The Tax Court of New Jersey recently addressed when out-of-state limited partners have a nexus with New Jersey for corporation business tax (CBT) purposes. In Preserve II, Inc. v. Division of Taxation, the Court rejected the limited partnership’s argument that it was a mere passive investor that lacked a nexus with New Jersey.
Corporate Business Tax Imposed on Preserve
The case involves theimposed by the Division of Taxation (the “Division”) for tax years 2005-2007, upon plaintiff Preserve II, Inc. (“Preserve”), a foreign corporation. The tax was on Preserve’s share of passed-through partnership income from two foreign limited partnerships, Pulte Homes of NJ, L.P. (“Pulte Homes NJ”) and Pulte Communities of NJ, L.P. (“Pulte Communities NJ”), in each of which Preserve is a 99 percent limited partner.
The general partners in those partnerships (Preserve I, Inc. and Pulte Home Corporation of the Delaware Valley) are also foreign corporations holding a one percent interest. All three entities are owned 100 percent by the same parent, also a non-domestic entity. The partnerships are in the business of developing, building, and selling residential homes in New Jersey, through the partners’ parent. All entities (the two partnerships, Preserve, the general partners, and their parent) are part of the same corporate family of Pulte Group, Inc., a national residential real estate developer and builder.
When the Division audited Preserve for CBT liabilities sometime in 2010, Preserve claimed that pursuant to BIS LP, Inc. v. Director, Div. of Taxation, 26 N.J. Tax 489 (App. Div. 2011), it was a mere holding company, thus a passive investor. It further claimed that it lacked any nexus or connection to New Jersey, and thus, was entitled to CBT refunds.
The Division disagreed and deemed Preserve to have sufficient constitutional contacts and nexus for CBT purposes. This determination was based on the fact that Preserve was authorized to do business in New Jersey, and the Division’s conclusion that Preserve had a “unitary relationship with” the two partnerships due to commonality of officers and shared banking facilities. It therefore denied Preserve’s refund claims. It also imposed CBT assessments against the partnerships with consequent interest and penalties for failure to withhold tax on income distributed to non-resident corporate partners who, or which, have not consented to New Jersey’s jurisdiction to tax them.
Applicable New Jersey Tax Regulations
Partnerships are not taxable entities in New Jersey. Pursuant to the New Jersey Gross Income Tax Act (GIT), the distributive share of any “member of a partnership” is taxed at an individual level. Pursuant to N.J.S.A. 54A:5-8(a)(3), a nonresident individual partner is taxed only on income sourced in New Jersey, thus, his or her “distributive share of” partnership income is subject to GIT if the partnership’s income is a result of “work done, services rendered or other business activities conducted” in New Jersey.
In 2002, the Business Tax Reform Act (BTRA) extended the reach of the CBT statute to domestic or foreign corporations. Under N.J.A.C. 18:7-7.6(a), an actual or deemed foreign corporate general partner is subject to the CBT just by its status as such partner. However, if a foreign corporation is a limited it is only considered to be doing business in the state and, therefore, subject to CBT, if: the limited partner is also a general partner of the limited partnership; the foreign corporation limited partner, in addition to the exercise of its rights and powers as a limited partner, takes an active part in the control of the partnership business; the foreign corporate limited partner meets the criteria set forth in N.J.A.C. 18:7-1.9 or 1.6, which sets forth criteria assessed for “doing business” in the state; or the business of the partnership is integrally related to the business of the foreign corporation.
New Jersey Tax Court’s Decision
The Tax Court affirmed the Division’s final determinations of CBT assessments against Preserve. Accordingly, it also denied Preserve’s CBT refund claims.
In reaching its decision, the court highlighted that the two partnerships “are in the business of developing, building and selling residential homes in New Jersey, through the partners’ parent. All entities (the two partnerships, Preserve, the general partners, and their parent) are part of the same corporate family of Pulte Group., Inc., a national residential real estate developer and builder.” The court further noted that the partnerships were “actively managed, operated, and, controlled in all aspects, by the same individuals.” Judge Mala Sundar further wrote:
These individuals were all officers of the parent, and some were officers of Preserve and the general partners. All of them had one and only one business goal and activity: that of furthering the Pulte family’s core business of developing, building and selling homes. In the absence of any evidence of absolute or finite lines between the corporate partners, their parent, and the partnerships’ business operations, the court cannot conclude that Preserve was a mere passive investor with zero nexus to New Jersey.
The decision in Preserve II, Inc. v. Division of Taxation is particularly notable because the facts of the case largely mirror BIS LLP in which the Tax Court determined that a limited partner lacked a nexus with New Jersey because the taxpayer was in a different line of business than the partnership. However, the decision is in line with Village Super Market of PA, Inc. v. Director, Div. of Taxation, 27 N.J. Tax 394, 410- 411 (Tax 2013). In that case, the Tax Court concluded that the taxpayer therein had “sufficient minimum contacts to meet the requirement of presence based nexus with New Jersey,” due to a physical presence of its office in New Jersey, a “contractual presence” due to a cash management Agreement governed by New Jersey laws, and “correlating business interests.”
The key theme in the Tax Court’s recent decisions is that the mere status of the corporation as a limited partner is not determinative of whether an entity is subject to CBT. Rather, the Division of Taxation (and the courts) will look closely at the relationship between the limited partner and partnership.
If you have any questions or if you would like to discuss the matter further, please contact me, Jeffrey Pittard, at 201-806-3364.