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Earlier this week, the New Jersey Superior Court, Appellate Division, affirmed a decision of the Tax Court of New Jersey finding that a lack of nexus existed for distributions made to a foreign limited liability partner from a partnership with an in-state presence. See, BIS LP Inc. v. Division of Taxation, Docket No. A-1172-09T2 (NJ Super. Ct. 2011).
BIS, the taxpayer at issue, was a foreign corporation with no place of business, property, employees or agents in the state of New Jersey. Its only interest was its ninety-nine percent (99%) limited partnership interest in BISYS Information Solutions ("Solutions"), which conducted business in New Jersey. As a result of restructuring, BIS became a wholly owned subsidiary of a holding company, BISYS, Inc. ("BISYS"). Pursuant to a partnership agreement, BISYS was a one percent general partner of Solutions and BIS was a ninety-nine percent (99%) limited partner of Solutions. Furthermore, the partnership agreement gave exclusive control of Solutions to the general partner, and made clear that BIS would not have a right to partake – directly or indirectly – in the active management of Solutions.
BIS filed its 2003 New Jersey corporation business tax ("CBT") return and contended that it owed no CBT because it did not have the nexus necessary to subject it to taxation in New Jersey. The director rejected this assertion, claiming that CBT was owed because BIS had a unitary relationship with the business conducted by Solutions in New Jersey.
The Superior Court affirmed the Tax Court and held BIS lacked sufficient New Jersey nexus to subject it to CBT. When so holding, the Court found:
The partnership interest was BIS' only or most substantial asset, and it produced BIS' income. However, BIS was not in the same line of business as Solutions. Nor, as we have stated, was there a 'substantial' overlapping of officers, and there was no sharing of offices, operational facilities, technology, or know-how.
The court found that while the two entities shared some corporate officers, that was insufficient, particularly compiled with the fact that BIS was not in the same line of business as Solutions and did not control Solutions.
The rationale behind the New Jersey Superior Court's reasoning is in stark contradiction to a Kentucky court's decision last year involving the same issue. In Revenue Cabinet v. Asworth Corp., Docket No. 2007-CA-002549-MR (Kentucky Ct. Appeals 2010), Asworth owned a ninety-nine percent (99%) limited partnership interest in Conwood Company, LP, a Delaware limited partnership which conducted business in Kentucky. Apart from its limited partnership interest in Conwood, Asworth had no other connection to Kentucky. Based upon an audit of Asworth, the Revenue Cabinet determined that Asworth owed additional taxes. Asworth appealed arguing that it lacked the requisite nexus with the state of Kentucky to be subject to tax. The court found that:
While the Corporations do no business in Kentucky, at various times they have owned up to a 99% limited and/or general partnership interest in, and have received distributive shares of partnership income from the profits of, a partnership which does business in Kentucky. Such a partnership unquestionably has received protection and benefits from Kentucky, thereby enabling the distribution of income to the Corporations. We hold that this connection gives rise to a substantial nexus with, and/or a physical presence within, Kentucky.
Earlier this year, the United States Supreme Court denied Asworth's petition for certiorari.
Thus, while based upon similar facts, the courts in New Jersey and Kentucky came to strikingly different conclusions. However, upon closer analysis, this apparent contradiction appears to be primarily due to the statutory language enacted in each state to address the facts at issue. In New Jersey, a foreign corporate limited partner is only considered to be doing business in the state and, therefore, subject to CBT, if:
- The limited partner is also a general partner of the limited partnership;
- The foreign corporation limited partner, in addition to the exercise of its rights and powers as a limited partner, takes an active part in the control of the partnership business;
- The foreign corporate limited partner meets the criteria set forth in N.J.A.C. 18:7-1.9 or 1.6 (relating to criteria assessed for "doing business" in the state); or
- The business of the partnership is integrally related to the business of the foreign corporation.
Because the New Jersey Superior Court found that BIS did not meet any of the aforementioned criteria, liability for the tax was not imposed on the foreign limited partner.
Conversely, in Kentucky, the statute expressly provides for liability for a nonresident limited partner receiving distributions from a partnership with an in-state presence. Specifically, the statute states:
Nonresident individuals and corporations which are partners in a partnership or shareholders in an S corporation which does business within and without Kentucky are taxable on their proportionate share of the distributive income passed through the partnership or S corporation attributable to business done in Kentucky. KRS 141.206(3)(b).
As such, in New Jersey and Kentucky, based upon each state's statute addressing almost identical facts, the courts reached different conclusions; the New Jersey court holding the taxpayer lacked sufficient nexus with New Jersey to be subject to CBT while the Kentucky court held the taxpayer had sufficient nexus with Kentucky to be subject to Kentucky corporate income tax.