Attorney-at-Law

HOWDY, PARTNER

In Uncategorized on 07/23/2013 at 17:36

It’s that simple to form a partnership for Federal income tax purposes, whatever State law may say. That’s the story from The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being (and this time doesn’t mess up the partitive genitive), His Honor Mark V. Holmes.

Oh yes, the case in point is Abdolreza T. Azimzadeh and Zohra Ehsan, 2013 T. C. Memo. 169, filed 7/23/13. The partnership story is all about Ab; Zohra is in it only for some W-2 wages she never bothered to report.

Ab isn’t big on recordkeeping, and that sinks a lot of his used-car dealings, with Judge Holmes preparing his usual tables.

Ab claims he was partners with Ray Barghi, or maybe Ray’s car business Luxury For Less.  If Ab was partners with Ray or LFL, his tax bite would be less, as Ray would be in it with him.

IRS says State law (California) should decide the partnership question.

“The Commissioner doesn’t think that Azimzadeh and Barghi were partners, and asked us to look at California law to see if they were. But federal tax law, and only federal tax law, controls the classification of  ‘partners’ and ‘partnerships’ for federal tax purposes.” 2013 T. C. Memo. 169, at p. 5. (Citations omitted.)

Judge Holmes goes on: “A partnership is a business entity with two or more owners. The business entity requirement doesn’t mean that the partnership needs to exist separately from its owners or otherwise be recognized under state law…, so it’s not fatal that Azimzadeh and Barghi didn’t form a separate state-law entity to do business. Rather, the hallmark of a partnership is that ‘the participants carry on a trade, business, financial operation, or venture and divide the profits therefrom.’” 2013 T. C. Memo. 169, at pp. 5-6 (Citations omitted).

Well, Ray could sign the business checks and did write himself a bunch of checks, some of which he labeled “Draw”, and he was around, but Barghi never shows up to testify. And there’s no written agreement, and Ab’s recordkeeping, as aforesaid, is almost non-existent. And of course Ab never filed a Form 1065 or issued K-1s. So Judge Holmes can’t tell what Ray contributed, or what he did, and Ab’s testimony doesn’t help.

In fact, Ab has “dented” his credibility generally. “Azimzadeh actually admitted at trial that he had changed the dates on numerous receipts that he had given to the Commissioner. We find this admission credible, and its natural effect is to reduce the weight we give his testimony on this and other issues.” 2013 T. C. Memo. 169, at p. 22, footnote 6.

Remember the Luna factors? If not, see my blogpost “Substance Over Form”, 2/11/11, where Judge Haines “distills” the Luna factors for deciding who is a partner and what is a partnership.

Burden of proof  is on Ab, and he flunks. No partnership.

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