In a decision released today, the Tax Court of New Jersey once again ruled in National Auto Dealers Exchange, L.P. v. Director, Division of Taxation,1 that partnerships are not taxable entities for purposes of New Jersey’s corporate income tax (known as the corporation business tax or “CBT”).
Today’s decision—on a motion for reconsideration from the Division of Taxation (“Division”)—affirms the court’s previous ruling from February. A copy of the decision is available here.
Background and February Ruling
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”)—consented to nexus with New Jersey. Manheim effectuated its consent by executing Form NJ-1065E (Nonresident Partner’s Statement of Maintaining a Regular Place of Business in New Jersey), a copy of which it provided to NADE. Because it consented to nexus, Manheim directly paid New Jersey income tax on its distributive share of income from the partnership.
Manheim later requested a full refund of the tax it had paid on the basis that it lacked nexus with New Jersey. In support of its refund claim, Manheim cited BIS LP, Inc. v. Director, Division of Taxation.2 In that case, the New Jersey appellate court concluded that a corporate partner lacked nexus where its only connection to New Jersey was a passive investment in a limited partnership doing business in the state. Because the limited partner asserted that it wasn’t subject to tax on the New Jersey income earned by the partnership, the Division sought to recover that tax from the partnership itself. Accordingly, the Division assessed CBT on NADE with respect to Manheim’s distributive share of NADE’s income.
NADE protested the assessment, arguing that once it filed Manheim’s NJ-1065E with its return, it no longer had a CBT withholding obligation. This past February, the Tax Court issued a decision in favor of NADE.3Reading the CBT statute as a whole, the court reasoned that partnerships are not taxable entities in New Jersey.4 (For more background and takeaways from the Tax Court’s February ruling in NADE, see our prior alert.)
The Division filed a motion for reconsideration asking the Tax Court to review the rationale of its decision.
Today’s Decision and Implications
In today’s decision, the court did not offer any new analysis on why it ruled that partnerships are not taxpayers for purposes of the CBT. The opinion does, however, illustrate the strict burden on a party moving for reconsideration in New Jersey.
Finding that the Division did not satisfy that burden, the court denied the Division’s motion for reconsideration.
That is, for a court to grant a motion for reconsideration, a party must satisfy a two-part test:5
(1) the party must prove that the court “acted in a arbitrary, capricious, or unreasonable manner;” and (2) if the party can demonstrate part one, then the court will grant the motion if the appeal “fall[s] into that narrow corridor in which either (a) the Court has expressed its decision based upon a palpably incorrect or irrational basis, or (b) it is obvious that the Court either did not consider, or failed to appreciate the significance of probative, competent evidence.”6
The court ruled that it didn’t need to analyze whether the Division satisfied the second part of the test because the Division didn’t satisfy the first part. The Division argued that the court overlooked a statutory provision defining “partnerships” as “taxpayers.” The court rejected the Division’s argument and stated that it “expressly considered” this definition when determining that the CBT statute as a whole does not apply to partnerships.7
Taxpayers should consider this decision—and other recent decisions on motions for reconsideration—when planning litigation strategy in New Jersey.8 If you receive an unfavorable decision, the best practice may be an appeal to the appellate court—rather than taking a second bite at the apple at Tax Court.