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Tax Law

New Jersey Tax Court Concluded SMLLC’s Share of Partnership Loss Not Business Loss

The New Jersey Tax Court ruled that an individual owner of a single-member limited liability company (“SMLLC”) correctly reported his distributive share of partnership income reported by the SMLCC. The SMLLC owned a 50% interest in a partnership that reported losses. On his New Jersey gross income tax return, the individual owner of the SMLCC reported the partnership losses that flowed through the SMLCC as New Jersey “partnership losses” that may be used to offset other partnership income on his New Jersey return. The New Jersey Division of Taxation took the position that when the partnership’s losses passed through the SMLLC, their character changed to “business losses” that cannot be used to offset partnership income. Although the court agreed with the Division’s classification of the SMLLC as a sole proprietorship, the court found that the SMLCC was not in the business of investing in partnerships, and rejected the argument that the SMLLC’s distributive share of the partnership losses was a “business loss.” Instead, the court upheld the individual’s treatment of the partnership losses that flowed through the SMLCC as partnership losses that properly offset other partnership income on the individual’s return. Stanard v. Dir., Div. of Taxation, No. 008149-2018, 2020 WL 895759 (N.J. Tax Ct. Feb. 24, 2020).