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New Jersey: Corporation Business Tax AMA Does Not Apply to Partnership Receipts

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Home Perspectives New Jersey: Corporation Business Tax AMA Does Not Apply to Partnership Receipts

In 2002, as part of various changes to New Jersey's corporation business tax, the state enacted a gross receipts tax, the 'alternative minimum assessment' (AMA), in order to boost revenues (see Hoffman, 'The New Jersey Business Tax Reform Act of 2002--Will Other States Follow Suit?,'  12 JMT 10 (October 2002)). Since then, taxpayers have raised questions about the constitutionality of the AMA. Much commentary has been put forth on that issue, and appeals are pending. One issue that has not been addressed, however, is how the AMA works for corporate partners. Some corporations have been paying AMA on their shares of partnership receipts; others have not. Now, as the statute of limitations for refunds draws near, the increasingly important question is: Who is right?

The answer is that a corporate partner's share of partnership receipts is not subject to AMA. Indeed, only an actual distribution received by a corporate partner can be subject to AMA, and even then, is subject to AMA only if received by a corporate partner that is domiciled in New Jersey or that manages the partnership interest from New Jersey. Thus, corporate partners should exclude their shares of partnership receipts from their AMA calculations on their 2005 and 2006 returns and, to the extent they have already paid AMA on those amounts, should consider refund claims for 2002-2004. (The statute of limitations for the 2002 calendar year expires in April 2007.)

Partner and partnership as separate entities.

Any entity classified as a 'partnership' for federal income tax purposes is specifically carved out of the AMA (N.J. Stat. Ann. § § 54:10A-5(h), - 4(t)). Instead, partnerships are subject to the income-based tax imposed under N.J. Stat. Ann. § 54:10A-15.11. Thus, a partnership, as an entity, is not itself subject to the AMA.

Furthermore, under New Jersey law, a partner and a partnership are, generally speaking, distinct legal entities. (See, e.g., N.J. Stat. Ann. § 42:1A-9(a). New Jersey's organic law regarding partnerships provides that '[a] partnership is an entity distinct from its partners.') This distinction, which is strictly maintained outside the tax context, is also maintained by New Jersey's courts in the tax context. See, for example, Chiron Corp. v. Director, Division of Taxation. 21 N.J. Tax 528 (2004), in which the New Jersey Tax Court concluded that a partnership is a legal entity separate from its partners for tax purposes. (This case was analyzed in Sollie and Gutowski, 'Partnership Factor Flow-Through: New Jersey Takes an Unusual Position,'  15 JMT 6 (July 2005).)

Because a partnership is a distinct legal entity, gross receipts earned by a partnership are the partnership's own gross receipts. They are not the corporate partner's gross receipts. Since, as a general matter, a partner and a partnership must be kept separate, the receipts of a partnership should not be aggregated with the partner's receipts--unless something in the AMA statute specifically requires it.

The AMA statute, however, does no such thing. In fact, it excludes a partnership's receipts from certain AMA calculations. For example, in determining whether a taxpayer has the minimum level of receipts necessary to subject the taxpayer to AMA liability, the calculation for an 'affiliated' or 'controlled' group looks to receipts of the individual group members. Since a partnership may not be part of any such group, a partnership's receipts must be excluded from this calculation. (See N.J. Stat. Ann. § § 54:10A-5a(a) and - 5a(b)(3), cross-referencing IRC Sections 1504 and 1563, which define 'affiliated group,' 'includable corporation,' and 'controlled group' so as to exclude partnerships.) Also, in computing the $20 million cap on a taxpayer's AMA liability, the computation for an affiliated group (see N.J. Stat. Ann. § 54:10A-5a(d)(2)) similarly excludes any partnerships. Thus, not only does the AMA statute not require a partner to aggregate its receipts with those of its partnership, in these instances it implicitly suggests that partnership receipts must be excluded.

Flow-through is tempting.

Nevertheless, a partner may be tempted to include its share of partnership receipts in the AMA base. This inclination may be due to the fact that the statutory definition of 'New Jersey gross receipts' for AMA purposes (N.J. Stat. Ann. § 54:10A-5a) is similar to the definition of the sales factor for income tax purposes (N.J. Stat. Ann. § 54:10A-6(B)) and, under the income tax, a corporate partner will often include its share of partnership receipts in its own sales factor (see N.J. Admin. Code 18:7-7.6(g)(2) and Example III). The New Jersey Division of Taxation, however, argues that the default rule is that a partner and a partnership are not unitary and, thus, their receipts are not combined in the partner's sales-factor numerator. (See Sollie and Gutowski, supra.)

The temptation to include should be resisted. A crucial difference exists between sales-factor apportionment and the AMA. Apportionment determines the portion of a taxpayer's income that is attributable to a state. Under New Jersey income tax law, a corporate partner's distributive share of partnership income is generally included in the corporation's taxable income because it is included in federal taxable income, the general starting point for determining New Jersey entire net income (see N.J. Stat. Ann. § 54:10A-4(k); IRC Section 702(a) (income and credits of partner)). Accordingly, the state's income tax regulations provide that a partner must include the apportionment factors of a unitary partnership with its own factors so that the partner's state taxable income is apportioned by reference to all of the activities (including partnership activities) that generated that income.

No such 'flow-through' regulation applies to the AMA. And the income tax regulation in this regard is based not on the sales-factor definition (see N.J. Stat. Ann. § 54:10A-6) but on the Division's statutory authority to make discretionary adjustments to a taxpayer's income tax apportionment factors in order to properly apportion income. (See N.J. Div. of Tax'n Technical Bulletin, No. TB-3, 6/21/91, citing to N.J. Stat. Ann. § 54:10A-8 as authority. TB-3 expired 6/30/92 but is still taken into consideration by the Division. See Chiron Corp., Brief of the Division of Taxation, page 24, footnote.) The AMA statute contains no such discretionary authority. Thus, a partner may exclude its share of partnership receipts from the AMA calculation--even if those receipts are included in its sales factor numerator.

Partnership distributions.

For many taxpayers, the above analysis is good news. But we caution that it is not entirely good for everyone. An actual distribution from a partnership to its corporate partner is a 'receipt' to the partner that may possibly be subject to AMA--if it is 'earned within the State' (N.J. Stat. Ann. § 54:10A-5a(a)(5)).

To determine whether a distribution received by a corporate partner is 'earned within' New Jersey, the rules for dividends may be instructive. Under New Jersey law, a partner's interest in a partnership is an intangible (N.J. Stat. Ann. § § 42:1A-27 and -28). Therefore, like a corporate dividend, a partnership distribution is a receipt from intangible property.

For AMA purposes, dividends are 'earned within' New Jersey if the recipient is commercially domiciled in New Jersey (see 35 N.J. Reg. 4310(a), explaining AMA's 'earned within the State' concept as it applies to dividends). Specifically, N.J. Admin. Code 18:7-18.1 provides: 'Dividends are included in New Jersey gross receipts when the recipient's commercial domicile is in New Jersey.' This suggests that dividends are included in the AMA tax base only if the recipient is commercially domiciled in New Jersey.

Given the similarity between dividends and partnership distributions, it seems reasonable to conclude that a partnership distribution is included in a corporate partner's AMA tax base only if the partner is commercially domiciled in New Jersey. Of course, the AMA statutes and regulations with regard to 'New Jersey gross receipts' are still somewhat vague; after all, it is difficult to precisely define the scope of '[a]ll other business receipts earned within the State' (N.J. Stat. Ann. § 54:10A-5a(a); N.J. Admin. Code 18:7-18.1). Based on this provision, the Division may take an aggressive position in arguing for New Jersey attribution of a partner's receipts. In our view, the Division may advocate the inclusion of a partnership distribution in the AMA base if the partner manages the partnership from New Jersey. (See, e.g., First Bank Stock Corp. v. State of Minnesota, 301 U.S. 234 (1937); Liverpool & London & Globe Insurance Co. of New York v. Board of Assessors for Parish of New Orleans, 221 U.S. 346 (1911) (applying 'business situs' rule to investments managed in a state).) Beyond that, we think the Division would have quite a challenge.

Take-away points:

  • Corporate partners should exclude their shares of partnership receipts from their New Jersey AMA calculations.
  • An actual distribution from a partnership to its corporate partner is a receipt to the partner that may possibly be subject to AMA.

This article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 16, No. 9, January 2007. Published by Warren, Gorham & Lamont, a division of RIA. Copyright (c) 2006 RIA.