When a partner files for a refund of New Jersey tax, claiming it is not a New Jersey resident, the partnership is not liable for tax on the partner’s share. The New Jersey Tax Court invalidated a corporation business tax (CBT) assessment against a limited partnership (LP) that filed its corporate partner’s Form NJ-1065E with its own partnership return.
Corporate Partner Revokes Resident Status Through Refund Claim
For the tax years at issue, the LP obtained Form NJ-1065E, Nonresident Corporate Partner’s Statement of Being an Exempt Corporation or Maintaining a Regular Place of Business in New Jersey, from its corporate partner. The LP submitted the forms with each of its partnership returns. In each Form 1065-E, the corporate partner checked the box that states “[b]y signing this statement, the nonresident corporate partner is declaring that it maintains a regular place of business in New Jersey other than a statutory office.”
The corporate partner filed CBT returns and paid the tax on its distributive share of New Jersey partnership income from the LP for the tax years at issue. However, the corporate partner later filed a refund claim, maintaining that it did not have nexus with New Jersey for CBT purposes. The Division of Taxation (DOT) denied the refund claim.
The DOT also audited the LP and assessed additional CBT on the corporate partner’s distributive share of the LP’s entire income for each of the tax years at issue. To support this assessment, the DOT cited to N.J.S.A. 54:10A-15.11, which generally requires partnerships to pay a tax on behalf of each nonresident partner based on the total share of partnership income or loss.
Partnership Not Liable for Tax on Nonresident Partner’s Share
First, the Tax Court noted that, as a pass-through entity, the LP is not subject to the CBT. The court rejected the DOT’s claim that a partnership, by virtue of having a nonresident corporate partner, becomes a taxable entity. As the court noted, the corporate partner is still the taxable entity, and the LP has no independent tax liability of its own.
In addition, the Tax Court also rejected the DOT’s argument that Sec. 54:10A-15.11 cancels out the provisions of N.J.S.A. 54:10A-15.7, which allows a nonresident corporate limited partner to submit an exemption form (Form NJ-1065E) that relieves the limited partnership of the duty to remit tax on behalf of that partner. The court noted that its conclusion is backed by the DOT’s own regulation (N.J.A.C. 18:7-17.8(a)), which states that filing Form NJ-1065E with a partnership return means that the partnership is not required to pay tax on a nonresident corporate limited partner’s behalf. Furthermore, by providing a partnership with Form NJ-1065E, the nonresident corporate limited partner consents to taxation by New Jersey. It also ceases to be a nonresident for the purposes of N.J.S.A. 54:10A-15.11, because it claims to have a regular place of business in New Jersey. In sum, when the nonresident corporate partner consents to New Jersey taxation under N.J.S.A. 54:10A-15.7, the DOT cannot require the partnership to follow N.J.S.A. 54:10A-15.11.
The DOT also claimed that the corporate partner’s refund claim “effectively revoked” its consent to taxation by New Jersey. To supports this contention, the DOT pointed out that New Jersey law is silent regarding the obligations of a partnership when a partner later changes its position and files a refund claim stating that it does not maintain a regular place of business in New Jersey. However, according to the court, the DOT overlooked the fact that these are the actions of the partner, not the partnership. The court found no legal basis to find that a Form NJ-1065E filed with the LP’s partnership return was “effectively revoked” by the corporate partner filing a refund claim.
Finally, the court dismissed the DOT’s claim that assessing a deficiency against the LP will protect New Jersey tax revenue and prevent the DOT from relitigating the issue of nexus if the corporate partner prevailed in its litigation seeking refunds. Whether the corporate partner has nexus with New Jersey for CBT purposes is not a basis for imposing the CBT on the LP.
National Auto Dealers Exchange, L.P. v. Director, Division of Taxation, New Jersey Tax Court, No. 000028-2014, February 26, 2018, ¶402-140