Monahan v. Comm'r of Internal Revenue

• Decision Date: 23 October 1997
• Docket Number: No. 11062–95.,11062–95.
• Citation: 109 T.C. No. 11,109 T.C. 235
• Parties: John M. and Rita K. MONAHAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

109 T.C. 235

109 T.C. No. 11

John M. and Rita K. MONAHAN, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 11062–95.

United States Tax Court.

Oct. 23, 1997.

F. Michael Kovach, Jr., for petitioners.

Cathy A. Goodson, for respondent.

HALPERN

1. Held: This Court may raise sua sponte the doctrine of issue preclusion, or collateral estoppel.

2. Held, further, interest payments that were credited to a partnership's bank account are taxable to Ps because P controlled partnership matters and benefited from and controlled the funds in that account.

3. Held, further, a $25,000 payment that was deposited in Ps' bank account is taxable to Ps because Ps failed to prove that the payment represents reimbursement of legal fees paid by P on behalf of a corporation.

4. Held, further, sec. 6662(a), I.R.C., accuracy-related penalty imposed for substantial understatement of income tax.

OPINION

HALPERN, Judge:

By notice of deficiency dated April 14, 1995, respondent determined a deficiency in petitioners' Federal income tax for 1991 of $161,055 and a penalty under section 6662(a) of $32,211. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. In addition, all references to petitioner are to John M. Monahan.

After concessions by respondent, the issues for decision are (1) whether certain interest payments that were credited to a partnership's bank account are taxable to petitioners, (2) whether a $25,000 payment that was deposited in petitioners' bank account is taxable to petitioners, and (3) whether petitioners are liable for the penalty. The parties have stipulated various facts, which we so find. The stipulation of facts, with accompanying exhibits, is incorporated herein by this reference. We need find few facts in addition to those stipulated; accordingly, we shall not separately set forth our additional findings of fact and shall include those findings in the discussion that follows. Petitioners bear the burden of proof on all questions of fact. Rule 142(a).

I. Background

Petitioners resided in Seattle, Washington, when the petition in this case was filed.

Petitioner is a lawyer specializing in corporate and international trade law with emphasis in tax planning and complex corporate transactions. Petitioner received an LL.M. (with emphasis in taxation) from New York University School of Law.

Petitioners are calendar year taxpayers.

II. Interest Payments Credited to Aldergrove's Bank AccountA. Introduction

1. Aldergrove

Aldergrove Investments Co. (Aldergrove), was a partnership between Grove Management Ltd. (GML), see infra sec. II.A.2., and petitioner. Aldergrove's principal place of business was on Anguilla (an island of the British West Indies). Aldergrove did not file a U.S. Partnership Return of Income for 1991. Petitioners did not report any income from Aldergrove for 1991.

Pursuant to the Aldergrove partnership agreement, effective July 1, 1984, partnership interests and capital contributions were as follows:

+----------------------------------+
                ¦¦          ¦Class A   ¦Class B    ¦
                ++----------+----------+-----------¦
                ¦¦GML       ¦10 percent¦100 percent¦
                ++----------+----------+-----------¦
                ¦¦          ¦$1,000    ¦$569,000   ¦
                ++----------+----------+-----------¦
                ¦¦          ¦          ¦           ¦
                ++----------+----------+-----------¦
                ¦¦Petitioner¦90 percent¦none       ¦
                ++----------+----------+-----------¦
                ¦¦          ¦$9,000    ¦           ¦
                +----------------------------------+
                

Class B partnership units were nonvoting, and, in partnership matters affecting both classes, partners voted in proportion to their percentage ownership of Class A partnership units.

2. GML

GML was a wholly owned subsidiary of Span Corp., Ltd., which, in turn, was wholly owned by Lynwood S. Bell (Mr. Bell), a Canadian citizen residing in Anguilla. Petitioner and GML entered into an agreement, effective July 1, 1984, that required petitioner to manage GML's investments and to provide investment advice. GML transferred assets to Aldergrove for management.

3. Jaguar Holdings/Ihatsu Fudosan and Hansa Finance

Jaguar Holdings, Ltd. (Jaguar Holdings), was wholly owned and controlled by Mr. Bell, and, on or about August 1, 1988, its name was changed to Ihatsu Fudosan Capital, Ltd. (Ihatsu Fudosan).

Hansa Finance and Trust, B.V. (Hansa Finance), was owned and operated by Mr. Bell.

4. Chestnut Grove and Group M

During 1991, petitioner was a 45–percent shareholder of both Chestnut Grove Investments, Inc. (Chestnut Grove), and Group M Construction, Inc. (Group M). Petitioner's brothers, Timothy E. Monahan and Peter J. Monahan, owned 45 percent and 10 percent, respectively, of the outstanding stock of both Chestnut Grove and Group M. Those corporations were organized for the purpose of acquiring and developing a 16–acre parcel located in Yakima, Washington (the Yakima property). That parcel was purchased in March 1987 for $400,000.

B. Transactions in Issue

A check that was drawn on an account held by Chestnut Grove and made payable to “Ihatsu Fudosan or Aldergrove Investment” in the amount of $116,000 for “interest” was endorsed “Dep only” to account number 250–0132969 at Security Pacific Bank (SP Bank), which account was held in the name of Aldergrove (the Aldergrove account). On December 26, 1991, SP Bank credited the Aldergrove account in the amount of $116,000.

A check that was drawn on an account held by Group M and made payable to “Ihatsu Fudosan or Aldergrove Investment” in the amount of $84,700 for “interest” was endorsed “Dep only” to the Aldergrove account. On December 26, 1991, SP Bank credited the Aldergrove account in the amount of $84,700.

On December 31, 1991, SP Bank credited the Aldergrove account in the amount of $140.66 for interest earned by the account.

C. Analysis1. Issue

The issue is whether the interest payments that were credited to the Aldergrove account in the amounts of $116,000, $84,700, and $140.66 (the 1991 interest payments), are taxable to petitioners (the 1991 interest issue).

2. Arguments of the Parties

Petitioners argue that Mr. Bell and his wholly owned corporations provided the financing that allowed Chestnut Grove and Group M to acquire the Yakima property. Petitioners argue that the checks in the amounts of $116,000 and $84,700, both made payable to Ihatsu Fudosan or Aldergrove (the Yakima interest payments), represent interest payments to Mr. Bell for the Yakima property loans and were held in trust for Mr. Bell by Aldergrove until those funds were transferred to a Bank of Bermuda account over which petitioner did not exercise any control, and, therefore, Mr. Bell is taxable on those payments, “regardless of whether Aldergrove Investments Co. was Petitioner's alter ego.”

Alternatively, petitioners argue that petitioner lacked sufficient dominion and control over the Aldergrove account to be taxable on the 1991 interest payments. Petitioners argue that petitioner has received no benefit from any of the 1991 interest payments and that those funds were transferred to a Bank of Bermuda account over which petitioner did not exercise any control.

Lastly, petitioners assert that, even if the Court were to find that Aldergrove must recognize the 1991 interest payments as income, petitioners are taxable only on petitioner's distributive share of that income.

Respondent asserts that this Court in Monahan v. Commissioner, T.C. Memo.1994–201 (Monahan I), affd. without published opinion 86 F.3d 1162 (9th Cir.1996),¹ found that, in 1991, petitioner controlled Aldergrove partnership matters and benefited from and controlled the funds in the Aldergrove account. Relying on the doctrine of collateral estoppel, respondent argues that petitioner is precluded from relitigating those issues. Since the 1991 interest payments were deposited in the Aldergrove account in 1991, respondent argues that those payments are taxable to petitioner.

Respondent argues alternatively that, if the Court finds the doctrine of collateral estoppel to be inapplicable, the 1991 interest payments are taxable to petitioners because petitioner made acquisition and development loans for the Yakima property to Chestnut Grove and Group M and benefited from and exercised control over the 1991 interest payments.

3. Relevant Legal Principles

a. Interest Income

Section 61(a)(4) provides that gross income means all income from whatever source derived, including interest. “Generally, interest earned on investment is taxable to the person who controls the principal.” P.R. Farms, Inc. v. Commissioner, 820 F.2d 1084, 1086 (9th Cir.1987) (citing Helvering v. Horst, 311 U.S. 112, 116–117, 61 S.Ct. 144, 85 L.Ed. 75 (1940)), affg. T.C. Memo.1984–549. “[C]ommand over property or enjoyment of its economic benefits * * * ' ”, which is the mark of true ownership, is a question of fact to be determined from all of the attendant facts and circumstances. See Hang v. Commissioner, 95 T.C. 74, 80, 1990 WL 98703 (1990) (quoting Anderson v. Commissioner, 164 F.2d 870, 873 (7th Cir.1947), affg. 5 T.C. 443, 1945 WL 34 (1945)). Mere legal title is not determinative of beneficial ownership. See Serianni v. Commissioner, 80 T.C. 1090, 1104, 1983 WL 14842 (1983), affd. 765 F.2d 1051 (11th Cir.1985).

b. The Doctrine of Issue Preclusion

The doctrine of issue preclusion, or collateral estoppel, provides that, once an issue of fact or law is “actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation.” Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979) (citing Parklane Hosiery Co. v. Shore, 439 U.S. 322, 326 n. 5, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979)). Issue preclusion is a judicially created equitable doctrine whose purposes are to protect parties from...