Kentucky Income / Franchise tax: Court of Appeals affirms that nonresident corporate limited partner has nexus
Revenue Cabinet v. Asworth Corporation, HT-Forum, Inc., and D Aviation Services, Inc., Ky. Ct. App. (11/20/09). The Kentucky Court of Appeals affirmed a circuit court's previous ruling, agreeing that an out-of-state corporation had acquired nexus in Kentucky solely due to its investment in a pass-through entity as a 99% limited partner. The Court agreed that the corporate limited partner had acquired nexus with the State through the partnership that did business within the State, as Kentucky recognizes the flow-through nature of partnerships and, accordingly, imposes state income tax upon the partners rather than upon the partnership itself. The Court also agreed that the corporation's derivation of income from a partnership doing business within and outside the State satisfied the Commerce Clause substantial nexus test, as well as Due Process Clause minimum contacts requirement.
The Court reversed the circuit court's previous ruling and reasoning requiring the use of a standard three-factor apportionment formula to determine the partner's state corporate income tax liability. Rather, the Court held that the corporation was taxable on its share of the partnership's distributable net income based on its business done in Kentucky, where "business done" was determined under applicable state statutes to be the partnership's single receipts factor of gross receipts or services performed in Kentucky to gross receipts or services performed everywhere.
