TAX COURT OPINION

Case: Solomon Windheim
Docket Number: 23188-07
Judge: Goeke
Opinion Type: memo
Filed: 06/10/2009
Pages: 13

T .C . Memo . 2009-,1 6 UNITED STATES TAX COUR T SOLOMON WINDHEIM, Petit'oner v . COMMISSIONER OF INTERNAL REVENUE, Responden t Docket No . 23188-07 . Solomon Windheim, pro se . Lisa P . Lafferty , for respondent . MEMORANDUM FINDINGS OF FAC T GOEKE, Judge : The issue for decisipn concerns the taxatio n of income from a partnership in which p e t itioner holds legal{' title but of which he denies that he is the beneficial owner Respondent determined Federal income tax deficiencies an d additions to tax against petitioner as follows : Year Deficiency Sec . 6651(a)(1) Sec . 6651(a)(2) Sec . 6654 Additions to Ta x $26,790 $6,028 2000 $6, 698 $1,441 2001 14,075 3,167 3,519 557 2.002 20,904 4,703 4,076 699 2003 15,870 3,571 2,142 40 9 After concessions, the issues for decision are : Whether petitioner is liable for tax on partnership income- .from Martinique Realty Associates, L .P . (Martinique), d,uring'the years at issue . We hold petitioner is not liable ; (2) whether petitioner is liable for additions to tax fo r failure .to file under section 6651(a)(1), failure to pay under section 6651(a)(2), and failure to pay estimated taxes unde r section 6654(a) for the years at issue .' We hold petitioner i s not liable . FINDINGS OF FAC T Some of the facts have been stipulated and are so found . The stipulation of facts, the accompanying exhibits, and the stipulation of settled issues are incorporated herein by this reference . Petitioner resided in Montreal, Quebec, Canada, at the time of filing his petition . 'Unless otherwise indicated, all section references are to the Internal Revenue Code , and all Rule references are to the Tax Court Rules of Practice and Procedure . the nearest dollar . Amounts are rounded to During the years at issue petitione held legal title t an 18 .879-percent limited partnership interest in Martinique . Martinique is a limited'partnership that owns real estate in Ne w York .2 Petitioner acquired legal title to the Martiniqu e partnership interest from his late fath e Joseph Windheim, (cid:127)'i r 1976 . In 1959 Joseph Windheim formed Les Promotions Taillo n Limitee (Taillon) .3 Before 1981 Josep h indheim was Taillon' s sole shareholder . At the time' of Joseph Windheim's death in 1 98 1 he had transferred all of his Taillon s t bck to petitioner and s petitioner's sister . From 1981 through 003 petitioner and hi s sister each owned 50 percent of Taillon . PetitiToner served as a n officer and director of Taillon from a t east 1981 through 2013 . Taillon was a family investment manageme t company wit h investments in securities and real estat Taillon maintained a bank account (the Taillon account) with 2 oronto Dominion Bank' (TD 1 Bank) . Before the years at issue petiti~ner treated the Tai l o n account as a family bank account with hi s mother, sister, and, wife . The family members used the Taill on account to pay thei r personal living expenses and routinely d eposited thei r 2Martinique was formerly known as Martinique Twelve KewI Gardens Corp . 3Taillon was originally incorporated as Efficiency Development, Ltd ., and changed its name in 1967 . personal funds into the account . During this time petitioner did not have a personal bank account . Over time disputes,arose .between petitioner and his sister over the management of Taillon . Petitioner instituted a lawsuit in Canada to liquidate Taillon . In the liquidation action petitioner accused his sister of misappropriating Taillon's assets and .excluding him from Taillon's business and operations beginning in 1995 . The court found that petitioner and his sister had agreed to divide Taillon's management in 1995, an d after 1995 the sister managed the real estate investments an d petitioner managed the stock portfolio, which subsequently became worthless . The Canadian court denied petitioner's request to liquidate Taillon . Family disputes continued after 1995 . Petitioner's siste r and mother continued to use the Taillon account to cash checks . When petitioner's mother and sister made deposits into th e Taillon , account , they would withdraw the deposits shortly thereafter . During this time the account generally maintained a nominalbalance . Petitioner remained an authorized signatory on the Taillon account but did not use the account during the years at issue . Taillon did not pay petitioner ' s personal expenses during the years at issue . In 1.998 petitioner brought an action against TD Bank in a Canadian court ( the Canadian lawsuit ) for negligently honoring - 5 - three distribution checks from Martiniqu totaling $149,635 .: The checks were payable to petitioner in car of his mother . Martinique mailed the checks to petition is mother's address consistent with past practice . Petition is sister signed he mother's name to endorse the checks, dep sited the checks int the Taillon account, and shortly thereafter withdrew the, deposited funds . Before discovering the three distributio n checks giving rise to the Canadian lawsut, petitioner was no t aware that Martinique issued distributioichecks in his nam e n care of his mother . TD Bank impleaded p petitioner's mother , sister, and Taillon as defendants in th e Canadian lawsuit . In response to the Canadian lawsuit petitioner's mothe r filed a lawsuit in New York against peti tioner and Martinique, 0 prohibit Martinique from issuing distrib ution checks to petitioner . In December 2000 the New Yo rk court awarde d petitioner's mother a constructive trust over distributions' aid with respect to the partnership interest to which petitioner held legal title and ordered Martinique to pa y all distributions t o petitioner's mother until entry of a dec ision in the Canadian . lawsuit . The .New York court further ord ered Martinique to follo w the Canadian court's decision regarding distributions . The Ne w York court found that petitioner's father transferred th e Martinique partnership interest to petitioner' s name fo r convenience only because petitioner was living in New York atI, the I t 6 - time . The New York court found that petitioner's mother and sister had an . interest in the Martinique distribution checks but did not expressly address who held beneficial ownership of the partnership interest . . In, July 2001 the Canadian court determined that petitioner had a beneficial interest in Martinique . The Canadian court further held that TD Bank negligently honored the Martiniqu e checks'and that petitioner was the owner of the proceeds from the three checks . The Canadian court ordered TD Bank to pay the proceeds of the three distribution checks to petitioner and ordered petitioner's mother and sister to indemnify TD Bank for the payment . TB Bank, Taillon, petitioner's mother, and his . sister appealed . During the pendency of the appeal Martinique continued to pay distribution checks to petitioner's mother pursuant to the New York court order . Following the Canadian court's decision petitioner attempte d to transfer beneficial ownership of the Martinique partnership interest to his minor child and legal title to his wife . However, Martinique refused to transfer ownership of the partnership interest because the Canadian lawsuit was still pending . . In November,2003 the Canadian appellate court reversed the lower court's decision and held that TD Bank was not negligent in honoring the checks because petitioner's sister was authorized-to,conduct transactions with respect to the Taillon account on the basis of the family's pas t practices . The Canadian appellate court did not address who held beneficial ] ownership of the Martinique partnership interest . The questi6 n of beneficial ownership was not material to the Canadian 1 1 appellate court's decision because the 1 wsuitwas against TD i Bank and not petitioner's mother or sister .- After the Canadia n appellate court decision, petitioner contacted an attorne y regarding an action against his sister . The attorney informed petitioner that the statute of limitati o s barred any furthe r action . Petitioner did not initiate an y redirect ! I payment of the Martinique distribution c ecks or to recover pas t distributions paid to his mother . For each year at issue Martinique it ssued a Schedule K- Partner's Share of Income, Credits, Ded ctions, etc . , in petitioner's name in care of his mother with respect to the partnership interest to which petitioner held legal title . ' = i Petitioner did not file an income tax re turn or pay income tai for any year at issue . OPINION A partner must take into account h i s distributive share,of each item of partnership income, gain , credit when determining his individual 1, oss, deduction, and' ICI ncome tax . Sec . 702~( 11 a) . Each partner is taxed on his distributivje share of partnershi p income . regardless of whether the income is actually distribute Iijl 0 Vecchio v . Commissioner , 103 T .C .' 170, 185 (1994) ; sec . 1 .702- 1(a), Income Tax Regs . Although petitioner holds record title to the Martiniqu e partnership interest, he contends that he was not the beneficial owner for Federal .tax purposes during the years at issue . Beneficial . ownership, not legal title, determines ownership for Federal income tax purposes . Ragahianti v . Commissioner , 71 T .C . 346, 349 (1978), affd . without published opinion 652 F .2d 65 (9th 11 Cir . 1981) ; Pac . Coast Music Jobbers Inc . v . Commissioner , 55 T .C . 866, 874 (1 .971), affd . 457 F .2d 1165 (5th Cir . 1972)! . The determination of the beneficial ownership of a partnershi p interest is made at the partner level . Grigoraci v . Commissioner , T .C . Memo . 2002-202 . Beneficial ownership is not a partnership . item subject to the partnership unified audit and litigation .,, procedures enacted by the Tax Equity and Fiscal Responsibility Act of 1982, Pub . L . 97-248, sec . 402, 96 Stat .. 648 . Id . Beneficial ownership is determined by actual command over the property or enjoyment of its economic benefits . Hang v . Commissioner , 95 T .C . 74, 80 (199.0) ; Cepeda v . Commissioner , T .C . Memo . 1994-62, affd . without published opinion 56 F .3d 1384 (5th .Cir . 1995) . In determining beneficial ownership the Court considers who has the greatest number of attributes of ownership . Ragcthianti v . Commissioner , supra at 349 ; Baird v . Commissioner , I I fl - 9 - 68 T .C . 115, 124 (1977) . Relevant facto :s include receipt ofl economic benefits from the partnership i terest, control over~jth e disposition of the partnership-interest, obligations and risks with respect to the partnership interest, and the manner in which the parties treat the partnership interest . See Graham v . Commissioner , T .C . Memo . 2005-68, affd . 57 Fed . Appx . 4 (9t h Cir . 2007) ; see also Grodt & McKay Realt~, Inc . v . Commissioner , 77 T .C . 1221, 1237-1238 ( .1981 ) We hold that petitioner was not the beneficial owner oflthe Martinique partnership interest during t e years at issue . Petitioner did not have the ability to direct or control th e disposition of the partnership interest . He could not alienate, encumber, or receive assets in redemption of the partnership . interest as respondent contends . Although the New York court order created a constructive trust over only the distribution checks and not the partnership interest, the New York order effectively prevented petitioner from transferring, legal title and beneficial ownership : After entry f the New York order, petitioner requested that Martinique transfer legal title to his wife and beneficial ownership to his daughter . Martinique refused to honor the request because th ownership issue was .not resolved in the Canadian lawsuit, which was on appeal . In addition, petitioner did not receive an economic bene l fit from the partnership interest during th years at issue . - 10 - Martinique . issued the . distribution checks to petitioner's mother . 11 For a significant portion of the years at issue , December 2000 to November 2003 , the New York court order directed payment of the distribution checks to petitioner ' s mother . Petitioner credibly testified that he did .not receive any distributions from ; Martinique during the years at issue . We find that Martinique mailed any distributions made either before or after the New York order to petitioner ' s mother in accordance with Martinique's past practice . There is no evidence in the record that petitioner' s mother deposited the distribution checks she received during .the, years at issue into the Taillon account or that petitioner benefited . in any way from the distributions . Petitioner credibly . testified that he did not use the Taillon account to pay .his personal ; expenses during the years at issue . Petitioner n o longer lived at a family-owned residence and was on increasingly bad terms . with his sister . In the light of the family dispute s and ongoing litigation, it is reasonable to assume tha t petitioner.'s mother and sister did not deposit the distributio n checks into the Taillon account . We acknowledge tha t petitioner's. argument that he is not the beneficial owner of the partnership interest is inconsistent with his positions in - 11 - previous lawsuits .' Despite this inconsistency, we find petitioner ' s testimony to be credible . Respondent argues that the lower court in the Canadia n lawsuit was the only court to decide the question of beneficial ownership . The Canadian lower court decision does not preclude ~ 11 petitioner from contesting his beneficial ownership for Federal tax purposes because that court decision was reversed on appeal . -See Hudson v . Commissioner , 100 T .C . 590, 593 .(1993) (collateral estoppel does not apply . to a trial cour 's conclusions of law or findings of fact when an appellate court has vacated, reversed, or set aside the trial court's decision), affd . without published opinion 71 F .3d 877 (5th Cir . 1995) . The Canadian appellate' court did not address who was the beneficial owner of the partnership interest .. Petitioner argues that the New York court order still controls payment of the dis ribution checks to hs mother because the Canadian lawsuit did not resolve the ownership issue or the right to receive the Marti ique distributions . I Respondent argues that petitioner could have pursued furthers legal action to enforce his ownership rights but instead decide d 'Respondent also points out an inconsistency in petitioner's trial testimony that Taillon stopped paying his personal expenses in 1995 and the findings of the Canadian court in the liquidation' action that he used the Taillon account to pay his persona l expenses at least until 1998 . In its M y 2003 decision denying liquidation the Canadian court made no indings with respectito the years at issue . We do not find thi~ discrepancy to be y significant for purposes of the years at issue . 11 - 12 - to allow his mother to-continue to receive the Martinique : distributions . Irrespective of whether petitioner could have initiated further legal action, we find that petitioner was not the beneficial owner during the years at issue . Petitioner's late father transferred legal title of the partnership interest to petitioner for purposes of convenience because . petitioner was living in New York at the time . See Hook v . Commissioner , 58 T .C . 267, 276 (1972) (attorney held record ownership of stock as an accommodation to his client) . At no time has the family treated . petitioner as the beneficial owner of the partnership interest . Nor has petitioner acted as the beneficial owner of the partnership interest, except during the unsuccessful .litigation and his unsuccessful attempt . to transfer the partnership interest . Petitioner's mother received th e partnership distributions both before and during the years at issue . While petitioner may .have benefited from th e distributions in prior years because they were deposited into the Taillon account, we find that petitioner did not receive an economic benefit from the distributions during the years at issue . N Accordingly, we hold that petitioner is not the beneficial owner of 'the Martinique partnership interest and is not subject to tax on the partnership income attributable to the partnershi p interest . Petitioner is not liable for the additions to tax because respondent has not established t hat there is a n understatement or underpayment of tax fo r the years at issu e 13 - See sec . 7491(c) ; Rule 142(a) . To reflect the foregoing, Decision will be entered I II for petitioner .