New Jersey: Corporate Partner Had Nexus Due to Ownership of Limited Partnership Interests

The New Jersey Superior Court, Appellate Division recently affirmed a Tax Court decision holding that a foreign corporate limited partner (the taxpayer) had Corporation Business Tax (CBT) nexus by virtue of owning limited partnership interests in two partnerships operating in New Jersey. The partnerships operating in New Jersey were engaged in developing and selling residential properties in New Jersey and were part of an overall group of entities engaged in real estate development.  The taxpayer and the two corporate general partners of the New Jersey partnerships were all owned by the same parent within the corporate group. The taxpayer paid CBT on part of its income as an investment company but later argued, after an audit, that under the partnership agreements it had no role in the operation of either partnership and was therefore simply a passive investor not subject to CBT.  After the tax court rejected the taxpayer’s argument that it was an investment company, it concluded that the taxpayer derived receipts from New Jersey sources and was subject to CBT for the tax years at issue. The taxpayer subsequently appealed.

Under New Jersey law, a domestic or foreign corporation is generally subject to CBT for the privilege of deriving receipts from New Jersey sources or otherwise doing business in the state.  Before the appeals court, the taxpayer argued that the tax court erred by holding that it had “automatic economic nexus” based on receipts of partnership income from New Jersey sources. In the taxpayer’s view, the legislature did not intend the “deriving revenue from New Jersey sources” language in the CBT imposition statute to apply broadly to a foreign limited partner whose taxability is governed by separate statutory provisions addressing limited partnerships that were enacted at the same time. These partnership specific statutes would be rendered superfluous if a corporation automatically became subject to CBT by virtue of deriving receipts from New Jersey sources.   Rejecting this position, the appellate court determined that the taxpayer had mischaracterized the tax court’s ruling with regard to automatic economic nexus. The tax court, the court concluded, performed an extensive analysis of whether the taxpayer had constitutional nexus with New Jersey and found that the taxpayer was not a mere passive investor in the partnership, but was part of an integrated enterprise engaged in building homes in New Jersey. The court further noted that the CBT imposition statute imposed tax on “every domestic or foreign corporation” unless there was a statutory exemption. Having the status of a foreign limited partner was not one of the statutory CBT exemptions. Further, the appellate court rejected the position that the partnership statutes addressing when a partnership must remit payment on behalf of a partner and how to allocate the partner’s receipts were rendered superfluous by its holding. In the court’s view, these statutory topics concerned different topics than those at issue in the CBT imposition statute. In conclusion, the appellate court affirmed the tax court’s ruling that the taxpayer was subject to the CBT. Please contact Jim Venere at 973-912-6349 with questions on Preserve II, Inc. v. Division of Taxation.