In Uncategorized on 12/05/2016 at 16:53

I shift my hands in a horizontal plane while contemplating Chinweike Nwabasili, 2016 T. C. Memo. 220, filed 12/5/16. Chin and his brother ran an event-promotion (music performance) business and a car exporting business together, and Chin testifies they were partners, except Chin files his business income and expenses for both businesses on a single Schedule C.

This is not a good start, but Judge Morrison does find that Chin did make some business payments, like buying three cars to sell offshore, and hiring bars and similar venues, such as for “musician Flavour Nabania and his band to perform at the bar New Karibbean City in Oakland, California,…..” 2016 T. C. Memo. 220, at p. 4.

IRS agrees that Chin was in business but balks at Chin’s substantiation of expenses.

Though on the trial Chin claims he and his brother were partners, that’s the first IRS heard of it. IRS claims each brother had his own business.

Well, Judge Morrison found that the bulk of the expenses Chin claimed were business-type expenses and he paid them.

But how to deal with the losses?

“Nwabasili credibly testified that he and his brother were partners in the two businesses.  He credibly testified that he and his brother agreed to share the income and expenses of the two businesses.  He explained how they divided the tasks with respect to the businesses.  Although many of the business documents referred to his brother and not him, Nwabasili explained that this was because his brother was the front man for the businesses even though they considered themselves equal partners.

“We find that the brothers intended to join together to conduct the businesses.  The event-promotion business and the car-export business were conducted in partnership.” Order, at p. 13.

So the expenses are partnership expenses, there being no showing the brother-partners agreed that each should bear his own expenses, or so engaged as a course of conduct.

But there’s no way to compute partnership income, because Chin didn’t report everything the partners took in. Ditto the partnership expenses, and some items might be disallowable personal expenses.

“Even if we could calculate the partnership’s loss, we face another problem in determining the deductible portion of Nwabasili’s distributive share of the loss. Section 704(d) provides that a partner’s distributive share of a partnership loss is allowed as a deduction only to the extent of the adjusted basis of the partner’s interest in the partnership at the end of the tax year.

“To be entitled to his share of any partnership loss, Nwabasili had to have a sufficient adjusted basis in his partnership interest….  See sec. 704(d).  The basis of a partner’s interest in the partnership acquired by a contribution of money is initially equal to the money the partner initially contributed.  Sec. 722.  It is increased by any other contributions by the partner to the partnership.” 2016 T. C. 220, at p. 16.

And of course there is no information sufficient to calculate Chin’s adjusted basis in the partnership.

So no fix on partnership income, partnership expenses or Chin’s basis in the partnership.

OK, but nobody raised this on the trial.

“The IRS did not raise these matters regarding the difficulty of calculating Nwabasili’s distributive share of the partnership loss.  Normally we do not consider matters not raised by the parties.  We make an exception in this instance.  Nwabasili did not explain to the IRS until trial that he had a partnership with his brother.  He filed his tax return as if he was not in partnership with his brother.  This gave the IRS the false impression that his disputed Schedule C expenses related to businesses that were exclusively his and that he had paid the disputed expenses.  He manipulated documents in an attempt to show that he had made payments that were actually made by his brother….  Given Nwabasili’s subterfuge, it is understandable that the IRS remained skeptical of whether the disputed expenses related to Nwabasili at all, whether directly or through a partnership.  That the IRS did not contend that the disputed deductions should be evaluated under the partnership tax rules (subchapter K of the Internal Revenue Code, sections 701 to 777) and disallowed for lack of information about the partnership’s gross income, the partnership’s deductions, or the adjusted basis in the partnership, does not prevent us from holding that the deductions should be denied on these grounds.  After all, it was Nwabasili who presented persuasive evidence that his businesses were conducted in partnership with brother.  For us to sustain the deductions he seeks on the ground that his businesses were conducted not in partnership with his brother would be contrary to what he argued at trial.  And it would be contrary to our view of the reality of the business arrangements.  We believe that Nwabasili conducted his businesses in partnership with his brother.  Partnerships are taxed under the partnership tax rules.”2016 T. C. Memo. 220, 18-20.

Chin, you broke it, you own it. No pass-through.


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