N.J. Admin. Code § 18:7-1.15

Current through Register Vol. 56, No. 11, June 3, 2024

Section 18:7-1.15 - Investment company; definition

(a) "Investment company" means any corporation:

1. Whose business for the period covered by its return consisted to the extent of at least 90 percent of "qualified investment activities" which are: investing or reinvesting in stocks, bonds, notes, mortgages, debentures, patents, patent rights, and other securities or the holding thereof after investing or reinvesting therein for its own account. As used in this rule, "qualified investment assets" are stocks, bonds, notes, mortgages, debentures, patents, patent rights, publicly traded limited partnership or limited liability company interests and other securities and cash on deposit;

2. Which had for the period covered by the return 90 percent or more of its average gross assets in New Jersey, at cost, invested in "qualified investment assets" referred to in (a)1 above;

3. Which meets the numerical tests in (f) below;

4. Which is not a banking corporation as defined by the Corporation Business Tax Act;

5. Which is not a financial business corporation as defined by the Corporation Business Tax Act; and

6. Which is not a merchant or dealer in stocks, bonds, or other securities, and which is regularly engaged in buying and selling such securities to customers.

(b) "Qualified investment assets" are measured by the taxpayer's assets as reported for book purposes at cost on a separate legal entity basis for balance sheet purposes. "Qualified investment activities" are measured by gross receipts and expenses as reported for Federal income tax purposes, and by adding thereto, Federal, state, municipal, and other obligations included in determining New Jersey entire net income, but not otherwise included in Federal taxable income. "Qualified investment activities" and "qualified investment assets" do not include the following specific assets or activities. The receipts, direct and indirect expenses, and assets connected with the following will not be included in the numerator of any test:

1. The making and/or negotiating of loans. These activities are generally considered as either banking and/or financial business activities;

2. The renting or leasing of real or tangible personal property. These activities are generally considered financial business activities or other than investment activities;

3. The investment in general partnerships since the status of a general partner is not considered as consistent with a qualified investment activity and investments in general partnerships are not statutorily enumerated assets;

4. The direct day-to-day management of operations of affiliated corporations or the actual providing of services, directly or as an intermediary, for the benefit of affiliated corporations;

5. The buying and/or selling of stocks, bonds, notes, and other securities for the corporation's customers;

6. The buying and/or selling of real or tangible personal property whether it is classified as inventory, as operating assets, or as capital assets;

7. The direct investment in collectibles, including, but not limited to, stamps, pottery, cars, and gold coins;

8. The direct investment in trademarks or similar assets; or

9. The direct investment in a non-publicly-traded pass-through entity, if that entity would not satisfy the definition of investment company if it had been organized as a corporation.

(c) "Receipts" include, but are not limited to, the gross payments received from others (affiliated or not) regardless of whether the receipt is accounted for as an item of income or reduction in expense:

1. For services performed;

2. For the sale or transfer of assets;

3. For income recognized from the liquidation of liabilities; and

4. From the investment or reinvestment of capital in stocks, bonds, notes, mortgages, debentures, patents, patent rights, and other securities, includible in computing entire net income.

(d) "Reimbursements" received are payments having no element of profit in a transaction or element of covering indirect costs, and are received from others for expenses made on their behalf and are the true expenses of the entity making the reimbursement; hence, neither the expense, nor its recovery, should appear on the taxpayer's income statement for Federal purposes. When a taxpayer's accounting method displays such items on its income statement, such items will be removed from any calculations required under the regulations for the taxpayer receiving the reimbursement and included on the reimbursing company's return.

(e) A corporation electing to file as an investment company shall make its election on a timely filed original return or on a timely filed amended return, and shall substantiate its claim in accordance with the tests enumerated in this rule. Where the taxpayer does not clearly document its claim to investment company status through attached riders, the claim will be denied. An election made on an amended return shall be filed in accordance with the periods shown in N.J.A.C. 18:7-13.8(a) to be eligible for any refund claimed. An election to file as an investment company, once made, may only be revoked by the taxpayer within four years of the filing of the original return. The election to file as an investment company is a taxpayer election and may not be initiated by the Division of Taxation or granted by the Division outside the time frame prescribed.

(f) In order for a corporation to qualify as an investment company, it must meet the three-part business test and the asset test:

1. Business test (three parts):

i. (Income adjusted): For purposes of the 90 percent requirement provided by (a)1 above, a taxpayer, during the entire period covered by its report, must have derived 90 percent or more of its total income before deductions as reported for Federal income tax purposes, from cash and/or investment assets. Total income before deductions as reported for Federal income tax purposes must be adjusted as follows:

(1) Add gross receipts or gross sales adjusted for gross profit (loss) reported for Federal income taxes;

(2) Add gross sales price from the disposition of assets adjusted for capital gain or loss or net gain or loss reported for Federal income taxes;

(3) Add interest on Federal, State, municipal, and other obligations included in determining New Jersey new income, but not otherwise included in Federal total income; and

(4) Do not add any capital loss carry back or carry forward in computing total income.

ii. (Income unadjusted): For purposes of the 90 percent requirement provided by (a) above, a taxpayer, during the entire period covered by its report, must have derived 90 percent or more of its total income before deductions, as reported for Federal income tax purposes, from cash and/or investment assets plus interest on Federal, State, municipal, and other obligations not otherwise included in Federal taxable income and exclusive of any capital loss carryback or carryforward.

(1) A gain resulting from the disposition of an asset and reported on the installment basis for Federal income taxes is considered income for purposes of the investment company statute in the year in which the installment is received under both (f)1i and ii above. Income reported on the installment basis is treated as investment income only if it is generated by the sale of an investment asset. Interest income received in conjunction with each installment is deemed investment income.

iii. (Deductions): For purposes of the 90 percent requirement provided by (a) above, a taxpayer, during the entire period covered by its report, must have incurred 90 percent or more of its total deductions as reported for Federal income tax purposes, for holding, investing, and reinvesting in cash and/or investment assets.

2. Assets test: For purposes of the 90 percent requirement provided by (a)2 above, at least 90 percent of the taxpayer's gross assets located in New Jersey, valued at cost, must consist of cash and/or investment assets, during the period covered by its report.

Example No. 1
Corporation A
Adjusted Income Test:
Sch. A- 6 Other Interest	$ 56,205	Sch. A-11 Total Income	$ 65,152
Sch. A-29 Interest on Exempt	Sch. A-29 Interest on
Securities	31,385	Exempt Securities	31,385
Total Investment Income	$ 87,590	Sch. D-Selling Price	62,053
$ 71,000 Less Gain-$ 8,947
Sch. A-9(a) Capital gain (*)
8,947
Total Income	$ 96,537	Total Income--Adjusted	$ 158,590
(*)From sale of
non-investment type assets.
Ratio of Investment Income ($ 87,590) to Total Income Adjusted
($ 158,590) equals 55%
Unadjusted Income Test:
Sch. A-6 Other Interest	$ 56,205	Sch. A-6 Other Interest	$ 56,205
Sch. A-29 Interest on Exempt	31,385	Sch. A-9(a) Capital Gain	8,947
Securities
Total Investment Income	$ 87,590	Sch. A-29 Interest on	31,385
Exempt Securities
Sch. A-9(a) Capital Gain (*)
8,947
Total Income	$ 96,537	Total Income-Unadjusted	$ 96,537
(*)From sale of
non-investment type assets.
Ratio of Investment Income ($ 87,590) to Total Income Unadjusted ($ 96,537)
equals 91%
Deduction Test:
Sch. A-13 Salaries	$ 24,000	Sch. A-13 Salaries	$ 24,000
Sch. A-17 Tax (Investment	Sch. A-17 Taxes
related)	1,000	1,000
Total related to Investments	$ 25,000	Sch. A-27 Total	$ 25,000
Deductions
Sch. A-17 Taxes (Real
Estate)	1,200
Sch. A-27 Total Deductions	$ 26,200
Ratio of Investment Related Deductions ($ 25,000) to Total Deductions
($ 26,200) equals 95%
Assets Test--CBT-100
Schedule B (restated at cost)
Cash	$ 21,588
Bonds, Notes & Mortgages	123,821
NJ State & Local	27,140
Governmental Obligations
All Other Governmental
Obligations	1,067,874
Total Intangible Personal	$ 1,240,393
Property
Land	5,000*
Buildings	30,000*
Machinery & Equipment	*
17,000
Total Real and Tangible	$ 52,000
Personal Property
Total Assets	$ 1,292,393
(*)Sold during accounting
period
Ratio of Total Intangible Assets to Total Assets equals 96%
Corporation A does not qualify since it did not meet the adjusted Income
Test.
Example No. 2
Corporaton B
Adjusted Income Test:
Sch. A6 Other Interest	$ 82,722	Sch. A6 Other Interest	$ 82,722
Total Income from	$ 82,722	Sch. A-11 Total	$ 82,722
Investments	Income--Adjusted
Ratio of Investment Income to Total Income--Adjusted equals 100%
Unadjusted Income Test:
Sch. A6 Other Interest	$ 82,722	Sch. A6 Other Interest	$ 82,722
Total Income from	$ 82,722	Sch. A-11 Total	$ 82,722
Investments	Income--Unadjusted
Ratio of Investment Income to Total Income--Unadjusted equals 100%
Deduction Test:
Sch. A-17 Taxes	$ 1,709
Sch. A-18 Interest Expense
37
Total Investment related$	Sch. A-27 Total	$ 1,746
deductions	1,746	Deductions
Ratio of Investment Related Deductions equals 100%
Assets Test: CBT-100
Schedule B (restated at cost)
Cash	$ 26,482
Bonds, Notes & Mortgages	365,444
JAll Other Governmental	499,254
Obligations
Total Investment Type Assets	$ 891,180
Total Real and Tangible	-0-
Personal Property
Total Assets	$ 891,180
Ratio of Investment Type Assets to Total Assets equals 100%
Corporation B qualifies as an investment company since it met each test.
Example No. 3
Corporation C
Adjusted Income Test:
Sch. A-5 Interest on Gov't	$ 9,000	Sch. A-11 Total Income	$ 32,000
Obligations
Sch. A-6 Other Interest	$ 5,000	Sch. A-2 Cost of Goods	$ 1,000
Sold
Sch. A-8 Gross Royalties	8,000	Sch. A-9(a) Sales Price
$ 10,000
Sch. A-9(a) Capital Gain	2,000	Gain 2,000 equals	8,000*
(Basis)
Sch. A-29 Interest on Other	Sch. A-29 Interest on
Obligations	500	Other Obligations	500
Total Income from$	Total Income--Adjusted	$ 41,500
Investments	24,500
Add: Basis of Asset Sold
8,000
Gross Investment Income	$ 32,500
(*)Investment type asset
Ratio of Gross Investment Income to Total Income--Adjusted equals 78%
Unadjusted Income Test:
Sch. A-11 Total Income	$ 32,000	Sch. A-11 Total Income	$ 32,000
Sch. A-3 Gross Profit	(1,000)*	Sch. A-29 Interest on	$ 500
Other Obligations
Sch. A-7 Gross Rents	(6,000)
Sch. A-29 Interest on Other
Obligations	500
Total Income--from	$ 25,500	Total Income--Unadjusted	$ 32,500
Investments
(*)Non-investment income
Ratio of Investment Income to Total Income--Unadjusted equals 78%
Deduction Test:
Sch. A-12 Compensation of	$ 2,000	Sch. A-12 Compensation	$ 2,000
Officers	of Officers
Sch. A-13 Salaries & Wages	10,000	Sch. A-13 Salaries &	10,000
Wages
Sch. A-17 Tax	10,000	Sch. A-17 Taxes	12,000*
Sch. A-21 Depreciation
1,100
Total Investment Related	$ 22,000	Sch. A-27 Total	$ 25,100
Deductions	Deductions
(*)Includes $ 2,000 real
estate tax
Ratio of Investment Related Deductions to Total Deductions equals 88%
Assets Test: CBT-100
Schedule B (restated at cost)
Cash	$ 5,000
Bonds, Notes & Mortgages	50,000
NJ State & Local Gov't	10,000
Obligations
All Other Gov't Obligations	100,000
Patents & Copyrights
1,000
Total Investment Type Assets	$ 166,000
Land	50,000
Bldgs. & Improvements	200,000
Total Real and Tangible	$ 250,000	(non-investment type
Personal Property	assets)
Total Assets	$ 416,000
Ratio of Investment Type Assets to Total Assets equals 40%
Corporation C does not qualify as an investment company since it did not
meet all tests.
Example No. 4
Corporation D
Adjusted Income Test:
Sch. A-4 Dividends	$ 14,000
Sch. A-5 Interest on Gov't	12,000
Obligations
Sch. A-6 Other Interest	11,000
Sch. A-8 Gross Royalties	Sch. A-11 Total Income	$ 48,000
11,000
Sch. A-11 Total Income	$ 48,000	Deduct: Capital loss per	(10,050)*
Federal Sch. D
Add: Sales price of assets	Add: Basis of capital
Isold	50,000	asset sold	60,050*
Total Investment Income	$ 98,000	Total Income--Adjusted	$ 98,000
(*)Investment type asset
sold at a loss
Ratio of Investment Income to Total Income--Adjusted equals 100%
Unadjusted Income Test:
Total Income from	$ 48,000	Sch. A-11 Total Income	$ 48,000
investments	Unadjusted
Ratio of Total Investment Income to Total Income--Unadjusted equals 100%
Deduction Test:
Total Investment Related	$ 30,250	Investment Related	$ 30,250
Deductions	Deductions
Sch. A-17 Real Estate	675
Tax
Sch. A-21 Depreciation
120
Sch. A-27 Total	$ 31,045
Deductions
Ratio of Investment Related Deductions to Total Deductions equals 97%
Assets Test: CBT-100
Schedule B (restated at cost)
Cash	$ 11,000
Accounts & Notes Receivable	12,000
Corporate Stocks	30,000
Bonds, Mortgages & Notes	30,000
NJ State & Local Gov't	15,000
Obligations
Patents & Copyrights	20,000
All Other Intangible	$ 60,000
Personal Property
Total Investment Type Assets	$ 178,000
Land	$ 15,000
Furniture & Equipment	1,200
Total Real and Tangible	$ 16,200
Personal Property
Total Assets	$ 194,200
Ratio of Investment Type Assets to Total Assets equals 92%
ICorporation D qualifies as an investment company since it met each test.

Example No. 5: Corporation A negotiates and discounts loans as opposed to merely investing in notes that were negotiated by others. It may not include the income from that activity in the numerator in determining whether its business "consisted to the extent of at least 90 percent of holding, investing and reinvesting in stocks, bonds, notes, mortgages, debentures, patent rights, and other securities for its own account" since it is, in fact, in competition with the business of national banks in employing moneyed capital with the object of making profit by its use as money and as such is a financial business for purposes of the Corporation Business Tax Act.

Example No. 6: Corporation B makes or deals in secured or unsecured loans and discounts. It may not include the income from that activity in the numerator in determining whether its business "consisted to the extent of at least 90 percent of holding, investing, and reinvesting in stocks, bonds, notes, mortgages, debentures, patent rights, and other securities for its own account" since it is, in fact, in competition with the business of national banks in employing moneyed capital with the object of making profit by its use as money and as such is a financial business prohibited by the Corporation Business Tax Act from qualifying for the election.

Example No. 7: Corporation C rents or leases property in transactions that approximate secured loans. It may not include the income from that activity in the numerator in determining whether its business "consisted to the extent of at least 90 percent of holding, investing, and reinvesting in stocks, bonds, notes, mortgages, debentures, patent rights, and other securities for its own account" since this is considered a financial business activity.

Example No. 8: Corporation D provides and charges Corporation O and other affiliates for general and administrative services it performs on behalf of Corporation O and the affiliates. The charges cover the cost, which includes a percentage of Corporation D's wages, depreciation expense, as well as other direct and indirect expenses incurred by Corporation D to provide these services. Corporation D must include such receipts in the denominator, but not the numerator, in calculating the tests provided under the rule. The charges made to Corporation O go beyond actual reimbursements and, while considered receipts, are not considered receipts from qualified investment activities within the meaning of the rule. Where such inclusion causes the percentage to drop below the 90 percent requirement, the corporation will be denied its claim to investment company status.

(g) An investment company may also qualify as a regulated investment company. See N.J.A.C. 18:7-1.13.

N.J. Admin. Code § 18:7-1.15

Amended by 49 N.J.R. 1694(a), effective 6/19/2017