On October 11, 2017, in Preserve II Inc. v. Div. of Taxation, the New Jersey Tax Court found that an out-of-state limited partner was not a mere passive investor in its two partnership investments and therefore had nexus with New Jersey. The Court held that Preserve II Inc. (Preserve) was subject to corporation business tax (CBT) because the lines between the partnerships, the limited partner, the general partner, and the parent of the limited and general partners were “completely blurred,” differentiating the facts and circumstances of this case from the BIS LP Inc. v. Div. of Taxation decision. As many taxpayers have relied on the BIS LP case, this decision creates uncertainty as to the taxability of limited partners in New Jersey for CBT purposes.
Preserve is a Michigan corporate limited partner, with 99% ownership in two Michigan partnerships. The general partners, with 1% ownership, and Preserve are commonly owned by its Michigan corporate parent. All entities belong to the same corporate family, Pulte Group, Inc., and are in the business of developing, building, and selling residential homes in New Jersey.
The taxpayer historically filed CBT returns, claiming investment company status, and did not dispute nexus with New Jersey. Following the BIS LP, Inc. decision, Preserve claimed it was entitled to CBT refunds since it was a mere holding company that held passive investments in partnerships. The taxpayer’s position relied on BIS LP, Inc., in which the tax court held that an out-of-state limited partner did not have nexus for CBT purposes, since its only contact with the state was its interest in the New Jersey partnership. The decision was based upon the facts that BIS had no control over the partnership’s business and did not have any physical presence in the state, and also that BIS was a foreign corporate limited partner that was not “integrally related” to the partnership, nor in the same line of business.
The Division of Taxation audited Preserve and denied the refund claim, determining that Preserve had nexus due to its unitary relationship with the two underlying partnerships, evidenced by common officers and banking facilities, and the fact that it was authorized to do business in the state of New Jersey. The Division also determined that Preserve was not entitled to the special apportionment rules for investment companies. Preserve appealed the assessments and denial of refund, arguing that it could not be unitary with the partnerships since the partnership agreements provide that general partners have all decision-making authority, while limited partners have no participation in the management of the partnership.
The Tax Court rejected the taxpayer’s argument, which said that merely having a limited partner status would preclude it from subjectivity to CBT. The Tax Court found that Preserve incorrectly relied upon BIS LP, Inc. In considering relevant facts and circumstances of the taxpayer’s business purpose, its activities related to the partnerships’ business, and the overall relationships and interdependence amongst the taxpayer, the partnerships and its parent, the Tax Court found that the partnerships were actively managed, operated, and controlled in all aspects, by the same individuals. These individuals consisted of officers of the parent of the taxpayer, as well as the general partners, all of which had the common goal of furthering the Pulte Group’s business. Additionally, the Tax Court held that Preserve was not entitled to the special apportionment allowed for investment companies, for the same reason it was determined to have nexus. The relationships between the taxpayer and the underlying partnerships were not determined to be those of passive investments.
The BIS LP, Inc. decision has been broadly interpreted by many companies and practitioners to determine no nexus with New Jersey for limited partners who otherwise have no other connection with the state. There are currently many similar pending refund claims that will potentially be impacted by the outcome of Preserve II Inc. This case demonstrates the Division’s consideration of substance over form, when determining whether a corporate limited partner is subject to CBT. Facts and circumstances will be considered to determine whether a limited partner is truly a passive investor in a partnership and not subject to CBT. These cases are likely to continue to be litigated; therefore, reliance on BIS LP, Inc. should be evaluated before taking a no nexus position for CBT purposes.
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