CFT 2001 - 01 - Corporation Franchise Tax Nexus for
Nonresident Limited Partners Following the UCOM Decision
The Ohio Board of Tax Appeals (BTA) recently issued its
franchise tax decision, UCOM, Inc. v. Tracy (May 26,
2000), BTA No. 97-K-880, unreported, (UCOM). The
Ohio Department of Taxation (Department) did not appeal this
decision and will follow it to the extent outlined herein.
UCOM was a Missouri corporation with its principal place of
business in Kansas. UCOM had no physical presence in Ohio but
was a limited partner in a Delaware limited partnership that
did business in Ohio. UCOM's sole connection with Ohio was
its ownership interest in the limited partnership. The
Department had found that UCOM was subject to the Ohio
franchise tax, in part relying on Mead Properties, Inc.
v. Limbach (Apr. 21, 1989), BTA Nos. 85-D-791 to
85-B-794, unreported, a case that noted the aggregate nature
of partnerships in recognizing the pass-through character of
income under the net income base.
The BTA held that ownership of the limited partnership
interest, by itself, did not create sufficient nexus to
subject UCOM to the Ohio corporate franchise tax for tax
years 1990 and 1991. For those years, former Ohio Revised
Code section 5733.01 imposed tax on a foreign corporation
"for the privilege of doing business in this state, owning or
using a part or all of its capital or property in this state,
or holding a certificate of compliance with the laws of this
state authorizing it to do business in this state." According
to the BTA, UCOM's mere ownership of a limited partnership
interest did not meet any of these disjunctive activities.
The Department will follow the BTA's ruling with regard to
the corporate franchise tax taxability of a limited partner
for taxable years ending prior to September 29, 1997.
The BTA's ruling does not apply to the corporate
franchise tax taxability of a limited partner for taxable
years ending on or after September 29, 1997.
Effective that date, Ohio Revised Code section 5733.01 was
amended to add another disjunctive activity that subjects a
foreign corporation to the Ohio franchise tax, i.e.,
"or otherwise having nexus with this state under the
Constitution of the United States". In Agley v.
Tracy (1999), 87 Ohio St.3d 265, and Dupee v.
Tracy (1999), 85 Ohio St.3d 350, the Ohio Supreme Court
held that a nonresident individual with an ownership interest
in a pass-through entity is subject to Ohio income tax on his
distributive share of income earned by the pass-through
entity from sources within Ohio. While these cases involved
Ohio's income tax on individuals, the cases recognize that
Ohio has nexus under the Constitution of the United States to
impose a tax measured by or imposed on pass-through income
that was earned from sources within Ohio. UCOM
interpreted the franchise tax law in effect before the above
amendment to Ohio Revised Code section 5733.01. Also,
UCOM does not address the taxability of the limited
partnership. For taxable years beginning in 1998 and
thereafter, Ohio Revised Code section 5733.41 imposes tax on
qualifying pass-through entities.
Tax Information Releases are not "Opinions of the Tax
Commissioner" within the meaning of ORC section 5703.53.
Accordingly, the Tax Commissioner is not bound by this
release. Nevertheless, the above discussion does reflect the
Income Tax Audit Division's interpretation of the
For further assistance please call 614-846-6712 or
800-282-1780 (within Ohio).