1 5 5 T.C. No . 8

UNITED STATES TAX COURT
CLINTON DECKARD, Pet i t i o n er v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 1 8 59 -1 7
. Fi l edSep t em b er 1 7 , 2 0 2 0
.

W was o rg an i zedi n 2 0 12 as a Ken tu cky n on s to ck , n onp ro fi t co rp orat i o n . In2 0 1 4 W

fi l eda ret ro act i v e el ect i o nfo r S co rp orat i on s t atu s as o f t h e d at e o f i t s i n co rp o rat i o n . P, wh o was W ’ s p res i d en t an do n e o f i t s d i rect o rs , th en rep o rt edp as s th ro u g h o p erat i n g l o ss es fro m W o n h i s 2 0 1 2 an d2 0 1 3 i n d i v idu al i n co m e t ax retu rn s . R d i s al l o w edth e p as s th ro u g h l o s s es . Hel d : As an o ffi cer an d d i rect or o f W , s ub ject t o the co n s trai n ts o f Ken tu cky

l aw an dW ’ s art i cl es o f i n co rp o rat i o n, P h el d n o o wn ers h i p i n teres ti n W equ i v al en t t o th ato f a s hareh o l d er fo r p u rp o s es o f ap p l y i n g s ub ch ap t er S. Hel d , fu rt h er, P i s n o ten t i t l edt o cl ai m p as s th ro u g h l o s s es fro m W o n h i s i n d iv i du al i n co m e t ax retu rn s .- 2
-

M arkA. Lo y d an dBai l ey Ro es e, fo r p et i t i o n er. Di an a N. W el l s, fo r res p o n d en t
.

OPINION THORNTON, Jud g e: In2 0 1 2 W at erfro n tFas h i o n W eek , In c. (W at erfro n t ),
was o rg an i zedu n d er Ken tu cky l aw as a n o n st o ck , n o npro fi t co rp o rat i on . In2 0 1 4 , i n h i s cap aci ty as W at erfro n t’ s p res i d en t , p et i t i o n er fi ledwi th th e In t ern al Rev en u e Serv i ce (IRS) W at erfro n t ’ s el ect i o nt o b e t reat ed as an S co rp orat i o n , effect i v e ret ro act i v el y

t o th e d at e o f i t s i n co rp o rat i o ni n 2 0 1 2
. Pet i t i o n er l at er fi l ed
u n t i m el y i n d i v i du al i n co m e t ax retu rn s fo r h i s t ax ab l e y ears 2 0 1 2 an d2 0 1 3 , cl ai m i ng W at erfro n t ’ s rep o rt edo p erat i n g l o s s es as o ffs et s ag ai n s t h i s i nd i vi du al t ax ab l e i n co m e. By

n o t i ce o f d efi ci en cy

res p o nd en td i s al l o wedthes e cl ai m ed p as s th ro u g h l o s s es . Pen d i n g b efo re u s are res p o n d en t ’ s m o t i o nfo r p art i al s u m m ary ju d g m en t
an d p et i t i o n er’ s cro s s -m o t i on fo r p art i al s u m m ary ju dg m en t
. 1 Th es e m o t i o n s as k
u s t o d eci d e (1 ) wh et h er W at erfro n tm ad e a v al i dS co rp o rat i o nel ect i on an d

1 Aft er res p on d en t fi l edh i s m o t i o nfo r p art ial s u m m ary ju d g m en t , th e p art i es s ub m i t t edm

u lt i pl e s t i p u l at i o n s o f s et t l edi s s u es . Res p o nd en t rep res en ts th atn o i s su es fo r t ri al wo u l d rem ai n s h o u l dwe g ran th i s m o ti o nfo r p art ial s u m m ary ju d g m en t
.- 3
-

(2 ) wh et h er p et i t i o n er was a s h areh o l d er o f W at erfro n tfo r th e t ax ab l e y ears 2 0 1 2
an d 2 0 1 3 . Al s o p en d i n g b efo re u s i s p et i t i o ner’ s s eco n dm ot io n fo r p art i al
s u m m ary ju d g m en tas t o W at erfro n t ’ s en t i t l em en tt o cert ai n d edu ct i on s . Th e p art i es ag ree t hatfo r p et i t io n er t o p rev ai l o nh i s s eco n d m o t i o nfo r p art i al
s u m m ary ju d g m en t , h e m

us t fi rs tp rev ai l o nh i s cro s s -m o t i o nfo r p art i al s u m m ary ju d g m en t
. Fo r t h e reas o n s ex p l ai n edb el o w, we ag ree wi th res po n den tth at p et i t i o n er
was n ota s h areh o l d er o r b en efi ci al o wn er o f W at erfro n tfo r t h e t ax ab l e y ears 2 0 1 2
an d 2 0 1 3 fo r p u rp o s es o f s ub ch ap t er S an ds o i s n o t en t it l edt o cl ai m p as s th ro u g h l o s s es fro m

W at erfro n to n h is i n d i v i du al i n co m e t ax retu rn s . Acco rd i n g l y , we wi l l g ran tres p o n d en t ’ s m ot i o n fo r p art i al s u m m ary ju d gm en t an dd en y

p et it i o n er’ s
m o ti o n s fo r p art i al s u m

m ary ju d g m en t
. 2

Back gro u n d Th e fo l l o w i n g b ack g ro u n di n fo rm at i o n i s b as ed o n t h e p art i es ’ m o t i o n p ap ers , th ei r s t i p u lat i o n s o f fact s , an dth e at t ach ed ex h i b i t s . When h e t i m el y p et i t i o n edth i s Co u rt , p et i t i o n er res i d edi nKen tu cky .

2 Un l es s o th erwi s e i nd i cat ed , al l s ect i o nreferen ces are t o th e In t ern al Rev enu e Co de i n effect atal l rel ev an tt i m es , an dal l Ru l e referen ces are t o th e Tax Co u rtRu l es o f Pract i ce an dPro cedu re.- 4
-

W at erfro n t was o rg an i zedo n M ay 8 , 2 0 1 2 , as a n o n s t o ck , n o np ro fi t
co rp o rat i o n u n der t h e Ken tu cky No np ro fi tCo rp o rat i o nAct s (Act ), Ky . Rev . St at
. An n . s ecs . 2 7 3 .1 6 1 -2 7 3 .3 90 (W es t2 0 1 2 ). Th e art i cl es o f i n co rp o rat i o n , s i g n edb y D. Kev i n Ry an as “ Org an izer” an dfi l edwi th t h e Secret ary o f St at e o f t h e Co m m o n weal th o f Ken tu cky

(Ken tu cky s ecret ary o f s t at e), s t at e i np art : Th e u n d ers i g n edh ereb y

fo rm s a n onp ro fi tco rp o rat io n (t h e “ Org an i zat i o n ”) p u rs u an tt o th e p ro v i s i o n s o f Ken tu cky No np ro fi t Co rp o rat i on Act , KRS 2 73 .1 6 1 t o 2 7 3 .3 9 0, an dad o p t s th e fo l l o wi ng as i t s art i cl es o f i n co rp orat i o n : Art i cl e I Th e n am e o f t he Org an i zat i o ns h al l b e WATERFRONT FASHION W EEK, INC. Art i cl e II A. Th i s Org an i zat i o n s h al l b e a n onp ro fi tco rp orat io n o rg an i zedfo r al l l awfu l ch ari t ab l e p u rp o s es . Th e p ri m ary m i s s i o no f th e Org an i zat i on i s t o rai s e m o n ey fo r t h e co n s erv at i o nan d m ai n t en an ce o f t h e W at erfro ntPark l ocat edi nLo u i s v i l l e, Ken tu cky , t o p ro vi d e eco n om i c d ev el o p m en t o p p ortu n it i es fo r v ari ou s l ocal , reg i o n al , an dn at i o n al fas h i o ni n du st ry d es i g n ers , t o p ro v i d e a p l at fo rm fo r wo m en t o em

b race t h ei r o wnp ers o n al s ty les an dex p l o re n ew s ty l e av en u es , an dt o en h an ce t h e qual i ty o f l i fe an dth e eco n o m i c v i t al i ty , al l i n p art n ers h ip wi th g o v ern m en t an dp ri v at e b u s i n es s co ncern s .- 5
- B. Th e Org an i zat i o ns h al l h av e al l th e p o wers o f a n o n s t o ck , n o np ro fi tco rp o rat i o nfo rm edo r ex i s t i n g u n der t h e p ro v i s i o n s o f KRS 2 7 3 .1 6 1 th ro ug h KRS 2 73 .3 9 0 * * *

* * * * * * * C. Th e Org an i zat i o ni s o rg an izedex cl u s i v el y fo r ch ari t ab l e an dedu cat i o n al p u rp o ses , i n cl u d in g , fo r s u ch p u rp o s es , th e m ak i n g o f d i s tri b u t i on s t o (i ) o rg an i zat i o n s th atqu al i fy as ex em pto rg an izat i o ns u n d er § 5 01 (c)(3 ) o f t h e In t ern al Rev enu e Co d e o f 1 9 8 6 , as am en d ed fro m t i m e-t o -t i m e (t he “ Co d e”) * * * , o r (i i ) an y o th er fed eral , s t at e, o r l o cal g ov ern m en ten t i ty o r en t erp ri s e es t ab l i s h edex cl u s i vel y fo r a p ub l i c p urp os e, i n cl u d i n g b u t n o tl i m i tedt o the W at erfro n t Dev el o p m en tCo rp o rat i o n . D. No p arto f t h e n etearn i n g s o f t h e Org an i zat i o ns h al l i n u re t o th e b en efi to f, o r b e d i s tri b u t ab l e t o i t s d i rect o rs , o ffi cers o r o th er p ri v at e p ers o ns , ex cep tth atth e Org an i zat i on s h al l b e au th o ri zed an dem po w ered t o pay

reas on ab l e co m

p en sat i o nfo r s erv i ces actu al l y ren d eredan dt o m ak e p aym en t s an d d i s tri b u t i on s i nfu rtheran ce o f i t s ex em p tp urp os es * * * . No twi th s t an d i n g an y o th er p ro v is i on o f t h es e Art i cl es , th e Org an izat i o n s hal l n o tcarryo n an y o th er act i v i t ies n o t p erm i t t edt o b e carri ed o n b y (i ) a co rp orat i o nex em

p tfro m fed eral i n co m e t ax u n der § 5 0 1 (c)(3 ) o f t h e Co d e o r (i i ) a co rp orat i o n , co n tri b u t i o n s t o wh i ch are d edu ct i b l e u n d er § 1 7 0(c)(2 ) o f t h e Co d e. Art i cl e III Th e Org an i zat i o n s h al l h av e n o m em b ers . * * * * * * * Art i cl e VII Th e n am es * * * o f t h e t h ree (3 ) i n d i v i dual s wh o s h al l s erv e as th e i n it i al d i rect ors o f th e Org an i zat i o n , u n t i l th ei r s u cces s o rs are- 6
-

el ect edo r ap p oi nt ed , an dqu al i fi ed , as p ro v id edu n d er t he By l aws [ 3 ] o f th e Org an i zat i on , are t h e fo l l o wi ng : Cl i n to nD. Deck ard* * * : M arg aret H. Du ffy

* * * ; an dD. J o s ep h Hag ert y * * *

* * * * * * * Art i cl e XII Th e fo reg o i n g n o twi th s t an d i n g , th e Org an i zat i o n m ay b e d i s s ol v ed b y

res o l u ti o n ap p ro v edb y

a t wo -t h i rd s (2 / 3 rd s ) m ajo ri ty o f th e d i rect o rs i n o ffi ce as d efi n edi n t h e Org an i zat i o n ’ s By l aws . Up o n th e d i ss ol u t i o n o f t h e Org an i zat i o n , i t s as s et s s h al l b e d is tri b u t edas d i rect edb y

a t wo -t hi rd s (2 / 3 rd s ) m ajo ri ty v ot e o f t he d i rect o rs i n o ffi ce fo r (i ) o n e o r m o re ex em p tp u rp os es th atare co n s i s t en twi th t h e ex em p tp urp os es o f t h e Org an i zat i o nan dwi th i n t h e m ean i n g o f § 5 0 1 (c)(3 ) o f t h e Co de o r co rres p o n d i ng s ect i o n o f an y fu tu re fed eral t ax co de, o r (i i) an y

o th er fed eral , s t at e, o r l o cal g o v ern m en t en ti ty o r en t erp ri s e es t ab l i s h edex cl u s i v el y fo r a p ub l i c p u rp o s e. Atal l rel ev an tt im es , W at erfro n t ex is t edu n d er t h e p ro v i s i on s o f th e Act . At al l rel ev an tt i m es , p et i t i on er was W at erfro nt ’ s p res i d en t an do n e o f i t s th ree d i rect o rs al o n g wi th M arg aret H. Du ffy , wh o was i t s s ecret ary an dtreas u rer, an d D. J os ep h Hag ert y . W at erfro n tn ev er ap p l i edfo r reco g n i t io no f t ax -ex em p ts t atu s wi th th e IRS. W at erfro n t p ro du cedan ev en tcal l edW at erfro n tFas h i on W eekth atwas h el datthe Lo u i s v i l l e W at erfro n tParkfro m Oct o b er 1 7 t o 1 9 , 2 01 2
. Th i s ev en t
was m ark et edas b en efi t i n g W at erfro n tDev el o pm en tCo rp ., a n o np ro fi t

3 W at erfro n th adn o b y l aws .- 7
-

o rg an i zat i o n th atm ai n t ai n s th e Lo u i s v i l l e W at erfro n tPark . Th e ev en tfai l ed , h o wev er, t o b reakev en . Co n s equ en t l y , W at erfro n tm ad e n o cas h ch ari tab l e
co n tri b u t i o n t o W at erfro n t Dev el o p m en tCo rp . Th e reco rd d o es n o t refl ectth at W at erfro n ten g ag edi n an y o th er act i v i ty atan y

rel ev an tt i m e. OnSep t em

b er 2 8 , 2 0 1 3 , th e Ken tu cky s ecret ary o f s t at e ad m i n i s trat iv el y d i s s o l v edW at erfro n tfo r fai l u re t o fi l e i t s 2 01 3 an n u al rep o rt . OnDecem b er 1 6 , 2 0 1 3 , aft er fi l i ng a rei n s tat em en tap p l icat io n, W at erfro n twas rei n s t at edas a
co rp o rat i o n du ly

i n co rp o rat edu n d er Ken tu cky l aw. On Sep tem

ber 3 0, 2 0 1 4 , th e Ken tu cky s ecret ary o f s t at e o n ce ag ai n ad m i n i st rat i v el y d is s o l v edW at erfro n t , th i s t i m e fo r fai l ure t o fi l e i t s 2 0 1 4 an n u al rep o rt . Th i s t i m e W at erfro n td i d n ots eek rei n s tat em en t
. OnOct o b er 2 8 , 2 01 4 , W at erfro n t m ai l edt o th e IRS Fo rm 2 5 5 3 , El ect i o n b y a Sm al l Bu s in es s Co rp orat i o n . Th e Fo rm 2 5 5 3 i n d i cat edth atW at erfro n t was el ect in g t o b e an S co rp o rat i o n ret ro act i v el y as o f t he d at e o f i ts i n co rp o rat i o n , M ay 8 , 2 0 1 2
. 4 Pet i t i o n er s i gn edth e Fo rm 2 55 3 i n h i s cap aci ty as W at erfro n t ’ s

4 A s m al l b u s in es s co rp o rat i o n g en eral l y m ay el ectu n d er s ec. 1 3 6 2 (a) t o b e an S co rp o rat i on fo r an y t ax ab l e y ear at an y t i m e du ri ng th e p reced i n g t ax ab l e y ear o r atan y t i m e du ri n g the t ax ab l e y ear an d o no r b efo re t he 1 5 th d ay o f t he t h i rd m o nt h o f t h e t ax ab l e y ear. See s ec. 1 3 6 2(b )(1 ). Rev . Pro c. 2 01 3 -3 0 , 2 0 1 3 -3 6 I.R.B. 1 7 3 , en ab l es a t ax p ay er t o m ak e a l at e, ret ro act i v e el ect i o ns o l o n g as th e el ect io n i s p ro p erl y

co m p l et edwi th i n three y ears an d7 5 d ay s aft er t h e effect i v e (co n ti n u ed ...)- 8
-

p res i den t . Pet it i o n er al s o s ig n edth e Fo rm 2 5 5 3 s hareh o l d er’ s co n s en ts t at em en t , i n d i cat i n g t h at h e h el da 1 0 0% o wn ers hi p i n t eres tacq u ired o nM ay 8 , 2 0 1 2
. OnJ an u ary

1 3 , 2 0 1 5 , W at erfro n t fi l edu n t i m el y Fo rm s 1 1 2 0 S, U.S. In co m e Tax Retu rn fo r an S Co rp o rat i o n , fo r i t s t ax ab l e y ears 2 0 1 2 an d2 0 1 3, rep o rt i n g
o p erat i n g l o s s es o f $ 27 7 ,9 6 7 an d$ 3 ,2 3 9 fo r 2 0 1 2 an d 2 0 1 3 , res p ect i v el y . At t ach edt o th e Fo rm s 1 12 0 S were Sch edu l es K-1 , Sh areh o ld er’ s Sh are o f In co m e, Deduct io n s, Cred i t s , et c., rep o rt i n g th atp et it i o n er h ad1 0 0 % s t o cko wn ers h i p o f W at erfro n tdu ri n g 2 0 1 2 an d 20 1 3
. OnM ay 1 2 , 2 0 1 5 , p et i t i o n er fi l ed u n t i m el y Fo rm s 1 0 4 0 , U.S. In d i v i du al In co m e Tax Return , fo r h i s t ax ab l e y ears 2 0 1 2 an d2 0 1 3 . Onth e Sch edu l es E, Sup p l em en t al In co m e an dLo s s, at t ach edt o th es e ret u rn s , p et i t i o n er rep o rt ed p as s th ro u g h , n o np as s i v e l o s s es fro m W at erfro n t o f $ 2 7 7 ,9 6 7 an d$ 3 ,2 3 9 fo r t ax ab l e y ears 2 0 1 2 an d2 0 1 3 , res p ect i vel y . By n o t ice o f d efi ci en cy

res p o n d en t d is al l o wed th es e rep ort edp as s th ro u g h l o s s es fro m

W at erfro n to n th e g ro u n dth atW at erfro n th adn o tm ad e a v al i dS
co rp o rat i o n el ect i o n o r, al tern at i v el y , th at p et i t io n er was n o t a s h areh ol d er o r
m em b er o f W at erfro n tfo r t ax ab l e y ears 2 0 1 2 an d2 0 1 3
.

4 (...co n t in u ed ) d at e. Res p o nd en th as rai s edn o i s s u e ab o u tth e t i m el in es s o f W at erfro n t’ s el ect io n .- 9
- Di s cu ss i o n I. Su m m ary J u d g m en tSt an d ard s Su m m ary ju d g m en ti s i n t en d edt o ex p ed i te l i t i g at i o nan d av o i du n n eces s ary
an d ex p en s i ve t ri al s. Fl a. Peach Co rp . v . Co m m i s s i o ner, 9 0 T.C. 6 7 8 , 6 8 1 (1 9 8 8 ). Th e Co u rtm ay

g ran ts u m

m ary ju d g m en twh en th ere i s n o g en u in e d i s p u t e as t o
an y m at eri al factan da d eci si o n m ay b e ren d eredas a m at ter o f l aw. Ru l e 1 2 1 (b ). Th e m o v i n g p arty

b ears the b u rd en o f p ro v i n g th atth ere i s n o g en ui n e d i s p u t e as t o an y m at eri al fact , an dfact ual i n feren ces wi l l b e read i na m an n er m o s tfav o rab l e t o the p art y

o p p o s i n g s u m

m ary ju d g m en t . See Su n d s tran dCo rp . v . Co m m i s s i o n er, 9 8 T.C. 5 1 8 , 5 2 0 (1 9 9 2 ), aff’ d , 1 7 F.3 d9 65 (7 th Ci r. 1 9 9 4 ). II. S Co rp o rat i o n s Gen eral l y Sub ch ap t er S al l o ws a qual i fi edco rp o rat i on , wi th th e co n s en t o f al l i t s
s h areh o ld ers , t o b e treat edas a p as s th ro u g h en ti ty fo r p u rp o s es o f Fed eral i n co m e t ax . Secs . 1 3 6 1 -1 3 6 6
. Co n s equ en t l y , an S co rp o rat i o n , u n l i k e a t rad i t i o n al C
co rp o rat i o n, g en eral l y

p ay s n o Fed eral i n co m e t ax . 5 In s t ead , a s h areh o l d er o f an S
co rp o rat i o n m

u s trep ort a p ro rat a s h are o f t h e S co rp o rat i on ’ s t ax ab l e i nco m e,

5 As ex cep t i o n s t o th is g en eral ru l e an S co rp orat i o nm ay b e t ax ab le i n cert ai n ci rcu m s t an ces o n b u i l t -i ng ai n s an d p as s i ve i n v es tm en ti n co m e, s ee s ecs . 1 3 7 4 an d1 3 7 5 , an dfo r recap tu re o f cert ai ni n v en to ry b en efi ts an di n v es t m en t cred i t s , s ee s ecs . 1 3 6 3 (d ), 1 3 7 1 (d )(2 ).- 1 0 -

l o s s es , d edu ct i o ns , an dcred i t s . Sec. 1 3 6 6 (a)(1 )(A); s ec. 1
. 1 36 6 -1 (a), In co m e Tax Reg s.; see Gi t l i t z v . Co m m i s si o n er, 5 3 1 U.S. 2 0 6, 2 0 9 (2 0 0 1); M al o o f v
. Co m m i s s i o n er, 4 5 6 F.3 d6 4 5 , 6 4 7 (6 th Ci r. 2 0 0 6 ), aff’ g T.C. M em o . 2 0 0 5 -7 5
. III. Sh areh o l d er o f S Co rp orat io n Th e cri t i cal qu es t i o n i s wh et h er p et it i on er s h o u l db e co n s id ereda
s h areh o ld er o f W at erfro n tdu ri n g the y ears ati ss u e. If h e was n o t , th en h e was n o t
en t i t l edt o cl ai m

p as s th ro u g h l o s s es fro m W at erfro n to nh is i n d i v i du al i n co m e t ax retu rn s . It is u n d i s pu t ed th atp et i t i o n er was n ot a s h areh o l d er o f reco rd ; W at erfro n t
was n otau th o ri zedt o i s s u e s t o ckan di nfacth adn o s h ares o f s t o ck . Pet i t i o n er
n ev erth el es s u rg es th ath e s h ou l db e co n s i d eredW at erfro n t ’ s s o l e s hareh o l d er b ecau s e, h e s ay s , h e h el dex cl u s i v e b en efi ci al o wn ers h ip o f t h e co rp o rat i o n . Pet i t i o ner’ s d ecl arat i on i n s up p o rto f h i s cro s s -m o t i on fo r p art i al s umm ary ju d g m en tas s ert s, am o n g o th er t h i n g s : th ato n o r ab o utJ u l y 2 2 , 2 0 1 1, h e h i red Ex trao rd i n ary

Ev en t s , an u nrel at edev en t -p l an n i n g b u s i n es s , t o co ord i n at e W at erfro n tFas h io n W eek ; th ato nM ay 3 , 2 0 1 2 , h e h i redAt t o rn ey D. Kev i nRy an t o ad v is e h i m

o n th e creat i o n o f a l eg al en ti ty t o co n du ctW at erfro n t Fas hi o nW eek b ecau s e Ex trao rd i n ary

Ev en t s h adad v i s ed p et i t io n er t h ata t ax -ex em p ten t i ty
wo u l den co u rag e s p on so rs t o m ak e t ax -d edu ct i b l e co n tri b ut i o n s t o t h e l eg al en t i ty ;- 1 1 -

th atAt t o rn ey

Ry an n ev er ad vi sedp et i t i o n er th ats p o n s o rs m i gh tb e ab l e t o d edu ct
s p o n so rs hi p s as trad e o r b u s i n es s ex p en ses ev en i f t h e l eg al en t i ty l ack edt ax ex em p ts t atu s ; th ato n M ay

8 , 2 0 1 2 , At t o rn ey

Ry an fo rm ed W at erfro n tu n d er t h e Act ; thatduri n g 2 01 2 an d2 0 1 3 p et i t i o ner was p res i d en t o f W at erfro n t an di t s

“ s o l e d eci s i o n m ak er”; th ato n o r ab o u t Au g u s t1 0 , 2 0 1 2, h e t erm i n at edth e ag reem en twi th Ex trao rd in ary Ev en t s b ecau s e i th adfai l edt o recru i t en ou g h
s p o n so rs o r rai s e en o ug h co n tri b u t i on s t o fu n dW at erfro n tFas h i o nW eek ; th ath e th en as s u m ed“ co m

p l et e co nt ro l ” o v er p l an n i n g W at erfro n t Fas h i o nW eek ,

“ ab an d o n edp l an s ” fo r W at erfro n tt o o b tai nFed eral t ax -ex em pts t atu s , an db eg an treat i n g W at erfro n t as a “ fo r-p ro fi tb u s i n es s th atI o wn eden t i rel y ”; an dth ati n Au g u s t2 0 1 2 h e m ad e o ver $ 2 7 5 ,0 0 0 o f co n tri b u t io n s t o W at erfro n trep res en t i n g
o v er 8 5% o f t h e t o t al co s to f W at erfro n t Fas h i o nW eek
. Res p o n d en th as n o t ex p res s ly d i s p u tedth es e as s ert edfact s . Fo r p urp o s es o f d eci d i n g res p o nd en t ’ s m o t i o n fo r p art i al s u m m ary ju d g m en t, we as s u m e th atth ey are t ru e. Nev ert h el es s , fo r t h e reas o n s ex p l ai nedb el o wwe co n cl u d e t h atas a
m at t er o f l aw p et i t i o n er i s n o tp ro p erl y treat ed as W at erfro n t’ s s h areh o ld er fo r p u rp os es o f s ub ch ap t er S. Th e s ub ch ap t er S reg u lat i o n s p ro v i d e: “ Ord i n ari l y , the p ers o n wh o wo u l d h av e t o i n cl u de i n g ro s s i n co m e d i v i d en d s d i s tri b u t edwi th res pect t o th e s t o ck o f- 1 2 -

th e co rp o rat io n (i f t h e co rp o rat i o nwere a C co rp o rat i o n ) i s co n s i d eredt o b e t h e
s h areh o ld er o f t h e co rp o rat i o n . ” Sec. 1 .1 3 61 -1 (e)(1 ), In co m e Tax Reg s . Ci t i n g th i s reg u l at i o n , o n e co urt h as o b s erv edth at“ th e qu es ti o nwh et h er a p ers o nwas a
s h areh o ld er o n the d at e o f the el ect i o nt o b e t ax ed u nd er Subch ap t er S i s equ iv al en tt o th e qu es t i o n wh et h er, h adth ere b een a v al i del ect i o n, h e wo u l dh av e b een requi redt o rep o rtas p ers on al i n co m e p ro fi t s earn edb y th e co rp o rat i o no n th atd at e.” Cab i n t ax i Co rp . v . Co m m i s s i o n er, 6 3 F.3 d6 1 4 , 6 1 6 (7 th Ci r. 1 99 5 ), aff’ g i n p art , rev ’ g in p arto n o th er g ro un d s T.C. M em o . 1 9 9 4 -3 1 6
. Th e res o l u t i o n
o f t h i s qu es t i o n d ep en d s o n wh et h er t h e p ers o n “ wo u l dh av e b een d eem ed a b en efi ci al o wn er o f s h ares i n the co rp orat i o n , en t i t l ed th erefo re t o d em an d fro m th e n o m i nal o wn er t h e d iv i d en d s o r an y o th er d i st ri b u t i o n s o f earn i n g s o nth o s e
s h ares .” Id
. Th e co u rt s l o o kt o St at e l aw t o d et erm i n e wh et h er a p ers o ni s a b en efi ci al
o wn er o f co rp o rat e s h ares : [A] l th o u g h the m ean in g o f “ s hareh o l d er” fo r p u rp o s es o f Subch ap t er S el ect i o n h as b een s ai dt o b e a m at t er o f fed eral l aw rat h er t h an o f s t at e l aw, th i s m ean s o nl y th ati ti s fed eral l aw wh ich d et erm in es wh i ch k i n d o f s h areh o l d er--n am el y , b en efi ci al rat h er t han reco rd --i s req u iredt o el ecti n o rd er fo r t h e co rp o rat i on t o ach i ev e Sub ch ap ter S s t atu s . Wh et h er a p art i cu l ar i n v es t o r was a s h areh o l d er o f t h at k i n d

-- i n th i s cas e was a b en efi ci al s h areh o ld er o f * * * [t he co rp o rat i o n] o n th e d at e o f t h e el ect i o n --i s an i ss u e o f s t at e l aw. [Ci t at i o no m i t t ed .]- 1 3 -

Id . at6 1 7 (ci t i n g Un i t ed St at es v . Nat ’ l Ban k o f Co m m erce, 4 72 U.S. 7 1 3 , 7 2 2 (1 9 8 5), Aqu i l in o v . Un i t ed St at es , 3 6 3 U.S. 5 0 9 , 5 1 3 (1 9 6 0 ), an dUn i tedSt at es v . Den li n ger, 9 8 2 F.2 d2 33 , 2 35 (7 th Ci r. 1 9 9 2 )); acco rdPah l v . Co m m is s i o n er, 1 5 0 F.3 d1 1 2 4 , 1 1 2 9 (9 th Ci r. 1 9 9 8 ), aff’ g T.C. M em o . 1 9 9 6 -1 7 6 ; s ee Swen so nv . Co m m i s s i o n er, 3 7 T.C. 1 24 , 1 3 1 (1 9 6 1 ) (“ In d et erm i ni n g wh en p et i ti o n er acq u i red th e s t o cki n qu es t io n , we m u s tl o okt o th e ap p l i cab l e St at e l aw.”), rev ’ do no th er g ro u nd s , 3 0 9 F.2 d6 7 2 (8 th Ci r. 1 9 6 2 ). Co n si s t en tl y

wi th th es e p recep t s , i nd eci d in g wh et h er a p ers o ni s p ro p erl y treat ed as an S co rp o rat io n s h areh o l der, co u rt s h av e freq u en t l y co n si dered wh et h er th e p ers o n i s a b en efi ci al o wn er o f t h e co rp o rat i o n ’ s s t ock . See, e.g
. , Pah l v
. Co m m i s s i o n er, 1 5 0 F.3 d1 1 2 4 ; Cab i n t ax i Co rp . v . Co m m i ss i on er, 6 3 F.3 d6 1 4 ; W i ls o n v . Co m

m i ss i o n er, 5 6 0 F.2 d 6 8 7 (5 th Ci r. 1 97 7 ), aff’ g T.C. M em o . 1 9 7 5
- 9 2 ; Ho o kv . Co m

m i s s io ner, 5 8 T.C. 2 6 7 (1 9 7 2 ); Bei rn e v . Co m m i s s i o n er, 5 2 T.C. 2 1 0 (1 96 9 ); Ho ffm an v . Co m m i s si o ner, 4 7 T.C. 2 18 (1 9 6 6 ), aff’ d p er cu ri am , 3 9 1 F.2 d9 3 0 (5 th Ci r. 1 9 6 8); Hi g h t o wer v . Co m m i s s i o n er, T.C. M em o. 2 0 0 5 -2 7 4 , aff’ d , 2 6 6 F. Ap p ’ x 6 4 6 (9 th Ci r. 2 0 08 ). Th e p art ies h av e ci t ed , an dwe h av e- 1 4 -

d i s co v ered , n o cas e ad dres s i ng b en efi ci al o wn ers h i p i na n o n s t o ck , n o np ro fi t
co rp o rat i o n fo r p u rp o s es o f s ub ch ap t er S. 6 No npro fi tco rp o rat i o n s are n o tg en eral l y co n s i dered t o h av e o wn ers . See Farro w v . Sai n tFran ci s M ed . Ct r., 4 0 7 S.W .3 d5 7 9 , 5 9 3 (M o . 2 0 1 3 ) (“No n -p ro fi t
co rp o rat i o ns d o n o th av e o wn ers . * * * [N] o n-p ro fi tco rp o rat i o n s d o n o th av e
s h areh o ld ers o r an y

o th er way

fo r t h i rd p art i es (wh et h er i n d i v i du al s o r en t i t i es ) t o
as s ert* * * [an ] ‘ o wn ers h i p ’ ro l e.”); Ph i l ip T. Hackn ey , “ Wh at W e Tal k Ab o u t Wh en W e Tal kAb o u tTax Ex em p ti o n ”, 3 3 Va. Tax Rev
. 1 1 5 , 1 2 1 (2 0 1 3 ) (“ Th ere
are n o ‘ o wn ers ’ o f a n o np ro fi to rg an i zat io n ; co n s equ en t l y we can no tu se a p as s -t h ro u g h t ax at i o n s y s tem l i k e we d o fo r p art ners h i p s wh ere i ti s cl ear wh o
o wn s th e fi rm .”); J o s ep h M ead& M i ch ael Po l l ack , “ Co u rt s , Co n s t i tu en ci es , an d th e En fo rcem en t o f Fi duci ary Du t i es i n th e No np ro fi t Sect o r”, 7 7 U. Pi t t . L. Rev
. 2 8 1 , 2 8 9 (2 0 1 6) (“ [N] onp ro fi t s d o n o t h av e o wn ers [.] ”).

6 In rare ci rcu m s t an ces , fo r p u rp o s es o f d et erm i n in g wh et h er p u rp o rt ed l y n o np ro fi tcem et ery co rp o rat io ns qu al i fi edfo r t ax ex em pt i on u n d er s ec. 5 0 1 , co u rt s h av e treat ed as equ i ty

i n t eres t s cert ai np ro fi t -s hari n g arran g em en t s wi th i ns i d ers . See Kn o l l wo o d M em ’ l Gard en s v . Co m m i s s io n er, 4 6 T.C. 7 6 4, 7 8 1 (1 9 6 6) (“ Th i s arran g em en tem

b od i es th e v ery

es s en ce o f an equ i ty

i n t eres t , ‘ a p art i ci p at i on i n th e p o tl u cko f t h e en t erp ri s e.’ ” (q u o t i ng Aqu al an e Sh o res , In c. v . Co m m i s si o n er, 2 6 9 F.2 d1 1 6 , 1 1 9 (5 th Ci r. 1 9 5 9 ), aff’ g 3 0 T.C. 5 1 9 (1 9 5 8 )); Ro s e Hi l l s M em ’ l Park As s ’ n v . Un i t ed St at es , 4 6 3 F.2 d4 2 5 , 4 3 0 (Ct . Cl . 1 9 7 2 ). Th es e cas es , h o wev er, d i dn o t i n v o l ve an y

i s s ue o f b en efi ci al o wn ers h i p fo r p u rp o s es o f s ub ch ap t er S.- 1 5 -

Th e reas o n n o np ro fi tco rp o rat i o n s are n o t g en eral ly co n s i d eredt o h av e
o wn ers i s t hatthey

are p ro h i b i t edfro m

d i s tri b u ti ng p ro fi t s t o i n s i d ers wh o are i n p o s i t i on s t o ex erci s e co nt ro l , s u ch as m em b ers , o ffi cers , o r d irect o rs : Th e l ead i n g th eo ry

o f n o np ro fi ten t erp ri s es h o ld s th atth e rat i o n al e fo r u s e o f t h e n o np ro fi tfo rm l i es ch i efl y i nth e s o -cal led“ n on d i s tri b u t i o n co n s trai n t”--i .e., th e fact th atwh i l e o rd i n ary b u si nes s co rp o rat io n s h av e s h areh o l d ers wh o are al l o wedt o recei v e t h e res i du al earn i ng s o f th e en terp ri s e, t h e m em

b ers o f a n o np ro fi tco rp o rat i o n are ex p res s l y p ro h i b it edfro m

recei v i n g an y

p arto f t he as s et s o r p ro p ert y o f t h e co rp orat i o n fo r t h em sel ves . See Han s m an n , Refo rm i ng No np ro fi t Co rp o rat i on Law, 1 2 9 U.Pa.L.Rev . 4 9 7 , 5 0 2 -5 0 7 , 5 5 7 (1 9 8 1 ); Han s m an n , Th e Ro l e o f No np ro fi tEn t erp ri s e, 8 9 Yal e L.J . 8 3 5 , 8 4 3
- 8 4 5 (1 9 8 0 ). * * * Au s ti n v . M i ch . Ch am

ber o f Co m

m erce, 4 9 4 U.S. 6 5 2 , 6 75 n .6 (1 9 9 0) (Bren n an , J ., co n cu rri n g). Co n seq u en t l y , th ere i s n o i n t eres ti na n o np ro fi tco rp o rat i o n eq u i v al en tt o th ato f a s t o ckh o l der i n a fo r-p ro fi tco rp o rat io n wh o s t an ds t o p ro fi tfro m the
s u cces s o f t h e en t erp ri s e. See 1 W i l l i am M . Fl et ch er, Cy cl o ped i a o f t h e Law o f Co rp o rat i o n s , s ec. 6 8.0 5 (W es t 2 0 2 0 ) (“ On e k ey d i s t i n ct i on b et ween n o np ro fi tan d fo r-p ro fi tco rp orat i o n s i s th ati n a n o np ro fi tco rp o rat i o n , s hareh o l d ers o r m em b ers d o n o t h av e a p ro p ri et ary i n t eres ti n t h e co rp orat i o n , as th ey d o i na fo r-p ro fi t
co rp o rat i o n.”); Hen ry

B. Han s m an n , “ Th e Ro l e o f No npro fi t En t erp ri s e”, 8 9 Yal e L.J . 8 35 , 8 3 8 (1 9 80 ) (“ Th u s a n o np ro fi tco rp o rat i o ni s d i s t i n g u i s hedfro m a fo r-- 1 6 -

p ro fi t (o r ‘ b u s in es s ’ ) co rp o rat i on p ri m ari l y b y the ab s en ce o f s t o cko r o th er i n d ici a
o f o wn ers h i p th atg i v e t h ei r o wn ers a s i m u l t an eo us s h are i nb o th p ro fi t s an d
co n tro l .”). Th e p ro h ib it i o n o n th e d i s tri b u t i o no f p ro fi t s i s cl earl y em b o d i edi nth e Act , wh i ch g o v ern s the fo rm at i o n , o p erat i o n , an dd i ss o l u t io no f n o n s t o ck , n o np ro fi t
co rp o rat i o ns i n Ken tu cky . 7 A co rp o rat i o ns ubjectt o th e p ro vi s i o n s o f t h e Act
m u stp o s ses s two i m

p o rt an tch aract eri s t i cs . Fi rs t , th e co rp o rat i o nm u s t b e

“ n o np ro fi t ”. Ky . Rev . St at
. An n . s ec. 2 7 3 .1 6 1 (1 ). A “ [n ] o np ro fi tco rp o rat i o n ” i s d efi n edas a co rp o rat i on n o p arto f the i n co m e o r p ro fi to f wh i ch i s d i st ri b u t ab l e t o i t s m em b ers , d i rect o rs , an do ffi cers . Id . s ec. 2 73 .1 6 1 (3 ). Co n s i s t en twi th th i s d efi n i t i o n , th e Actex p res s l y p ro h i b i t s a n o np ro fi tco rp o rat i o n fro m p ay in g a d i v i d en d o r d i s tri b u t i n g an y p arto f i t s i nco m e o r p ro fi t s t o i t s m em b ers , d i rect o rs ,

7 Th e Act in co rp o rat es p ro v i si o ns o f t h e M od el No np ro fi tCo rp o rat i on Act
. See M ari l yn E. Ph el an , 1 No np ro fi tOrg an i zat i o n s : Law an dTax at i o n2 d , s ec. 1 : 3 0 (W es t l aw 2 0 2 0 ).- 1 7 -

o r o ffi cers . Id
. s ec. 2 7 3
. 2 3 7
. 8 Seco n d , th e co rp orat i o n“ sh al l n o th av e o r i s s u e
s h ares o f s to ck .” Id
. 9 As a Ken tu cky

n o n st o ck , n o np ro fi t co rp o rat io ns ub jectt o th e p ro v i s i o n s o f th e Act , W at erfro n th adn o s t o ckan dco ul di s s u e n o s t o ck . Co n s equ en t l y , p et i t i o n er d o es n o t fal l wi th i n t h e fo ur co rn ers o f t he reg u l at i on wh i ch

“ [o ] rd i n ari l y ” t reat s as an S co rp o rat i o ns h areh o l d er “ th e p ers o nwh o wo u l dh av e t o i ncl ud e i n g ro s s i n co m e d i v i d en d s d is tri b u t edwi th res p ectt o th e s to cko f t h e
co rp o rat i o n (i f t h e co rp o rat i o n were a C co rp o rat io n )”. Sec. 1 .1 3 6 1-1 (e)(1 ), In co m e Tax Reg s . (em

p h as i s ad d ed ).

8 As p o s s i b l e ex cep ti o n s t o th i s g en eral ru l e, Ky . Rev . St at . An n . s ec. 2 7 3 .2 3 7 (W es t2 0 1 2 ) p ro v id es :

A co rp o rat i o n m ay

p ay co m p en s at i o ni na reas on ab l e am o u n t t o i t s m em bers , d i rect o rs , o r o ffi cers fo r s erv i ces ren d ered , m ay co n fer b en efi t s up o n i t s m em

b ers i n co n fo rm i ty

wi th i t s p u rp o s es , an dup on d i s s ol u t i o n o r fi n al l i qu i d at i o nm ay m ak e d i s tri b u ti o n s t o i ts m em bers as p erm i t tedb y

KRS 2 73 .1 6 1 t o 2 7 3 .3 9 0, an dn o s u ch p aym en t , b en efi to r d i s tri b u t io n s h al l b e d eem edt o b e a d iv i d en do r a d i s tri b u t i on o f i nco m e o r p ro fi t.
9 Un s u rp ri si n g l y

i n t h e l i g h t o f t h es e co n st rai n ts , th e Actco n t ai n s n o p ro v is i o n fo r a b en efi ci al s h areh o l d er o f a n o np ro fi tco rp orat i o n . By co n tras t , Ken tu cky co rp o rat e l aw p ro v i d es a d efi n i t io n fo r “ b en efi ci al s h areh o l d er” wi th res p ectt o fo r-p ro fi tco rp o rat i o n s : “ ‘ Ben efi ci al s h areh o l d er’ m ean s th e p ers o nwh o i s a b en efi ci al o wn er o f s hares h el di na v o t i n g tru s t o r b y a n o m i n ee as th e reco rd s h areh o ld er.” Ky . Rev . St at . An n . s ec. 2 7 1 B.1 3 -0 1 0(6 ) (W es t2 0 20 ).- 1 8 -

Fu rt herm o re, p et i t i o n er d i dn o to th erwi se p o ss es s an o wn ers h i p i n teres ti n W at erfro n tequ i val en t t o th ato f a s h areh ol d er. Becau s e h e was p res i d en t an da d i rect o r o f W at erfro n t , th e Act , al o n g wi th W at erfro n t’ s art i cl es o f i nco rp o rat i o n , ex p res s l y p ro h i b i t ed an y

p arto f W at erfro n t’ s i n co m e o r p ro fi tfro m b ei ng d i s tri b u t edt o h i m

o r i n u ri ng t o h i s b en efi t . See Ky . Rev . St at . An n . s ec. 2 7 3 .2 3 7
. 1 0 In th e l i gh t o f t h is n o n d is tri b u t i o nco n s trai n t , treat i n g p et i t i o ner as a s h areh o l d er
o f W at erfro n t wo u l d b e fu n dam en t al l y i n co m pat i b l e wi th t h e p u rp o se an d
o p erat i o n o f s ub ch ap t er S, wh i ch g en eral l y t ax es an S co rp o rat io n ’ s i n co m e
cu rren t l y atth e s h areh ol d er l ev el
. Fu rt herm o re, p et i t i o n er l ack edd i s s o lu t i o n ri g ht s i nW at erfro n t ty p i cal o f a
s h areh o ld er. No n e o f W at erfro n t ’ s as s et s co ul d b e d is tri b u t ed t o h i m up on

1 0 Pet i t i o ner as s ert s th atth e Actp ro v id es an ex cep t i on t o th e g en eral ru l e ag ai n s tp ri v at e i n u rem en t , i n th ata n o np ro fi tco rp o rat i o nm ay “ co n fer b en efi t s up o n i ts m em

b ers i n co n fo rm i ty

wi th i t s p u rp o s es ”. Ky . Rev
. St at . An n . s ec. 2 7 3 .2 3 7 . Co n s equ en t l y , p et i ti o n er p o s i t s : “ When a n o np ro fi tco rp orat i o ncan d i s tri b u t e t h e p ro fi ts o f a b us i nes s t o i t s m em b ers th ath o l dcert i fi cat es o f m em b ers h i p , th ere i s n o s i g n ifi can td i fferen ce b et w een a Ken tu cky n onp ro fi t co rp o rat i o n an d a ‘ s t an d ard ’ co rp o rat i o n .” Th e s h ortan s wer i s thatW at erfro n t h ad n o m em

b ers . Th e Actd efi n es “ M em b er” as “ o n e h av i n g m em b ers h i p ri g h ts i n a co rp o rat i o n i n acco rd an ce wi th th e p ro v i s i o ns o f i t s art icl es o f i n co rp o rat i o no r b y l aws ”. Ky . Rev . St at . An n . s ec. 2 7 3
. 1 6 1 (6 ) (W es t 2 0 1 2 ). W at erfro n t ’ s art i cl es o f i n co rp o rat i o n ex p res s l y p ro v i d e: “ Th e Org an i zat i o n s hal l h av e n o m em b ers .” W e reject wi th o u tfu rt h er d is cu s s i o nth e n o t i o nth atthere i s n o s i g ni fi can t d i fferen ce u n d er Ken tu cky l aw b etween a n o np ro fi tco rp o rat i o nan do ther co rp o rat i o ns .- 1 9 -

W at erfro n t ’ s d i s so l ut i o n . See Ky . Rev . St at . An n . s ec. 2 7 3
. 3 0 3
. 1 1 Co n s i s t en twi th th e co n s trai n t s o f t h e Act , W at erfro n t ’ s art i cl es o f i n co rp orat i on p ro v i d e t h at , up o n

1 1 Ky . Rev
. St at . An n . s ec. 2 7 3.3 0 3 (W es t2 0 1 2 ) p ro vi d es : Th e as s et s o f a co rp o rat i o n i nth e p ro ces s o f d i s s o lu t i o n s hal l b e ap p l iedan dd i s tri b ut edas fo l lo ws : (1 ) Al l l iab i l i t i es an do b l i g at i o n s o f t he co rp o rat i o ns h al l b e p ai d an dd is ch arg ed , o r ad equ at e p ro vi s i o n s s h al l b e m ad e t h erefo r; (2 ) As set s h el db y

th e co rp o rat i o nup o nco n d i t i o nreq ui ri ng retu rn , tran s fer o r co n v ey an ce, wh i ch co n d i t i o no ccu rs b y reas o no f th e d i ss ol u t i o n , s h al l b e ret u rn ed , tran s ferred o r co nv ey ed i n acco rd an ce wi th s u ch req u i rem en t s ; (3 ) As set s recei v edan dh el db y th e co rp o rat i o ns ubjectt o l i m i t at i o n s p erm i t t i ng th ei r u s e o n l y fo r ch ari t ab l e, rel i g i ou s , el eem os y n ary , b en ev o l en t , edu cat i o nal o r s i m i lar p urp o s es , b u tn o t h el d up o n a co n d it i o n req u i ri ng return , tran s fer o r co n vey an ce b y reas o n o f t h e d i s s o l u ti o n , s h al l b e t ran sferred o r co n v ey edt o o n e o r m o re d o m es t i c o r fo rei g n n o npro fi t co rp o rat i o n s , s o ci et i es , o r o rg an i zat i o n s en g ag edi n act iv i ti es s ub s t an t i al l y s im il ar t o th os e o f th e d i ss ol v i n g co rp o rat i o n , p u rs u an tt o a p l an o f d i s tri bu t i o nad o pt ed as p ro vi dedi n KRS 2 7 3 .1 6 1 t o 2 7 3 .3 9 0 ; (4 ) Oth er as s et s , i f an y , s hal l b e d i s tri b ut edi nacco rd an ce wi th th e p ro v i s i o n s o f th e art i cl es o f i n co rp o rat i o no r t h e b y l aws t o the ex t en tth atth e art i cl es o f i n co rp orat i o n o r b y l aws d et erm i n e t h e d i s tri b u t i ve ri g h t s o f m em b ers , o r an y

cl as s o r cl as ses o f m em

b ers , o r p ro v i d e fo r d i s tri b u t i o n t o o th ers ; (5 ) An y rem ai n i n g as s et s m ay

b e d i s tri b u t edt o s u ch n o np ro fi t s o ci et i es , o rg an izat i o n s o r d o m es t i c o r fo rei g nco rp o rat i o n s , as m ay b e s p eci fi ed in a p l an o f d i s tri b u ti o nad o p t ed as p ro v i d edi n KRS 2 7 3 .1 61 t o 2 7 3 .3 9 0
.- 2 0 -

i t s d i s s o l u t io n, i ts as set s s h al l b e d i s tri b u t edfo r ex em p t p u rp o ses wi th i n th e
m ean i n g o f s ect i o n 5 0 1 (c)(3 ) o r s hal l b e d i s tri b u t edt o an en t i ty es t ab l i s h edfo r p ub l i c p u rp o s es . Pet i t i o ner as s ert s th ati n Au g u st2 0 1 2 h e “ as s u m edco m pl et e co n tro l o v er th e p l an n i n g o f t h e fas h i o n weekev en t ” an db eg an “ treat i n g * * * [i t ] as a fo rp ro fi t b u s i n es s ”. Ev en as s u m i n g th atth i s i s tru e, an y s u ch act i o n s wo u l d n o tg i v e ri se t o own ers hi p ri g h t s i n W at erfro n tg reat er t h an th os e affo rd edb y th e Actan d W at erfro n t ’ s art icl es o f i n co rp o rat i o n . Co n tro l o ver W at erfro n twas v es t edi ni t s th ree d i rect o rs , as fi du ci ari es en tru s t edwi th th e du t i es an dp owers i m p o sedup o n th em b y th e Actan d t h e art i cl es o f i nco rp o rat io n . See Ky . Rev
. St at . An n . s ec. 2 7 3 .2 1 5 (1 ); Bal l ardv . 1 40 0 W i l l o wCo u n ci l o f Co -Own ers , In c., 4 30 S.W .3 d2 2 9 , 2 4 1 (Ky . 2 01 3 ). In th e l i g h to f t h es e v ari o u s co n s i d erat i o n s, we co n cl u de t h at p et i t i o n er, as
an o ffi cer an d d i rect o r o f W at erfro n t , s ubjectt o th e co ns trai nt s o f th e Actan d W at erfro n t ’ s art icl es o f i n co rp o rat i o n , l ack edo wn ers hi p ri gh t s i n W at erfro n t equ iv al en tt o th o s e o f a s h areh o l d er fo r p u rp o s es o f ap p l y in g s ub ch ap t er S. IV. Pet i t i o n er’ s Sub st an ce Ov er Fo rm Arg um en t In v o k i ng th e d o ctri ne o f s ub s t an ce o v er fo rm , p et i t i o ner u rg es th atwe
s h o u ldd i s reg ardW at erfro n t ’ s fo rm as a n o npro fi tco rp o rat i o nan di n s teads h o u l d- 2 1 -

reg ardi t , i n s ub s t an ce, as a fo r-p ro fi ten t i ty . He as s ert s t h at h e i nt en d ed W at erfro n tt o b e a fo r-p ro fi t en t i ty an d“ o bject i v el y

o p erat ed ” i t“ co ns i s t en t l y wi th i t bei n g a fo r-p ro fi ten t i ty th at h e o wn eden t i rel y .” He u rg es th at“ th e o n l y fact i n co n s i s t en twi th W at erfro n t* * * b ei n g a fo r-p ro fi ten t i ty i s th atan at t o rn ey fo rm ed* * * [i t ] as a n o np ro fi tco rp o rat i o np ri or t o wh en th e eco n o m ic real i t i es o f th e p ro jectcam e t o l i g h t.” He s t at es thatal th o ug h h e “ s h ou l dh av e s o u g htt o ch an ge W at erfro n t [’ s ] * * * co rp o rat e d o cu m en t s t o refl ect ” t h es e ch an g edp l an s, h e was “ m is t ak en l y

u n aware o f th es e fo rm al it i es o f co rp o rat e l aw” an ds o treat ed W at erfro n t“ l i ke h e was th e s o le o wn er i n ev ery p ract i cal s en s e.” Tax p ay ers are g en eral ly

b o u n db y

the fo rm o f t h e t ran s act io nth ey

ch o o s e. As th e Sup rem e Co u rt h as s t at ed : “ [W ] h i l e a t ax p ay er i s free t o o rg an ize h i s affai rs as h e ch o o s es , n ev ert h el es s , o n ce h av in g d on e s o , h e m u s taccep tth e t ax
co n seq u en ces o f h i s ch o ice, wh et h er co nt em p l at edo r n ot .” Co m

m i s s i o n er v . Nat ’ l Al fal fa Deh y drat i n g & M i l l i ng Co ., 4 1 7 U.S. 1 34 , 1 49 (1 9 74 ); s ee M al oo f v
. Co m m i s s i o n er, 4 5 6 F.3 dat6 5 1 (“ [A] s a g en eral ru l e, co u rt s wi l l d eem th e fo rm o f a t ran sact i o n t o refl ecti t s s ub s tan ce.”); Tel ev i s io n In du s ., In c. v . Co m m i s si o n er, 2 8 4 F.2 d3 2 2, 3 2 5 (2 dCi r. 1 9 6 0 ) (“ Itwo u l db e qu i t e i n t o lerab l e t o p y ram i dth e
ex i s t in g co m

pl ex i t i es o f t ax l aw b y

a ru l e t h atth e t ax s hal l b e t h atres ul t in g fro m- 2 2 -

th e fo rm o f t ran s act i o n t ax p ay ers h av e ch o s en o r fro m an y o th er fo rm

th ey m i g h t h av e ch o s en , wh i ch ev er i s l es s .”), aff’ g 3 2 T.C. 1 2 9 7 (1 9 59 ). No th i n g i n th e reco rds u g g es t s th atW at erfro n t ’ s fo rm d i d n o tres p ecti t s
s ub s t an ce. To th e co n trary , the reco rds h o ws th at i nM ay 2 0 1 2 W at erfro n twas p u rp os efu l l y

o rg an i zedas a n o np ro fi t co rp o rat i o n , up o nan at t o rn ey ’ s ad v i ce, wi th th e ex p ect at io n t h ati two ul ds eekt ax -ex em p ts t atus s o as t o faci l i t at e t ax d educt i b l e g i ft s . It s co rp o rat e ex i s t en ce as a n o npro fi t co rp o rat i on b eg an wh en i t s art i cl es o f i n co rp o rat i o n were fi l edo nM ay 8 , 2 0 1 2 . See Ky . Rev . St at . An n . s ec. 2 7 3 .2 5 3 1 . It was n o t u n t i l s ev eral m on th s l at er t h atp et i t i o n er ch an g edco u rs e, ab an do n edp l an s t o o b t ai n Fed eral t ax -ex em pts t atu s fo r W at erfro n t , an d “ as s u m ed
co n tro l ”. An y

s u ch act i o n s aft er W at erfro n t ’ s o rg an i zat i o nh adn o effect up o n i t s
s t atu s as a n onpro fi tco rp o rat i o n u n d er t h e Act . In d eed , th e p art ies h av e s t i p u l at ed th atat al l rel ev an tt im es W at erfro n tex i s t edu n der t h e p ro v i s io n s o f t h e Act
. V. Lack o f Tax -Ex em

ptSt atu s Pet i t i o ner s ug g es t s th atb ecau s e W at erfro n tn ev er g ai n edt ax -ex em p t s t atu s (wh ich i tn ev er s o u g h t ), i ts h o u l db e reg ard edas a fo r-p ro fi tco rp o rat i o n. He
reas on s : Co rp o rat i on s th at d o n o th av e ex em pts t atu s are d eem edt o b e fo rp ro fi ten t i t i es . Fo r-p ro fi ten t i t i es h av e s h areh o l d ers . A n o npro fi t co rp orat i o n th atl o s ti t s ex em p t s t atus i s n o d i fferen tth an a n o np ro fi t- 2 3 -

co rp orat i o n th atn ev er ap p l i edfo r o r o b t ai n ed ex em p ts t atu s . Co n seq u en t l y , b ecau se W at erfro n tFas h i o nW eekwas n o tan ex em p t o rg an i zat i o n , i t s s h areh o l d ers m u s tb e i d en t i fi ed , reg ard l es s o f wh et h er t h e co rp o rat i o n was p ro fi t ab l e. [Fn . ref. o m i t t ed .] Pet i t i o ner’ s arg u m en tco n fu s es Fed eral t ax -ex em p ts t atu s wi th s tatu s as a
n o np ro fi tco rp o rat i o n u n d er St at e l aw. As n o t ed , atal l rel ev an tt i m es W at erfro nt
was s ub jectt o the p ro v i s i o n s o f t h e Act . Th e d eci s i on n o tt o s eekFed eral t ax ex em p ts t atu s fo r W at erfro nt h as n o b eari n g o ni t s s tatu s as a n o np ro fi tco rp o rat i o n
u n d er t h e Acto r o n th e o wn ers h i p co n s trai n t s i m p os edth ereu n d er. VI. Co n cl u s i o n W e co ncl u d e t h at th ere i s n o g en ui n e d is p u te o f m at eri al fact req u i ri n g a tri al an dth atres p o n d en ti s en t i t l edt o ju d g m en t as a m at t er o f l aw t h atp et i t i o n er
was n ota s h areh o l d er o f W at erfro n tdu ri n g th e y ears ati s s u e. Co n seq u en t l y , we
n eed no tad dres s res p o n d en t ’ s al t ern at i ve arg u m en t th at W at erfro n tfai l edt o m ak e
a v al i dS co rp o rat i on el ect i o n fo r t h e y ears ati s s u e. 1 2

1 2 In th e l i g h to f o ur h o l d i n g th atp et i t i on er was n o t a s h areh o l d er o f W at erfro n tdu ri n g th e y ears ati s s u e, t h e qu es t i on ari s es wh et h er we wo u l d h av e juri s d i ct i o n i n th i s p ro ceed in g t o d et erm i n e wh et h er W at erfro n t m ad e a v al i dS co rp o rat i o n el ect i o n . Th e p art ies h av e n o t ad dres s ed th i s juri s d ict i o n al i s s u e. In v ari o u s d efi ci en cy

cas es , wh ere t h e n o ti ce o f d efi ci en cy i s s u edt o an S co rp o rat i o n s h areh o ld er i n cl u dedS co rp o rat i o nad ju st m en t s , thi s Co u rth as h el dth ati th as juri s d i ct i o n t o red et erm in e th o se ad ju s t m en t s as p arto f t he s h areh o l der-l ev el p ro ceed in g . See W i n t er v . Co m m i s s i o n er, 1 35 T.C. 2 3 8 (2 0 1 0 ); Tab e v . Co m m i s s i o n er, T.C. M em o . 2 0 1 9 -1 4 9 ; Ferg u s o nv . Co m m i s s i o ner, T.C. M em o .

(co n ti n u ed ...)- 2 4 -

To refl ectthe fo reg o i n g , Anap p ro p ri at e o rd er an dd eci s i o n wi l l b e en t ered
.

1 2 (...co n t i nu ed ) 2 0 1 9 -4 0 ; M cNel y

v . Co m m i s s i o n er, T.C. M em o. 2 0 19 -3 9; Berryv . Co m m i s s i o n er, T.C. M em o . 2 01 8 -1 4 3 ; Po wel l v . Co m m i s s i o ner, T.C. M em o. 2 0 1 6 -1 1 1 , aff’ d , 6 8 9 F. Ap p ’ x 7 6 3 (4 th Ci r. 2 0 1 7 ); Al l i v . Co m m i s s i o n er, T.C. M em o . 2 0 1 4 -1 5 . No n e o f t h es e cas es i n v ol v eda d efi ci en cy p ro ceed i n g --l i k e t he o n e p res en t l y b efo re u s -- b ro u gh t b y

an i n d i vi du al wh o was n o ta s hareh o l d er o f t he p u t at iv e S co rp o rat i o n . Ou r d is p o s i t i o n o f t h e i n s t an tcas e m ak es i t u n n eces s ary fo r u s t o co n s i d er fu rt h er th i s p o t en t i al juri s d i ct i o n al i s s u e.