N.J. Courts: No N.J. Tax on Limited Partnerships—Or Their Limited Partners

by Reed Smith

[authors: David J. Gutowski, Kyle O. Sollie]

If you are a corporate partner whose only connection with New Jersey is an interest in a partnership (and maybe even an LLC), you should file a refund claim as a result of last Friday’s BIS decision.

On Friday, the New Jersey Tax Court issued an opinion ordering the Division of Taxation to refund the tax paid by a partnership headquartered in New Jersey. The tax had been paid on behalf of BIS, a 99% limited partner whose only connection with New Jersey was its interest in the partnership.1 Last year, the appellate court ruled that BIS was not subject to tax on its share of the partnership’s income because BIS was not unitary with the partnership, and thus had no nexus.2 (A detailed analysis of this decision is available at: http://www.reedsmith.com/njtax.)

On remand to the Tax Court, the Division argued that BIS was not entitled to a refund because the partnership had correctly paid the tax. In the Division’s view, the partnership was obligated to pay tax regardless of whether the partner had nexus. In any event, the Division argued, that even if no tax was due, the partnership (not the partner) was the party entitled to the refund because it was the partnership that had paid the tax. Since the partnership had not filed a refund claim, the Division argued that it was now too late.

The Tax Court rejected the Division’s arguments. In doing so, the court relied on language in the statutes and regulations that the tax paid by the partnership is credited to the limited partner and, if the limited partner has no nexus, then the payments are overpayments that may be refunded to that limited partner.3

In practice, this has a significant impact on New Jersey’s non-resident partnership tax regime. What this means is that a corporate partner or a corporate member of an LLC should consider filing a refund claim for taxes paid on its behalf by the partnership or LLC, if the corporation doesn’t actively manage the business and its only connection with New Jersey is the interest in the partnership or LLC.

A copy of the decision is available here.

If you have questions about the refund opportunities created by the BIS decision, please contact one of the authors or the Reed Smith attorney with whom you usually work. For more information on Reed Smith’s New Jersey tax practice, visit www.reedsmith.com/njtax.

About Reed Smith State Tax

Reed Smith’s state and local tax practice is comprised of lawyers across seven offices nationwide. The practice focuses on state and local audit defense and refund appeals (from the administrative level through the appellate courts), as well as planning and transactional matters involving income, franchise, unclaimed property, sales and use, and property tax issues. Click here to view our State Tax team.

1. BIS LP, Inc. v. Director, Division of Taxation, Docket No. 007847-2007 (N.J. Tax Ct. October 25, 2012).
2. BIS LP, Inc. v. Director, Division of Taxation, No. A-1172-09T2, 2011 WL 3667622, at *2, *7 (App. Div. 2011).
3. See N.J.S.A. 54:10A-15.7; 54:10A-15.11; N.J.A.C. 18:7-17.6.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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