                        NOT FOR PUBLICATION WITHOUT THE
                      APPROVAL OF THE APPELLATE DIVISION
     This opinion shall not "constitute precedent or be binding upon any court."
      Although it is posted on the internet, this opinion is binding only on the
        parties in the case and its use in other cases is limited. R. 1:36-3.




                                       SUPERIOR COURT OF NEW JERSEY
                                       APPELLATE DIVISION
                                       DOCKET NO. A-5735-14T3

MCI COMMUNICATION SERVICES,
INC.,

        Plaintiff-Appellant,

v.

DIRECTOR, DIVISION OF
TAXATION,

     Defendant-Respondent.
____________________________

              Argued January 19, 2017 – Decided June 15, 2018

              Before Judges Fuentes, Simonelli and Gooden
              Brown.

              On appeal from the Tax Court of New Jersey,
              Docket No. 013905-2010.

              Carley A. Roberts (Sutherland Asbill & Brennan
              LLP) of the California bar, admitted pro hac
              vice, argued the cause for appellant (Day
              Pitney LLP and Carley A. Roberts, attorneys;
              Michael James Guerriero, Carley A. Roberts,
              Eric S. Tresh (Sutherland Asbill & Brennan
              LLP) of the Georgia bar, admitted pro hac
              vice, and Maria E. Biava, Associate General
              Counsel for respondent Verizon Communications
              Inc., of the Michigan and Illinois bars,
              admitted pro hac vice, on the briefs).
            Michael J. Duffy, Deputy Attorney General,
            argued the cause for respondent (Christopher
            S. Porrino, Attorney General, attorney;
            Melissa H. Raksa, Assistant Attorney General,
            of counsel; Michael J. Duffy, on the brief).

            The opinion of the court was delivered by

FUENTES, P.J.A.D.

     In this appeal, we are asked to determine whether the New

Jersey's Corporation Business Tax Act, N.J.S.A. 54:10A-1 to -40,

permits a corporate taxpayer to reduce its New Jersey reported

income by erasing a decision it made as a part of its federal tax

strategy.    The taxpayer here is MCI Communication Services, Inc.

Plaintiff acquired cancellation of debt income (CODI) arising out

of a Title 11 bankruptcy, which was pushed down to it by its parent

company.    The taxpayer only received this pushed-down CODI because

it filed a consolidated tax return.

     Pursuant to 26 U.S.C. § 108(a)(1)(A), plaintiff then excluded

the CODI from its gross income on its federal consolidated tax

return.     However, 26 U.S.C. § 108(b) required the taxpayer to

reduce its tax attributes to account for the exclusion, and 26

U.S.C. § 108(b)(5) permitted the taxpayer to meet this requirement

by decreasing its depreciation deductions by the amount of the

exclusion.

     On its New Jersey separate tax return, the taxpayer asserted

that the CODI was not taxable income under New Jersey law and

                                  2                          A-5735-14T3
claimed a deduction that reduced its Entire Net Income by the

amount of its forfeited depreciation deductions.              The Director of

the Division of Taxation denied the deduction, explaining New

Jersey law does not sanction this arrangement.              Plaintiff appealed

the determination to the Tax Court and argued the Division erred

because: (1) New Jersey calculates taxable income by looking to a

taxpayer's   federal    tax   return,     N.J.S.A.    54:10A-4(k);     (2)   New

Jersey    law,     specifically     N.J.A.C.      18:7-11.15(b),       forbids

consolidated tax returns, so the taxpayer was required to report

its income as if it had filed its federal return separately; (3)

had the taxpayer filed a separate federal tax return, it would

have    neither    received   the   pushed-down      CODI    nor   reduced   its

depreciation deductions by that amount; and (4) treating the

pushed-down CODI as taxable income amounts to creating and taxing

phantom income.

       The Tax Court affirmed the Director's decision.               Plaintiff

now appeals.       We affirm substantially for the reasons expressed

by Judge Kathi F. Fiamingo in her letter opinion dated July 20,

2015.

       Affirmed.




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