United States

New Jersey: Partnership Not “Per Se” Taxable Under Corporation Business Tax Act

Mar 05, 2018
From KPMG TaxWatch

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The New Jersey Tax Court recently addressed whether the Division of Taxation could assess a limited partnership in lieu of a corporate partner. The corporate partner had originally confirmed its status as a resident limited partner by filing form NJ-1065E. This form indicates that the corporate limited partner is subject to the New Jersey Corporation Business Tax (CBT) and relieves the partnership from withholding on the nonresident partner’s distributive share of partnership income sourced to New Jersey. After the BIS, L.P. Inc. decision, the corporate limited partner “revoked” the form NJ-1065E and filed a CBT refund claim. Shortly thereafter, the Division assessed the partnership, asserting that the revocation had the effect of triggering a “withholding” tax obligation and therefore the assessment was proper. The limited partnership, in response, argued that the Division lacked statutory authority to assess a CBT deficiency against a partnership. Furthermore, even if the corporate partner’s refund claim were to be viewed as a revocation of its Forms NJ-1065E, the issue of nexus would nevertheless have to be litigated.

The tax court rejected the Division’s position, noting the general imposition language of the CBT Act does not include partnerships. Further, stated exceptions to the imposition language in the CBT statute (which includes partnerships in the definition of a taxpayer) imposed a withholding and remitting obligation only when a partnership had New Jersey source income and nonresident partners. This interpretation was reinforced by the statutory provision attributing payments by the partnership as “credited to the partnership accounts of its nonresident partners” and not the partnership entity. In sum, the text of the CBT Act and the Division’s regulations clearly evidenced that the Division was mistaken in its belief that a partnership, by virtue of having a nonresident corporate partner, could become a taxable entity. The taxable entity is the corporate partner, in the court’s view, and the partnership has no independent tax liability of its own. The court also noted that it would be “illogical” if any refund claim filed by a partner subjected the partnership to liability. Please contact Jim Venere at 973-912-6349 with questions on National Auto Dealers Exchange, L.P. v. Director, 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.