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In Preserve II,¹ the New Jersey Tax Court (court) ruled that an out-of-state corporate limited partner of two partnerships doing business in New Jersey has nexus with New Jersey because it is a deemed general partner as a result of its interrelation with the general partners and the operating partnership doing business in the state. This is the third New Jersey opinion to deal with the nexus status of corporate limited partners for purposes of New Jersey's corporate business tax (CBT), following earlier decisions in BIS² and Village Super Market.³ The court also denied investment company status to the corporate limited partner (which would have allowed an effectively lower CBT tax rate), finding that it was not entitled to investment company status.

Background

Preserve II was a non-New Jersey corporation that owned 99% of each of two New Jersey limited partnerships, which were engaged in the homebuilding business. Two general partners each owned 1% of one of the partnerships, respectively. Preserve II and the general partners were all subsidiaries of Pulte Home Corporation (PHC), which was a subsidiary of Pulte Group, Inc. (Pulte Group), a nationally known and publicly traded homebuilding company.

N.J.A.C. 18:7-7.6 provides an exemption from nexus for foreign corporations with New Jersey business activity limited to holding a limited partnership interest in a partnership with New Jersey nexus. The exemption is not available to limited corporate partners under the following circumstances:

— The limited partner also is a general partner of the limited partnership;
— The foreign corporate 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; or
— The business of the partnership is integrally related to the business of the foreign corporation.

Court rules corporate limited partner not exempt from nexus

Based upon the court's factual analysis of Preserve II's role in the operation of the limited partnerships, the court determined that Preserve II failed the "integrally related" prong of the administrative code nexus exemption. The key to the court's nexus finding was the blurred distinctions among Preserve II, PHC, the partnerships, and the general partners. According to the court, all four groups carried on essentially the same mission: Furthering Pulte Group's homebuilding operations in New Jersey. The court believes that the testimony from Pulte Group's witnesses, demonstrating that they were unaware of the existence of Preserve II, the partnerships, and the general partners, supported this thesis. The court found that Preserve II's officers worked exclusively to further Pulte Group's homebuilding business, not to further a separate, passive investment function. The court also found that Preserve II did not have the authority to make, sell, or diversify any investments. Taking into account these facts, the court found that Preserve II essentially took part in the partnerships' New Jersey business, and that it had nexus with New Jersey pursuant to N.J.S.A. 54:10A-2 and N.J.A.C. 18:7-1.6.

The court further determined that there was significant integration and interdependence between Preserve II, the partnerships, the general partners, and PHC. There was sharing of officers between the four groups, as well as common tax compliance, financing, and employee medical and benefit plans. In sum, the court found that Preserve II "was as much of a general partner as the other corporate general partners."⁴ The court's analysis of the integration and interdependence of the four groups, with the unitary business principle echoing in the background, supported its analysis, but was not strictly necessary for its legal nexus conclusion.⁵

The court also denied investment company status to Preserve II. Relying on Manheim v. Director,⁶ the court found that Preserve II was not a passive investor entitled to investment company status. Rather, Preserve II's facts demonstrated that it had blurred the distinction among the partnerships, the general partners, and Preserve II, and that Preserve II in essence acted as a general partner. As such, it could not be a passive investor entitled to investment company status.

Finally, the court abated the amnesty penalty for 2005 to 2007, finding that Preserve II did not willfully underpay tax, and abated the underpayment penalty for tax years 2005 to 2006, finding that the mid-year effective date of N.J.A.C. 18:7-1.15, governing the election to be taxed as an investment company, was illogical and unfair to taxpayers.

Implications

The taxpayers in this case have filed a notice of appeal. If the court's decision stands, it will serve as additional guidance relating to the issue of whether limited partners have CBT nexus with New Jersey. The facts of this case are somewhat different from the facts in Village Super Market. Thus, this case can be seen as expanding the definition of nexus and clawing back even more of the no-nexus zone which was established in the court's ruling in BIS. Also, while neither this case nor Village Super Market explicitly relied on the unitary business principle that was critical to the conclusion in the court's ruling in BIS, it is clear that the court is incorporating many unitary business concepts in its ostensibly non-unitary nexus analysis. This case demonstrates that centralized management, functional integration, and economies of scale, in the form of elements such as shared officers, tax compliance, financing, and overall management goals, are important to the court's analysis of nexus for all partners in a partnership doing business in New Jersey. Taxpayers who utilize a similar limited partnership structure may face nexus inquiries or audits from the New Jersey Division of Taxation. Going forward, taxpayers may want to consider revising their legal entity structure and employment policies in order to minimize the centralized management, functional integration, and economies of scale between limited partners, on the one hand, and their operating partnerships and general partners, on the other.

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Contact Information For additional information concerning this Alert, please contact:   State and Local Taxation Group • Bill Korman (212) 773-4180 • Michael Puzyk (212) 773-3032

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ENDNOTES

¹ Preserve II, Inc. v. Director, Div. of Taxation, Dkt. No. 010921-2013, Pulte Homes of NJ, L.P. v. Director, Div. of Taxation, Dkt. No. 010920-2013, and Pulte Communities of NJ, L.P. v. Director, Div. of Taxation, Dkt. No. 010922-2013 (N.J. Tax Ct. October 4, 2017).

² BIS LP, Inc. v. Director, Div. of Taxation, 25 N.J. Tax 88 (Tax 2009); aff'd, 26 N.J. Tax 489 (2011).

³ Village Super Market v. Director, Div. of Taxation, 27 N.J. Tax 394 (Tax 2013).

⁴ Preserve II, supra, at44.

⁵ Although the court compared the facts of the case with the taxpayer's facts in BIS v. Director, and discussed the unitary business principle relied on in that case, the court ultimately did not per se rely on the unitary business principle. Rather, the court found that Preserve II, on its own merits, had nexus with New Jersey. Thus, the court's decision was similar to that in Village Super Market v. Director.

⁶ Manheim NJ Invs., Inc. v. Director, Div. of Taxation, 30 N.J. Tax 18 (Tax 2017).