In recent years, states have moved aggressively to reduce or eliminate the tax benefits of passive investment companies. In New Jersey, however, PICs face multiple challenges: the state’s throwout rule, combined with the impact of the recent New Jersey Supreme Court ruling in Lanco and now, the requirements of FIN 48 to account for uncertainty in income tax positions. In this article, the authors examine the interplay between Lanco, FIN 48, and the throwout rule and suggest how affected companies might respond.

Since the 1980s, taxpayers have used passive investment companies (PICs) to reduce their effective tax rates. In recent years, most states have taken away the state tax benefits of PICs by asserting nexus, forcing combinations, and denying deductions. New Jersey has gone even further. As a result of the state’s throwout rule, holding company structures that once generated tax savings are now actually increasing effective tax rates.

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This article was originally published in the BNA Tax Management Weekly State Tax Report and BNA Tax Management State Tax Library. The article is reprinted with permission from Tax Management Inc., a subsidiary of The Bureau of National Affairs, Inc., 1250 23rd Street, N.W., Washington, D.C. 20037 (www.bnatax.com).  The authors recently joined Reed Smith from Dechert.