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Newark Building Associates v. Director

Decided: May 28, 1974.


Handler, Meanor and Kole. The opinion of the court was delivered by Kole, J.s.c., Temporarily Assigned.


The Division of Tax Appeals entered a judgment imposing liability on appellant to pay taxes under the New Jersey Unincorporated Business Tax Act, N.J.S.A. 54:11B-1 et seq. (sometimes hereafter referred to as "the act"), for its taxable years ending August 31, 1967 and 1968, respectively. The Division held that appellant was taxable as a "business" as that term is used in the act. This appeal followed.

Appellant was organized on August 1, 1952 by agreement as a New Jersey partnership for the purpose of acquiring and holding title to a 33-story office building, the National Newark Building at 744 Broad Street, Newark, New Jersey. At is inception appellant consisted of 20 individuals, each of whom contributed $110,000 to the partnership capital. Under the agreement, any two partners may execute a lease of the property; partnership interests may be sold and transferred; and the partnership is to continue on the death of any partner.

On September 2, 1952 appellant entered into an agreement with another New Jersey partnership, 744 Broad Street Realty Associates (Broad Street), leasing the entire National Newark Building to Broad Street for a term of 25 years, with an option to renew for another 25 years, at an annual rent of $736,000 payable in equal monthly installments of $61,333.64. On October 1, 1962 appellant purchased an adjacent parcel of land used as an open-air parking lot, and simultaneously leased it to Broad Street at an annual rental of $11,500 for a period coterminous with the lease of the National Newark Building. Both leases will be referred to hereafter as "the lease." The lease permits the lessee to terminate the tenancy at any time on 60 days' notice.

The lease is a "net lease." Appellant receives the rental free from all taxes, charges or expenses of any kind. Broad Street, the lessee, is required to operate and manage the property, collect all rents, pay all taxes, charges, operating and maintenance expenses, insurance premiums, and costs

of repairs, improvements and replacements. Broad Street is permitted to assign the lease and sublet. Accordingly, at no time has appellant ever operated or managed either the building or the parking lot or rendered any services to any tenant or subtenant. Broad Street has taken possession and has sublet the premises to various tenants. Appellant's activities have consisted solely of maintaining its existence as a partnership and filing such documents as are required of it by law, accepting the net rent and depositing it in its bank account, making the required payments to the mortgagee, and distributing to the partners the net proceeds. It has no employees. Its required accounting, legal and other partnership supervisory acts are performed by its attorneys at a stated fee of $12,000 a year, plus, apparently, disbursements for accounting fees. At the time of the instant controversy appellant's partners had increased from 20 to 54. At August 31, 1968 the partnership assets were about $5,500,000 and the partners' capital account was about $1,000,000. For the tax year ended August 31, 1968, it had gross income of $659,888.99, net income of $153,338.36 and an expenditure of $15,499.93 for "legal and accounting fees."

The Unincorporated Business Tax Act was enacted in 1966 and imposes

N.J.S.A. 54:11B-2(e) reads in part:

"Unincorporated business" shall mean and include any trade, business, profession or occupation conducted or practiced for profit in whole or in part within this State by any individual or other unincorporated entity not subject to the Corporation Business Tax Act (1945) (P.L. 1945, c. 162) or the Financial Business Tax Law (1946) (P.L. 1946, c. 174), except that:

i. * * *

ii. An individual or other unincorporated entity, except a dealer holding property primarily for sale to customers in the ordinary course of his or its trade or business, shall not be deemed engaged in an unincorporated business solely by reason of the purchase, sale or exchange of property for his or its own account, but this subparagraph shall not apply if the unincorporated entity is taxable as a corporation for Federal Income Tax purposes.*fn1

The sole issue on this appeal is whether the Legislature intended the kind of real property activities engaged in by appellant to render it an "unincorporated business" as that term is used in N.J.S.A. 54:11B-1 et seq. It is taxable under that act only if it is a business.

The Division of Tax Appeals found appellant's operation was an "unincorporated business" and thus subject to the tax. In so deciding the judge appeared to place weight on two factors: (1) the replacement tax program, L. 1966, cc. 133 to 138, of which the Unincorporated Business Tax Act is a part, was intended by the Legislature to impose a business tax on all sectors of the business community (see Foosaner v. Director, Div. of Taxation, 58 N.J. 57 (1971)); (2) N.J.S.A. 42:1-6(1) defines a partnership as "an association of two or more persons to carry on as co-owners a business for profit " (emphasis supplied). We find neither rationale persuasive.

The mere fact that the Legislature may have intended the entire business community of the State to share in some way in the payment of business taxes does not aid in the determination of whether, in the first instance, it contemplated that a particular activity be considered a "business" under the act. There can be no doubt that some activities conducted for profit were not intended to be subject to this tax. If this were not so, N.J.S.A. 54:11B-2(e) would have defined "unincorporated business" as meaning and including

"any [activity] conducted or practiced for profit * * *," rather than as a "trade, business, profession or occupation" so conducted. The reliance on the legislative definition of partnership found in the Partnership Act, N.J.S.A. 42:1-1 et seq., as a "business for profit" was misplaced. The tax statute applies to a business, irrespective of whether it is operated in an individual or partnership capacity. Additionally, N.J.S.A. 54:11B-1 et seq. and the Partnership Act, N.J.S.A. 42:1-1 et seq., are not in pari materia, nor are they statutes on cognate subjects. See State v. Brown, 22 N.J. 405, 415 (1956); Aviation Services v. Hanover Tp. Bd. of Adjustment, 20 N.J. 275, 285 (1956). Further, a corporation is organized for the purpose of doing business, and, as hereinafter discussed, corporations have been held under certain circumstances not to be engaged in business. And subparagraph (ii) of N.J.S.A. 54:11B-2(e) specifically provides ...

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