New Jersey Rules that Out-of-State Limited Partner Has Income Tax Nexus

December 14, 2017

A residential real estate developer’s case demonstrates that the determination of whether or not an out-of-state limited partner has nexus is dependent upon the specific facts of the situation.

Typically, states consider taxpayers that own interests in pass-through entities (e.g., partnerships, limited liability companies and S-corporations) to have income tax nexus in those states in which the pass-through entity (“PTE”) has income tax nexus. However, several states, including New Jersey, have guidance that certain passive limited partners may not have nexus. [1] On Oct. 4, 2017, the New Jersey Tax Court issued an opinion addressing whether or not a corporate limited partner had income tax nexus in New Jersey based on its ownership of two foreign limited partnerships that do business in the state. [2]

Preserve II, Inc. (“Preserve”) is a Michigan corporation and a 99 percent limited partner of two Michigan partnerships, all part of the Pulte Group (a national residential real estate developer and builder). The partnerships are in the business of developing, building and selling residential homes in New Jersey.

From 2005 to 2007, Preserve filed CBT returns and did not dispute that it had nexus with New Jersey. However, in 2009, the New Jersey Tax Court issued a decision (the BIS case) in which it held that an out-of-state corporation that was a 99 percent limited partner in a partnership that conducted business in New Jersey did not have New Jersey income tax nexus (that decision was affirmed in 2011). [3]

This decision was based on the fact that the foreign corporate limited partner had no control over the partnership’s business and had no other physical contacts with the state. In addition, the BIS Court found that the foreign corporate limited partner was “not integrally related” (i.e., not unitary) with the partnership since it was not in the same line of business. On a subsequent New Jersey audit in 2010 and based on BIS, Preserve argued that it lacked nexus with New Jersey and was entitled to refunds.

New Jersey denied any refund claims because it argued that Preserve had nexus with the state. This determination was based on the fact that Preserve was authorized to do business in the state and it concluded that Preserve had a “unitary relationship” with the two partnerships that it owned due to commonality of officers and shared banking facilities.

On appeal, the Court rejected Preserve’s argument that it was merely a limited partner in the partnership and thus did not have nexus. The Court noted that just being labeled as a limited partner (without ability to participate in the partnership’s business) in the partnership agreement is not dispositive. In other words, the Court must look to the facts and circumstances of Preserve’s business purposes, its involvement in the business activity and the shared relationships between all of the Pulte entities.

Based on that examination, the Court found that Preserve did have nexus in New Jersey. First, key management personnel who were officers of Preserve were also officers of the general partners, as well as the ultimate Pulte parent corporations, and their jobs were to manage and operate the partnerships’ business of developing, building and selling residential homes. There was no evidence, explicit or implicit, to show that these officers played a distinctly passive role for Preserve.

Second, the Court found that Preserve was fully integrated and interdependent (i.e., unitary) with the partnership and the Pulte group generally. Besides the commonality of officers, all of the Pulte entities shared tax preparation, filing and payment resources, as well as the same financing facilities. In addition, neither Preserve nor the partnerships nor their general partners were allowed to open/operate external bank or financial accounts or to make investments. Finally, all employees participated in the same benefit plans.

Based on these facts, the Court stated:

In sum, the court finds that there was no substantive distinction made as to the corporate partners . . . . Evidence shows that the lines between [the entities] are not as finite as specified in the partnership agreements, and are in fact extremely blurred (if drawn at all), and do not credibly establish a distinction as to Preserve due to its limited partner status, and the other two corporate general partners. There was only one hat worn by the individuals who actively managed the partnerships’ business, some of whom were officers of both Preserve and the general partners, some of whom were only the general partner’s officer, and all of whom were officers of the parent. That hat was to actively run the day-to-day operation of Pulte’s core business, home development and building. . . . The court cannot, and will not conclude that due to the partnership agreements’ language of reserving the exercise of power, control or management only to the general partner, the necessary consequence must be that Preserve did nothing in either partnership except receive its share of pass-through income. Under the facts here Preserve was as much of a general partner as the other corporate general partners, and Preserve had nexus to New Jersey.

This decision reinforces the fact that the determination of whether or not an out-of-state limited partner has nexus is dependent upon the specific facts of the situation and that the specific terms of the partnership agreement do not carry much (if any) weight. Also, if a taxpayer has been relying on the BIS decision as support for not filing in New Jersey, it is recommended that such position be re-analyzed in light of this case.

Aprio’s SALT team is experienced in addressing nexus issues for owners of PTEs, as well as the obligations of the PTE with respect to the income passing through to those owners, such as withholding tax requirements. We constantly monitor these and other important state tax issues, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at for more information.

This article was featured in the November/December 2017 SALT Newsletter.

[1] See N.J. Admin. Code 18:7-7.6.

[2] Preserve II, Inc. et al. v. Director, Div. of Taxation, New Jersey Tax Court Docket No. 010920-2013 – 010922-2013 (Oct. 4, 2017).

[3] BIS LP, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 88 (Tax 2009), aff’d, 26 N.J. Tax 489 (App. Div. 2011).

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.

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