www.alphonsemourad.com
www.uscorruptjudges.com
www.bostonmandelascandal.com

Court agrees Mandela landlord owes $190G
Boston Herald; Boston, Mass.; Jul 8, 2003; Jerry Moskal;
Abstract:
Documents in the 2-year-old case said [Alphonse Mourad] was the sole owner of V&M, a Subchapter S corporation in Watertown that owned the 276- unit Mandela Apartments on Washington Street in Roxbury. V&M went bankrupt.
"We agree with respondent that (Mourad) is obviously confusing V&M Management with himself," [Robert P. Ruwe] wrote. "The record demonstrates that V&M Management, and not (Mourad), filed a petition for reorganization in bankruptcy."
The IRS had claimed that Mourad realized an almost $2.1 million capital gain on the sale of V&M's assets in 1997. Mourad denied that he received any of the proceeds from the sale of V&M.
Full Text:
Copyright Boston Herald Library Jul 8, 2003
WASHINGTON - Alphonse Mourad, former landlord to Boston's indigent, may become $189,745 poorer himself under a recent U.S. Tax Court decision.
On Wednesday, Judge Robert P. Ruwe upheld an Internal Revenue Service ruling that he owed taxes on the $2.1 million in proceeds from the sale of his bankrupt company, V&M Management Inc. Mourad, a Hyde Park resident, said he plans to appeal the ruling.
"I'm also going to sue the IRS for more than $20 million," he said. But Mourad said he can't afford a lawyer and hopes that one will agree to represent him on a "pro bono" basis.
Mourad has 90 days after Ruwe issued his 13-page opinion to appeal.
Documents in the 2-year-old case said Mourad was the sole owner of V&M, a Subchapter S corporation in Watertown that owned the 276- unit Mandela Apartments on Washington Street in Roxbury. V&M went bankrupt.
Mourad contends that Beacon Management, which now runs the apartment building, and the V&M bankruptcy trustee, Stephen S. Gray, should pay the back taxes and penalties.
However, Ruwe agreed with the IRS that while Mourad's former company filed for bankruptcy Jan. 8, 1996, Mourad was not granted personal bankruptcy protection.
"We agree with respondent that (Mourad) is obviously confusing V&M Management with himself," Ruwe wrote. "The record demonstrates that V&M Management, and not (Mourad), filed a petition for reorganization in bankruptcy."
Mourad claims he never received any proceeds from the sale of his bankrupt company. He charged that Beacon and not he got the benefit of a $17 million low-income housing tax credit.
"If (Beacon) becomes the owner and he gets the tax credit, why doesn't (Beacon) pay the taxes?" he said last week.
The IRS had claimed that Mourad realized an almost $2.1 million capital gain on the sale of V&M's assets in 1997. Mourad denied that he received any of the proceeds from the sale of V&M.
An IRS spokesman declined to comment on the case.
Mourad, a Lebanese immigrant, has created a Web site - www.bostonmandelascandal.com - to tell his story.

Does Bankruptcy Terminate S Corp Status?

A business that elects to be an S corporation continues to be taxed as such until the election is terminated. It can be terminated in any of three ways: (1) The shareholders revoke the election, (2) the corporation no longer satisfies the eligibility requirements or (3) the corporation has too much passive income during the three previous tax years.

Alphonse Mourad was the sole shareholder of V&M Management, an S corporation that owned and operated a 275-unit apartment complex. In 1996 V&M petitioned for reorganization under chapter 11 of the Bankruptcy Code. To administer the reorganization, the bankruptcy court appointed an independent trustee who, in 1997, sold the apartment complex. The sale resulted in a gain of $2.1 million, which was reported on V&M's 1997 form 1120S and Mourad's 1997 schedule K-1. Mourad did not file a tax return for 1997, the IRS issued him a notice of deficiency for that year and he, in turn, petitioned the Tax Court for relief.

Mourad argued the gain should have been reported by V&M, not by him, since V&M's filing for bankruptcy had terminated its status as an S corporation. The Tax Court disagreed (see Mourad v. Commissioner, 121 TC no. 1). The Tax Court held that a bankruptcy proceeding conducted under chapter 11 did not end S corporation status. Its finding was similar to that in an earlier case, In re Stadler Associates, Inc, 186 Bankr. 762, in which a bankruptcy court decided a petition under chapter 7 of the bankruptcy laws had not terminated S corporation status. In Stadler the court said that, if it permitted a bankruptcy to end S corporation status, it would be adding a fourth way of S corporation termination not specified in the tax code.

Mourad also argued it was unfair to tax him on the income of the property during the bankruptcy proceeding since he had received no benefit from it during that time. The court disagreed with this as well, saying Mourad had single taxation before the bankruptcy and also had benefited later, since the proceeds from the sale of the property reduced the liabilities of V&M for which he was personally responsible. Mourad appealed the decision to the First Circuit Court of Appeals.

Result. For the IRS. The taxpayer reiterated that V&M's S corporation status ended when it entered bankruptcy proceedings but now used the argument that V&M no longer met the eligibility requirements under the Internal Revenue Code. He said when the trustee took control of V&M the corporate creditors were, in essence, the new owners. Since these new owners were not individuals, V&M no longer was an eligible corporation and its S corporation status was terminated. He also argued that another class of stock had been created because the "new owners" had rights and preferences different from his; therefore V&M was no longer an eligible corporation.

The appellate court rejected these arguments, saying the trustee was more like the management of V&M and that neither the trustee nor the creditors took the place of the taxpayer as the sole shareholder. It said the law states any income in a bankruptcy case should be "taxed only as though such case had not been commenced." The court agreed with the Tax Court that none of the three ways the tax code laid out for terminating an S corporation applied in this case. The court also could find no shareholders with different rights from the taxpayer's. This case emphasizes that a bankruptcy proceeding under Chapter 11 does not affect the S corporation status of an entity.
Alphonse Mourad v. Commissioner, 387 F3d 27.

Prepared by Charles J. Reichert, CPA, professor of accounting, University of Wisconsin, Superior

Home