The opinion of the court was delivered by: Crabtree
Plaintiffs *fn1 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 1979 *fn2 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, *fn3 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.
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 statute relevant to the Disposition of the substantive issue is N.J.S.A. 54A:5-1(c), which provides:
Net 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 determining 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 L. Ed. 2d 223 (Tax 1993); Spinella v. Director, Div. of Taxation, 13 L. Ed. 2d 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 ...