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Gold v. Ringel

A-5899-96T2 (N.J. Super. App. Div. 1998) (Unpublished)

PARTITION; PARTNERSHIPS—In a partition action, income taxes are entitled to consideration. Where property is acquired for investment and operated for the profit of the partners, matters other than economic fairness to the partners are entitled to little weight.

Two individuals were the sole partners in each of two partnerships. One partnership owned two apartment developments and undeveloped land. The other partnership owned a shopping center. Initially, one partner commenced an action to partition the first of the two partnerships. The other partner sought to add the second partnership to the action and to have the properties of both partnerships partitioned in one proceeding. The reason for taking this approach was that the second partner believed that he could minimize the income tax he would incur because of the partition by maximizing the proportion of his partnership interest distributed to him in kind. In that action, the lower court refused to permit consolidation. Only the partnership that owned the apartment properties and the vacant land was partitioned in that proceeding. The Appellate Division later affirmed the lower court’s refusal to consolidate the two actions.

In this, the second action, the court dealt only with the shopping center partnership. Here, the partners agreed that the property should not be sold, but should be distributed in kind. The property was of the nature that it could be distributed to one partner or the other, but not divided between the two of them. The partner that complained about the tax treatment in the first, now finished, action, argued that in this, the second action, he was entitled to the more favorable tax treatment because he had borne the adverse tax consequences of the earlier partition. The other partner contended that the tax consequences were immaterial to the issue of who should get the property and that he would be a better manager of the shopping center and had been more closely involved in its construction and operation. The lower court agreed with the second partner and ordered that the partner complaining of the tax consequences receive cash and the second partner receive the property. The court’s rationale for awarding the property in this way was that the second partner had shown a level of personal involvement within the center indicative of the fact that the center comprises more than a mere business venture to him. In the court’s view, his style of management would better serve the tenants, the customers, and the community-at-large. The Appellate Division disagreed and found that the lower court had erred in refusing to consider the facts and dispositions of the earlier partition case and the tax consequences to the parties that would result from the partition orders in both cases.

Where distribution in kind is feasible, distributing property to each distributee with a value proportionate to its ownership interest is most likely to achieve the fairest result. It is therefore the preferred method for partitioning real estate. If both partnerships’ properties had been partitioned in a single proceeding, the two partners would each have been entitled to have as large a part of his property interest as possible distributed to him in kind. Although res judicata and collateral estoppel precluded relitigation of the earlier partition action, those considerations did not alter the proposition that, to the extent feasible, the partners were entitled to an apportionment in kind of all the properties that were owned in common. Res judicata and collateral estoppel did not require the lower court in the second action to disregard past events which might have affected a determination of what would be a fair partition. The case was therefore remanded. Since fairness in the proportionate allocation of benefits and burdens should be the objective of a partition action, income taxes are entitled to consideration. Because the property in question was acquired for investment and operated for the profit of the partners, matters other than economic fairness to the partners are entitled to little weight. Therefore, the matter was remanded to the lower court to give appropriate consideration in deciding how distribution of the shopping center assets could be accomplished most fairly. In the words of the Appellate Division, “[i]n the absence of strong countervailing considerations, [t]he complaining partner is entitled to receive a distribution in kind that will leave him, as nearly as possible, in the same position as if the properties of both partnerships had been partitioned in a single proceeding.”


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