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NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT
COMMITTEE ON OPINIONS
DANIEL SCHIFF and ADELAIDE * TAX COURT OF NEW JERSEY
SCHIFF, * DOCKET NO. 000625-94
*
Plaintiff, *
*
v. *
*
DIRECTOR, DIVISION OF *
TAXATION, *
*
Defendant. *
Decided October 31, 1995
Mark A. Goldsmith for plaintiffs (Herrick, Feinstein,
attorneys; Mark A. Goldsmith and Steven M. Richman
on the brief).
Joseph Fogelson for defendant (Deborah T. Poritz,
Attorney General of New Jersey, attorney).
CRABTREE, J.T.C.
PlaintiffsSee footnote 1 seek review of defendant's determination of a
deficiency in gross income tax for the taxable year 1988 in the
amount of $178,593.75, including a 5" late payment penalty and
interest calculated to May 16, 1992. Defendant determined that, in
computing plaintiff's distributive share of gain from the
disposition of partnership property, the property's adjusted basis
for federal income tax purposes must be used, even though plaintiff
derived no tax benefit for New Jersey gross income tax purposes in
prior years from his share of partnership losses, which were
primarily attributable to depreciation deductions claimed by the
partnerships in those earlier years. In their brief, plaintiffs
also claim that even if they realized a share of the gain realized
by the partnerships with respect to the disposition of partnership
property in 1988, such gain was fully offset by a loss on the
simultaneous disposition of Mr. Schiff's partnership interests.
Also, plaintiffs claim that the deficiency notice was untimely
as it was not issued within three years after the return was filed.
The case came before this court on plaintiffs' motion for
summary judgment and defendant's cross motion for summary judgment.
At the court's direction the parties submitted a supplemental
stipulation of facts. As the facts are now undisputed the case is
ripe for adjudication.
Plaintiffs filed their 1988 New Jersey gross income tax return
on or before April 15, 1989, a date which fell on Saturday.
Defendant's deficiency notice was mailed in an envelope bearing a
private postage meter postmark of April 17, 1992. No other
postmark appeared on the envelope. The brief in support of
defendant's cross motion was accompanied by an affidavit from
Stuart Gossoff, the plant manager of the United States Postal
Service's processing and distribution center in Trenton, New
Jersey. Mr. Gossoff stated that, in accordance with standard
Postal Service procedures, any first class mail envelope received
by the Postal Service bearing sender applied postage metering that
contains a date that is either the current date or a later date
will be processed by Postal Service personnel, who will not put
another date on the envelope. If, on the other hand, any first
class mail envelope received by the Postal Service bearing sender
applied postage metering that contains a date that is earlier than
the current date will be processed by Postal Service personnel, who
will put another date on the envelope indicating the date of the
Postal Service's receipt of the envelope. Thus, he continued, in
accordance with these procedures, if a first class mail envelope
mailed by the New Jersey Division of Taxation and bearing postage
metering applied by the Division that contains the date of April
17, 1992, was processed by Postal Service personnel, who did not
put another date on the envelope, that envelope, he said, must have
been delivered to the Postal Service on or before April 17, 1992.
Plaintiff acquired a limited partnership interest in Riverside
Ltd., a California limited partnership (hereafter Riverside), in
1979See footnote 2. While the record does not indicate the amount plaintiff
paid for his interest in Riverside, the record is clear that by the
time his interest in Riverside terminated in 1988, the federal
income tax basis in that interest was reduced to zero.
Riverside was formed for the purpose of acquiring 114.5 acres
of land in Riverside County, California, and holding it for capital
appreciation. Riverside purchased the land, on July 6, 1979, for
$37,000 cash and a purchase money mortgage of $3,663,000. On May
1, 1988, Riverside conveyed the land to the holder of the mortgage
in lieu of foreclosure. Immediately thereafter, but still in 1988,
Riverside discontinued all business operations and disposed of all
its assets in satisfaction of its liabilities. Except for a cash
distribution of $75,676, in 1987, out of the proceeds of sale of
1.962 acres of land, Riverside made no actual distributions to any
of its limited partners (including plaintiff) at any time between
1979, when it was formed, and 1988, when it went out of business,
or at any time thereafter.
The amount of principal and accrued interest due on the
mortgage at the time of the conveyance in lieu of foreclosure was
$2,485,684. Plaintiff's allocable share of this indebtedness was
$84,301.
Plaintiff became a limited partner in Colonial House, Ltd., a
Texas limited partnership (hereafter Colonial), in 1984, paying at
that time $1,500,000 in cash for his interest. On September 12,
1988, Colonial conveyed its real property in Harris County, Texas,
to the mortgagee of such property by deed in lieu of foreclosure.
Colonial ceased all operations in 1988, following the conveyance as
aforesaid; it had no assets and engaged in no business activity
after 1988. Colonial made no actual distributions to any of its
limited partners, including plaintiff, between 1984, when it was
formed, and 1988, when it went out of business, or at any time
thereafter.
The amount of principal and accrued interest due on the
mortgage at the time of the conveyance in lieu of foreclosure was
$25,970,911. Plaintiff's allocable share of that indebtedness was
$3,004,336. The federal income tax basis in plaintiff's
partnership interest in Colonial at the time of the conveyance in
lieu of foreclosure was reduced to zero.
On their 1988 federal income tax return, plaintiffs reported
capital gains of $3,086,111, composed of their distributive shares
of the gains attributable to the Riverside and Colonial
foreclosures ($84,301 and $3,004,336, respectively,See footnote 3 less $2,526
in capital loss carryovers). Plaintiffs reported the Riverside and
Colonial transactions on their 1988 New Jersey gross income tax
return but assigned a gain of zero. Upon audit, defendant
determined that plaintiffs should have reported the same gain on
their New Jersey return as they reported on their federal return
and determined a deficiency accordingly.
The Limitations Issue
N.J.S.A 54A:9-4(a) provides that gross income tax shall be
assessed (with exceptions not material here) within three years
after the return was filed. N.J.S.A. 54A:9-4(b)(1) provides that
a gross income tax return filed before the last day prescribed by
law shall be deemed to be filed on such last day. N.J.S.A 54A:9-11(c) provides, in substance, that when the last day prescribed for
filing falls on a Saturday, Sunday or holiday, the return is timely
if it is filed on the next succeeding business day. In this case,
plaintiffs' 1988 gross income tax return was apparently filed on a
Saturday (April 15, 1989). Thus, under the last mentioned statute,
the return was deemed filed on Monday, April 17, 1989. That being
so, the notice of deficiency issued on April 17, 1992 was timely.
It is well settled in this state, that when there is a legal
requirement of a number of days, months or years for the doing of
an act, the computation excludes the first day and includes the
last, absent a contrary legislative indication. DeLisle v. City of
Camden,
67 N.J. Super. 587 (App. Div. 1961); Warshaw v. deMayo,
8 N.J. Misc. 359 (Sup. Ct. 1930); McCulloch v. Hopper,
47 N.J.L. 189
(Sup. Ct. 1885).
Plaintiffs raise the issue of timely mailing, challenging the
conclusive effect of a private postage meter postmark appearing on
the envelope transmitting the notice of deficiency. Defendant
counters with the affidavit of Stuart Gossoff, an employee of the
United States Postal Service, who stated that, whenever first class
mail is delivered to the Postal Service bearing a sender-applied
postage metered date that is either the current date or a later
date, Postal Service personnel will not put another date on the
envelope. The envelope containing the notice of deficiency, in
evidence, bears only the postage metered postmark.
Plaintiffs attempt to refute Mr. Gossoff's affidavit by a
supplemental certification of Steven Richman, one of plaintiffs'
attorneys. In that certification, Mr. Richman describes an
experiment he conducted, which involved mailing three envelopes,
each bearing a different date, in May 1995, imprinted by a postage
meter, to his office in Princeton, New Jersey. He claims that
these envelopes were taken to the post office on May 18, 1995. The
envelope bearing the postage meter marking of May 15, 1995, he
continues, was not delivered to his office until May 22, 1995, and
it did not bear a postmark date imprinted by the Post Office.
Counsel's experiment does not confute the Gossoff affidavit.
To defeat a summary judgment motion (in this case, defendant's
cross motion), the adverse party must respond with an affidavit or
certification setting forth specific facts showing that there is a
genuine issue for trial. R. 4:46-5. The experiment described in
the Richman certification merely shows that at another post office,
and at another time, the practice of the Postal Service regarding
sender supplied postmarks, as described in the Gossoff affidavit,
was not followed. The Richman experiment does not serve to dispel
the inference which the court may draw from the evidence of the
Postal Service practice, as contained in the Gossoff affidavit,
that the practice was followed in the case of the mailing of the
deficiency notice on April 17, 1992. N.J.R.E. 406.
Accordingly, the court concludes that the deficiency notice in
question was timely issued.
The Substantive Issue
The statute relevant to the disposition of the substantive
issue is N.J.S.A. 54A:5-1(c), which provides:
[N]et gains or net income, less net losses,
derived from the sale, exchange or other
disposition of property, including real or
personal, whether tangible or intangible,
as determined in accordance with the method of
accounting allowed for federal income tax purposes.
For the purpose of determing gain or loss, the basis
of property shall be the adjusted basis used for
federal income tax purposes. (Emphasis supplied)
Defendant, relying upon the statute, concluded that plaintiffs
were obliged to use, for New Jersey gross income tax purposes, the
federal income tax basis in calculating their distributive share of
the gain realized by Riverside and Colonial in connection with the
conveyances of partnership property in lieu of foreclosure and
determined the deficiency accordingly. Plaintiffs, in their
complaint, challenged defendant's determination on the ground that,
as they were unable to use the losses passed through to them by the
partnerships in prior years because of the prohibition in N.J.S.A.
54A:5-2 against netting of intercategory gains and losses, it would
be inequitable to require them to use the federal income tax basis
in determining gain for New Jersey gross income tax purposes. In
the alternative, plaintiffs argue on brief that even if the federal
income tax basis were used, their distributive share of the gain
realized on the conveyances of partnership property in lieu of
foreclosure would be fully offset by the capital loss realized on
the disposition of Mr. Schiff's interest in the partnerships.
The first issue raised by plaintiffs, namely, the alleged
inequity of requiring the use of the federal income tax basis in
accordance with N.J.S.A. 54A:5-1(c), must be resolved in
defendant's favor. This court has held on two occasions that in
determining gain on the sale, exchange or other disposition of
property for New Jersey gross income tax purposes, federal income
tax basis must be used, even though such basis was reduced in prior
years by losses that were not deductible for New Jersey tax
purposes. Vasudev v. Taxation Div. Director,
13 N.J. Tax 223 (Tax
1993); Spinella v. Director,Div. of Taxation,
13 N.J. Tax 305 (Tax
1993). Thus, plaintiffs' inability to deduct prior years'
partnership losses for New Jersey gross income tax purposes,
because of the prohibition of N.J.S.A. 54A:5-2 against netting of
intercategory gains and losses, is irrelevant to the application of
N.J.S.A. 54A:5-1(c), which mandates the use of federal income tax
basis in determining gain on the sale of property.
Plaintiffs' second argument, advanced for the first time on
brief, is more troublesome. Plaintiff contends that his
distributive share of any gain realized by the partnerships upon
the transfers in lieu of foreclosure is completely offset by the
loss upon the disposition of his interests in the partnerships.
This argument is based entirely on the partnership provisions of
the federal Internal Revenue Code. As the issue raised by the
argument is one of first impression in this court, it behooves us
to examine the cases decided in the United States Tax Court, as
well as the Code provisions and Treasury Regulations upon which the
decisions in those cases are based, for guidance in resolving the
issue.
To put the decided cases in context, it is in order to examine
the relevant Code sections and Treasury Regulations dealing with
the treatment of partnership liabilities.
To begin with, section 731(a) of the Code provides that in the
case of a distribution by a partnership to a partner, gain shall be
recognized to such partner to the extent that any money distributed
exceeds the adjusted basis of the partner's interest in the
partnership immediately before the distribution and that any gain
recognized shall be considered as gain from the sale or exchange of
the partnership interest of the distributee partner. Section 741
of the Code provides that such gain (or loss) is considered as gain
or loss from the sale or exchange of a capital asset.
Code section 752(b) provides that any decrease in a partner's
share of partnership liabilities shall be considered as a
distribution of money to the partner by the partnership. Section
752(c) provides that a liability to which property is subject shall
be considered as a liability of the owner of the property.
To the extent that none of the partners has any personal
liability and thus, no risk of loss with respect to a partnership
liability, i.e., the liability is nonrecourse, then all the
partners, including limited partners, share such liability in the
same proportion as they share profits. See Willis, Pennell and
Postlewaite, Partnership Taxation, (5 ed. 1995), sec. 32.02; Treas.
Reg. 1.752-3. In this connection, the Internal Revunue Service, in
Rev. Rul. 74-40, C.B. 1974-1,159, ruled in three situations in
which a limited partner, with no liability for partnership debts,
either withdrew from the partnership or sold his interest therein,
that his distributive share of partnership liabilities was deemed
a distribution of money and was includible in the gain realized on
the sale of his partnership interest or his withdrawal from the
partnership. The treatment of the abandonment of a limited
partner's interest in an insolvent partnership was addressed in
Rev. Rul. 93-80, C.B. 1993-2,239, where the Service ruled that a
loss incurred on the abandonment or worthlessness of a partnership
interest is an ordinary loss if sale or exchange treatment is
inapplicable, but if there were an actual distribution of cash or
property, or a deemed distribution within the purview of section
752(b), i.e., a reduction in the partner's share of liabilities,
the transaction is treated as a sale or exchange, and the loss is
thus capital in nature.
The decided cases in the United States Tax Court provide
further illumination of the issue. For example, in Pietz v.
Commissioner of Internal Revenue,
59 T.C. 207 (1972), the taxpayers
were equal partners with others in a partnership formed to operate
a motel. The venture was unsuccessful, and the motel and its
furnishings were sold. The purchaser paid $60,000 in cash, assumed
the mortgage and gave a second mortgage to the other partners,
leaving the partnership with no assets. The taxpayers, suffering
a loss of their investment upon termination of the partnership,
claimed an ordinary loss for federal tax purposes. The Tax Court
held that the loss was capital in nature and upheld the
Commissioner's deficiency determination, saying:
We believe and find that the sale of the
motel and the application of the proceeds
to payment of the indebtedness to the bank,
with the second mortgage being distributed
to the Grants, was an integral part of the
plan agreed upon by the partners to liquidate
and terminate the unsuccessful partnership
venture in a manner that would satisfy all
the partners and be in their best interests;
and that payment of the debt to the bank was
a part of the liquidation process agreed upon.
While the parties place considerable emphasis
on whether the $60,000 liability to the bank
was a partnership liability or a liability of
the petitioners individually, we do not
believe it makes much difference in the end
result, under the particular circumstances
of this case, and we have made no effort
to answer that question specifically. If it
was a liability of the petitioners individually
it would appear that through the interplay of
sections 752(b), 731, and 741, the payment of
that liability by the partnership would be
considered a distribution of money to petition-
ers in liquidation and any loss recognized
would be considered a loss from the sale
or exchange of their partnership interests....
On the other hand, if the liability was that
of the partnership, the payment of that liability
by the partnership would result in a decrease
in each of the partners'share of the liabilities
of the partnership and would be considered as a
distribution of money to the partners by the
partnership under section 752(b). This being a
distribution in liquidation of the petitioners'
interest in the partnership, and being considered
a distribution of money, loss would be recognized
to the petitioners under section 731(a)(2) but it
would be considered a loss from the sale or exchange
of the partnership interests of the petitioners
under section 731(a). This would bring into play
section 741 and the loss would be considered as a
loss from the sale or exchange of a capital asset,
resulting in a capital loss.... [at 217-218]
In O'Brien v. Commissioner of Internal Revenue,
77 T.C. 113
(1981), the taxpayer held a 10" interest in a partnership or joint
venture which acquired real estate by giving nonrecourse notes. On
December 3, 1976, taxpayer wrote to the general partner stating
that he abandoned his interest in the partnership as of that date.
At the time, the partnership had nonrecourse liabilities of
$989,549. The venture continued after the taxpayer's withdrawal.
On his 1976 federal income tax return, taxpayer claimed an ordinary
loss of $14,865.30. In affirming the Commissioner's disallowance
of the loss as an ordinary loss, the Tax Court concluded that when
the taxpayer terminated his partnership interest by abandoning it,
he was relieved of his full share of the partnership's nonrecourse
liabilities. As a result of this "decrease," the court went on,
the taxpayer was deemed to have received a distribution of money
from the partnership in the amount of his share of the partnership
liabilities, and that under section 731(a)(2), the deemed
distribution liquidated his interest in the partnership and the
resulting loss was considered as a loss from the sale or exchange
of his partnership interest. In relating the taxpayer's lack of
personal liability to the deemed distribution provisions of section
752(b), the court observed:
Notwithstanding petitioner's lack of
personal liability for any part of this
partnership indebtedness, as long as he
continued to be a partner he was considered
as sharing proportionately with the other
partners in such indebtedness for the purpose
of determining the adjusted basis of his
partnership interest by reason, as pointed
out above, of section 752(c), and section
1.752-1(e), Income Tax Regs. Petitioner's
abandonment of his partnership interest
resulted in a decrease in his share of
the partnership liabilities within the
meaning of section 752(b), not because
he ever had personal liability under State
law, but because he is no longer considered
under the applicable Code provisions as
sharing in the nonrecourse liabilities of
the partnership.
Petitioner also contends that no distribution
in liquidation occurred, and that therefore
section 731 is inapplicable. Although it is
true that petitioner did not receive an actual
cash distribution, petitioner is "considered"
by virtue of section 752(b) to have received a
"distribution of money" when he was relieved
of his share of the partnership's nonrecourse
debts. Moreover, this "distribution" occurred
upon the termination by abandonment of petitioner's
partnership interest. Therefore, petitioner
is deemed to have received this distribution
in liquidation of his partnership interest.
[at 118]
Finally, the case of Tapper v. Commissioner of Internal
Revenue, TC Memo. 1986-597See footnote 4 is particularly significant, as the
facts of that case are similar to the facts of the case under
review.
In Tapper, the taxpayersSee footnote 5 were general partners in a limited
partnership organized to construct a post office facility in
Kearny, New Jersey. The facility, the only asset of the
partnership, was built in 1968 and leased to the United States
Government under a long-term lease. In August of 1978, the
partnership sold the facility to the Government for $26,201,556,
which included cash of $4,022,866 and the assumption of the
mortgage on the property of $22,178,690. Thereafter, but prior to
the end of 1978, the partnership was dissolved by the general
partners pursuant to the partnership agreement. No distributions
(except for the deemed distributions hereafter described) were made
to any of the partners, either with respect to the sale of the post
office facility or in connection with the dissolution of the
partnership.
The partnership realized a capital gain on the sale of the
post office building of $3,548,291, of which $183,294 was allocable
to the taxpayers. The partnership realized ordinary income
(attributable to depreciation recapture pursuant to section 1250 of
the Code) from the sale of $3,326,817, of which $263,484 was
allocable to the taxpayers. When the Government assumed the
mortgage on the post office facility, the partnership was relieved
of liabilities of $22,178,690. The taxpayers' proportionate share
of that liability was $1,756,552.
The taxpayers claimed an ordinary loss, under Code section
165, upon the dissolution and liquidation of the partnership. The
court agreed with the Commissioner and held that the loss was
capital in nature. In ruling upon the character of the loss, the
court said, at pp. 12-13See footnote 6:
In essence, petitioners argue that the
sale of the post office (and their consequent
release from liability under the mortgage)
was unrelated to the subsequent liquidation
of the partnership, and therefore that at the
time of liquidation their partnership interest
was worthless. If they received no distribution
upon liquidation, petitioners argue, they should
not be treated by section 731(a) as having sold
or exchanged their partnership interest, and thus
should be entitled to claim an ordinary loss under
section 165 upon 'abandoning' their partnership
interest.
Respondent maintains that the sale of the post
office facility and subsequent liquidation of the
partnership were part of an integrated plan of
dissolution of the partnership, and thus that
any loss realized is capital in nature. We agree
with respondent. Section 731 provides that loss
recognized by a partner who receives a distribution
in liquidation of his partnership interest
shall be treated as if it were derived from
the sale or exchange of the partnership
interest. Section 741 generally treats the
sale or exchange of a partnership interest
as the sale or exchange of a capital asset.
Section 761(d) provides that the term
'liquidation of a partner's interest' means
'the termination of a partner's entire
interest in a partnership' by means of a
distribution, or series of distributions,
to the partner by the partnership....
. . .
From these facts it becomes clear that
the sale of the post office resulted in a
distribution to petitioner in complete
termination of his partnership interest.
The building was the only asset the partner-
ship owned. What remained to be done and
what was required to be done after the
building was sold was simply to wind up
the affairs of the partnership before
terminating it. Thus, when the building
was sold, petitioner received a distribution
(in the form of relief from liability) of
his share of the assets of the partnership.
Because we view the sale of the facility
and the subsequent liquidation of the
partnership as steps in an integated
transaction, this case is governed by
section 731(a)(2), which provides that
loss may be recognized by a partner who
receives a distribution in liquidation
of his partnership interest, if the
distribution consists solely of, inter
alia, 'money.' Section 752(b) provides
that any decrease in a partner's share
of liabilities of a partnership shall
be considered as a distribution of money
to the partner by the partnership. Thus,
the purchaser's assumption of the mortgage
on the postal facility is treated as a
distribution of money to petitioner to
the extent of his proportionate share of
partnership liabilities. To the extent
that his basis in his partnership interest
exceeds the amount of this deemed distribu-
tion, petitioner is entitled to claim a loss.
The character of the loss is governed by
sections 731(a) and 741, which provide that
the loss is considered to have been derived
from the sale or exchange of the partner's
interest in the partnership, a capital asset.
Having determined the character of the loss, the court
addressed the calculation of the taxpayers' basis in their
partnership interests in aid of measuring the extent of the
allowable loss. Basis had to be determined because of another
issue in the case which is irrelevant to the case under review.
The court's calculation of basis is significant because it
underscores the interplay between the taxpayers' share of the
capital gain and ordinary income realized by the partnership upon
the sale of the post office building and the treatment of the
disposition of the taxpayers' interests in the partnership in
connection with the latter's liquidation soon after the sale. The
court's calculations were as follows:
Basis as of 1/1/78.............$1,206,984
Capital contribution
during 1978......................$187,790
Capital contribution of
December 26, 1978................$225,000
Capital gain on sale of
facility in 1978.................$183,294See footnote 7
Ordinary income from sale of
facility in 1978.................$263,284
Ordinary loss from operations
in 1978.........................($108,450)
------------
Taxpayers' basis before
distributions..................$1,958,102
Deemed distribution on dissolution
(decrease in taxpayers' share of
partnership liabilities).......$1,756,552
Taxpayers' loss on dissolution...$201,550
The most significant feature of the foregoing calculation is
the implicit recognition of the fact that two taxable events
occurred, notwithstanding the court's conclusion that the sale of
partnership property and the dissolution of the partnership were
part of an integrated transaction. First was the income realized
by the partnership from the sale of the post office building and
passed through to the taxpayers. The second was the amount
realized upon the partnership's dissolution from the deemed
distribution, i.e., the decrease of the taxpayers' share of
partnership liabilities.
The following conclusions can be drawn from the foregoing
cases, statutes, Regulations and Revenue Rulings:
1. Distributions to partners in excess of basis are
treated, under section 731, as sales or exchanges of partnership
interests; and a sale or exchange of a partnership interest is
capital in nature.
2. Any decrease in a partner's share of partnership
liabilities is treated the same as a cash distribution (a deemed
distribution).
3. Deemed distributions apply to nonrecourse liabilities
and to limited partners who are not liable for partnership debts.
4. The abandonment of a partnership interest and the
dissolution of a partnership are treated as a sale or exchange of
a partnership interest when a partner's share of partnership
liabilities (including nonrecourse liabilities and liabilities
attributable to a limited partner) is reduced.
5. A mortgage foreclosure (or a transfer of mortgaged
property in lieu thereof) is a sale or exchange of partnership
property giving rise to capital gain treatment.
6. However, while a distributive share of such capital
gain is taxable to a partner in accordance with his interest in the
partnership, if such share is not distributed to the partner (and
it certainly cannot be distributed if the transaction giving rise
to the gain is a mortgage foreclosure), the gain recognized to the
partner is added to the basis of his partnership interest. See
section 705(a) of the Code.
7. The mortgage foreclosure giving rise to the capital
gain also results in a decrease in the partner's share of
partnership liabilities, which as indicated above, is a deemed
distribution which is capital in nature and gives rise to capital
gain or loss with respect to the partner's interest in the
partnership upon the dissolution or liquidation of the partnership.
Application of these conclusions to the facts in the case
under review discloses the following:
Plaintiff's basis in his interests in the partnerships,
which the court has found to be zero at the beginning of the
taxable year before the court, is increased by his distributive
share of the capital gains realized by the partnerships upon the
conveyance of partnership property in lieu of foreclosure, such
property being, in the case of each partnership, the sole
partnership asset.
Each partnership terminated its business immediately following
the transfer of its sole asset.
Plaintiff's distributive share of the partnership mortgage
debt was equal to his distributive share of the capital gain
realized by the partnerships upon the transfers in lieu of
foreclosure.
The deemed distribution represented by the reduction of
plaintiff's share of partnership liabilities was part of an
integrated transaction composed of the transfers in lieu of
foreclosure of the sole assets of the partnerships and the de facto
dissolution and liquidation of the partnerships. The transfers in
lieu of foreclosure gave rise to capital gain to the partnerships,
a distributive share of which was passed through to plaintiff,
while the dissolution and liquidation of the partnerships gave rise
to a disposition of plaintiff's interests in the partnerships.
Thus, there are two taxable events here.See footnote 8 One is the
disposition of plaintiff's interests in the partnerships; the other
is the capital gain realized by the partnerships upon the transfers
in lieu of foreclosure.
Plaintiff realized no gain or loss on the disposition of his
partnership interests, as the following calculation will show:
Basis in partnership
interests on 1/1/88...............-0-
Plaintiff's share of
capital gain added to basis:
Riverside......................$84,401
Colonial....................$3,004,336
Basis before distribution...$3,088,637
Less deemed distribution
(decrease in liabilities)...$3,088,637
Gain (or Loss)..............$ -0-
Notwithstanding the absence of gain on the disposition of
plaintiff's partnership interests, he remains liable under N.J.S.A.
54A:5-1(c) for his distributive share of the capital gain realized
by the partnerships upon the transfers in lieu of foreclosure of
partnership properties. Plaintiff's 1988 federal income tax return
shows his distributive share of such gain to be $84,401 for
Riverside and $3,004,336 for Colonial. As indicated above, federal
income tax basis must be used for New Jersey gross income tax
purposes, so the amount of gain reported for federal purposes must
also be reported for New Jersey purposes.
Defendant's deficiency assessment is upheld. Judgment will be
entered in accordance with this opinion.
Footnote: 1Hereinafter, throughout this opinion, whenever the singular
plaintiff is used, it will refer to Daniel Schiff, the investor
involved in the transactions to be described. Adelaide Schiff is
a party only because a joint return was filed.
Footnote: 2Plaintiffs' 1988 New Jersey gross income tax return indicates
the date of acquisition to be November 2, 1983, a date which is at
variance with the parties' stipulation of facts. The 1983 date
would appear to be incorrect as the Schedule K-1 of IRS Form 1065
(the partnership return) issued to plaintiff for 1983, shows a
negative capital account for plaintiff of -$14,754. This is a
clear indication that plaintiff acquired his interest in Riverside
in a year prior to 1983.
Footnote: 3A mortgage foreclosure constitutes a sale or exchange of
property for federal income tax purposes; the amount realized is
measured by the amount of principal and interest due on the
mortgage debt at the time of the foreclosure. Commissioner of
Internal Revenue v.Tufts,
461 U.S. 300,
103 S.Ct. 1826,
75 L.Ed.2d 863 (1983).
Footnote: 4The cited opinion is not officially published; only those Tax
Court reports published by the United States Government Printing
Office are authorized publications. See section 7462 of the
Internal Revenue Code. The opinion in Tapper is "published" by the
commercial tax reporting services. However, while the opinion is
not an authorized publication (by which this court is not bound in
any event), it is cited for its persuasive reasoning and the
similarity of the facts to the facts in the case sub judice.
Footnote: 5The cases of the two general partners were consolidated for
trial and decision.
Footnote: 6 Pagination is by Westlaw.
Footnote: 7As there was no distribution of the taxpayers' share of the
capital gain and ordinary income realized upon the partnership's
sale of the post office building, such share was added to the basis
of their partnership interests. See section 705(a)(1) of the Code.
Footnote: 8The critical issue in this case is the treatment of deemed
distributions. For purposes of the New Jersey Gross Income Tax
Act, the deemed distributions may be characterized either as gain
realized upon the sale, exchange or other disposition of property
within the meaning of N.J.S.A. 54A:5-1(c) (deemed distributions in
this case would qualify for capital gain treatment under federal
law, as indicated in this opinion), or as partnership distributions
cognizable under N.J.S.A. 54A:5-1(k), which includes a partner's
distributive share of partnership income among the categories of
income taxable under the New Jersey Gross Income Tax Act. As New
Jersey does not provide for differential rates, i.e., one rate for
capital gains and another rate for ordinary income, it is
irrelevant in this case whether the deemed distribution is treated
as capital in nature or as a distributive share of partnership
income.
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