Par Mark L. Nachbar
Just when you thought it was safe to follow BIS LP, Inc.,1 along comes Preserve II Inc.2 New Jersey has now determined that ownership of a limited partnership interest by an out-of-state corporation can result in nexus in the state under certain circumstances.
Preserve II (“Preserve”) was a Michigan corporation and a 99% limited partner in two Michigan partnerships, collectively referred to as the Pulte Partnerships. These partnerships were involved with developing, building, and selling residential homes in New Jersey.
On its originally filed corporate returns for 2005 through 2007, Preserve did not dispute that it had nexus and filed New Jersey Corporate Business Tax (CBT) returns as an investment company eligible to be taxed on a reduced portion—40%—of its income. After the BIS ruling was issued in 2009, Preserve subsequently argued on a 2010 audit that it did not have nexus in New Jersey based on BIS and requested a refund. Preserve contended that it was a holding company with passive investments in partnerships.
The state denied the refund claim, asserting that Preserve had nexus with the state because it was authorized to do business in the state, and it had a unitary relationship with the Pulte Partnerships. As such, it was not eligible to be treated as a holding company.
The Tax Court found that, unlike in BIS, Preserve “was as much of a general partner as the other corporate general partners,” and Preserve had no other, or different, lines of business. Because the court determined that Preserve acted as a general partner, it did not qualify as an investment company eligible for discounted tax assessment.
This opinion more closely follows the reasoning in Village Super Market of PA Inc. v. Division of Taxation.3 In this case, the court determined that a nonresident limited partner was subject to the CBT on its share of partnership income because the lines between the entities were blurred, with the use of common agents, directors, and places of business.
The outcome in Preserve indicates that the state will be looking into the relationships of the entities to determine nexus and not just the legal structure. The BIS analysis is not necessarily the only approach to determining nexus in New Jersey for partnership interests.
1 BIS LP Inc. v. Division of Taxation [N.J. Super. Ct. App. Div., No. A-1172-09T2, 8/23/11, 2011 WL 3667622 (unpublished opinion), aff'g 25 NJ Tax 88, 2009 WL 2367729 (Tax Ct., 2009)].
2 Preserve II Inc. v. Division of Taxation (N.J. Tax Ct., No. 010921-2013, 10/4/17).
3 27 N.J. Tax 394 (2013).
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