N.J. Court Sides With Tax Division in Limited Partner Nexus Fight

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By David McAfee

Taxpayers will need to take pains to prove—through a trial—that they are truly limited passive investors in a partnership to avoid a New Jersey tax bill after a new state tax court opinion, a tax practitioner said.

The Division of Taxation correctly applied the corporation business tax (CBT) to a subsidiary of a national residential real estate developer, the New Jersey Tax Court held in an opinion released Oct. 11 ( Preserve II Inc. v. Dir., Div. of Taxation , N.J. Tax Ct., No. 010921-2013, 10/4/17 ).

The Tax Court affirmed the division’s final determination of CBT assessments against Preserve II Inc., a corporation that’s part of Pulte Group Inc., which admitted that it did business in New Jersey but disputed that it had nexus for taxation purposes. The tax was applied on Preserve’s share of passed-through partnership income from two foreign limited partnerships, in each of which Preserve is a 99 percent limited partner.

Matthew L. Setzer, associate at Reed Smith LLP in Philadelphia, told Bloomberg BNA in an Oct. 11 email that “many taxpayers have pending appeals (administratively and at Tax Court), and they may now not know what to do in light of Preserve.”

According to the court’s opinion, 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 said the partnerships were “actively managed, operated, and, controlled in all aspects, by the same individuals.”

“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,” Judge Mala Sundar wrote in the opinion. “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 Tax Court affirmed the division’s decision to deny Preserve’s CBT refund claims.

Leah Robinson, partner and State and Local Tax Group lead at Mayer Brown LLP who represents the companies, said the companies are “considering their options.”

Big Implications

Setzer said the facts of the case are basically identical to a prior case, where the Tax Court concluded that a taxpayer—a limited partner with a 99 percent interest in a partnership—didn’t have nexus with New Jersey because the taxpayer wasn’t in the same line of business as the partnership.

“Here Judge Sundar determined that a limited partner’s reliance on [the prior case]—for the proposition that it does not have nexus with New Jersey based on a partnership agreement that states it cannot participate in the business of the partnership—is misguided,” he said. Sundar noted that such reliance “elevate[s] form over substance” and “render[s] redundant ... the need for a trial on cases with these issues,” which Setzer said represented “the significance of the decision.”

Setzer said factors the Tax Court will consider for limited partners with pending claims include:

  •  are there blurred lines between the limited partner, general partner, and the partnership?;
  •  the capital contribution of the limited partner; and
  •  overlap of officers and key management personnel.

Investment Company Status

Preserve argued that it received authority to do business in New Jersey for just five days in 2006 and in 2007, rendering the division’s 2005 assessment invalid. The company also said it didn’t have any nexus in New Jersey because it was a limited partner that doesn’t control the business of the partnerships.

If nexus to New Jersey is found, Preserve argued, it should receive investment company status and only be taxed on a portion of its New Jersey income.

The court ultimately sided with the Taxation Division, which disputed Preserve’s claims, saying the division’s determination “is not unreasonable, arbitrary or capricious.”

The court held further that Preserve isn’t liable for underpayment penalties for 2005 or 2006, or for amnesty penalties levied between 2005 and 2007.

Preserve is represented by Open Weaver Banks of Eversheds Sutherland (US) LLP in New York, NY, and Robinson. The Division of Taxation is represented by state Attorney General Christopher S. Porrino.

To contact the reporter on this story: David McAfee in Los Angeles at dMcAfee@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

Text of the opinion is at http://src.bna.com/the.

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