N.J. Admin. Code § 18:7-7.6

Current through Register Vol. 56, No. 21, November 4, 2024

Section 18:7-7.6 - Corporate partners and partnerships

(a) A foreign corporation that is a general partner in a general or limited partnership or is deemed to be a general partner in a limited partnership doing business in New Jersey satisfies the subjectivity requirements set forth at N.J.S.A. 54:10A-2. A foreign corporation that is a general partner of a general or limited partnership doing business in New Jersey is subject to filing a corporation business tax return in New Jersey and paying the applicable tax under the terms of the Corporation Business Tax Act to New Jersey. Such a corporation is also deemed to be employing, or owning capital or property in New Jersey, or maintaining an office in New Jersey, if the partnership does so.

(b) Subsection (a) above may apply to foreign corporations, otherwise not subject to the New Jersey corporation business tax, whose only connection to this State is restricted to owning one or more limited partnership interests in one or more limited partnerships doing business in New Jersey, provided the taxpayer's connection with this State is sufficient to give this State jurisdiction to impose the tax under the Constitution and statutes of the United States. See N.J.A.C. 18:7-1.6.

(c) A foreign corporate limited partner of a limited partnership doing business in New Jersey is considered exercising its franchise to do business in this State, doing business in this State or employing capital in this State, and, therefore, is subject to tax under N.J.S.A. 54:10A-2 and filing a corporation business tax return, if:

1. The limited partner is also a general partner of the limited partnership;

2. 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;

3. The foreign corporate limited partner meets the criteria set forth in N.J.A.C. 18:7-1.9 or 1.6; or 4. The business of the partnership is integrally related to the business of the foreign corporation.

(d) Tax filing and payment responsibilities of partnerships are set forth in N.J.A.C. 18:7-17. For the partnership processing fee, see N.J.A.C. 18:35-11.

(e) It shall be the burden of the taxpayer to prove to the Director by clear and cogent evidence that the facts and circumstances surrounding its involvement with the limited partnership or limited liability company do not subject it to tax under the Act.

(f) For purposes of this section, the term "partnership" has the same meaning as is set forth under I.R.C. § 7701(a)(2) and the regulations issued thereunder. Partnerships that are not treated for Federal tax purposes as pass-through entities are also not treated as pass-through entities under this section. The term "partnership" shall include limited liability companies treated as partnerships.

(g) For purposes of apportionment (allocation) of corporate income, where the subject corporation and the partnership are not part of a single unitary business, including a business carried on directly by the foreign corporate partner, separate accounting apportionment should be used to arrive at corporate income. If the New Jersey business of the partnership is part of a single unitary business including a business carried on directly by the foreign corporate partner, flow through accounting apportionment should be used with respect to the incomes of the two entities.

1. Separate accounting apportionment, for purposes of this subsection only, means use of the following method: The corporation's distributive share of the partnership's business income would be apportioned to New Jersey by computing the applicable N.J.S.A. 54:10A-6 apportionment factor for that business by only taking into account the corporate partner's share of the receipts of the business that the partnership carries on directly. Second, the corporation's entire net income, excluding its distributive share of the partnership's income is apportioned to New Jersey by computing the applicable N.J.S.A. 54:10A-6 apportionment factor for that business by only taking into account the receipts (excluding receipts from the partnership namely, receipts from intercompany transactions) of the business that the corporation carries on directly. Third, these two amounts would be added together to arrive at the corporation's entire net income apportioned to New Jersey.

2. "Flow through accounting apportionment," for the purpose of this section only, means use of the following method: Taxpayer shall separately compute the receipts fractions attributable to the partnership activity. The taxpayer next computes the receipts fractions attributable to the corporate activity. An allocation factor combining the factors of the corporation and the partnership is then applied to the corporation's entire net income including its distributive share of the partnership's income.

3. Facts that either singly or in combination may suggest that the corporation and partnership are part of a unitary business and hence that a flow through approach may be appropriate include, without limitation thereto:

i. Substantial intercompany-partnership transactions;

ii. The partnership interest is the only or the most substantial asset of the corporation;

iii. The partnership interest produces all or most of the income of the corporation;

iv. The corporation and the partnership are in the same line of business;

v. There is substantial overlapping of employees and offices; and/or

vi. There is sharing of operational facilities, technology, and/or know-how.

4. For further information about combined returns and unitary businesses, see N.J.A.C. 18:7-21.

5. For purposes of determining the application of the small corporation tax rate, the entire net income of a general partner (actual or deemed) should include the partner's proportionate share of the unapportioned net income of the partnership and the entire net income of a limited partner should include the partner's proportionate share of the unapportioned net income of the partnership.

(h) The accounting methods described at (g) above are also applied to domestic corporate partners. If a domestic corporation is a partner in a foreign partnership that does not conduct business in New Jersey, and the corporation's own business and that of the partnership are not unitary, then the corporation's income from the partnership shall not be included in the corporation's tax base, and the partnership's receipts, payroll, and property shall not be considered in determining the apportionment factor to apply to the corporation's income from its own business. If, however, the two businesses are unitary, then the flow through method should be used in apportioning the corporation's income. For further information about combined returns and unitary businesses, see N.J.A.C. 18:7-21.

1. Solely for purposes of this section, each regular place of business of a partnership that is unitary with a corporate partner is to be treated as a regular place of business of the corporate partner. Relief pursuant to N.J.A.C. 18:7-8.3 is permitted to domestic partners with respect to partnership income duplicated on a return of a domestic corporate partner filed with another state. By virtue of its subjectivity under the Corporation Business Tax Act, a corporate partner may seek relief under N.J.S.A. 54:10A-8 if the taxpayer believes that tax computed does not result in a fair apportionment.

(i) A "tiered partnership," for the purposes of this section, is a partnership whose partners are partnerships. A corporation that is a partner in a partnership that in turn is a partner in yet another partnership is not immune from New Jersey taxation simply because of the tiered partnership. The ultimate tax burden and loss benefit falls on the corporate partner. The corporation shall file a New Jersey corporation business tax return taking account of its ultimate distributive share of the tiered partnership's income or loss from New Jersey activities.

(j) The classification of partnership items of income, expense, or loss as operational or nonoperational is to be determined in accordance with N.J.S.A. 54:10A-6.1. Whether or not a partnership is unitary or nonunitary with its corporate partner is a different issue from the issue of taxability of operational or nonoperational income or the deductibility of operational or nonoperational expenses or losses.

(k) Any New Jersey corporate tax credits for which a subject corporate partner may qualify shall pass through to the corporate partner. The corporate partner may claim its proportionate share of such credit on its New Jersey corporation business tax return.

EXAMPLE I

Corporation ABC is a foreign corporation which allocates to New Jersey, and also has 50 percent share in a partnership that is doing business in New Jersey, but is not unitary with the corporation. The corporation would calculate its allocation factor and allocated income exclusive of the activities of the partnership. The partnership would calculate its allocated income based upon its own attributes, and the allocated incomes from both entities are combined to make allocated net income.

ABC Corp.	Fraction in NJ	General Partnership	Fraction in NJ
Property NJ	9,000	500
Everywhere	10,000	.900000	1,000	.500000
Receipts NJ	3,000	5,000
Everywhere	10,000	.300000	20,000	.250000
Double Weighting of Receipts Fraction	.300000	.250000
Payroll NJ	6,000	250
Everywhere	10,000	.600000	1,000	.250000
Total	2.100000	1.250000
Allocation Factor (Total divided by 4)	.525000	.132500
Net Income of Corporation	$5,000
Corporation's Distributive Share of Partnership Income	$1,000 ------
Total Net Income	$6,000
Corporation's Income	5,000
Corporation's Allocation Factor	.525000
Corporation's Allocation Net Income	$2,625
Partnership Income	1,000
Partnership	.312500
Allocation Factor
Partnership	$ 313
Allocation Net
Income	------
Total Allocated Net	$2,938
Income

EXAMPLE II

Corporation DEF is a foreign corporation that has no nexus with New Jersey other than a 50 percent general partnership interest in a partnership, which is not unitary with the corporation. The corporation would calculate its allocation factor and allocated income exclusive of the activities of the partnership. In this case, the allocation factor is zero and the corporation does not allocate any of its income to New Jersey. The partnership would allocate its income as a separate entity. The allocated income from both calculations are then combined to compute the tax liability of the corporation.

DEF Corp.	Fraction in NJ	General Partnership	Fraction in NJ
Property NJ	0	750
Everywhere	10,000	0.000000	1,000	.750000
Receipts NJ	0	10,000
Everywhere	10,000	0.000000	20,000	.500000
Double Weighting of Receipts Fraction	0.000000	.500000
Payroll NJ	0	750
Everywhere	10,000	0.000000	1,000	.750000
Total	0.000000	2.500000
Allocation Factor (Total divided by 4)	0.000000	.625000
Net Income of Corporation	$5,000
Corporation's Distributive Share of Partnership Income	$1,000 ------
Total Net Income	$6,000
Corporation's Income	5,000
Corporation's Allocation Factor	.000000
Corporation's Allocation Net Income	$0
Partnership Income	1,000
Partnership Allocation Factor	.625000
Partnership Allocation Net Income	$ 625 ------
Total Allocated Net Income	$ 625

EXAMPLE III

Corporation XYZ is unitary with a partnership and holds a 50 percent general partnership interest in a general partnership. The taxpayer should use the flow through method of allocation since there is a sufficient integration of assets and business activities between the corporation and partnership.

XYZ Corp.	50 Percent Partnership Interest	Combined	Fraction in NJ
Property NJ	9,000	750	9,750
Everywhere	10,000	1,000	11,000	.886364
Receipts NJ	3,000	10,000	13,000
Everywhere	10,000	20,000	30,000	.433333
Double Weighting of Receipts Fraction	.433333
Payroll NJ	6,000	750	6,750
Everywhere	10,000	1,000	11,000	.613636 -----------
Total	2.36666
Allocation Factor (Total divided by 4)	.591667
Net Income of Corporation	$5,000
Corporation's	$1,000
Distributive Share
of Partnership
Income	------
Total Net Income	$6,000
Combined Allocation Factor	.591667
Allocated Entire Net Income	$3,550

The numerator and denominator of each fraction is determined by taking the corporation's property, payroll or receipts in New Jersey and everywhere and adding them to its share of the partnership's property, payroll or receipts in New Jersey and everywhere. The partnership's fractions are based on the corporation's percentage ownership interest without regard to special allocations. The column in the example headed "Fraction in NJ" represents each combined fraction in decimal form.

EXAMPLE IV

Corporation GHI is a foreign corporation which has no nexus with New Jersey other than a 10 percent general partnership interest in a limited partnership, which is unitary with the corporation. GHI is subject to Corporation Business Tax. Since the corporation has a unitary relationship with the partnership, the flow through method should be used to calculate the correct amount of income to be allocated to New Jersey. Corporation LMN holds a limited partnership interest in the same limited partnership. The corporation and the partnership are not part of a unitary business, and the limited partnership does not have liabilities to third parties. LMN is not subject to corporation business tax in New Jersey since it is a true limited partner, not a "deemed general partner" pursuant to (c) above.

GHI Corp.	10 Percent General Partnership Interest	Combined	Fraction in NJ
Property NJ	0	750	750
Everywhere	10,000	1,000	11,000	.068182
Receipts NJ	0	10,000	10,000
Everywhere	10,000	20,000	30,000	.333333
Double Weighting of Receipts Fraction	.333333
Payroll NJ	0	750	750
Everywhere	10,000	1,000	11,000	.068182 ----------
Total	.803030
Allocation Factor (Total divided by 4)	.200758
Net Income of Corporation	$5,000
Corporation's Distributive Share of Partnership Income	$1,000 ------
Total Net Income	$6,000
Combined Allocation Factor	.200758
Allocated Entire Net Income	$1,205

N.J. Admin. Code § 18:7-7.6

Amended by 49 N.J.R. 1694(a), effective 6/19/2017

Amended by 54 N.J.R. 1819(a), effective 9/19/2022