Attorney-at-Law

THE BIG FREEZE

In Uncategorized on 08/13/2013 at 18:36

No, not the way the universe will end when, according to some theorists, the universe will have expanded such that all heat will be so evenly distributed that none is left to do any work and everything stops.

No, this is the story of Dr. Woody and Dr. Kumar, two battling oncologist radiologists, and how Judge Vasquez decides Dr. Kumar’s tax fate, in Ramesh T. Kumar and Pushparani V. Kumar , 2013 T. C. Memo. 184, filed 8/13/13.

Woody and Ram were shareholders, 60-40, in a sub S. As is not unusual among partners, a dispute arose and Woody froze Ram out, told him nothing, and gave him nothing except a K-1 for $215K in ordinary business income and $2k in interest.

Of course Woody gave Ram no cash. So Ram sued, got an accounting, and settled by selling his stock to the sub S in complete redemption of his interest.

Ram never reports the business or interest income from the K-1, and IRS issues a deficiency, but following my blogpost “Don’t Get Yourself Into A State”, 5/11/11, IRS concedes the penalty.

But Ram owes the tax.

Judge Vasquez: “Petitioners argue that they are not liable for tax on [the S Corp’s] income because Dr. Kumar was not the beneficial owner of his [S Corp] shares in 2005. When the record owner of S corporation stock holds that stock for the benefit of another, such as a nominee, an agent, or a passthrough entity, then income, losses, deductions, and credits of the corporation are passed through not to the record owner but to the beneficial owner of the stock. A taxpayer is the beneficial owner of property if the taxpayer controls the property or has the economic benefit of ownership of the property. We have previously noted that cases applying the beneficial ownership test involve an arrangement between parties who had some agreement or understanding regarding their relationship with each other.” “ 2013 T. C. Memo. 184, at p. 6. (Citations and name omitted).

Ram argues that because Woody froze him out, Woody grabbed his beneficial ownership.

No go, says Judge Vasquez: “However, petitioners have not cited any cases, nor are we aware of any, where one shareholder was able to take beneficial ownership of stock away from another shareholder absent an agreement between the two shareholders or a provision in the corporation’s governing articles to that effect. On the contrary, we have held that when one shareholder merely interferes with another shareholder’s participation in the corporation as a result of a poor relationship between the shareholders, such interference does not amount to a deprivation of the economic benefit of the shares.” 2013 T. C.Memo. 184, at p. 7. (Citation omitted).

Ram and Woody never agreed. So Ram is on the hook for the tax and interest. And since he stipulated when he settled with Woody that each would bear his own tax consequences, he’s out there by himself.

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