Taxpayers contest the denial of their claim for refund by the Director of the Division of Taxation, and the assessment of tax on their 1975 gain from the sale of two apartment house properties under the Capital Gains and Other Unearned Income Tax Act, N.J.S.A. 54:8B-1 et seq.*fn1 Taxpayers are partners in a partnership which owned and operated two apartment houses which were sold in 1975. They contend that their gain on the sale is not taxable under the statute.
The issues in this case are: (1) whether the partnership's ownership and operation of the apartment houses constituted a trade or business, (2) if the partnership is engaged in a trade or business, is each of the partners deemed to be engaged in a trade or business for the purpose of characterizing gain of a partner from the sale and (3) if the property is deemed to be used in a trade or business, whether the Director, by regulation, properly included in the tax, gain on property used in a trade or business.
The parties entered into a stipulation of facts which included affidavits of Donald Swift and Robert Malesardi, and tax returns and other documents relating to the assessments. Pursuant to the stipulation, the Director conducted cross-examination of taxpayers' affiants and presented testimony of a tax analyst.
The following appear from the stipulation of facts. Taxpayers are partners in a general partnership known as Dean Management Company, hereinafter referred to as "DMC." On October 31, 1968 DMC purchased three apartment buildings. The two buildings which are the subject of this litigation are known as the "Chester Place property" and the "Prospect Avenue property." In 1975, Malesardi, Quakenbush, Swift and Company, a firm of certified public accountants, hereinafter referred to as "MQS," provided management services for the properties. DMC paid for all property taxes, maintenance and operating expenses, insurance premiums and repair costs and kept separate records. In addition to their association with DMC, taxpayers Swift and Malesardi are partners of MQS.
The Prospect Avenue property was sold in May 1975 for $705,000, for a net gain of $345,580, and the Chester Place property was sold in December 1975 for $335,000, for a net gain of $142,821. The gain realized by the five taxpayers was allocated as follows:
Gain from Gain from Apt. Total
Land Sale Bldg. Sale Gain
Robert Malesardi $13,419 $167,585 $181,004
Daniel Dinzik 5,591 69,842 75,433
Robert Schiffer 4,473 55,846 60,319
Richard Malesardi 4,473 55,846 60,319
Donald W. Swift 4,473 55,846 60,319
For federal income tax purposes taxpayers treated the property as I.R.C. § 1221(2) and I.R.C. § 1231(b)(1) assets. Section 1221 defines the term "capital assets" but excludes from this definition certain property used in a trade or business. Section 1231 permits capital gain treatment on certain property despite its exclusion from the definition of capital asset in § 1221(2). Each taxpayer reported his gain from the sale of the apartment buildings on his 1975 federal income tax return as a § 1231 gain.
Taxpayers did not report their gain from the 1975 sales on their 1975 New Jersey capital gains tax returns on the ground that the gain was specifically excluded from tax under the statute. Having paid excess estimated tax, taxpayers claimed refunds for 1975. Following are the refunds claimed by each taxpayer which form the basis of this litigation:
Robert Malesardi $9,454.85