O. Partnership and the Corporate Partner (Section .1700)

  1. Reporting Partnership Net Income
    A corporation which is a member of a partnership or joint venture doing business in North Carolina is subject to North Carolina income tax and is required to include in the total net income subject to apportionment and allocation its share of the partnership’s net income or net loss to the same extent required for Federal income tax purposes.

  2. Business Income or Nonbusiness Income
    Whether a corporate partner's share of the partnership's net income is classified as business income or nonbusiness income depends upon the facts in each case. Such income is classified as nonbusiness income where the corporate partner limits its connection to the partnership to the mere investment of funds or property and does not regularly or materially participate in the day-to-day operation of the partnership. Where the relationship is more extensive or where the business of the partnership is directly or integrally related to the business of the corporate partner, the corporate partner's share of the partnership net income is generally classifiable as business income. When classified as business income, the corporate partner's apportionment factors shall include its proportionate share of the partnership's property, payrolls and sales. If such income is classified as nonbusiness income, it shall be included in the corporate partner's net taxable income and allocated in accordance with the allocation provisions of G.S. 105-130.4.

    Examples:

    1. D Corporation is engaged in the real estate business outside North Carolina and is also a partner in the operation of a restaurant in North Carolina. D's interest in the partnership would constitute "doing business" in this State for income and franchise tax purposes and its share of the partnership net income or loss would be allocated directly to North Carolina.

    2. Y Corporation operates a manufacturing business in North Carolina and is a partner in a shopping center venture outside North Carolina. Y's only connection with the partnership is through its contributions to capital of the partnership. Y's share of the partnership's net income or loss is nonbusiness income allocable outside North Carolina.

    3. X, a foreign corporation with manufacturing plants in North Carolina and in several other states, forms an equal partnership with another corporation for the purpose of producing a raw material to be used in its manufacturing process. X furnishes capital, labor and management for the partnership. The partnership operation is directly related to and connected with X's regular business, and X's share of the partnership's net income is business income apportionable to North Carolina. Also, the apportionment factors of X should include its proportionate share of the property, payrolls and sales of the partnerships.

    4. Z, a foreign corporation with its commercial domicile in New York is engaged in the business of textile manufacturing in North Carolina and other states. It enters into a partnership agreement with an unrelated foreign corporation for the purpose of mineral exploration and provides funds for the venture. Its share of the net income or loss from the partnership is nonbusiness income and is allocated to the State in which the partnership property and/or activity is located.


    Note: The result of Example (d) will be the same for a North Carolina corporation with its commercial domicile in this State since the situs state of the partnership property and/or activity has the jurisdiction to tax such business. The basic rule supporting this requirement is that intangible personal property (partnership investment) which has acquired a "business situs" in a state other than the domicile of the owner is taxable in such situs state.