Corporate Close-Up: Court Rules that New Jersey Cannot Assess Limited Partnership for Corporate Limited Partner’s Share of Corporate Business Tax

In litigation stemming from the landmark BIS LP decision, the New Jersey Tax Court has held in National Auto Dealers Exchange, L.P. v. Director, New Jersey Division of Taxation that the state could not assess Corporate Business Tax (CBT) directly against a limited partnership regardless of whether the partnership’s corporate limited partner had nexus with New Jersey.

In 2011, a New Jersey appellate court ruled in BIS LP., Inc. v. Director, New Jersey Division of Taxation that the state could not constitutionally impose the CBT on an out-of-state limited partner where the partner did not have a place of business or other ties to New Jersey and where it was not unitary with the limited partnership.

Following the BIS decision, Manheim NJ Investments, Inc. (MNJI) a Georgia corporation and a limited partner of National Auto Dealers Exchange (NADE), a New Jersey limited partnership filed a refund claim with the New Jersey Division of Taxation arguing that it did not have a unitary relationship with NADE and, as a result of BIS LP, should be entitled to a refund of CBT it previously paid.

With that litigation ongoing, the division responded by issuing an assessment against NADE directly, resulting in the current ruling on Feb. 26, 2018 in which the tax court granted NADE’s motion for summary judgment dismissing the assessment against NADE.

As background, NADE owned and operated a wholesale automotive auction business in New Jersey and had one general partner and one limited partner, both nonresident corporations with a principal place of business in Georgia. As NADE was a partnership for federal income tax purposes, for the tax years in question, under New Jersey law, it was required to withhold CBT on each corporate partner’s distributive share of income, unless an exception applied. NADE submitted Form NJ-1065E on behalf of both corporate partners, on which MNJI signed a statement that it maintained a regular place of business in New Jersey other than a statutory office. MNJI then filed its own CBT return in New Jersey and paid all applicable taxes.

Following the assessment by New Jersey, NADE filed a motion for summary judgment with the tax court, arguing that the division does not have statutory authority to impose CBT on a limited partnership. It alleged that its only obligation was to withhold and remit CBT on behalf of its corporate partners if the partner did not consent to New Jersey taxation, and that this obligation was relieved when it submitted a signed Form NJ-1065E on behalf of MNJI. The division argued that MNJI effectively revoked its Form NJ-1065E by filing the refund request, NADE is a taxable entity under New Jersey law and thus subject to CBT, there is no statutory authority for Form NJ-1065E acting as an exemption, and the form only exists as a recordkeeping method for the limited partnership and does not affect its obligation to remit withholding tax.

The tax court rejected all of the division’s arguments, finding that limited partnerships are not included in the definition of corporation under the CBT. The court ruled that the only statutory CBT requirement imposed on a partnership is the duty to withhold and remit tax for nonconsenting nonresident partners and that the corporate partner is the entity subject to CBT, not the partnership itself. Further, existing statutory law and regulations provide that filing a signed Form NJ-1065E “establishes that the partnership is not required to pay tax on a nonresident corporate limited partner’s behalf,” and relieved NADE from the obligation to withhold and remit CBT for the corporate partner. Ultimately, the tax court concluded that existing law provides an exemption for the partnership when the nonresident corporate partner consents to taxation and it cannot be required to later defend itself against the corporate partner’s change of heart. NADE fulfilled its obligations by submitting a valid Form NJ-1065E and cannot be subject to additional requirements, as a result the division lacks the statutory authority to impose CBT on the partnership.

There are currently 18 other states[1] that do not impose income tax on limited partnerships at the entity level, require withholding for nonresident corporate partners, and provide an exception to the withholding requirement for corporate partners who have a business location within the state or consent to be taxed by the state. The exception for consent to taxation in these states functions similarly to New Jersey Form 1065E in that the corporate partner agrees to file a return and pay any applicable tax to the state, thereby relieving the limited partnership of its duty to withhold tax on the partner’s distributive share of income. Though the tax court ruling is not precedential, other states and taxpayers may look to it in any case where the state’s taxing body is seeking to impose the obligation of a corporate partner on the limited partnership itself.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Are there other arguments supporting the New Jersey Division of Taxation’s position that a limited partnership should be liable for the corporate limited partner’s unpaid tax?

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[1] These states are Arkansas, California, Georgia, Illinois, Kentucky, Maine, Massachusetts, Montana, New Mexico, New York, North Carolina, Oklahoma, Oregon, Rhode Island, South Carolina, Virginia, West Virginia, and Wisconsin.