member of a combined group because a disregarded entity is not a member of the combined group. However, if a disregarded entity is part of a unitary business of a combined group, the owner of the disregarded entity will be a member of the combined group and must be included as part of the combined return, except as otherwise excluded.

(d) Partnerships, limited partnerships, or limited liability companies treated as partnerships, for Federal purposes are business entities that can be unitary with a combined group. However, these entities are not members of a combined group for New Jersey corporation business tax purposes. With regard to unitary partnerships, limited partnerships, or limited liability companies treated as partnerships, the respective income and attributes flow through to the corporate partners that are members of the combined group for the purposes of computing entire net income, allocation, and for the purposes of determining inclusion in the water's-edge basis pursuant to N.J.S.A. 42:2C-92(a), 54:10A-4(gg), 54:10A-4.6(c)(1), 54:10A-15.6, and 54:10A-15.7. Partnerships, limited partnerships, and limited liability companies that are treated as partnerships for Federal purposes are not subject to the $ 2,000 minimum tax as a member of a combined group because they are not a member of the combined group. However, Form NJ-CBT-1065 must still be filed.

(e) Newly acquired business entities under common ownership with a combined group must be included as one of the members of the combined group if it is operating as part of the combined group's business enterprise as described at N.J.A.C. 18:7-21.2(a).

(f) The Director may permit by petition of the taxpayer and the members of its unitary business group that a certain otherwise excluded taxpayer that is a member of a combined group be included in the combined group reported on the combined return. However, all of the members of the combined group, including such otherwise excluded taxpayer must disclose all of their books and records to the Director. The otherwise excluded taxpayer will be denied inclusion as a member of the combined group on the combined return if the Director determines the principal purpose of such inclusion is to exploit the tax attributes of either the other members or the otherwise excluded taxpayer.

(g) For the purposes of determining whether a real estate investment trust, investment company, or regulated investment company that is owned by a bank or savings and loan association is included as a member of the combined group as a captive, the bank or savings and loan association will determine whether its assets exceed 15billionbyusinganaveragevalueforthegroupprivilegeperiod.Iftheaverageassetsofthebankorsavingsandloanassociationforthegroupprivilegeperiodare15 billion by using an average value for the group privilege period. If the average assets of the bank or savings and loan association for the group privilege period are 15 billion or less, a real estate investment trust, investment company, or regulated investment company owned by the bank is not a "captive" and would file a separate return. The combined group cannot file a short-period return merely because the value of the bank's or savings and loan association's assets changed during the group privilege period.

  1. The average value of the assets shall be determined in accordance with U.S. G.A.A.P. or I.F.R.S. as reported for financial and regulatory reporting purposes using the quarterly reports filed with the FDIC and Federal Reserve.

  2. There are instances where a bank or savings loan association may determine whether its assets exceed the $ 15 billion threshold without using the average value of the group's 12-month privilege period. The following are some of the scenarios, but are not all inclusive:

i. If there is a merger or acquisition occurring during the last month of the group privilege period that involves two or more banks or savings and loan associations and the combined annual average assets exceed $ 15 billion, the bank or savings and loan association can use the average value of the assets during the preceding 11 months in the group privilege period.

ii. If there is a merger or acquisition occurring during the first 11 months of the group privilege period that involves two or more banks or savings and loan associations and the combined annual average of the assets exceed 15billion,thesurvivingbankcanuseaweightedaveragevalueoftheassetsfromthepre−mergermonthsandthepost−mergermonthstodeterminewhetheritsassetsexceedtheannual15 billion, the surviving bank can use a weighted average value of the assets from the pre-merger months and the post-merger months to determine whether its assets exceed the annual 15 billion limit.

iii. Regardless of whether two combined groups are merging or a combined group is reorganizing its business structure, if the banks or savings and loan associations merge into a newly created entity that is also a bank or savings and loan association that is the surviving entity in the merger, then the assets of the non-surviving entity are treated as the assets of the new entity. Thus, for the months during the privilege period, each bank would determine its own average assets for the months the non-surviving entities existed during the period and not for the full 12 months. If the new corporation is the new managerial member of the combined group, the combined group must update its managerial member information instead of requesting a new NU (combined group identification) number.

iv. If two previously unrelated separate return filing banks or savings and loan associations merge into a newly created entity ("NewCo") that is also a bank or savings and loan association that is the surviving entity in the merger, then the assets of the two non-surviving entities are treated as the assets of the newly created entity. The two non-surviving banks would file short period returns for the months prior to the merger, and each bank would determine its own average assets for the months prior to the merger. If, as a result of the merger, NewCo's assets exceed $ 15 billion for its privilege period, then it would file a combined return with its "captives." In addition, NewCo must register as the managerial member of the combined group.

v. If there is a temporary (less than 30 days) abnormal market fluctuation that results in the value of the bank's or savings and loan association's assets temporarily increasing or decreasing, the annual average asset values may be calculated without including the temporary abnormal increase or decrease in assets values.

vi. If an event, such as a natural disaster (Act of God), nationalization by a government, war, civil unrest, or riot, results in the bank or savings and loan association having to write off certain assets as a total loss during the group privilege period, the bank or savings and loan association must include the value of the impacted assets in the same manner as it is required to report for financial and regulatory reporting purposes. For example, a bank owns 2billioncommercialbondsinaninsurancecompanyandduringthegroupprivilegeperiodaCategory4hurricanedirectlyhitstheareaswheretheinsurancecompanyinsuresthemajorityofitscustomers′risksresultingintheinsurancecompanydeclaringinsolvencybecausethebonds′worthdecreasedtonegative2 billion commercial bonds in an insurance company and during the group privilege period a Category 4 hurricane directly hits the areas where the insurance company insures the majority of its customers' risks resulting in the insurance company declaring insolvency because the bonds' worth decreased to negative 1 billion. As a result, the bank has to report the negative 1billionastheassetvalueofthebondsforthegroupprivilegeperiodforfinancialandregulatorypurposes.Forthegroupprivilegeperiod,thebankwouldreportthevalueofthebondsasnegative1 billion as the asset value of the bonds for the group privilege period for financial and regulatory purposes. For the group privilege period, the bank would report the value of the bonds as negative 1 billion.

vii. If an event, such as a natural disaster (Act of God), nationalization by a government, war, civil unrest, or riot, results in the bank or savings and loan association having to mark down the value of the assets impacted by the event, the bank or savings and loan association must include the value of the impacted assets in the same manner as it is required to report for financial and regulatory reporting purposes. For example, a bank owns commercial real estate in County A valued at 150millionandadroughtcausedariotthatdamaged,butdidnotdestroy,therealestate.Asaresult,thebankhadtomarkdownthevalueofthebuildingto150 million and a drought caused a riot that damaged, but did not destroy, the real estate. As a result, the bank had to mark down the value of the building to 140 million for financial and regulatory reporting purposes. For the group privilege period, the bank would report the asset value of the real estate at $ 140 million.

  1. Captive investment companies, captive regulated investment companies, and captive real estate investment trusts that are part of a combined group cannot file separate returns except to align the income reporting for the group privilege period. If the "captives" have a different privilege period than the group privilege period, the investment companies, regulated investment companies, or real estate investment trusts must file short period returns for the months preceding the start of the group privilege period. If they have a different Federal tax year than the group privilege period, the income of the investment companies, regulated investment companies, and real estate investment trusts occurring during the months of the group privilege period must be reported on the combined return, and a short period return must be filed for the months preceding the investment companies, regulated investment companies, and real estate investment trusts being included as members of the combined group.

i. If in a subsequent group privilege period, the investment companies, regulated investment companies, and real estate investment trusts were excluded from the combined group, due to their parent meeting the exception for bank and savings and loan associations with assets valued at 15billionorless,thentheinvestmentcompanies,regulatedinvestmentcompanies,andrealestateinvestmenttrustswouldfileseparatereturns.However,theinvestmentcompanies,regulatedinvestmentcompanies,andrealestateinvestmenttrustswillmaintainthesame12−monthreportingperiodthattheseentitieshadwhiletheyweremembersofthecombinedgroup,evenifthemonthsdifferfromtheentity′staxyearmonthsforFederalpurposes.Thisissothatif/whenthebank′sorsavingsandloanassociation′saverageannualassetsexceed15 billion or less, then the investment companies, regulated investment companies, and real estate investment trusts would file separate returns. However, the investment companies, regulated investment companies, and real estate investment trusts will maintain the same 12-month reporting period that these entities had while they were members of the combined group, even if the months differ from the entity's tax year months for Federal purposes. This is so that if/when the bank's or savings and loan association's average annual assets exceed 15 billion in a subsequent group privilege period, these investment companies, regulated investment companies, and real estate investment trusts will not have to file short period returns to subsequently realign their income reporting with the combined group for New Jersey purposes.

  1. Banks or savings and loan associations and the captive investment companies, captive regulated investment companies, or captive real estate investment trusts are subject to the rules of combined reporting and ordinarily are included as members of a New Jersey combined return (CBT-100U). However, there are some instances where banks and savings and loan associations have previously filed separate returns in periods ending before July 31, 2023, and as a result of the law changes now must file combined returns.

i. If the annual average value of the bank's or savings and loan association's assets exceed $ 15 billion for the privilege period, the bank or savings and loan association and its captive investment companies, regulated captive investment companies, and captive real estate investment trusts must file a New Jersey combined return. If the bank or savings and loan association is not already a member of a combined group, it must register as the managerial member; and the group privilege period will be the bank's or savings and loan association's 12-month privilege period. However, if the bank or savings and loan association is a member of an existing combined group, then the privilege period for the existing combined group will be the same as that existing group's managerial member.

ii. If the bank's or saving and loan association's assets are $ 15 billion or less for the privilege period, and the bank or saving and loan association is not part of a combined group, then the bank or savings and loan association and its investment companies, regulated investment companies, and real estate investment trusts must each file separate returns. However, if the bank or savings and loan association is a member of a combined group, the bank or savings and loan association will continue to be a member of the combined group, and the investment companies, regulated investment companies, and real estate investment trusts owned by the bank or savings and loan association will file separate returns for the privilege period.

  1. Whether investment companies, regulated investment companies, and real estate investment trusts are included in the combined group or file separate returns varies depending on the value of the assets of the bank or savings and loan association owner, and the timing of the merger or acquisition. The following examples illustrate whether the investment companies, regulated investment companies, and real estate investment trusts file as part of the combined group or file separate returns:

i. Example 1:

Bank A is a member of Combined Group A. The value of Bank A's assets is 15.5billionatthestartofthegroupprivilegeperiod.BankAownsREITAandInvestmentCoA.BankBisamemberofCombinedGroupB.ThevalueofBankB′sassetsis15.5 billion at the start of the group privilege period. Bank A owns REIT A and Investment Co A. Bank B is a member of Combined Group B. The value of Bank B's assets is 10 billion at the start of the group privilege period. Bank B owns RIC B. Combined Group A acquires Combined Group B on August 1. Shortly thereafter, Bank B is merged into Bank A. Note: The average value of Bank A's assets for the 12-month group privilege period exceeds 15billion.TheaveragevalueofBankB′sassetsforthepre−mergerandacquisitionmonthsislessthan15 billion. The average value of Bank B's assets for the pre-merger and acquisition months is less than 15 billion.

Combined Group A files a combined return for the full 12-month group privilege period on which REIT A and Investment Co A are included as members of the combined group as "captives." Combined Group B will file a short period combined return for the months January 1 through July 31. For the period of August 1 through December 31, they will be included as members of Combined Group A's combined return. RIC B will file a separate short period return for the months January 1 through July 31. For the period of August 1 through December 31, RIC B will be included as a member of Combined Group A since Bank A's average assets exceed $ 15 Billion.

ii. Example 2:

Bank C is a member of Combined Group C. The value of Bank C's assets is 12.5billionatthestartofthegroupprivilegeperiod.BankCownsREITCandInvestmentCoC.BankDisamemberofCombinedGroupD.BankDownsRICD.ThevalueofBankD′sassetsis12.5 billion at the start of the group privilege period. Bank C owns REIT C and Investment Co C. Bank D is a member of Combined Group D. Bank D owns RIC D. The value of Bank D's assets is 11 billion at the start of the group privilege period. Combined Group C acquires Combined Group D on December 1. Shortly thereafter, Bank D is merged into Bank C. Combined Group C files a combined return for the full 12-month group privilege period.

Combined Group D will file a short period combined return for the months January 1 through November 30. For the period of December 1 through December 31, they will be included as members of Combined Group C's combined return. As the merger and acquisition happened in the last month of the group privilege period and Bank C's and Bank D's average value of their respective assets was less than 15billionduringthepreceding11months,REITC,InvestmentCoC,andRegulatedInvestmentCoDarenotincludedas"captives"forthegroupprivilegeperiod.REITC,InvestmentCoC,andRICDwillfileseparatereturnsforthefull12−monthperiodbeginningJanuary1andendingDecember31.InthesubsequentgroupprivilegeperiodforCombinedGroupC,REITC,InvestmentCoC,andRegulatedInvestmentCoDwillbeincludedasmembersofthecombinedgroupsincetheyare"captives,"assumingBankC′saverageassetvalueforthegroupprivilegeperiodisinexcessof15 billion during the preceding 11 months, REIT C, Investment Co C, and Regulated Investment Co D are not included as "captives" for the group privilege period. REIT C, Investment Co C, and RIC D will file separate returns for the full 12-month period beginning January 1 and ending December 31. In the subsequent group privilege period for Combined Group C, REIT C, Investment Co C, and Regulated Investment Co D will be included as members of the combined group since they are "captives," assuming Bank C's average asset value for the group privilege period is in excess of 15 billion.

iii. Example 3:

Same facts as in Example 2 above, except Bank D also owns REIT D and Investment Co D. Shortly after the December 1 acquisition, REIT D and Investment Co D merged into REIT C and Investment Co C, respectively.

Combined Group C files a combined return for the full 12-month group privilege period. Combined Group D will file a short period combined return for the months January 1 through November 30. For the period of December 1 through December 31, they will be included as members of Combined Group C's combined return. As the merger and acquisition happened in the last month of the group privilege period and Bank C's and Bank D's average value of their respective assets was less than 15billionduringthepreceding11months,REITC,InvestmentCoC,InvestmentCoD,andREITD,arenotincludedas"captives"forthegroupprivilegeperiodandmustfileseparatereturnsfortheperiod.However,REITDandInvestmentCoDwillfileshortperiodreturnsforthemonthspriortothemergingintoREITCandInvestmentCoC(thatis,January1throughNovember30).AssumingtheaverageannualassetsofBankCremainsinexcessof15 billion during the preceding 11 months, REIT C, Investment Co C, Investment Co D, and REIT D, are not included as "captives" for the group privilege period and must file separate returns for the period. However, REIT D and Investment Co D will file short period returns for the months prior to the merging into REIT C and Investment Co C (that is, January 1 through November 30). Assuming the average annual assets of Bank C remains in excess of 15 billion during the subsequent group privilege period for Combined Group C, REIT C and Investment Co C will be included as members of the Combined Group C since they are "captives."

iv. Example 4:

The voting stock of REIT ABC is owned as follows: 95 percent by a life insurance company ("X") in a segregated asset account described at I.R.C. § 817, one percent by X in its general account, and four percent by an unaffiliated insurance company ("Y") in a segregated asset account. REIT ABC is not captive because the voting stock held by X and Y in segregated asset accounts pursuant to I.R.C. § 817 are not taken into account in determining the ownership of total voting stock, that is:

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