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Trial Calendar: Boston, Massachusetts
Date: May 20, 2002
TRIAL MEMORANDUM FOR RESPONDENT
DOCKET NO. 7873-01
NAME OF CASE:
Alphonse Mourad v. Commissioner of Internal Revenue
ATTORNEYS:
Petitioner:
Pro Se 617-312-4919
Respondent:
Christine Colley (617) 565-7877
AMOUNT IN DISPUTE:
Year
1997
Deficiency
$189,745.00
STIPULATION OF FACTS:
Completed In Process X
ISSUES:
1. Whether petitioner realized a capital gain in the amount of $2,088,554 from the sale of assets by his S-Corporation, V&M Management, Inc.
2. Whether petitioner is entitled to a low income housing credit for the 1997 tax year.
3. Whether respondent waived all claims for payment of petitioner's income tax for 1997 at a September 26, 1997 Bankruptcy Court confirmation hearing.
WITNESSES RESPONDENT EXPECTS TO CALL:
1. Respondent may call Alphonse Mourad.
2. Respondent reserves the right to call rebuttal witnesses as necessary.
CURRENT ESTIMATE OF TRIAL TIME: 3 hours
SUMMARY OF FACTS:
The petitioner failed to file an individual tax return for the 1997 year, and a substitute for return was prepared by respondent. Petitioner was the sole shareholder of an S-Corporation, V&M Management, Inc., (V&M) that provided low income housing in the Boston area, which owned a 276 unit apartment complex, the Mandela Apartments. V&M filed for bankruptcy under Chapter 11 on January 6, 1996, with over $9 million in debts. The bankruptcy court appointed Stephen Gray as trustee of the bankruptcy estate on April 2, 1996. Since there were no corporate returns filed for 1995, 1996, and 1997, Mr. Gray had the 1995, 1996, and 1997 corporate returns (Forms 1120S) prepared by an independent accounting firm. The 1997 return was filed on October 2, 1998. The respondent accepted the 1997 return as filed. No low-income housing credit was claimed on the return. The Schedule K-l issued to petitioner by V&M Management, Inc., shows that the corporation received $2,088,554 of gain in 1997 due to the sale of assets, which flowed through to petitioner. There was a total section 1231 gain of $1,794,602, and a long term capital gain of $293,952. After adjustments for a carried forward interest expense deduction of $965,226, an unused net operating loss of $433,167, in addition to the standard deduction allowance of $4,150, petitioner's corrected individual taxable income was determined to be $686,011 for the 1997 year.
Pursuant to a plan confirmed by the bankruptcy court on July 26, 1997, the trustee sold V&M's interest in Mandela Apartments to Beacon Management, Inc. Petitioner claims that he should not be charged with a capital gain on the property because he was not the owner at the time of the sale, and that he should have been credited with a $14 million low income housing credit. Petitioner also alleges that respondent waived all claims for payment of his individual income tax at the bankruptcy confirmation hearing. However, petitioner has produced no evidence in support of this allegation.
BRIEF SYNOPSIS OF LEGAL AUTHORITIES
Docket No. 7873-01:
1. Petitioner's chief objection is not to respondent's calculation of the capital gain, but rather that the income earned and recapture of depreciation by the S-Corporation, V&M Management, Inc. (hereinafter "V&M") while in receivership should not be attributable to him.
In the bankruptcy case, petitioner was not a "debtor in possession," as in most Chapter 11 bankruptcies, where the debtor will usually remain in control of its business after a reorganization is commenced. 11 U.S.C. § 1101
(1). In petitioner's case, the bankruptcy court ordered that a trustee be appointed, pursuant to 11 U.S.C. § 1104(a). Trustees in bankruptcy who have possession or hold title to substantially all of the property or business of a corporation, whether or not they are operating the businesses or using the property, are required to file or make returns for the corporation in the same manner and form as the corporation. I.R.C. § 6012(b)(3); Treas. Reg. § 1.6012-3(b)(4). Although no separate taxable entity is created in a corporate Chapter 11 reorganization pursuant to I.R.C. § 1399, the trustee is essentially charged with managing the affairs of the debtor, which includes the filing of corporate tax returns and the payment of taxes that are due. The trustee is also authorized to sign the returns on behalf of the debtor corporation. I.R.C. §§ 6062 and 6012(b)(3).
Since a separate taxable entity was not created by the corporate reorganization under Chapter 11 of the Bankruptcy Code, the corporation's income was taxed as it would have been outside of the bankruptcy. Therefore, in this case, the Sub-chapter S corporate income is not taxed at the corporate level, but is passed through and taxed to its shareholder in a manner similar to a partnership. I.R.C. § 1366. Items of income, loss, deductions, and credits are generally passed through to shareholders, and included on their tax returns in the same form as received, paid, or incurred by the corporation. Id. Thus, the Form K-l issued to petitioner accurately attributed to him the gain from the sale of property in 1997 by V&M.
Under I.R.C. § 42 (entitled "Low-Income Housing Credit") and I.R.C. § 38 (entitled "General Business Credit"), a non-refundable income tax credit can be claimed by the owner of a newly constructed or substantially rehabilitated qualified low-income housing project placed in service after 1986 and generally before July 1, 1992. I.R.C. §§ 42 (a) and (o)(l); I.R.C. § 38(b) (5) .
Docket No. 7873-01
To qualify for the credit, the owner of a low-income building must be subject to a long-term low-income housing use agreement with a housing agency. I.R.C. § 42(h)(6)(A) and (D).
Moreover, a building will not qualify unless there is a period of at least 10 years between the date of its acquisition by the taxpayer and the date the building was last placed in service. I.R.C. § 42 (d) (2) (B)(ii). Petitioner has not yet provided evidence of the date V&M purchased the property and the date it was last placed in service. However, the trustee had the authority to act on behalf of V&M in preparing and filing tax returns. Thus, if the debtor was eligible for the credit, the trustee had the authority to claim it.
By the plain terms of the statute, in order to claim the credit, the taxpayer had to have purchased the property and held it for 10 years to become eligible. V&M did r-c": claim the low-income housing credit on .its 1997 Form 1-120S, nor is there any evidence that petitioner claimed this credit cr. an amended return for the 1997 year. Petitioner has produced no evidence that he is entitled to claim the low-income housir-g credit.
*Petitioner has presented no evidence that respondent waived any claims for payment of petitioner's 1997 individual income taxes.
EVIDENTIARY PROBLEMS:
None anticipated at this time.
Date:
MAY 2, 2002
CHRISTINE COLLEY
Senior Attorney (SBSE)
Tax Court Bar No. CC0250
Docket No. 7873-01
CERTIFICATE OF SERVICE
This is to certify that a copy of the foregoing TRIAL MEMORANDUM FOR RESPONDENT was served on petitioner by mailing the same on May 2nd, 2002
in a postage paid wrapper addressed as follows:
Alphonse Mourad
125 West Street
Hyde Park, MA 02136
MAY 2,2002
CHRISTINE COLLEY
Senior Attorney (SBSE)
Tax Court Bar No. CC0250