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UNITED STATES TAX COURT
WASHINGTON, DC 20217
Docket No. 7873-01
COMMISSIONER OF INTERNAL REVENUE,
Pursuant to the determination of the Court, as set forth in its Opinion (121 T.C. No. 1), filed July 2, 2003, it is ORDERED AND DECIDED: That there is a deficiency in income tax due from petitioner for the taxable year 1997 in the amount of $189,745.
Robert P. Ruwe
ENTERED: July 3, 2003
121 T.C. No. 1
UNITED STATES TAX COURT
COMMISSIONER OF INTERNAL REVENUE,
Docket No. 7873-01. Filed July 2, 2003.
In 1996, P's wholly owned S corporation filed a
petition for bankruptcy reorganization. The U.S.
Bankruptcy Court appointed an independent trustee to
administer the bankruptcy estate. In 1997, a plan of
reorganization was confirmed, and the S corporation
sold its principal assets. The bankruptcy trustee
filed a Form 1120S for the S corporation's 1997 tax
year, which reported a large gain. P failed to file
his individual income tax return for 1997. From
information disclosed by the S corporation on its 1997
return, R determined P's income and issued a notice of
Held: The filing of a bankruptcy petition for
reorganization neither terminates an S corporation's
tax status nor creates a separate taxable entity. P is
liable for tax on the income of the S corporation.
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1Respondent objected to many of the exhibits on the basis of
relevancy and/or hearsay. Even if we accept those exhibits, they
would have no effect on our findings of fact or the outcome of
Held, further, P failed to follow the procedures
necessary to claim low-income housing tax credits.
Held, further, statements made by R's
representative at a bankruptcy plan confirmation
hearing did not waive R's determination that P owes
income taxes for 1997.
Alphonse Mourad, pro se.
Steven M. Carr, for respondent.
RUWE, Judge: Respondent determined a $189,745 income tax
deficiency for petitioner's 1997 tax year. The issues presented
to the Court are: (1) Whether petitioner should be taxed on gain
from the sale of assets by his S corporation during the
corporation's bankruptcy proceeding; (2) whether petitioner is
entitled to low-income housing tax credits; and (3) whether
respondent waived his claims for payment of petitioner's 1997
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
The stipulation of facts, the second stipulation of facts, and
the accompanying exhibits are incorporated herein by this
reference.1 At the time the petition was filed, petitioner
resided in Massachusetts.
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2Petitioner is also listed as owning 100 percent of V&M
Management on its 1998 and 1999 Forms 1120S, U.S. Income Tax
Return for an S Corporation. V&M Management elected to be taxed
as an S corporation on Jan. 1, 1984.
3V&M Management d.b.a. Vasquez Development Co., Inc.,
acquired title to Mandela Apartments from the Secretary of
Housing and Urban Development on Dec. 11, 1981.
During the year at issue, petitioner was the sole
shareholder of V&M Management, Inc., an S corporation (V&M
Management).2 V&M Management owned and operated a 275-unit
apartment complex known as Mandela Apartments in Roxbury,
On January 8, 1996, V&M Management filed a petition for
reorganization pursuant to chapter 11 of the U.S. Bankruptcy Code
in the U.S. Bankruptcy Court, District of Massachusetts, Boston.
The bankruptcy court appointed an independent trustee, Stephen S.
Gray (the bankruptcy trustee), to administer the reorganization.
In the bankruptcy action, the Commissioner filed proofs of claim
for employment taxes due and owing by V&M Management.
On September 26, 1997, the bankruptcy court confirmed a plan
of reorganization (the plan). The cornerstone of the plan was
the sale of Mandela Apartments and its related property. Because
the plan called for full payment of the employment taxes owed by
V&M Management, the Commissioner had no objection to the plan.
On or about December 18, 1997, the bankruptcy trustee sold
Mandela Apartments and its related property for $2,872,351.
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4V&M Management's 1997 return was signed by the bankruptcy
trustee on Sept. 1, 1998.
5The 1997 Schedule K-1 indicates that $1,794,602 was a net
sec. 1231 gain and $293,952 was a net long-term capital gain.
6Respondent carried forward an interest expense deduction of
$965,226 and a net operating loss of $433,167. Additionally,
respondent allowed $4,150 as a standard deduction.
On behalf of V&M Management, the bankruptcy trustee prepared
and filed Forms 1120S, U.S. Income Tax Return for an S
Corporation, for tax years 1995 through 1999.4 The 1997 Schedule
K-1, Shareholder's Share of Income, Credits, Deduction, etc.,
reported that petitioner realized a gain of $2,088,554 from the
sale of the Mandela Apartments' property.5
Petitioner did not file individual income tax returns for
1996 and 1997. On August 13, 2001, respondent issued a notice of
deficiency for the 1997 tax year, which determined that
petitioner received income of $2,088,554. Respondent's
determination was based on information reported on V&M
Management's 1997 Schedule K-1. In determining the amount of
petitioner's deficiency, respondent allowed deductions of
$1,402,543.6 Respondent determined that petitioner owed $189,745
in income taxes for 1997.
V&M Management has never claimed low-income housing credits
on any of its returns. V&M Management never applied for an
allocation of low-income housing credits and never received Form
8609, Low-Income Housing Credit Allocation Certification, from
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7Except as indicated to the contrary, all section references
are to the Internal Revenue Code for the year in issue.
the State of Massachusetts. Neither V&M Management nor
petitioner ever attached Form 8609 to their tax returns.
Petitioner never claimed low-income housing credits on his
personal returns for the years during which V&M Management owned
A. Income Imputed From the S Corporation
Petitioner does not question respondent's calculation of
income. Rather, petitioner argues that he should not be treated
as a shareholder of an S corporation after V&M Management filed a
petition with the bankruptcy court.
One of the benefits of S corporation tax status is that
income earned by the entity escapes corporate-level taxation.
See sec. 1363.7 Thus, an S corporation's income passes through
the entity and is, generally, taxed only at the shareholder level
on a pro rata basis. See secs. 1363, 1366.
An election to be an S corporation continues until
terminated. See sec. 1362(d). An S corporation election
terminates in one of three ways: (1) Revocation by the
shareholder(s); (2) the entity ceases to be a "small business
corporation"; or (3) the entity's passive income exceeds 25
percent of its gross receipts for the previous 3 consecutive
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years. See id. The Code provides only these three ways by which
the S corporation election may be terminated. See sec. 1362(d).
Petitioner makes no claim that either the first or third method
of termination applies. Thus, we must determine whether the
filing of the chapter 11 bankruptcy petition terminates V&M
Management's status as a "small business corporation". Section
1361(b) provides in part:
SEC. 1361(b). Small Business Corporation.--
(1) In general.--For purposes of this subchapter,
the term "small business corporation" means a domestic
corporation which is not an ineligible corporation and
which does not--
(A) have more than 75 shareholders,
(B) have as a shareholder a person (other
than an estate and other than a trust described in
subsection (c)(2)) who is not an individual,
(C) have a nonresident alien as a
(D) have more than 1 class of stock.
Section 1361(b)(2) describes an "ineligible corporation" as:
any corporation which is--
(A) a financial institution which uses the
reserve method of accounting for bad debts
described in section 585,
(B) an insurance company subject to tax under
(C) a corporation to which an election under
section 936 applies, or
(D) a DISC or former DISC.
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The filing of the bankruptcy petition had no impact on V&M
Management's qualification as a "small business corporation"
under section 1361(b). Petitioner was the only shareholder of
V&M Management during the year in issue and remained the only
shareholder through 1999.
Neither party cites any previous court opinions that have
decided whether or not an S corporation's status is terminated by
virtue of filing a chapter 11 petition in bankruptcy. This
appears to be an issue of first impression.
The issue of whether the filing of a bankruptcy petition
causes the termination of an S corporation's status was addressed
in In re Stadler Associates, Inc., 186 Bankr. 762 (Bankr. S.D.
Fla. 1995). In that case, the sole shareholder of the debtor
corporation contended that the filing of a bankruptcy petition
terminates S corporation status since the shareholder lost
control of the debtor. Disagreeing, the bankruptcy court held
that the filing of a petition in bankruptcy does not cause the
corporation to cease to be a "small business corporation" or
otherwise terminate the S corporation status. The bankruptcy
court held that "rules of statutory construction prohibit this
Court from adding a fourth method of terminating an S corporation
election where the Internal Revenue Code clearly sets forth the
aforementioned three methods". Id. at 764. We agree.
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8See also 11 U.S.C. sec. 346(c) (2000) ("The commencement of
a case under this title concerning a corporation or a partnership
does not effect a change in the status of such corporation or
partnership for the purpose of any State or local law imposing a
tax on or measured by income.").
In re Stadler Associates, Inc. involved a voluntary petition
under chapter 7 of the Bankruptcy Code. In this case, V&M
Management filed a voluntary petition under chapter 11 of the
Bankruptcy Code. Although the remedies sought in a chapter 7
liquidation proceeding are different from those in a chapter 11
reorganization proceeding, this difference does not affect
application of the rationale stated in In re Stadler Associates,
Inc. to both types of bankruptcy proceedings.
Likewise, no new or separate taxable entity was created by
the filing of the bankruptcy petition. Section 1399 provides:
"Except in any case to which section 1398 applies, no separate
taxable entity shall result from the commencement of a case under
title 11 of the United States Code." Section 1398 is
inapplicable since it applies exclusively to individuals. The
legislative history explains:
The bill provides that no taxable entity results
from commencement of a bankruptcy case involving a
partnership or corporation. This rule * * * reverses
current Internal Revenue Service practice as to
partnerships, under which the estate of a partnership
in bankruptcy is treated as a taxable entity (Rev. Rul.
68-48, 1968-1 C.B. 301) * * * [H. Rept. 96-833, at 20-
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9Accord Schindler v. Walker (In re Harbor Village Dev.), 75
AFTR 2d 95-508, 95-1 USTC par. 50,032 (Bankr. D. Mass. 1994)
(partners, and not bankrupt partnership, were liable for taxes
from income generated while partnership in ch. 11 bankruptcy).
We hold that a bankruptcy petition filed by an S corporation
does not cause the corporation to cease being a "small business
corporation" or otherwise terminate its status as an S
corporation. The tax treatment of the S corporation is the same
whether or not the entity filed for bankruptcy.9
Petitioner argues that it is unfair to tax him on
passthrough income earned by his solely owned S corporation while
it was in chapter 11 bankruptcy reorganization because he
"received no actual benefit from the use of the property". We
disagree. Since electing S corporation status, petitioner has
enjoyed passthrough, one-level taxation and corporate liability
protection. V&M Management's income tax returns show that over
the years petitioner had substantial income from V&M Management
and that the S corporation's business property was depreciated,
thus reducing the amount of petitioner's taxable income.
Furthermore, petitioner testified that he was personally liable
for the debts of V&M Management. The proceeds from the sale of
Mandela Apartments reduced V&M Management's debt liability. See
Schindler v. Walker (In re Harbor Village Dev.), 75 AFTR 2d 95-
508, 95-1 USTC par. 50,032 (Bankr. D. Mass. 1994) ("the income
[while in bankruptcy] will be used to satisfy claims of the
Debtor's creditors"). Since no separate taxable entity was
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created when V&M Management filed for bankruptcy and the S
corporation status was not otherwise terminated, the passthrough
treatment of V&M Management's income realized during bankruptcy
is correctly imputed to petitioner.
B. Low-Income Housing Credit
Petitioner argues in the alternative that if the S
corporation status of V&M Management is not terminated by the
filing of a bankruptcy petition, he is entitled to low-income
housing credits which offset his income tax liability generated
from the sale of Mandela Apartments. Section 38 provides for a
general business credit, which includes a low-income housing
credit. Section 42 describes the method and manner taxpayers
must use to compute their low-income housing credit. Petitioner
failed to claim the credit while V&M Management owned the
property for which he seeks the credit. Only now, after the
purported qualifying property has been sold, does petitioner seek
Petitioner's failure to comply with any of the procedures
and requirements stated in the statutes and regulations granting
the low-income housing credit makes him ineligible for it. To be
eligible for low-income housing credits, a taxpayer must first
obtain permission from the appropriate State or local agency.
See sec. 42(h); sec. 1.42-1T(a)(2), Temporary Income Tax Regs.,
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10The credit-seeking taxpayer must similarly complete Part
II of Form 8609. See sec. 1.42-1T(h)(2), Temporary Income Tax
Regs., 52 Fed. Reg. 23439 (June 22, 1987).
52 Fed. Reg. 23432 (June 22, 1987) ("Generally, the low income
housing credit determined under section 42 is allowed and may be
claimed for any taxable year if, and to the extent that, the
owner of a qualified low income building receives a housing
credit allocation from a State or local housing credit agency.").
As the regulations explain, the taxpayer is not entitled to a
low-income housing credit "in any year in excess of an effective
housing credit allocation received from a State or local housing
credit agency." Sec. 1.42-1T(e)(1), Temporary Income Tax Regs.,
52 Fed. Reg. 23437 (June 22, 1987); see sec. 42(h). "Housing
credit allocations are deemed made when Part I of IRS Form 8609,
Low-Income Housing Credit Allocation Certification, is completed
and signed by an authorized officer of the housing credit
agency".10 Sec. 1.42-1T(d)(8), Temporary Income Tax Regs., 52
Fed. Reg. 23437 (June 22, 1987). Furthermore, the taxpayer must
file a completed Form 8609 and a Form 8586, Low-Income Housing
Credit, with his tax return for each year the credit is claimed.
Sec. 1.42-1T(h)(2), Temporary Income Tax Regs., 52 Fed. Reg.
23439 (June 22, 1987). Neither V&M Management nor petitioner
ever applied for an allocation of low-income housing credits,
received Form 8609, or attached Form 8609 to its or his tax
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return. Under these circumstances petitioner is ineligible for
low-income housing credits.
C. Alleged Waiver of Petitioner's Income Taxes
Lastly, petitioner argues that respondent "waived all claims
for payment [of taxes] * * * at the September 26, 1997 bankruptcy
court confirmation hearing." At the plan confirmation hearing,
counsel for the Commissioner withdrew a previous objection
because the confirmed plan called for the full payment of
employment taxes due and owing by V&M Management. There were no
claims against V&M Management for income tax liabilities because
an S corporation is not generally liable for income tax.
We agree with respondent that petitioner is obviously
confusing V&M Management with himself. The record demonstrates
that V&M Management, and not petitioner, filed a petition for
reorganization in bankruptcy. The Commissioner filed proofs of
claim in the bankruptcy case for unpaid employment taxes. It was
these taxes, owed by V&M Management, which were at issue in the
bankruptcy proceeding. A plan of reorganization was confirmed by
the bankruptcy court to which the Commissioner had no objection.
In contrast, here, petitioner filed a petition seeking
redetermination of a deficiency of income taxes determined
against him. V&M Management is not a party to these proceedings.
Although the amount of the deficiency that respondent determined
is directly related to the sale of the Mandela Apartments by V&M
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Management, the statements respondent's representative made
during the bankruptcy confirmation hearing did not refer to, and
had no effect on, petitioner's income tax liability for the year
at issue. Accordingly, we hold that respondent did not waive his
claim that petitioner owes income tax for 1997.
The filing of a bankruptcy petition does not terminate V&M
Management's S corporation election, and the income of V&M
Management is taxable to petitioner. Petitioner is not entitled
to low-income housing tax credits for 1997, and respondent did
not waive any claim that petitioner is liable for income tax for
the year 1997.
Decision will be entered for