United States: Court Hears Oral Argument in New Jersey Partnership Nexus Case: Tough Questions for Division of Taxation

Earlier this week, a New Jersey appellate court heard oral argument in BIS LP, Inc. v. Director, Div. of Taxation, which is the lead case addressing the issue of whether a corporate limited partner is taxable on its distributive share of income from a partnership doing business in New Jersey. The court seemed skeptical of the Division of Taxation's arguments, suggesting that the Division will have a difficult time prevailing at this level. Meanwhile, the Division has a new voluntary disclosure initiative for partnerships and partners that runs from March 15, 2014 through May 15, 2014.


The taxpayer, BIS LP, Inc. ("BIS"), held a 99 percent limited partnership interest in a limited partnership that was headquartered in New Jersey. BIS was a Delaware corporation with no offices, property, or employees in New Jersey. Its only income was its distributive share from the partnership, with which it shared some corporate officers. BIS argued that it was non-unitary with the partnership and that its interest in the partnership did not create tax nexus with New Jersey.

Accordingly, BIS requested a refund of the New Jersey corporation business tax "withheld" on its behalf by the partnership.1 In 2009, the New Jersey Tax Court ruled in favor of BIS.2 Then, in 2011, the Appellate Division of the New Jersey Superior Court (which is the intermediate court of appeals) affirmed, but remanded the case back to the Tax Court to determine whether BIS or the partnership should get the refund.3 On remand, the Tax Court ruled that BIS (the partner) was entitled to the refund.4 (We analyzed these decisions in detail in a previous article and teleseminar. To access that content, please click here.)

The Division appealed the Tax Court's decision back to the appeals court, which held oral argument on Tuesday before a two-judge panel.

Difficult Time for Division during Oral Argument

The Division argued that neither the partnership nor the partner was entitled to the refund. The Division argued that if a corporate partner doesn't have nexus with New Jersey, it can't get the refund because it's not a "taxpayer" under the statute. The Division further argued that the partnership couldn't get the refund because the partnership never filed a refund claim and such a claim would now be time barred. The Division's position, therefore, was that New Jersey "should get to keep the money."

The court appeared unmoved by the Division's reasoning. The court had previously ruled that the partner did not have nexus and pointed out that the issue on remand was limited to whether the refund should be ordered paid to the partnership or the partner. In a series of difficult questions, the court asked whether the Division was trying to re-litigate issues that the court had already decided. Specifically, the court suggested that the Division's position had "morphed" into whether the State had to pay a refund at all and asked whether this was beyond the scope of the issue before the court.

Based on oral argument, it seems that the Division will have a difficult time convincing the appeals court to reverse the Tax Court's decision that a corporate limited partner is entitled to a refund of tax withheld on its behalf by a non-unitary partnership.

In the event that the appeals court affirms, expect the Division to appeal to the New Jersey Supreme Court. At that level, the Division will likely make a two-pronged argument: (1) that the lower courts should have determined that BIS and the partnership were unitary and, as a result, that BIS had nexus with New Jersey; and (2) that the statute imposes an entity-level tax on partnerships and that the State still gets to keep any tax paid—even the portion paid on behalf of limited partners without New Jersey tax nexus. Thus far, the Division hasn't focused on the second argument. This may be due to constitutional problems with the position: under this interpretation, the statute imposes an entity-level tax only on partnerships with out-of-state partners and thus discriminates against interstate commerce.5

Next Steps for Taxpayers

If a partnership doing business in New Jersey has paid New Jersey corporation business tax on behalf of any nonresident partners, refund claims can be filed to get that tax back. To avoid statute of limitations problems, both the partner and the partnership may need to file claims. Even a partner with relatively weak non-unitary facts may be able to prevail under New Jersey's taxpayer-friendly case law—even if the partner is taking a unitary position in other states. (Remember, BIS's only asset was its interest in the limited partnership, and BIS owned 99 percent of the limited partnership; still, they were held to be non-unitary.) But taxpayers must evaluate potential risks and exposures before filing any claim. In certain instances, the Division will grant the partner a refund but then assess the partnership a corresponding amount plus interest and penalties. If BIS ultimately wins the case, the Division may have a difficult time sustaining these assessments. Still, it is an issue that requires consideration.

The Division has also announced a new voluntary disclosure initiative for partners and partnerships that have not previously filed tax returns. Although the Division has not specifically indicated what it will do after the initiative ends on May 15, it wouldn't be surprising if the initiative is followed by a renewed audit focus. Therefore, despite the Division's struggles in the BIS case, the VDA initiative is something that partners and partnerships should at least consider.

If you are interested in more information on the BIS case or New Jersey's new voluntary disclosure initiative, please contact one of the authors of this alert, or the Reed Smith attorney with whom you normally work. For more information on Reed Smith's New Jersey tax practice, visit www.reedsmith.com/njtax.

1. A partnership doing business in New Jersey is required to remit corporation business tax on behalf of any non-resident corporate partners; the tax paid is credited to the non-resident partners based on each partner's share of the partnership's apportioned net income. See N.J.S.A. 54:10A-15.11.
2. 25 N.J. Tax 88 (Tax Ct. 2009).
3. 26 N.J. Tax 489 (App. Div. 2011).
4. 27 N.J. Tax 58, 67 (Tax Ct. 2012).
5. The Christie Administration's most recent proposed state budget mentions a legislative fix to revise the statute and ensure that New Jersey collects tax on partnership income. FY 2015 Budget Summary at 31, available at http://www.state.nj.us/treasury/omb/publications/15bib/BIB.pdf.  

This article is presented for informational purposes only and is not intended to constitute legal advice.

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