Payments to taxpayer held to be compensation, not distributions.

• Author: Beavers, James A.

The Eleventh Circuit, affirming the Tax Court, held that payments made to a taxpayer by limited partnerships that he controlled but did not own an interest in were compensation reportable on Schedule C, not partnership distributions.

Background

Martin Plotkin controlled a limited partnership, Autumn Years LP, which owned a 99% limited partnership interest in Rolla Health Care Associates LP (RHCA), a Missouri limited partnership that owned and operated a nursing home in Rolla, Mo. Although Plotkin controlled Autumn Years, he did not own a direct interest in the entity. Instead, his children, his ex-wife, and several other entities owned or controlled by Plotkin were the owners. However, neither his ex-wife nor his three children were aware that they were members of the partnership. Plotkin never drafted financial statements, filed partnership tax returns, or observed other partnership formalities with respect to Autumn Years.

Autumn Years received payments from RHCA and a number of other entities that Plotkin owned or controlled. Plotkin treated the funds deposited into Autumn Years's bank accounts as his own, writing numerous checks for personal expenses. During the years in question, he did not have any bank or other financial accounts in his name.

In 1995, RHCA sold the Rolla nursing home. Plotkin, through RHCA, used a portion of the sales proceeds to pay off the mortgage on a home that he built for an old girlfriend. Plotkin also used the sale as an opportunity to transfer money to his then-girlfriend, Barbara Nemec, by having a brokerage set up and owned by Nemec sell the nursing home on a commission basis. After receiving the commission from the sale, the brokerage business bought a home in Florida that it shortly %AI.) afterward transferred to Nemec. Plotkin and Nemec took up residence in the home.

Plotkin's Criminal Tax Conviction

In 1999, a district court convicted Plotkin of three counts of willfully making and subscribing false income tax returns. The district court found that, during 1991, 1992, and 1993, Plotkin received and failed to report substantial income from the Rolla nursing home. Plotkin argued at trial that the funds used to pay his personal expenses were partnership distributions to Autumn Years's limited partners. The district court rejected this argument, explaining that Autumn Years was a sham and had not been treated as a true partnership. Specifically, the district court found that no partnership formalities were...