Docket Number 7873-01


Petitioner ALPHONSE MOURAD hereby submits his post trail memorandum in this matter. The issues before the Court are those raised in the appeal letter dated July 13, 2001, which listed three specific issues, and which incorporated by reference the issues raised in the Taxpayer Appeal Letter to Mr. Stephen Daige, dated September 8, 2000, and additional matters raised in the course of the trial on May 20, 2002. For the convenience of the Court, the Petitioner will group the arguments into general categories which will include all issues where the claims or assertions overlap.

A. Respondent's Objections on Grounds of Hearsay and Relevancy

On May 17, 2002, the parties entered into a Second Stipulation of Facts. Many of the proposed exhibits were objected to by the Respondent Commissioner [hereinafter, "the IRS] on grounds of relevancy, the hearsay nature of the document, or both. At the hearing on May 20, 2002, a substantial discussion took place concerning the best way to handle the IRS's objections and ultimately, it was decided to permit the parties to argue the objections in the post-trial memoranda (TR. May 20, 2002, pp. 3-7). The Federal Rules of Evidence are binding on the Tax Court, Rule 143(a), Rules of the Tax Court.

The first evidentiary claim is that some of the proffered evidence is not relevant to the claims asserted. Relevant evidence is any evidence which has a tendency to make the existence of any fact which is of consequence to the action more or less probable than it would have been without the evidence. Rule 401, Rules of Evidence. In other words, relevant evidence need not directly prove a fact, it need only have a tendency to make the existence of a fact more or less likely.

For those matters outside the scope of Rules 803 or 804, Rules of Evidence, the hearsay objections to the evidence are controlled by Rule 807, the residual exception rule. The rule really has two parts, one procedural, the other legal. The Rule cannot come into effect unless knowledge of the existence of the proposed evidence is made available to the opponent in sufficient time to allow a response. This criteria was met, as the IRS signed off on the stipulation and was provided with copies of all the documents.

The second component requires that the evidence be material, that it is more probative than other evidence which the proponent could procure by reasonable means, and the general purposes of the rules and the interests of justice would be served by the admission of the evidence. The materiality of each document will be discussed below.

It is true that for all of the contested documents the Petitioner could have issued subpoenas and compelled the attendance of the custodians of records, and the maker of each document to lay the foundation for authenticity, but this would have extended the hearing for days, and would have been a useless exercise since the IRS has not objected to any document on grounds of authenticity. The court recognized that the Petitioner is at a disadvantage in a case where he is not represented by an attorney [Tr., p. 6], and the production of the documents rather than a string of witnesses to testify concerning the documents is far more reasonable in terms of the efficiency of the proceeding and the use of everyone's time.

The same argument applies to the purposes of the rules and the ends of justice requirements. The purpose of the rules, fundamentally, is to protect the proceeding from becoming a trial by affidavit, and to protect a jury from being influenced by unreliable statements made outside the court room and not under oath, at a time when there was no opportunity for cross-examination. All of the documents proposed by the Petitioner are either documents prepared in the ordinary course of business, records of court documents, or records of a government agency. None of them are affidavits whose affiants are unavailable to testify. Although the documents may have been prepared at a time when there was no opportunity to cross-examine, such cross-examination would have been pointless for this proceeding. The Petitioner does not believe that the IRS is seriously asserting that cross-examination of the preparer or the custodian of the document would alter the assertions made in the contents of the documents. With regard to any documents or testimony arising from the bankruptcy proceeding, the IRS was a full party. Additionally, since this is a trial to the court, the court can take the documents as presented, and give them whatever weight to court deems appropriate, so that any prejudicial effect arising from their preparation or contents can be overcome.

Finally, the ends of justice would be met by permitting the introduction of these documents. The court has, under Rule 807, wide-ranging discretion to admit documents, and in this case, given the Petitioner's financial and physical limitations, it would be unjust to require him to bring in substantiating witnesses for each proposed document.

There is really no argument here that the documents are not authentic, or that they are not reliable, or that they do not reflect the facts of the matter as the maker of the document thought them to be at the time the document was prepared. For these reasons, the hearsay objection should be overruled and the documents admitted.

The other ground for objection is that of relevancy, and for this objection, each document will have to be treated individually.

Exhibit 8-J, a letter from the trustee Mr. Gray to the Massachusetts Department of Housing, is relevant to the issue of attribution of income for tax purposes in that it tends to show that Petitioner Mourad had no control over any of the operations of V&M Management from April 2, 1996 and onward, and thus had neither accounting nor fiscal control over any income. It is also relevant to the issue of the application process for the low income housing tax credits (hereinafter: "the housing tax credits") which Petitioner argues could only have been legally awarded to him as the owner of V&M Management.

Exhibit 10-J a letter from tax counsel for the purchasers of the property from Trustee Gray, is relevant to the issue of the income tax liability and the housing tax credits. The letter, on page 3, contains an assertion that in 1997, the general partners who had acquired the property from Stephen Gray were the owners of the property, an assertion exactly contrary to what is maintained by the IRS in this case.

Exhibit 11-J is a letter from the partnership to its tax counsel indicating that it was the owner of the project in 1997, and that it would file the income tax returns for 1997. It is thus relevant to the issue of Petitioner's liability for 1997 taxes.

Exhibit 12-J is a binding confirmation of the issuance of 1998 tax credits to the partnership based upon its 1997 representations that it was the owner of the property. The document is therefore relevant to both the income tax and the housing tax credit claims.

Exhibits 13-J and J-14 are cover letters indicating what documents were sent from the partnership to the Massachusetts Department of Housing. They are relevant to show the procedure by which the partnership obtained the housing tax credit.

Exhibit 15-J is a carryover allocation of the housing credits for 1998. It is relevant to show the allocation of the housing credit and the basis of the property for purposes of capital gains calculations.

Exhibit 16-J shows that the trustee acknowledged his responsibility to pay federal taxes which had been incurred by the corporation.

Exhibit 20-J is the income tax return for V&M Management for 1999 and supporting documents. It is relevant to show the continuing control of all aspects of the property by parties other that Petitioner.

Exhibit 21-J shows that no annual reports were filed with the Massachusetts Corporation Commission while the trustee was in control of V&M Management, and htat in August, 1998, the corporation was dissolved.

Exhibit 22-J is a printout from the federal Department of Housing and Urban Development of payments made to the owner of the project for the years 1995 through 2000. It is relevant to the issue of the attribution of income and the calculation of Petitioner's income taxes.

Another ground for admission of these documents is that they, and the documents appended to this brief, are largely judicially noticeable.

Judicial notice in a tax court proceeding is governed by Rule 143, Rules of Evidence. This rule in turn refers the parties and the court to the Rules of Evidence of the District of Columbia, the evidentiary rules of the Rules of Civil Procedure, and the Federal Rules of Evidence.

Under Rule 201, Rules of Evidence, a court may take judicial notice of an adjudicatory fact when it is capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned. The various documents proposed by the Petitioner both in the Second Stipulation of Facts and the Appendix to this brief are records of a government agency, a document prepared in reference to a government record or proceeding, or are part of a related judicial proceeding in the bankruptcy court. In many instances, these are documents of the IRS itself, or were part of proceedings in which the IRS appeared and was represented by counsel. The Respondent in this proceeding cannot reasonably question the authenticity or accuracy of the proffered documents, and for this reason, the court, in the interests of time and efficiency, should take judicial notice of them.

Administrative appeal boards and administrative law judges have a wider range of discretion for taking judicial notice than a court may have. Getachew v. INS, 25 F.3d 841 (9 Cir., 1994); Banks v, Schweiker, 654 F.2d 637 (9 Cir., 1981). The court can take judicial notice of IRS procedures and regulations. Wilson v. C.I.R., 77 T.C. 324 (1981). The court may also take judicial notice of materials in the court's files from prior proceedings, or of files in related cases, or of court orders in unrelated cases. Kinnett Dairies , Inc. V. Farrow, 580 F.2d 1260 (5 Cir., 1978); Hill v. Goord, 63 F. Supp. 2d 254 (E.D.N.Y., 1999); Cagan v. Midwest Real Estate Corp., 774 F. Supp. 1089 (N.D. Ill., 1991). Finally, the offical records of a government agency may be judicially noticed. Massachusetts v. Westcott, 431 U.S. 322, 97 S.Ct. 1755 (1977); American Indians v. United States, 667 F.2d 980 (Ct. Cl., 1981).

For the reasons given, the proposed documents in the Second Stipulation of Facts and the appendix to this brief should be admitted and considered by this court.

B. Issues Concerning the $965,226 in investment interest expense.

In 1994, Petitioner, as the sole shareholder of V&M Management, a Sub-chapter S corporation, filed a 1120S and a supporting Form 8825 which showed an interest expense of $996,357 (Exhibit 17-J, Second Stipulation of Facts).

Subsequently, this amount was carried forward to the 1994 1040 as the sum of $965,226. The figure of $965,226 is the amount used by the IRS to calculate and adjust the purported tax deficiency (Exhibit 2-J, Stipulation of Facts, page 5). For purposes of this proceeding, Petitioner does not dispute that $965,226 is the correct amount.
Attached to Exhibit 2-J were several pages of calculations and explanations showing how the IRS recomputed the K-1's for 1996 and 1997 in order to arrive at the claimed deficiency. Although theses explanations were not included in the stipulated exhibits, they are part of the file of this case. For the convenience of the Court, an additional copy is attached to this memorandum as Appendix A, IRS calculations for substitute returns and K-1's of Petitioner. Page 8 of Appendix One is a Form 886A explanation of the factual and legal bases which underlay the calculation of the deficiency. Section "C" addresses the treatment of the investment interest expense. The commentary notes that that the 1994 Form 1040 "shows a disallowed investment interest expense of $965,226 to be carried forward to 1995. The 1995 Form 1040 that Mr. Mourad filed did not utilize any of the interest expense."

The following paragraph of the commentary then explains that "[t]he K-1 issued to Mr. Mourad by the trustee for 1997 reflects income that is to be reported on the shareholders 1997 Form 1040. The examination division prepared a substitute for return for 1996 and 1997 as Mr. Mourad did not file these returns. The purpose of this adjustment is to give Mr. Mourad the benefit of the unused investment interest expense."
Petitioner agrees that the examination division had the authority to make adjustments using the unused investment interest expense, but disagrees with the allocation made by the division.
In 1995, the K-1 was prepared by the trustee, as it was in 1996 and 1967 (Exhibit 18-J, Second Stipulation of Facts). The failure of the trustee to carry forward the $965,226 has been noted by the IRS. As a result of the failure of the trustee to properly carry the amount forward, the Petitioner now has a tax deficiency of $5,613, which, with interest and penalties, amounted to $10,718.67 as of March 20, 2000. Appendix B, Notice of Deficiency, March 20, 2000, attached. The rationale which rightfully permits the examination division to recalculate the K-1 which was prepared by the trustee for 1996 and 1997 should be applied to the K-1 for 1995 as well, and upon such a recalculation, the appropriate amount of the unused investment interest expense should be applied to the 1995 K-1 as will be necessary to reduce the Petitioner's tax liability for 1995 to zero. The balance should then be applied in the recalculation of the 1997 K-1.

C. The Petitioner is not Liable for the 1997 Taxes Based upon the Sale of the Assets of the Estate.

1. (V&M Management did not exist as a taxable entity in 1997).

The IRS claims that Petitioner is personally liable for the payment of capital gains taxes for the sale of the assets of the sub-chapter S corporation, V&M Management in 1997. In its analysis, the IRS relies primarily on the decision in In Re Harbor Village Development, BC-DC Mass, 95-1 USTC. 87,125. In that the decision, the Court said, at 87, 127:

IRC Sec. 708 provides that a partnership continues for tax purposes
until termination. 26 U.S.C. Sec. 708 (a). Termination for tax purposes occurs only if either "(A) no part of any business , financial operation or venture of the partnership continues to be carried on by any of its partners in a partnership, or (B) within a twelve month period there is a sale or exchange of fifty percent or more of the total interest in partnership capital and profits." Id., Sec. 708(b)(1). Here, neither happened during the tax years at issue, so termination of the partnership did not occur for tax purposes.

It is stipulated by the parties that Petitioner was the sole share holder of V&M Management (Stipulation of Facts 4). It is also undisputed by the parties that Stephen Gray was named as the Chapter 11 Trustee, and it is a matter of historical fact that he was appointed on April 2, 1996. On September 26, 1997, a Chapter 11 plan was confirmed by the Bankruptcy Court (Stipulation of Facts, 10, 11). It is also uncontested by the parties that the entire assets of V&M management were sold in 1997 (Exhibit 6-J, Stipulation of Facts).

In order to be taxable, a taxable entity has to exist. Under the holding in In Re Harbor Village, taxes cannot be assessed against the partners in a partnership which has been terminated. In order to be terminated, no part of the business can be carried on by the partners, or, alternatively, within a twelve month period, 50 percent or more of the partnership total assets of the partnership have been sold or exchanged. In the instant case, Petitioner did not carry on any aspect whatsoever of the operation of the estate during any period of the taxable year 1997. At the same time, all of the assets of V&M Management were sold during tax year 1997, so the second criteria of In Re Harbor Village has been met as well. On either prong of the decision therefore, no tax liability could be attributed to the Petitioner in 1997.

2. The trustee Stephen Gray was the beneficial owner of the property in 1997.

Under the proceedings of the Bankruptcy Court, the Trustee "stepped into the shoes" of Alphonse Mourad (Transcript, page. 24; Exhibit 8-J). The Bankruptcy Court essentially made the Trustee Stephen Gray the beneficial owner of the property (Wilson v. C.I.R., 560 F.2d 687, 689 (5th Cir., 1997) (Beneficial ownership of stock, not mere record ownership or other formal indicia, determines who bears the tax consequences). . Petitioner had no rights of operation, no access, no ability to control, in short, had no business relationship with V&M Management following the appointment of the Trustee. Indeed, as the IRS had recognized, the Petitioner was even at the mercy of the accountants who were employed by the Trustee for the preparation of his own Form 1040's and K-1's, and because of this, incorrect and improper tax returns were filed on the Petitioner's "behalf." The controlling law in this case was established by Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct., 336 (1930), where the Court said:

But taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed--the actual benefit for which the tax is paid. . . . The income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.

The holding in Corliss has consistently been regarded as bedrock law by the tax courts. See for example, Grant Creek Water Works v. C.I.R., 91 T.C.. 322, 326 (1988) (Whether a taxpayer has received an interest in property that entitles him to investment tax credit and depreciation deductions depends on whether the benefits and burdens of ownership have passed to the taxpayer, citing Grodt & McKay Realty, Inc. V. Commissioner, 77 T.C. 1221, 1235-1238 (1981)); Hulter v. C.I.R., 91 T.C. 371, 388 (1988).

The facts in this case show that the Petitioner received no actual benefit from the use of the property, although he may technically have been the owner in 1997. The trustee had "actual command over the property taxed." The Petitioner had no command whatsoever over the property, and even lacked sufficient command to prepare his own tax returns. Under the orders of the bankruptcy court, it was the trustee who had "unfettered command " of the assets of V&M. Under Corliss, the assessment of a tax liability of $189,745 against Petitioner must be set aside.

The beneficial interests of the trustee and his business associated can be easily assertained from the records of the bankruptcy court. On September 19, 1997, the bankruptcy court awarded the trustee fees in the amount of $246, 087.00, and expenses in the amount of $5,867. In addition, the trustees law firm of Choate, Hall was provisionally awarded fees of $342,798.00 (Appendix C, Court order of September 19, 1997). Between September 1, 1997 and September 30, 1997, the trustee paid $457,700 various parties for administrative expenses in running the affairs of V&M, including a $129, 200.00 payment to himself. Between November 1, 1997 and November 31, 1997, the trustee paid an additional administrative sum of $289, 620, including a $77,000 payment to himself. (Appendix D, Monthly Report ending November, 1997: exert). In short, the trustee was paying himself $77,000 a month to operate V&M Management. In light of these extraordinary sums for management fees, it would be absurd to assert that the trustee did not have a beneficial interest in the property. Under the controlling law, any assessment for the sale of the assets of the corporation must be directed to the trustee, and not to the Petitioner.

3. The Petitioner is entitled to a set-off of all business related expenses for professional and management services incurred in 1997

4. The 1997 return and K-1 filed by the trustee for 1997 (Stipulation of Facts, Exhibit J-6) shows an item on line 19 of the 1120S indicating $1,004,242 in "other deductions." The Federal Statement attached as the third from the last page of Exhibit 6-J shows "Bankruptcy expenses and corporate expenses" with no further explanation. As Appendix D shows, in two months alone in 1997, the trustee incurred business expenses for management fees and professional expenses for V&M of $761,000. The September 19, 1997 court Order Allowing Fees of Stephen Gray, Trustee shows a total disbursement of $251,954. for professional fees and management services on behalf of V&M (APPENDIX E). Under the Code, these are all deductible business expenses for V&M Management and should have been reported as deductions on the 1120S for 1997. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8 (1933); American Savings Bank v. CIR, 56 TC 828 (1971); Smith-Bridgeman and Co. v. CIR, 12 TC 287 (19511). Insofar as these deductions were not reported, the Petitioner, under the theory of attributable income advanced by the IRS, is entitled to these set-offs against the income generated by the sale of the real property. For this reason, the deficiency, if the court finds that a deficiency exists, must be recalcuated.

D. Petitioner is Entitled to be Awarded a Low Income Housing Credit for 1997 and Previous Years

1. The reservation of low income tax credit in 1997 requires that a substitute tax return be prepared on Petitioner's behalf, and that the proportional amount of the tax credit be attributed to the Petitioner.

a. Factual Background

The Petitioner organized V&M Management (hereafter: V&M) was organized as a Massachusetts corporation on July 6, 1981 (Stipulation of Facts, No. 6). On December 11, 1981, V&M Management acquired a 275 unit apartment complex, known as Mandela Apartments, from the Secretary of Housing and Urban Development (hereafter: HUD) (Stipulation of Facts, No. 8). V&M owned and operated the complex (Stipulation of Facts, No. 7). The Petitioner was at all times hereinafter relevant the sole shareholder of V&M , a sub-chapter S corporation (Stipulation of Facts,
No. 5).

At the time of the sale to V&M, HUD was subject to Massachusetts urban renewal planning, and could not have sold the property without a public hearing and without having brought the property up to code in accordance with Mass. Gen. Statutes Sec. 121A (Transcript of Proceedings, May 20, 2002, hereinafter, "Tr.," p. 16-17) . Rather than proceeding under Sec. 121A, HUD sold the property directly to Petitioner and his two partners for one million five hundred thousand dollars less than the highest bid for the property in order to promote minority ownership (Tr., p. 17).

Eventually, Petitioner became the sole shareholder in V&M (Tr., p. 17). HUD retained management control, and informed Petitioner that they would retain management control until the HUD mortgage was paid off (TR., p. 17). In 1984, Petitioner refinanced the mortgage for approximately two million dollars, paid off the HUD mortgage, but HUD retained management control until 1987 (TR, pp. 16, 17).

Because Petitioner had no experience in operating federally-subsidized Section 8 housing he determined to sell the property, and in 1984, found a buyer willing to pay three million, seven hundred thousand dollars for the Mandela Apartments (TR., p. 18). In the course of the negotiations, the buyer asked if the property were subject to 121A, and the Petitioner said that the property was not subject to Sec.121A, since the purchase from HUD had not been subject to Sec. 121A, and the Petitioner had only been receiving city of Boston excise tax statements, rather than statements relating to Sec. 121A (Tr., 18). The buyer, quite naturally, wanted some kind of letter from the Boston Housing Authority indicating that the property was not subject to Sec 121A (TR., p. 18). When the Petitioner went to the BRA, he was told that not only was the property subject to Sec 121A, but that HUD owed about one million, seven hundred thousand in back taxes since 1970, and that not transfer of the property would be permitted without BRA approval (TR., p. 18).

An action was brought in state court on the contract, and eventually, the court found that the contract was void, in part based upon findings that the BRA had tried to make a back room deal with the buyer in which the BRA would approve the transfer if the buyer transferred certain other properties to the BRA (TR., p.

Because the Petitioner was unable to transfer the property unless the debts which had been accumulated under HUD management were paid, the Petitioner arranged for the payment of the HUD taxes and the back taxes under Sec. 121A since 1981. The Petitioner then obtained a commitment letter from a bank in Washington which would have allowed him to pay off all the debts of V&M (Tr., p. 20), but HUD refused to approve the refinancing of the property (Tr., p. 20).

In 1990, the State Attorney General, in conjunction with the BRA, filed for a receivership and for payment of the Sec. 121A taxes in state court (Tr., p. 20). Over the next few years, the Petitioner spent approximately one million eight hundred thousand in attorney's fees on various litigation arising out of the Mandela Apartments and the attempts by the State and the BRA to take it over (Tr. P. 20). Eventually, the receivership was not allowed (Tr., p. 20).

Although efforts by the BRA o control the Mandela Apartments had failed, an action was subsequently brought in the state court by a junior mortgagor who had a note for $50,000, with a principal of $150,000. The junior mortgagor claimed that the total due was one million, three hundred and fifty thousand dollars (Tr., p. 20). The state court refused to compel the parties to settle on a payoff figure, and the trial court told the junior mortgagor that he could proceed with a foreclosure (Tr., p. 21). At that time, the Petitioner was receiving over $200,000 a month from HUD, had an annual income in excess of 2 million dollars, and was financially capable of paying a reasonable settlement figure (Tr., p. 21).

Because of the threatened foreclosure, the Petitioner was forced to bring V&M into the bankruptcy court under Chapter 11 (Tr., p. 21). The bankruptcy proceeding was filed on January 8, 1996 under the title "In the Matter of V&M Management, Debtor, Case No. 96-10123" (Stipulation of Facts, No. 9). None of the direct creditors, icluding the principal mortgage holder Winter Hill Bank, asked for the appointment of a trustee, but the BRA, the State Department of Revenue, and the City of Boston all intervened and asked for the appointment of a receiver (Tr. p. 22). Based on claims that the Petitioner had mismanaged the property in 1984 (when HUD had management control), and claims in the newspapers that the Petitioner had taken $995,000 of project funds for his own use in 1995, the bankruptcy judge ordered a trustee appointed (Tr., p. 22). Stephen Gray was named as the Chapter 11 Trustee by the court (Stipulation of Facts, No. 10). Contrary to what the newspapers had reported, the project in fact lost $81,000 in 1995 (Tr., p. 23). When the trustee was first appointed, he set a value on the property of $100,000, and wanted to auction it immediately (Tr., p. 33). Petitioner obtained refinancing commitment letters for $5 million, which forced the trustee to create a bankruptcy plan. When the trustee submitted his plan, the Petitioner obtained a refinancing commitment of $9 million (Tr., 33-34). As the Petitioner stated at the hearing, "Money was never my problem." (Tr., p. 34).

While the bankruptcy matter was proceeding, Petitioner discovered through a third party that the Trustee was in fact represented in other matters by Petitioner's counsel, Hanify and King (Tr. p. 23). The Petitioner filed complaints with the Board of Overseers of the State Bar, and although no ruling was made concerning his counsel, the Board did determine that the trustee had filed false disclosure statements in the bankruptcy court (Tr., p. 23; Appendix. F, Letter from Bar Counsel to Petitioner, July 27, 1998, and supporting documents).

On June 22, 1997, a proposed plan of reorganization was filed by the trustee (Appendix G, Proposed Plan for Reorganization: exerts), which plan was approved by the bankruptcy court on September 26, 1997 (Stipulation of Facts 11). A copy of the order confirming the plan is attached as Appendix H, Order Approving the Plan). Under the plan, the trustee was immediately authorized to dispose of the assets of V&M (Order Approving Plan, Appendix H, paragraphs 13, 18).

On December 18, 1997, a Deed of improvements was signed by the trustee granting the Mandela Apartments to Beacon (Exhibit 9-J, Second Stipulation of Facts).

b. The Petitioner was essentially held hostage by the trustee, and had no legal recourse to assert his claim to the tax credits

Even before being authorized by the court to dispose of the property, the trustee had taken it upon himself on August 26, 1997, to request an allocation of low income housing credits (Exhibit 8-J, Second Stipulation of Facts). Submitted with the application were various documents to support the application, including an application itself (Exhibit 8-J). The application was made on behalf of V&M Management, although the trustee seemed to be confused as to who actually controlled the development, at one point stating that "The site is owned and controlled by V&M Management," and at another point, stating that "site control resides exclusively in the Trustee." (Exhibit 8-J).

Regardless of what confusion may have existed in the mind of the trustee, the facts are not seriously in dispute by the parties here. As of August 26, 1997, the Petitioner, as the only shareholder in V&M, owned the property of the Mandela Apartments; the trustee, as empowered by the bankruptcy court, had exclusive and plenary power to manage and control the corporation, as well as the exclusive power to manage the apartment complex.

This arrangement put the Petitioner in the position of essentially being held hostage by the trustee and his accountants. The trustee prepared the 1120-S tax forms for V&M Management for the years 1995 through 1999 (Stipulation of Facts, 16). Thus, any income, losses, credits or other pass-throughs of the sub-chapter S corporation were determined exclusively by the trustee and his accountants, and the tax liability of the Petitioner was totally in the hands of the trustee and his accountants.

As the trustee apparently understood the law, and as the IRS argues here, V&M was not liable for any taxes due, but rather, Petitioner would be held personally liable. Thus, there was no incentive whatsoever for the trustee or his accountants to utilize any past credits or balances to offset any tax liability incurred by the Petitioner.

When the IRS recalculated a substitute 1997 tax return for V&M, the IRS found that although the trustee had been preparing V&M's returns since 1995, there was $965,226 in interest expense, $433,167 in net operating cost carryover, and $4,150 in standard deductions which had not been applied to V&M and the Petitioner by the trustee and his accountants (Appendix I, Substitute Tax Calculations, page 3). It should have been obvious to the accountants for the trustee that these credits and allowances didn't just vanish into thin air after 1995. The gross negligence of the trustee and his accountants deprived the Petitioner of $1,402,543 in deductions and set-off to which he was legally entitled in 1996 or 1997.

This pattern of ignoring the financial rights and interests of the Petitioner continued with regard to the Petitioner's right to assert a claim for the low income housing tax credits. Under Sec. 42(b) of the Code, only a "taxpayer" can apply for a low income credit. This language is carried on through the low income credit provisions. No place does it say that a manager of low income housing can apply for a credit, the Code is restricted to owners and taxpayers. Thus, if the trustee had any right to apply for the credit in 1997, it could only be on behalf of V&M Management, and if this Court agrees with the argument of the IRS that the income from the sale of the assets of V&M must be passed through to Petitioner, then by parallel reasoning, the benefits of the tax credits must be passed through to Petitioner as well (Code Sec. 1366(b)).

But, as the facts have shown, the Petitioner was unable to force the trustee to follow the tax code with regard to reporting, and was unable to force the trustee to follow the procedures necessary to proceed with the allocation of a tax credit.

Nonetheless, the Low Income Housing Tax Credit Program of the Commonwealth, based on the trustees submissions, did make a conditional reservation for 1997 of low income tax credits (Exhibit 10-J, Second Stipulation of Facts). The reservation was made on the condition that the partnership (essentially Beacon) show ownership, and that the proper basis be established by December 1, 1997. The letter from counsel for the partnership demonstrated that the conditions had been met (Exhibit 10-J, supra). But if the present argument of the IRS is correct, that V&M and hence the Petitioner, were owners of the property until the deed was executed, then any tax credit for 1997 through December 18, 1997 should have been imputed to, or allocated to, V&M and passed through to the Petitioner.
Sec. 42(f)(4) of the Code permits a proportional distribution of a tax credit which is allowable under section (a) when a building is disposed of during a tax year. Here, of course, Petitioner's right to the credit arises under the Code provisions governing ten year ownership of pre-existing buildings, but the general principle is the same. The Petitioner would have been allowed a tax credit, and indeed, a tax credit was reserved by the trustee, and the Petitioner would have received the tax credit, but for the indifference and gross negligence of the trustee. Since the Petitioner has no remedy in any other court, the proper remedy lies here.

Therefore, the Petitioner is requesting that this court remand this matter to the IRS with instructions that, under its general supervisory responsibilities for the administration of the tax code, the IRS determine the amount of credit that was set aside for the partnership, and use this credit as a set-off against the purported income from the sale of the assets. Of course, the IRS will argue that the credit was never actually received by the Petitioner, and so it cannot be used as a set-off. But this is simply the mirror of the argument that the IRS is making with regard to income from the sale--regardless of whether Petitioner received the income, he still has to pay taxes on it. The purpose of the tax laws is not only to collect revenue, it is to assess tax liability in an equitable manner. The only remedy which will provide that measure of equity is the attribution of the reserved tax credits for 1997 to the Petitioner, and the completion of a substitute tax return for 1997.

2. The Petitioner should be permitted to file substitute or amended returns for 1994 through 1996 in order to claim the tax credits

The Internal Revenue Code does not explicitly provide either for a taxpayer's filing, or for the Commissioner's acceptance, of an amended return; instead, an amended return is a creature of administrative origin and grace. Badaracco v. Commissioner, 464 U.S. 386, 393, 104 S.Ct. 756 (1983), citing Hillsboro National Bank v. Commissioner, 460 U.S. 370, 378-380, n. 10 (1983). The ability of a taxpayer to correct a return in a subsequent year for unclaimed credits in a prior year is recognized in the tax regulations at 26 C.F.R. Sec. 1.461-1(3), which states:

If a taxpayer ascertains that a liability should have been taken into account in a prior taxable year, the taxpayer should, if within the period of limitation, file a claim for credit or refund of any overpayment of tax arising therefrom.

Although the regulation speaks of a "claim," it is clear from the next sentence that the method employed should be that of an amended return.

E. The Petitioner should be entitled to roll back the 1998 low income credits as a set-off against the attributed income from the sale of the property.

In 1998, the trustee or Beacon filed a 1120S and a K-1 on behalf of Petitioner and V&M Management (Exhibit 7-J, Stipulation of Facts). In 1999, the trustee or Beacon filed a 1120S and a K-1 on behalf of Petitioner and V&M Management (Exhibit 20-J, Second Stipulation of Facts). In both cases, there were net losses to V&M Management. If, as the IRS argues, V&M still exists as a taxable entity, and if, as the IRS argues, Petitioner is still the taxpayer for purposes of subchapter S tax assessments, then as the taxpayer, Petitioner is also the recipient of the tax credit benefits for 1998 under Sec. 42(a).

Section 39 of the Code allows a taxpayer to rollback for one year, or rollforward for five years, tax credits and allowances. The low income housing credits were never disallowed, they have simply expired with regard to the taxable year in question. Section 196(a) authorizes deductions for carryforward credits which have expired, MCI Communications v. United States, 26 F. Supp. 2d, 6, 12-13 (D.C., 1998), citing B.F. Goodrich Co. V. United States, 94 F.3d 1545, 1551 (Fed. Cir., 1996). Similarly, if the taxpayer has never had the credit disallowed, then under Sec. 39, he should be entitled to a rollback as well. If the tax payer, in this case Petitioner, elects to make such a rollback, then an amended return must be filed.

F. The Court should order an audit of the returns of the Trustee for 1995 through 1997.

Since the inception of this matter, the Petitioner has been seeking a full audit of the financial affairs of the trustee, Stephen Gray. He has requested such an audit from the IRS many times, and has provided the IRS with documents that show that the trustee has misrepresented facts pertaining to his trusteeship, has prepared tax documents which in fact were incorrect and false, and has not reported income which should have been reported and has taken expenses which were not in fact paid. The records of the IRS are replete with letters and documents from the Petitioner showing that essentially, the Petitioner would maintain, the trustee has committed tax fraud which has injured the Petitioner.

The Petitioner recognizes that he has no direct remedy or cause against the trustee in this court as the trustee is not a party. However, the general supervisory power of the IRS and its investigative branch should be brought to bear on what Petitioner sees as little more than a taxpayer scandal. This court has and can review the records of the IRS, and can take judicial notice of the efforts of the Petitioner to force this matter to an investigation. This court has the power to order the IRS, which is a party here, to undertake at least an examination to determine if a full audit and investigation is called for.

G. Conclusion

For the foregoing reasons, the deficiencies assessed against the Petitioner should be set aside and the other remedies sought by the Petitioner fully granted. The Petitioner has been litigating this matter for many years in an attempt to recover his property and assert his legal rights. He would like to draw this matter to a close as quickly and finally as possible both as a matter of his health, but also as a matter of his future life. For these reasons he seeks an expeditious ruling in his favor on all the issues.

Dated: ______________________ By: ______________________________