United States

New Jersey: Corporate Partner Had Nexus Due to Ownership of Limited Partnership Interests

Oct 16, 2017
From KPMG TaxWatch

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Recently, the New Jersey Tax Court held that a foreign corporate limited partner had Corporation Business Tax (CBT) nexus by virtue of owning limited partnership interests in two partnerships operating in New Jersey. The partnerships operating in New Jersey were engaged in developing and selling residential properties in New Jersey and were part of an overall group of companies engaged in real estate development. The taxpayer and the two corporate general partners of the New Jersey partnerships were all owned by the same parent within the corporate group.

The taxpayer had originally filed its returns and paid CBT claiming the status of an investment company.  As an investment company, the taxpayer paid CBT on only 40 percent of its income. It later argued, after an audit, that under the partnership agreements it had no role in the operation of either partnership and was therefore simply a passive investor not subject to CBT. In support of this position, the taxpayer cited to BIS LP, Inc., a case in which a New Jersey appeals court held that mere ownership in a limited partnership was insufficient to create nexus with New Jersey. The tax court noted at the outset that the taxpayer’s reliance on BIS LP was misplaced to the extent it stood for the proposition that a limited partner can never be subject to the CBT because it does not participate in the partnership’s business per the partnership agreement. Rather, it was necessary for the court to consider all the facts and circumstances of the taxpayer’s business purpose, its involvement in the partnerships’ business, and its and the partnerships’ dependence and interdependence on their common owner. After reviewing the facts and circumstances, the tax court distinguished the instant case from the situation in BIS LP, Inc.  Notably, in the court’s view, despite the partnership agreement, the business activities and operations between the various entities within the overall group “were far from sharp and distinct and in fact were completely blurred.” In fact, the court concluded that the taxpayer “was as much of a general partner as the other corporate general partners” and “was completely integrated and interdependent” with the partnerships and common parent company. There was also a “commonality of officers” and “sharing of management personnel and functions,” between the parties. In the absence of any evidence of “absolute or finite lines between the corporate partners, their parent, and the partnerships’ business operations,” the court concluded that the taxpayer was not a mere passive investor with zero nexus to New Jersey. Having reached that determination, the tax court also concluded that the taxpayer did not qualify for investment company status because it was not a passive investor in the partnerships. Please contact Jim Venere at 973-912-6349 with questions on Preserve II, Inc. v. Division of Taxation.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.