Taxpayer Acquired Beneficial Ownership of S Corporation in Divorce

(Parker Tax Publishing April 2019)

A district court held that a taxpayer became a beneficial owner of an S corporation in a divorce proceeding and therefore owed the tax assessed on the taxpayer's pro rata share of the S corporation's income. The court rejected the taxpayer's arguments that a stipulated agreement in the divorce was merely an agreement to agree and that she could not have become the owner of the shares because the S corporation had been administratively dissolved and no transfer of shares occurred. Bonilla v. U.S., 2019 PTC 102 (D. Conn. 2019).

Background

Migdalia Bonilla was married to professional baseball player Bobby Bonilla in 1986. In 1994, Mr. Bonilla incorporated a Florida corporation called Bobby Bo Investments, Inc. (BBI) to hold investments. BBI was administratively dissolved in August 1995.

Ms. Bonilla and Mr. Bonilla were divorced in Connecticut in 2009. The divorce decree ordered that ownership of assets, including BBI, be divided equally within 30 days. In April 2010, Ms. Bonilla filed a motion for contempt stating that no division of the assets had occurred. In a May 2010 hearing, Mr. Bonilla's counsel stated that Mr. Bonilla wanted to keep BBI. However, in a December 2010 hearing, the parties agreed that Ms. Bonilla would have ownership of BBI and that she and her attorney would bear the burden of effectuating the transfer of interests.

BBI held Mr. Bonilla's interest in Performance Imaging (PI), an entity formed in 1996, after BBI had been administratively dissolved. BBI made no contributions to PI after 2000. Since 2000, other than sending documents including Schedules K-1 to PI's investor members, there was no communication between PI and its investors. PI never made income distributions to its members. PI's financial documents listed BBI's share of PI's profit, loss and capital as 69.51 percent.

BBI was an S corporation in 2010 and 2011. BBI did not file any tax returns for 2009, 2010, or 2011. Ms. Bonilla was provided with PI's Schedule K-1 for BBI for the 2009 tax year in September 2010. In September 2011, Ms. Bonilla's attorney sent PI a copy of the divorce decree and a transcript of the December 2010 hearing. In response to a request from PI for BBI's address, Ms. Bonilla's attorney provided Ms. Bonilla's address. PI's K-1s for BBI for tax years 2010 through 2016 listed BBI's address as Ms. Bonilla's residence.

Ms. Bonilla did not report any portion of BBI's share of PI's income on her 2010 and 2011 tax returns. After auditing PI, the IRS increased Ms. Bonilla's income for 2010 and 2011 by $780,300 and $55,100, respectively, equal to 69.51 percent of PI's income. The IRS assessed taxes, fees and penalties against Ms. Bonilla totaling $323,100 for 2010 and $21,800 for 2011. Ms. Bonilla paid the full amounts and requested a refund. Her refund claim noted that she was contesting the IRS's determination that she was an owner of BBI. The IRS rejected her claim and she took her case to a district court.

Ms. Bonilla and the government filed cross motions for summary judgment. Ms. Bonilla contended that the IRS improperly determined her ownership interest in BBI without first issuing a notice of deficiency. She also argued that as an administratively dissolved corporation, BBI could not transfer its shares to her. Ms. Bonilla said that the stipulated agreement in the December 2010 divorce proceeding was an unenforceable "agreement to agree" that did not effect a transfer of ownership of BBI to her.

The government argued that the court lacked jurisdiction because, under the variance doctrine codified in Code Sec. 7422, Ms. Bonilla could not raise different grounds for the refund than those brought to the IRS. As to Ms. Bonilla's ownership of BBI, the government argued that, irrespective of whether she received legal title to BBI shares, she was its beneficial owner in 2010 and 2011.

Analysis

The district court agreed in part with the IRS's variance doctrine argument and found that the court had no jurisdiction over Ms. Bonilla's argument that the dissolution of BBI barred BBI from holding an interest in PI because this argument was not contained in her administrative refund claim. The court also rejected Ms. Bonilla's notice argument, reasoning that under Code Sec. 6213, she could have raised that argument before paying the amount the IRS alleged was owed by bringing suit to enjoin the assessment. The court also rejected Ms. Bonilla's argument that the December 2010 hearing resulted in an unenforceable agreement to agree because, at the end of the hearing, Ms. Bonilla confirmed that the agreement resolved all outstanding issues in the divorce.

Regarding the ownership of BBI, the district court concluded that Ms. Bonilla acquired beneficial ownership as to half of the company following the 2009 divorce decree and ownership of all of the company following the December 2010 hearing. In the court's view, ownership was transferred not by BBI but by the divorce court, so it did not matter that BBI had been administratively dissolved.

The court determined that Ms. Bonilla was a beneficial owner of BBI under Connecticut law. The court noted that under Connecticut law, a divorce court can assign either spouse all or any part of the estate of the other spouse. It was undisputed, in the court's view, that the divorce court ordered BBI to be divided equally between Ms. Bonilla and Mr. Bonilla in 2009 and that Ms. Bonilla obtained a 50 percent interest in BBI at that time by operation of law. The court further found that Ms. Bonilla had an enforceable beneficial interest in all of BBI as of the December 2010 hearing, even though no paperwork was ever signed effectuating the transfer. The court concluded that the parties entered into an enforceable agreement, later incorporated into a court order, which resolved all outstanding issues in the divorce.

To the extent that beneficial ownership of a Florida corporation is determined under Florida law, the court noted that Florida courts have held that one may be a beneficial owner of stock notwithstanding the lack of legal title. The court also noted that the Connecticut divorce court's decision would be afforded preclusive effect in Florida under the principle of comity and the constitutional requirement of full faith and credit.

For a discussion of filing a claim for a refund or credit of tax overpayment, see Parker Tax ¶261,110. For a discussion of the beneficial ownership of S corporation stock for purposes of allocating income, see Parker Tax ¶31,935.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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