Great Lakes-Dunbar-Rochester v. State Tax Com'n, LAKES-DUNBAR-ROCHESTER

• Decision Date: 31 May 1984
• Docket Number: LAKES-DUNBAR-ROCHESTER
• Citation: 102 A.D.2d 1,477 N.Y.S.2d 461
• Parties: In the Matter of GREAT, a Joint Venture, Petitioner, v. STATE TAX COMMISSION of the State of New York, Respondent.
• Court: New York Supreme Court — Appellate Division

Page 461

477 N.Y.S.2d 461

102 A.D.2d 1

In the Matter of GREAT LAKES-DUNBAR-ROCHESTER, a Joint Venture, Petitioner, v. STATE TAX COMMISSION of the State of New York, Respondent.

Supreme Court, Appellate Division Third Department.

May 31, 1984.

Kavinoky & Cook, Buffalo (Peter D. Cook, Buffalo, of counsel), for petitioner.

Robert Abrams, Atty. Gen. (Maurice K. Peaslee, Albany, of counsel), for respondent.

Before KANE, J.P., and MAIN, MIKOLL, YESAWICH and HARVEY, JJ.

HARVEY, Justice.

The use tax in this case was assessed on the amount of money reimbursed to the two members of a joint venture from the receipts of a construction contract in accordance with an agreement by the two members for the use of their heavy equipment on the job.

The City of Rochester advertised for bids to construct a sewer outfall which consisted of laying a pipe, 10 feet in diameter, 18,000 feet into Lake Ontario. Two corporations, Great Lakes Dredge and Dock Company and Dunbar and Sullivan Dredging Company, decided to bid on the contract as a joint venture. After it had been determined that they were the successful bidders, they entered into a written agreement confirming the establishment of the joint venture. Among other terms, the agreement provided that the two members would share the receipts, profits and losses on a percentage basis. Each was required to advance capital and equipment in the same ratio.

The construction contract which was executed by the president of each company referred to "Great Lakes Dredge & Dock Co. and Dunbar & Sullivan Dredging Co. (a joint venture)" as the contractor. Performance was commenced and each member contributed a certain amount of cash, personnel and equipment. A number of regular employees of both members, who were not hourly employees, were assigned to various supervisory positions and paid by the individual members. From time to time, those members were reimbursed from the project receipts for the salaries which had been paid by them. In the same manner, each member assigned certain equipment to the job along with personnel to supervise its use. This equipment consisted primarily of marine vessels such as tugs and scows, together with clamshells and cranes mounted thereon. From time to time the project manager reimbursed members for the use of their equipment at rates established by the joint venture agreement.

Examination of the joint venture agreement, the construction contract and the acts of the parties involved therein reveals nothing particularly novel in any respect. It is common practice for business entities to join forces in like manner in order to gain from the skills and experience of those entities, to take advantage of the ownership of the specialized equipment required by the job, to share in the advance of working capital to the project and to hedge against the possibility of business loss or other liability. The internal arrangement between the two members was essentially that one member would share two thirds and the other one third of the obligations and benefits of the project.

The dispute arises from the furnishing of equipment by the members to the project. Each was required to furnish equipment as nearly as possible in the same proportion as in the advance of working capital and the entitlement to profits. Although the record does not indicate the actual market value of the equipment involved, an examination of the nature of the equipment would indicate that the capital investment of each member was most substantial. It would also appear that the expense of ownership of the equipment would be substantial and continuation of those expenses over an extended period of time, without reimbursement, would seriously deplete cash reserves. Consequently, the two members agreed that they would be reimbursed for their expenses of ownership from time to time from receipts of the project. The problem in this case results from the members' written characterization of those reimbursements as "rents".

Respondent accepted the members' characterization at face value. On August 16, 1974, it made the determination that the amounts reimbursed the two members of the joint venture constituted rent of leased personal property and assessed a use tax of $334,795.65, plus penalty and interest in the amount of $119,321.39, for the period from December 1, 1969 through May 31, 1974. On October 11, 1974, petitioner demanded a hearing which was conducted October 31, 1978. Respondent rendered its decision on December 29, 1982, which found in petitioner's favor in some respects but continued its assessment for the amounts the members were reimbursed for the equipment assigned to the project.

The crucial and contested portion of respondent's decision is contained in the conclusions of law and is quoted as follows:

That the provisions of the joint venture agreement itself, together with the fact that the rental agreements in issue were entered into by separate and distinct entities and cash payments flowed among the separate bank accounts of the entities, more than provides "substantial evidence and a reasonable basis for the ... conclusion that" the leasing of vessels and equipment by the joint venturers to the joint venture constituted the rental of tangible personal property and not a contribution of capital and was therefore subject to sales and use tax (see Concrete Delivery Co. v. State Tax Commission, 71 A.D.2d 330, 423 N.Y.S.2d 293).

Respondent correctly determined that a joint venture is a "person" as defined by subdivision (a) of section 1101 of the Tax Law. Although the section does not specifically refer to joint ventures, it does define a partnership as a person within the meaning of the article. Generally speaking, a joint venture is a partnership organized for a limited time and purpose (16 N.Y.Jur.2d, Business Relationships, § 1578, pp. 254-255; Dogan v. Harbert Const. Corp., 507 F.Supp. 254, 258). It is apparent, however, that respondent has taken a further step and has determined that a partnership is a person or entity separate and apart from the partners who compose it. This determination is contrary to basic, established law. A partnership, unlike a corporation, is not in the eyes of the law a legal entity separate and apart from the individuals composing the firm (15 N.Y.Jur.2d, Business Relationships, § 1285, p. 571; see Caplan v. Caplan, 268 N.Y. 445, 198 N.E. 23; Chemical Bank of Rochester v. Ashenburg, 94 Misc.2d 64, 67, 405 N.Y.S.2d 175). Respondent's reliance upon Matter of Concrete Delivery Co. v. State Tax Comm., 71 A.D.2d 330, 423 N.Y.S.2d 293, mot. for lv. to app. den. 49 N.Y.2d 709, 429 N.Y.S.2d 1026, 407 N.E.2d 482, and Matter of Ormsby Haulers v. Tully, 72 A.D.2d 845, 421 N.Y.S.2d 701, is misplaced. Those cases pertained to transactions between individuals and corporations.

Although it is within the authority of the Legislature to treat partnerships as legal entities for specified purposes, it has not done so in article 28 of the Tax Law. Respondent is not entitled to any contrary inference because tax statutes are to be strictly construed in favor of the taxpayer (Bathrick Enterprises v. Murphy, 27 A.D.2d 215, 277 N.Y.S.2d 869, affd. 23 N.Y.2d 664, 295 N.Y.S.2d 489, 242 N.E.2d 745). In order to establish tax liability on the part of this petitioner, it is necessary that there by substantial evidence supporting the conclusion that a lease of personal property took place. It was freely admitted by the joint venturers that they had frequently referred to their property as "rental". Petitioner has explained that this terminology has been used...