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PAPERWORK MATTERS

October 27, 2005

If mother and son report the income from a rental building on partnership returns for 21 years, it would be logical to expect that when mom dies, her estate will only be taxed based on her ownership percentage of the building as shown on the partnership returns. Locical, but not necessarily correct.

Marie Maniglia died in 1999. She held an interest in an apartment building at 7 Commonwealth Avenue, Boston, through the "Fam-Trust." This trust was a "nominee" trust. The Fam-Trust held the title to the building as tenants in common with Frank, one of Marie's sons. The trust was created in 1977 with Marie's other son, Joseph, as trustee. The trust document showed only Marie as the trust beneiciary.

Frank transferred his tenancy in common to the trust for to Marie for "nominal" consideration in 1977. Frank died in a plane wreck in 1985.

Before Marie died, the building's income had been reported on partnership returns going back to 1978. The partnership had reported its ownership as evenly split between Marie and Joseph at least from 1996. Her estate tax return paid tax only on half of the building value.

Unfortunately, there were no documents other than the partnership returns showing that Joe owned any interest in the building. As the Tax Court states:

The estate contends that Joseph S. Maniglia obtained a
percent pro rata share of the proceeds when the property was
refinanced and that he contributed the $25,000 in cash towards
the purchase of the property. However, the estate has failed
offer any documentary evidence corroborating its contentions.
The only evidence the estate offered to counter the documentary
evidence showing the decedent was the sole beneficial owner
the property was the self-serving testimony of Joseph S.
Maniglia and the vague testimony of his wife.

The estate put its accountant on the stand to say that Mom really owned only half the building. That backfired:

At trial, the estate offered Joseph S. Maniglia’s
accountant, Mr. Pino, as a witness. Mr. Pino’s testimony was of
little help because of his poor memory. He could not remember:
The year he became licensed as a Certified Public Accountant,
the year he met the Maniglias and began preparing their returns,
or whether he ever knew that Joseph S. Maniglia was or was not a coowner of the property. Additionally, Mr. Pino’s admission that his license was suspended "back then" because of a tax evasion conviction brings his credibility into question.

The Moral: If you want to put property into a partnership, mind your paperwork. Make sure the deed reflects the ownership you want it too. Oh, and remember that the Tax Court won't be impressed if your accountant is a tax cheat.

Cite: Estate of Marie A. Maniglia v. Commissioner, T.C. Memo 2005-247

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