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UNITED STATES TAX COURT

SEP 13, 2002
ALPHONSE MOURAD,
Petitioner,

v. docket No. 7873-01

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

BRIEF FOR RESPONDENT

E. JOHN WILLIAMS, JR.
Chief Counsel
Internal Revenue Service
OF COUNSEL:

KEVIN M. BROWN Division Counsel
(Small Business/Self-Employed) LINDA R. DETTERY Area Counsel (SBSE) MAUREEN T. O'BRIEN Associate Area Counsel (SBSE) MARY P. HAMILTON
Acting Associate Area Counsel (SBSE) STEVEN M. CARR Attorney (SBSE) 10 Causeway Street Room 401 Boston, MA 02222-1061
(617) 565-7838

CONTENTS
PRELIMINARY STATEMENT ..................... 1
QUESTIONS PRESENTED ...................... 2
RESPONDENT'S REQUEST FOR FINDINGS OF FACT ........... 3
ULTIMATE FINDINGS OF FACT ................... 6
POINTS RELIED UPON ...................... 7
ARGUMENT ........................... 9
I. Petitioner realized a capital gain in the amount
of $2,088.554 from the sale of assets by his S-
Corporation, V&M Management, Inc. ............ 9
II. Petitioner is not entitled to a low-income housing credit for the 1997 tax year. ............. 11
III. Respondent did not waive all claims for payment of
petitioner's income tax for 1997 at a September 26.
1997 Bankruptcy Court confirmation hearing....... 15
CONCLUSION ......................... 18

CITATIONS
CODE SECTIONS:
I.R.C. § 38 ........................ 11
I.R.C. § 42 ...................... 11, 12
I.R.C. § 42(h)(l)(A) ................... 13
I.R.C. § 1366 ........................ 10
I.R.C. § 1399 ......................... 9
I.R.C. § 6012(b) (3) .................... 9, 10
I.R.C. § 6062 ........................ 10
REGULATIONS:
Treas. Reg. §1. 42-1T (a) (2) .................12
Treas. Reg. §1. 42-1T (d) (8) ................13
Treas. Reg. §1.42-lT(e) ....................... 12
Treas. Reg. §1. 42-1T (h) (2) ...............'13
MISCELLANEOUS:
11 U.S.C. § 1104(a) ...................... .....9
Staff of Joint Comm. on Taxation^ General Explanation of the Tax Reform Act of 1986 at 152 (J. Comrn. Print 1987) ....... 11
T.C. Rule 142(a) ....................... 9
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UNITED STATES TAX COURT
ALPHONSE MOURAD,)
Petitioner, v. Docket No. 7873-01

COMMISSIONER OF INTERNAL REVENUE,
Respondent.
BRIEF FOR RESPONDENT
PRELIMINARY STATEMENT
This is a case for a redetermination of a deficiency determined by respondent for the taxpayer's 1997 tax year in the amount of $189,745.00.
The trial was held before Judge Robert P. Ruwe in Boston, Massachusetts on May 20, 2002. The evidence consists of the Stipulation of Facts and attached exhibits, the Second
a
Stipulation of Facts and attached exhibits, and the testimony of petitioner Alphonse Mourad.
The Court ordered the parties to file simultaneous opening briefs on or before July 22, 2002. The due date for the opening briefs was extended by the Court, on petitioner's motion, until September 13, 2002. No other briefs have been ordered by the Court.
Since no concessions have been made, a Rule 155 computation will not be necessary in this case.

Docket No. 7873-01
QUESTIONS PRESENTED
1. Whether petitioner realized a capital gain in the amount of $2,088,554 from the sale of assets by his S-Corporation, V&M Management, Inc.
2. Whether petitioner is entitled to a low-income housing credit for the 1997 tax year.
3. Whether respondent waived all claims for payment of petitioner's income tax for 1997 at a September 26, 1997 Bankruptcy Court confirmation hearing.
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Docket No. 7873-01
RESPONDENT'S BEQUEST FOR FINDINGS OF FACT
(1) At the time the amended petition in this case was filed on July 17, 2001, petitioner resided at 125 West Street, Hyde Park, Massachusetts 02136. (First Stip., par. 1)
(2) Petitioner did not file an individual income tax return (Form 1040) for 1997. :?irst Stip., par. 2)
(3) A substitute for return was prepared by respondent for petitioner's 1997 year. (First Stip., par. 3; Ex. 1-J)
(4) The respondent issued a notice of deficiency by certified mail to the petitioner for taxable year 1997 on August 13, 2001. (First Stip., par. 4; Ex. 2-J)
(5) Petitioner was the sole shareholder of V&M Management, Inc. (hereinafter referred to as "V&M"). (First Stip., par. 5)
(6) V&M was a sub-chapter S corporation organized as a Massachusetts corporation on July 6, 1981. (First Stip., pars.
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5,6)
(7) V&M, doing business as Vasquez Development Company, Inc., acquired title to the Mandela Apartments, a 275 unit apartment complex in F.oxbury, Massachusetts, from the Secretary of Housing and Urban Development on December 11, 1981. (First Stip., pars. 7,8)
(8) On January 8, 1996, V&M filed a Chapter 11 petition in the United States Bankruptcy Court, District of Massachusetts,
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Docket ^:=. 7873-01
Boston, entitled "In the Matter of V&M Management, Inc., Debtor,
Case Nc. 96-10123". (First Stip., par. 9)
(?' Stephen S. Gray was named as the Chapter 11 Trustee of V&M by ihe Bankruptcy Court. (First Stip., par. 10)
(10} A Chapter 11 plan was confirmed on September 26, 1997. (First Slip., par. 11)
(11) The respondent had no objection to confirmation of the Chapter 11 plan, in that all of its administrative claims were to be paid in full, with interest and penalties. (First Stip., par. 12)
(12' Respondent filed a Proof of Claim showing claims for unpaid employment tax (FICA and FUTA) with the U.S. Bankruptcy Court ;r. July 3, 1996. (First Stip., par. 13; Ex. 3-J)
(13) Respondent filed a Proof of Claim showing claims for unpaid employment tax (FICA and FUTA) with the U.S. Bankruptcy Court ;r. June 18, 1997. (First Stip., par. 14; Ex. 4-J)
;14) Stephen S. Gray, as Chapter 11 Trustee of V&M sold the Mandels Apartments to Mandela Homes Limited Partnership on December 18, 1997. (Second Stip., par. 2, Ex. 9-J)
,15) The Trustee appointed by the Bankruptcy Court for V&M hired =-- accountant who prepared V&M's Forms 1120-S and the associated K-ls for the' years 1995 through 1999., None of the tax

Docket No. 7873-01
returns contained a claim for low-income housing credits. (First
Stip., par. 16; Exs. 6-J, 7-J, 18-J, 19-J, 20-J)
(16) The petitioner authorized the preparation of and personally signed V&M's Form 1120-S for the year 1994. The tax return did not contain a claim for low-income housing credits. (Ex. 17-J)
(17) The gain from the sale of the Mandela Apartments was reflected on the V&M tax return for 1997 and petitioner's K-l associated with that tax return. (Ex. 6-J)
(18) V&M never applied for an allocation of low-income housing credits. (Tr. 39)
(19) V&M never received a Low-Income Housing Credit Allocation Certification (Form 8609). (Tr. 40)
(20) Neither V&M nor petitioner ever attached a Low-Income Housing Credit Allocation Certification (Form 8609) to their tax returns. (Tr. 40; First Stip., pars. 17-18; Exs. 6-J; 7-J; 17-J;
18-J; 19-J; 20-J; Second Stip., pars. 10-13)
(21) Petitioner never claimed low-income housing'credits on his personal tax returns (Forms 1040) for the tax years 1981 through 1997, the time during which V&M owned the development. (Tr. 40)
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Docket No. 7873-01
ULTIMATE FINDINGS OF FACT
(22) The sale of capital assets in 1997 by ViM Management, Inc., a sub-chapter S corporation wholly owned by ^he petitioner, resulted in the realization of capital gain in 19;'" to the petitioner. (Entire record)
(23) The petitioner never requested, nor does he qualify for, a low-income housing credit for his 1997 taxable year. (Entire record)
(24) The respondent has never waived claim t; payment of petitioner's 1997 income taxes, either in a Bankr-c^cy Court proceeding or at any other time. (Entire record)
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Docket No. 7873-01
POINTS RELIED UPON
Petitioner failed to file an individual income tax return (Form 1040) for 1997 and the respondent prepared a substitute for return for that year as described below.
Petitioner was the sole shareholder of V&M Management, Inc. (hereinafter referred to as "V&M"), a Massachusetts sub-chapter S corporation. V&M acquired title to the Mandela Apartments, a 275 unit apartment complex in Roxbury, Massachusetts, from the Secretary of Housing and Urban Development on December 11, 1981.
On January 8, 1996, V&M filed a Chapter 11 petition in the United States Bankruptcy Court for the District of Massachusetts.
Stephen S. Gray was named as the Chapter 11 Trustee by the Bankruptcy Court. A Chapter 11 plan was confirmed on September 26, 1997. The respondent did not object to confirmation of the Chapter 11 plan, in that all of its claims against the
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corporation (for unpaid employment taxes) were to be paid in full, with interest and penalties. The Chapter 11 Trustee of V&M sold the Mandela Apartments to Mandela Homes Limited Partnership on December 18, 1997.
The Trustee appointed by the Bankruptcy Court for V&M prepared V&M's Forms 1120-S and associated K-ls for the years
^
1995 through 1999. None of the tax returns contained a claim for low-income housing credits. V&M's Form 1120-S for 1994, as well

Docket No. 7873-01
as the petitioner's associated K-l, was prepared by its own accountant and was signed by the petitioner. Similar to the later tax returns filed by the Chapter 11 Trustee, the 1994 tax return did not contain a claim for low-income housing credits.
Gain in the total amount of $2,088,554 from the sale of the Mandela Apartments was properly reflected on the V&M tax return for 1997. The gain was composed of section 1231 gain of $1,794,602 and a long term capital gain of $293,952. The gain properly flowed down to petitioner via his 1997 Schedule K-l.
The respondent used information from the petitioner's 1997 K-l to prepare the substitute for return and the notice of deficiency for the petitioner. After negative adjustments for petitioner's carried forward interest expense deduction of $965,226 and net operating loss of $433,167, in addition to the standard deduction of $4,150, petitioner's corrected individual
«
taxable income was properly determined to be $686,011 for the 1997 year. The respondent issued a notice of deficiency showing petitioner's deficiency of $189,745 on August 13, 2001.
Neither V&M nor petitioner ever applied for an allocation of low-income housing credits or claimed such credits on their tax returns.
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Docket No. 7873-01
ARGUMENT
I. Petitioner realized a capital gain in the amount of $2,088.55- from the sale of assets by his S-Corporation. V&M Management, Inc.
Respc-.dent has asserted that petitioner realized a gain in 1997 through his S corporation. On this issue and all issues in this case, petitioner bears the burden of proof. T.C. Rule 142(a) .
The Bankruptcy Code permits the Bankruptcy Court to order the appointment of a trustee at any time prior to the confirmation of a plan at the request of a party in interest or the United States Trustee, after notice and a hearing. 11 U.S.C. § 1104(a). The Bankruptcy Court can order the appointment of a trustee c-.ly 1) for cause, including fraud, dishonesty, incompeter.ze or gross mismanagement of the affairs of the debtor
*
by currer--: management or 2) if it in the best interests of creditors, equity security holders and the estate. Id. Although no separate taxable entity is created in a corporate Chapter 11 reorganization pursuant to I.R.C. § 1399, trustees in bankruptcy who have possession or hold title to substantially all of the property =r business of a corporation are required to file or make returns for the corporation. I.R.C. § 6012(b)(3). The
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Sccket No. 7873-01
trustee is authorized to sign the returns on behalf cf the debtor
corporation. I.R.C. §§ 6062 and 6012(b)(3).
In the present case, a trustee, Stephen S. Gray, was appointed by the Bankruptcy Court while V&M was still operating izs business. The trustee filed tax returns on behalf of V&M. However, a separate taxable entity was not created by the corporate reorganization under Chapter 11 of the Bankruptcy Code. Thus, V&M's income is taxed as it would have been outside of the bankruptcy.
Generally, the income of a corporation electing Subchapter S status is not taxed at the corporate level, but is passed through and taxed to its shareholders in a manner similar to a partnership. I.R.C. § 1366. Items of income, loss, deduction and credit are generally passed through to shareholders and must ce included on the shareholders' tax returns in the same manner
*
as received, paid or incurred by the corporation. Id. Because VaM was an S corporation, the Forms K-l issued to the petitioner accurately attributes the income of V&M to him individually.
The respondent accepted as filed the tax return prepared by the trustee for V&M for the 1997 tax year. The K-l associated with the 1997 tax return was used to compute the petitioner's tax liability for that year'. The petitioner has not disputed the accuracy of V&M's 1997 tax return nor filed an amended tax return
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Docket No. 7873-01
on behalf of V&M. The petitioner only disputes the fact that the
income generated by V&M's transactions is taxable to him as the
sole shareholder of V&M. Unfortunately for the petitioner, this
treatment is squarely in line with the relevant law on the
subject.
II. Petitioner is not entitled to a low-income housing credit for the 1997 tax year.
At the trial of this matter, petitioner stated that if he is liable for gain on the sale of V&M's housing development, then he should be entitled to claim low-income housing credits. As the discussion below explains, this statement is erroneous and is not 'founded in law.
Under I.R.C. §42 (the "Low-Income Housing Credit") and §38 (the "General Business Credit"), the owner of a newly constructed
*
or substantially rehabilitated qualified low-income housing project may, upon compliance with many specific requirements, claim a nonrefundable income tax credit. The low-income housing credit was put into place by the 1986 Tax Reform Act to give private investors incentive to build or rehabilitate low-income housing developments. Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986 at 152 (J. Comm. Print 1987). However, the credits are not automatically available to
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Docket No. 7873-01
any taxpayer who owns a housing develop~.ent. The provisions set out under I.R.C. § 42 are extraordinarily complex and are meant to ensure that only taxpayers who comply with certain specific requirements will be able to benefit frcr. low-income housing credits. Although it appears that the petitioner failed to comply with I.R.C. §42 in many ways, iz is not necessary to discuss them all. Therefore, the respcr-dent will refrain from discussing all the intricacies and workings of section 42. Because the petitioner failed to meet ^he threshold requirements set forth under that section, only those requirements will be discussed below.
Low-income housing credits are al-ccated by state or local agencies to qualified projects within zl'.eir region. According to the Treasury Regulations under section 42, " [g]enerally, the low income housing credit determined under section 42 is allowed and
*
may be claimed for any taxable year if, and to the extent that, the owner of a qualified low income bui-ding receives a housing credit allocation from a State or local housing credit agency." Treas. Reg. §1.42-1T(a) (2) . Furthermore, "[a]n owner of a qualified low-income housing building r.ay not claim a low-income housing credit determined under sectior. 42 in any year in excess of an effective housing'credit allocation received from a State or local housing credit agency." Treas. Reg. §1.42-lT(e).
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Docket No. 7873-01
Under I.R.C. § 42 (h)(1)(A) and the above quoted regulations, a taxpayer otherwise eligible to claim the low-income housing credit must receive an allocation from the appropriate state or local agency before taking the credit. (It should be noted for the sake of completeness that a very narrow exception for developments financed by tax-exempt bonds is set out in §42(h)(4), but the petitioner has not argued or produced any evidence that this exception would apply in this case.) The taxpayer must go through a rigorous approval process in order to obtain the allocation from the applicable agency. After the application has been successfully completed, the agency formalizes the allocation of credit through the use of a Form 8609 (entitled "Low-Income Housing Credit Allocation Certification".) Treas. Reg. §1.42-1T(d)(8). The agency completes Part I of the Form, stating that an allocation of
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credit has been made, and sends the Form to the owner of the development. Id. The taxpayer seeking to claim the credit must complete Part II of the Form 8609, which requires certifying to various other requirements set forth under section 42. Treas. Reg. §1.42-lT(h)(2). The taxpayer must file the Form 8609 and a Form 8586 (entitled "Low Income Housing Credit") with his or her tax return each year that the low-income housing credit is claimed. Id.
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Docket No. 7873-01
It is clear that the petitioner in this case has failed to overcome the first hurdle in claiming low-income tax credits. This failure is fatal to his claim that he is entitled to the credits. The petitioner testified that V&M never applied for an allocation of low-income housing credits. He testified that V&M never received a Low-Income Housing Credit Allocation Certification (Form 8609). He testified that neither V&M nor petitioner ever attached a Low-Income Housing Credit Allocation Certification (Form 8609) to their tax returns. Finally, petitioner testified that he never claimed low-income housing credits on his personal income tax returns for the tax years 1981 through 1997, the time during which his company owned the development. All of the above testimony is conclusive evidence that the petitioner was not entitled to claim the low-income housing credits for 1997.
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With respect to this issue, the respondent hereby renews his objections to certain of the exhibits submitted with the Second Stipulation of Facts. As stated in the Second Stipulation of Facts, the Respondent objects to Exhibits 8-J, 10-J, 11-J, 12-J, 13-J, 14-J, 15-J, 20-J, 21-J and 22-J under Federal Rule of Evidence 402 because they are irrelevant to this matter. Exhibits 8-J, 10-J, 11-J, 12-J, 13-J, 14-J, 15-J appear to be documents related to an unrelated taxpayer's attempts to secure
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Docket No. 7873-01
low-income housing credits for a year subsequent to the year at issue in this case. Exhibit 20-J is an unsigned "Client Copy" of a tax return for the 1999 tax year, two years after the year at issue. Not only is it unclear if this return was actually filed, it is for a tax year which is not at issue and therefore, has no bearing on the tax year at issue. Exhibit 21-J is irrelevant in that it is nothing more than a printout of V&M's corporate information on file at the Commonwealth of Massachusetts Secretary of the Commonwealth. Exhibit 22-J is irrelevant in that it appears to be nothing more than a record of Section 8 payments made on behalf of the residents of the housing development at issue in this case, information that is irrelevant to the issues of this case.
As stated in the Second Stipulation of Facts, the Respondent also objects to Exhibits 8-J, 10-J, 11-J, 12-J, 13-J, 14-J, 15-J
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and 22-J under Federal Rule of Evidence 802 because they contain inadmissible hearsay offered to prove the truth of the matter.,
III. Respondent did not waive all claims for payment of petitioner's income tax for 1997 at a September 26, 1997 Bankruptcy Court confirmation hearing.
Petitioner's assertion that respondent waived all claims for payment of petitioner's income tax for 1997 at the Bankruptcy
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Docket No. 7873-01
Court confirmation hearing has no support in fact or in law. This claim appears to refer to the fact that at the September 26, 1997 confirmation hearing for the Chapter 11 Plan of Reorganization, an attorney representing the respondent withdrew her objection to the Chapter 11 plan, stating that the respondent's administrative claim was going to be paid fully through the plan. Although the petitioner's assertion in this regard was not developed at the trial of this matter, it appears that the petitioner is confused about the legal relationship between the respondent's claims against V&M and those it has against the petitioner.
The respondent had asserted an administrative claim against V&M for employment taxes based upon wages paid by the corporation. The respondent asserted this claim during the bankruptcy and was to be paid in full through the plan. The
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respondent did not have any other claim against V&M in the corporation's bankruptcy case, because any income produced'by the corporation's activity had flowed through to the petitioner and was not taxable to the corporation. The fact that the corporation had no outstanding tax liability does not change the fact that the taxpayer is responsible individually for the gain generated by the sale of the corporation's property. The
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Docket No. 7873-01
petitioner's statement that the respondent waived its claims
against the petitioner is without merit.
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Docket No. 7873-01
CONCLUSION
It follows that the determir.ation of the Commissioner of Internal Revenue should be sustained.
B. JOHN WILLIAMS, JR.
Chief Counsel
Internal Revenue Service

Date:
SEP 1 2 2002

STEVEN M. CARR
Attorney (SBSE)
Tax Court Bar No. CS0441
10 Causeway Street
Room 401
Boston, MA 02222-1061
Telephone: (617) 565-7868

OF COUNSEL:
KEVIN M. BROWN Division Counsel
(Small Business/Self-Employed) LINDA R. DETTERY Area Counsel
(Small Business/Self-Employed:Ar5a 1) MAUREEN T. 0'BRIEN Associate Area Counsel (SBSE) MARY P. HAMILTON Acting Associate Area Counsel (S3SE)
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