Information Release

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 law.

For further assistance please call 614-846-6712 or 800-282-1780 (within Ohio).