Mester v. Morgenstern

Callahan, J.

Plaintiff appeals from an interlocutory judgment awarding him an accounting upon the ground that the trial court failed to appraise properly the terms of a joint venture between the parties and to fix the extent to which plaintiff was to share in the profits. We are in accord with the view of appellant that the court erred in not finding the exact terms of the joint venture and in referring to the Referee upon the accounting the basic question of the formula upon which the parties agreed for fixing their interest in the venture.

In the latter part of 1948, defendants Morgenstern and Grogel, through a controlled corporation, contracted to buy certain acreage in Massapequa, Long Island, known as the Caroon Estate, for $175,000. They had already discussed with plaintiff the development of this land by the erection of homes, and plaintiff had agreed to finance the venture and take part in developing the property, if he was given 50% of the profits, the balance to be divided 25% to Morgenstern and 25% to Grogel. At the time plaintiff’s accrued income from other sources was so high that he did not care to enter the deal, unless his profits would be deemed “ capital gains ” under the Federal tax laws. The parties consulted an accountant, who conceived the idea that the property should be acquired by a partnership consisting of plaintiff and the respective wives of both individual defendants (acting for their husbands), that the two individual defendants would form corporations to take conveyances of the land from the partnership, and develop the same by laying out streets, installing sewers, etc., and erect homes for sale. All or most of the profits arising out of the sale of the homes, i.e., the excess of receipts from sales over construction costs, would then be turned over to the partnership as the price for the original land, and the sum so realized, it was hoped, would be taxable only as capital gains. Plaintiff had a 50% interest in the partnership, the wives 25% each. The amount of profits or “ capital gains ” would be divided in like proportion.

No price was placed upon the land on its acquisition by the corporations from the partnership, as it was not the intent or purpose of the parties to effect a normal sale at an agreed price, but rather it was their intent and purpose to realize a profit on the sale of the land with improvements to purchasers of homes in the development, and to let that profit be determined, as it would have to be determined, by the price that the corporations finally received on the sale of the homes. It was the theory of the accountant that by allocating to the land such realized profits, those profits could be considered as “ capital gains ” attributed to the sale of land by the partnership rather than as corporation profits attributable to the sale of homes. It was also the theory of the accountant, in furtherance of the attempt to classify the profits of the venture as ‘ ‘ capital gains ’ ’ from the sale of land rather than as income or profit from the operations of the corporations, to avoid identifying plaintiff with the corporations.

It took several years to complete the project and sell the homes. The venture, however, was quite successful.

The several corporate defendants 11 Budget ”, “ Banch ” and “ Manor ” were formed, and through mesne conveyances they took title to different plots or acreage. Building loans were arranged and completed. Sales were made of improved plots, and also some vacant land. Plaintiff supplied sums in excess of $200,000 in cash for development purposes, which took the form of “ loans ” to Morgenstern. These loans bore no interest, and Morgenstern did not list them as obligations in financial statements which he furnished to certain banks. Thus, the form of plaintiff’s separation from the investment in the building projects was ostensibly preserved. Some of the corporate and partnership books and records were likewise written up to carry out the appearance of separation in the purchase and sale of the land from the building program. However, when plaintiff insisted on written statements as to the status of the venture, “consolidated” balance sheets and other like statements of assets and liabilities were rendered to him, which clearly treated the whole project as one.

The disputed question between the parties is whether their agreement contemplated the allocation to the partnership and to the land of all the profits of the development, as plaintiff contends, or whether, as defendants contend, the “bulk” of the profits were to be attributed to the land with a “ satisfactory ” profit allocated to the corporations. In plaintiff’s view, the measurement of the profits allocable to the venture was fixed. In defendants’ view, the allocation was left open for further determination without any standard of fixation, although defendants suggest that the determination was to be made in the discretion of defendant Horgenstern. They concede that no precise definition of what was to constitute the “ bulk ” of the entire profits or a “ satisfactory ” profit to the building companies was ever arrived at.

The trial court agreed with the views of defendants’ witnesses on this subject. While recognizing that it could not permit the Eeferee to make a contract for the parties, it decided that the Eeferee, upon evidence adduced before him, could make a finding as to what the price should be for the land in accordance with some formula agreed to by the parties.

We disagree with the trial court’s appraisal of the evidence as to the terms of the joint venture and its determination to leave the fixation of such terms to the Eeferee. There was no basis for the court or a Eeferee arriving at a formula except in accordance with the contention of one or the other of the parties. Which it was, the court was obliged to determine. There was no occasion for a reference on that issue. Nor was there any basis, as the trial court conceded, for the court making a contract for the parties or fixing, as the minority of this court would do, a “ reasonable ” price or profit to be accorded the partnership on some kind of equitable considerations. As the decision and reference in this particular cannot stand, we must determine, if we satisfactorily can, what the agreement of the parties was.

We hold that the evidence satisfactorily discloses that the parties did agree upon a formula. Simply stated, it was to accrue to the joint venture or partnership, ostensibly as the sales price for the land, the “ profits ” of the development enterprise, represented by the difference between the cost of construction, including reasonable salaries for the individual defendants as officers of the construction companies, and the sales price of the developed properties, including a sum representing the value of any unsold real property and any cash on hand.

It is not for us to determine the tax incidents of the arrangements, but it is not apparent to us how the tax incidents would be affected or improved by allocating to the venture the “ bulk ” of the profits rather than the whole. We would assume that the nature of the transaction and of the parties’ interests, rather than the division of their interests, would determine the tax consequences. We are not persuaded, even if we were inclined to aid their tax scheme, that acceptance of defendants’ version would serve their purpose. Whatever the division was between them, it was a guise for treating the profits realized from a real estate development as a profit on the sale of land rather than as a corporate profit.

Both the substance and the form of the arrangement are clear. Indeed the parties are not in dispute as to either but only as to the percentage allotments. It is the documentary evidence which establishes the interests of the parties. Massapequa Associates was the name employed by the partnership for the conduct of its venture. Defendants prepared a consolidated balance sheet, a reconciliation of net worth, and a consolidated statement of income, profit and loss of Massapequa Associates, which included all the defendant corporations and their operations and show beyond cavil that the houses as well as the land, the assets of the corporations and their income and profit, were all those of the single venture, and that the investment in the whole was 50% by the plaintiff and 25% each by the male defendants.

The record made by the parties is so clear that we can with conviction find the actual agreement of the parties, which was, regardless of mechanics for tax purposes, to engage in a real estate development and divide the profits between them 50% to plaintiff and 25% to each of the male defendants. Whether the accounting is direct between the parties or through the form and channel of Massapequa is a detail which the Referee can determine as a matter of convenience.

Fixation of the reasonable value of the land by the Referee as of the time of the transfer would mean that market value would enter into the calculation, a contingency foreign to the agreement of the parties, as contended for by both sides.

The Statute of Frauds appears to present no difficulty. The contract was performed, and the legal and equitable rules of partnership responsibility would apply.

The judgment appealed from should be modified as indicated herein, and, as so modified, affirmed, with costs. Findings of fact to the contrary are reversed, and new findings, if desired, may be settled on notice.