BIS, LLP v. Director, Division of Taxation: NJ Superior Court Gets It Right!

The recent decision of the Superior Court of New Jersey in BIS LP, Inc. v. Dir., Div. of Taxation, 2011 N.J. Super. Unpub. LEXIS 2269 (App.Div. Aug. 23, 2011) gives multistate taxpayers around the nation a reason to be optimistic that occasionally a court can properly apply unitary principles.

Here is an overview of the facts. BIS and BISYS, Inc. ("BISYS") were part of BISYS Group, Inc., which provided processing and outsourcing services for banks, mutual fund companies, and insurance companies. Through a reorganization, BISYS transferred 99 percent of its banking information assets to BIS and transferred one percent of these assets to BISYS Information Solutions L.P. ("Solutions") in exchange for a one percent general partnership interest in Solutions. BIS received a 99 percent limited partnership interest when it transferred to Solutions the assets it had received from BISYS. BIS had no contact with New Jersey other than its limited partnership interest in Solutions. The business of Solutions was managed solely by BISYS, per the partnership agreement. BIS had no control or voice in Solutions' business affairs, and was only given access to certain financial information and rights of consent for significant restructuring events.

Under  N.J.A.C. 18:7-7.6(c), a foreign corporate limited partner of a limited partnership doing business in New Jersey is also considered to be doing business in New Jersey and, therefore, subject to New Jersey taxation if:

  1. the limited partner is also a general partner;
  2. the limited partner takes and active role in the partnership's business;
  3. the 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 limited partner

After finding that BIS did not meet the first three conditions of N.J.A.C. 18:7-7.6(c), the Tax Court of New Jersey focused on the fourth condition and found that BIS and Solutions were not unitary and, therefore, not subject to the New Jersey Corporate Business Tax ("CBT"). New Jersey's Director of the Division of Taxation ("Director") appealed the result to the Superior Court, claiming that BIS and Solutions were unitary and BIS was subject to CBT. The Superior Court upheld the non-unitary and nontaxable determination and reached the following conclusions:

  • The partnership provisions requiring joint consent for mergers, new partners and transfers of partnership interests ". . . [did] not indicate the unitary nature of BIS, BISYS, and Solutions, or establish that BIS was doing business in New Jersey. BISYS controlled the ongoing business activity of Solutions." 
  • ". . . the sharing of some officers and office space has been found to be insufficient to show a unitary business."
  • "The right to inspect books, records, and returns [did] not show that BIS controlled Solutions." 
  • After acknowledging that BIS was an investment company, the Superior Court determined that BIS and Solutions were not in the same line of business, even though BIS's only or primary asset was its investment in Solutions.
  • "Because BIS and Solutions were not involved in a single enterprise or line of business, the Court's discussion of a flow of value [was] not relevant here."

In reaching a non-unitary decision, the Superior Court correctly analyzed and applied the constitutional requirements for a unitary relationship as interpreted by the U.S. Supreme Court in Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768 (U.S. 1992), and other U.S. Supreme Court decisions. The decision shows us that there is still hope that courts can properly apply the law to the facts in complex tax cases!

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