United States: NJ Tax Court: Division Assessment Stricken Because Limited Partnership Not Subject To Corporation Business Tax

Last Updated: March 1 2018
Article by David J. Gutowski and Matthew L. Setzer

At a Glance...

Yesterday, the New Jersey Tax Court of New Jersey issued yet another decision involving the taxation of partnerships and their nonresident limited partners in National Auto Dealers Exchange, L.P. v. Director, Div. of Taxation.1 The court found that a partnership is not a taxable entity for purposes of New Jersey's corporate income tax (known as the corporation business tax or "CBT").

The court's decision is consistent with the result in a prior Tax Court decision, BIS L.P., Inc. v. Director, Div. of Taxation.2 But the court's reasoning in National Auto Dealers goes far beyond its prior guidance and creates further uncertainty concerning the application of statutory amendments made in 2014.


National Auto Dealers Exchange, L.P. ("NADE") was a Delaware limited partnership that did business in New Jersey. Its limited partner Manheim NJ Investments, Inc.("Manheim") provided NADE with the Division's Form NJ-1065E, consenting to nexus with New Jersey. Consistent with that form, Manheim filed CBT returns and paid tax on its distributive share of NADE's income. Manheim subsequently filed a refund claim in light of the appellate court's decision in BIS,3 which held that a corporate limited partner was not subject to CBT if its only connection to the state was through a non-unitary limited partnership. After Manheim asserted that it lacked nexus with New Jersey, the Division issued an assessment to NADE.

NADE protested the assessment, arguing that its CBT obligations were extinguished when it filed a copy of Form NJ-1065E with its original return. According to NADE, it was improper to assess tax on the partnership just because the partner files a refund claim.

Court's Decision

The court agreed with NADE and rejected the Division's assertion that partnerships are taxable entities under the CBT statute. Reading the statute as a whole, the court reasoned that partnerships are not defined as taxable entities even if they are required to withhold tax payments on behalf of nonresident partners in certain circumstances.4 As a result, the court granted NADE's motion for summary judgment and removed the Division's assessment.

Implications of the Decision

Partnerships Currently Facing Assessments. The Division argued that Manheim had "effectively revoked" its NJ-1065E consent to nexus when it filed a refund claim. Under the Division's theory, this created a withholding obligation for NADE because Manheim deemed itself to be a nonresident partner. The court disagreed. As explained by the court, "the partnership's only obligation is either to remit the CBT or collect the partner's consent via Form NJ-1065E, and any one of these actions effectively relieves the partnership from the duty to do anything further with regard to CBT." The court's reasoning effectively prohibits the Division from assessing tax on any partnership that received a Form NJ-1065E from its nonresident partners. If your partnership was assessed, you should review your return files and confirm whether the form was submitted.

2014 Statutory Change. Effective in 2014, the New Jersey legislature amended the CBT partnership "withholding" statute. Under the revised statute, a partnership must pay tax on behalf of its nonresident partners. These "withheld" tax payments are credited to the nonresident partners, but a partner is entitled to the credit only if it concedes nexus with New Jersey. In effect, to the extent a partner lacks nexus with New Jersey, the statute imposes an entity-level tax on partnerships—or so many taxpayers thought. The Tax Court's decision in National Auto Dealers Exchange calls this conclusion into question. After all, if a partnership is not a taxable entity for CBT purposes, it would be improper for the Division to retain any tax paid by the partnership.

There are also constitutional problems with the 2014 statutory amendments. In particular, the statute requires only partnerships with nonresident partners to pay the withholding tax. Because of this discrimination, partnerships with nonresident partners should consider challenging the rule. Although the Division may try to defend this discrimination based on the compensatory tax doctrine, the Division would have a difficult time prevailing with such an argument.5 In addition, there are potential Due Process problems if the Division retains tax payments from a partnership even though the partnership is not a taxable entity for CBT purposes. If your partnership paid withholding tax beginning in 2014, it should consider filing a refund claim.


1. Docket No. 00028–2014.

2. See BIS LP, Inc. v. Director, Division of Taxation, 27 N.J. Tax 58, 65–66 (N.J. Tax 2012).

3. See BIS LP, Inc. v. Director, Division of Taxation, 26 N.J. Tax 489 (N.J. Super. Ct. App. Div. 2011).

4. See N.J.S.A. 54:10A–2. But see N.J.S.A. 54:10A–15.7(b); N.J.S.A. 54:10A–15.11.

5. David J. Gutowski, et al., The BIS Case: A Big Shift in New Jersey's Unitary Business Rule and the Taxation of Corporate Partners, 22 J. of Multistate Tax. 7 (2012), available here.

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

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