In a decision released today, the Tax Court of New Jersey ruled in Preserve II, Inc. v. Division of Taxation that a limited partner's interest in a partnership doing business in New Jersey created nexus for corporation business tax (CBT) purposes.1 (A copy of the decision can be found at the Tax Court's website). The decision creates uncertainty for taxpayers that had been relying on BIS LP, Inc. v. Division of Taxation,2 a 2011 decision issued by New Jersey's appellate court. Both cases raised similar issues and had similar facts, yet the Tax Court ruled against the limited partner in Preserve II.
Numerous appeals are pending for other, similarly situated taxpayers at the administrative level and in the courts. Those taxpayers will need to re-examine their strategy in the wake of today's decision.
The case involved an out-of-state limited partner (Preserve) with a 99% interest in two partnerships that conducted homebuilding activities in New Jersey. The partnership agreements gave general partners (not Preserve) "full, exclusive and absolute" authority to manage and control the partnerships. But Preserve and the general partners shared corporate officers, accounting and tax services, banking facilities, and other functions. The limited partner, general partners, and the underlying partnerships were indirectly owned by the same corporate parent.
Preserve argued that it lacked income tax nexus with New Jersey because it was merely a passive investor in the partnerships. The Division countered that Preserve and the partnerships were unitary because of the close relationship and shared functions between Preserve and the general partners. Judge Sundar heard oral argument in March 2016.
Prior Nexus Guidance for Limited Partners
The Division's regulation provides that a limited partner has nexus with New Jersey if the limited partner: is also a general partner; takes an active part in the control of the partnership; has property in New Jersey; has payroll in New Jersey; or is integrally related with the business of the partnership.3 The New Jersey courts analyzed this regulation in BIS LP, Inc.4 Like Preserve II, the BIS LP case involved a corporate limited partner whose only connection to New Jersey was a 99% interest in a partnership doing business in the state. But the Division had stipulated that the limited partner in BIS LP didn't have the right to participate in the management of the partnership, and that the limited partner and partnership...