                        T.C. Memo. 2005-297



                      UNITED STATES TAX COURT



                 TIMOTHY J. BURKE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 14904-04.             Filed December 27, 2005.


     Timothy J. Burke, pro se.

     Michael R. Fiore, for respondent.



                        MEMORANDUM OPINION


     WELLS, Judge:   This matter is before the Court on

respondent’s motion for summary judgment pursuant to Rule 121 and

petitioner’s cross-motion for partial summary judgment.   The

issues1 for decision are:   (1) Whether petitioner is required to


     1
       Petitioner moves for partial summary judgment with respect
to the first issue.
                               - 2 -

report his distributive share of partnership income for the 1998

taxable year despite the fact that his distributive share of that

income was not actually distributed to him but is being held in

escrow because of a dispute with his former partner; (2) whether

respondent correctly calculated that distributive share; and (3)

whether petitioner is entitled to deduct certain business

expenses.   After considering respondent’s motion and petitioner’s

response, we conclude that there remain no issues of material

fact that require trial.   For the reasons stated below, we will

grant respondent’s motion for summary judgment and deny

petitioner’s motion for partial summary judgment.   Unless

otherwise indicated, all Rule references are to the Tax Court

Rules of Practice and Procedure, and all section references are

to the Internal Revenue Code, as amended.

                            Background

     At the time of filing the petition, petitioner resided in

West Roxbury, Massachusetts.

     Petitioner is an attorney, admitted to practice in

Massachusetts and before the United States Tax Court, and a

certified public accountant.   On October 13, 1993, petitioner

formed a partnership (the partnership) with Jeffrey Cohen, named

“Cohen & Burke”, to practice law and prepare tax returns.

Shortly after formation, the partnership purchased a tax

preparation practice owned by the estate of Mr. Cohen’s father.
                                 - 3 -

The partnership agreement provided that, from October 13 through

December 31, 1993, each partner would be entitled to 100 percent

of the income attributable to business that partner generated.

The partners agreed that, beginning January 1, 1994, each partner

who originated new business would receive an origination fee of

10 percent of the billing from that business.      The remainder of

the profits and losses was to be split equally.

     Disagreement arose between petitioner and Mr. Cohen shortly

after formation of the partnership.      During December 1995, the

partnership agreement was terminated.      As a result of

representations made by Mr. Cohen during January 1996, the

parties agreed to conduct the partnership under a new oral

agreement (the new agreement).    Pursuant to the new agreement,

the partnership’s income was allocated as follows:      (1) A

guaranteed payment of 10 percent of the gross profits from the

tax return preparation business would be paid to the originating

partner; (2) 100 percent of the gross profits from legal services

attributable to each originating partner was allocated to that

partner; (3) the remaining net profits were allocated equally to

each partner; and (4) with respect to work referred from one

partner to the other, a referral fee of 33 percent of gross

profits from the referred work would be paid to the referring

partner.   The new agreement was effective from January 1, 1996,

through December 31, 1998.   Petitioner prepared and filed the
                                 - 4 -

partnership returns (including schedules) for the 1996 and 1997

taxable years and allocated the partnership’s income in

accordance with the new agreement.

     During early 1998, Mr. Cohen began stating that he had never

agreed to the new agreement.   Mr. Cohen’s statements caused a

dispute which resulted in a deadlock:    petitioner and Mr. Cohen

agreed to pay expenses but could not agree on distributions.     On

September 18, 1998, Mr. Cohen’s attorney sent petitioner a letter

suggesting that petitioner and Mr. Cohen should not remove or

dissipate any of the partnership’s assets, except as required in

the normal course of business.

     During 1998, it became clear that Mr. Cohen and petitioner

could not resolve their disputes without litigation.   No later

than November 1998, money received by the partnership was stolen

by Mr. Cohen, who opened a legal practice that was in direct

competition with Cohen & Burke.    Mr. Cohen and petitioner began

to place the partnership receipts in an escrow account until the

dispute could be resolved.

     Mr. Cohen prepared Form 1065, U.S. Partnership Return of

Income (including schedules), for the 1998 taxable year reporting

$242,000 in ordinary income, and, on October 14, 1999, filed the

Form 1065 with the Andover, Massachusetts, Internal Revenue

Service Center.   The Schedules K-1, Partner’s Share of Income,

Credit, Deductions, etc., issued to petitioner and Mr. Cohen
                                - 5 -

reported each partner’s distributive share as $121,000.    On

October 20, 1999, petitioner filed his Form 1040, U.S. Individual

Income Tax Return, for the 1998 taxable year reporting zero as

his distributive share of partnership income and filed, along

with his Form 1040, a notice of inconsistent determination

stating that the Form 1065 was replete with factual and legal

inaccuracies.

     On October 4, 1999, petitioner filed suit against Mr. Cohen

in the Massachusetts Superior Court requesting damages for breach

of fiduciary duty, breach of contract, deceit, and conversion and

requesting an accounting.    Mr. Cohen and petitioner agreed to

keep the partnership receipts in escrow.    At the time the lawsuit

was filed, petitioner did not know the sum of the stolen

deposits.   During the course of the State court litigation,

petitioner learned that Mr. Cohen had not been forthcoming

regarding all of the partnership’s income.    Petitioner prepared

an analysis of the partnership income for the 1998 taxable year

and determined, on the basis of the new agreement and the

information available to him, that he was entitled to

approximately $151,000.2    Mr. Cohen’s position in the lawsuit was


     2
       Petitioner had previously analyzed the partnership’s
income, but that analysis lacked information regarding the
deposits stolen by Mr. Cohen. The second analysis largely uses
the same information regarding the partnership’s income for 1998
but also includes certain deposits received by petitioner and not
deposited in the partnership account and some of the deposits
                                                   (continued...)
                                - 6 -

that the partners were entitled to only 50 percent of the

partnership’s profits each and were not entitled to any amounts

based on the new agreement.   On October 16, 2002, the jury found

for petitioner “with regard to the partnership between January 1,

1996 through December 31, 1998"; i.e., the income of the

partnership should be allocated according to the new agreement.

Although petitioner received a favorable jury verdict, as of the

time of the submission of the parties’ moving papers in the

instant case, the partnership receipts remained in escrow pending

the Massachusetts Superior Court’s decision on petitioner’s

motion for an accounting.

     Respondent determined a $41,338 deficiency based on the

$121,000 reported to petitioner on his Schedule K-1 and mailed

petitioner a notice of deficiency on May 14, 2004.   Petitioner

timely petitioned this Court.   After petitioner provided

respondent an income analysis of the partnership’s income for

1998 during discovery, respondent increased the deficiency to

$53,077.   Using the income analysis petitioner provided,

respondent determined petitioner’s distributive share under the

new agreement was $151,682.




     2
      (...continued)
stolen by Mr. Cohen. Respondent deducted the stolen deposits
from the calculation of the increased deficiency.
                                  - 7 -

                               Discussion

       Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.      Fla. Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).      Summary judgment may be

granted where there is no genuine issue of material fact and a

decision may be rendered as a matter of law.     Rule 121(a) and

(b).    The moving party bears the burden of proving that there is

no genuine issue of material fact, and factual inferences are

viewed in a light most favorable to the nonmoving party.      Craig

v. Commissioner, 119 T.C. 252, 260 (2002); Dahlstrom v.

Commissioner, 85 T.C. 812, 821 (1985); Jacklin v. Commissioner,

79 T.C. 340, 344 (1982).    The party opposing summary judgment

must set forth specific facts which show that a genuine question

of material fact exists and may not rely merely on allegations or

denials in the pleadings.      Grant Creek Water Works, Ltd. v.

Commissioner, 91 T.C. 322, 325 (1988); Casanova Co. v.

Commissioner, 87 T.C. 214, 217 (1986).

1. Whether Petitioner Must Include in His Distributive Share of
   Partnership Income for the 1998 Taxable Year Amounts That Are
   in Dispute Between the Former Partners

       Section 701 provides:   “A partnership as such shall not be

subject to the income tax imposed by this chapter.     Persons

carrying on business as partners shall be liable for income tax

only in their separate or individual capacities.”     In determining

his income tax, each partner must separately include his
                                - 8 -

distributive share of the partnership’s taxable income or loss.

Sec. 702(a)(8).   As a general rule, a partner’s distributive

share of income, gain, loss, deduction, or credit is determined

by the partnership agreement.   Sec. 704(a).

     Section 1.702-1(a), Income Tax Regs., provides:    “Each

partner is required to take into account separately in his return

his distributive share, whether or not distributed, of each class

or item of partnership income”. (Emphasis added.)    “Few

principles of partnership taxation are more firmly established

than that no matter the reason for nondistribution each partner

must pay taxes on his distributive share.”     United States v.

Basye, 410 U.S. 441, 454 (1973).   “The tax is thus imposed upon

the partner’s proportionate share of the net income of the

partnership, and the fact that it may not be currently

distributable, whether by agreement of the parties or operation

of law, is not material.”   Heiner v. Mellon, 304 U.S. 271, 281

(1938); see also First Mechs. Bank v. Commissioner, 91 F.2d 275,

279 (3d Cir. 1937) (holding that a partner’s share of partnership

income was taxable to him for the year in which the income was

realized by the partnership even though not distributed to the

partner in that year); Chama v. Commissioner, T.C. Memo. 2001-253

(holding that a partner was taxable on his share of partnership

gain even though not distributed to him but instead reinvested by

the partnership); Johnston v. Commissioner, T.C. Memo. 1984-374
                                - 9 -

(holding that each partner is taxed on his distributive share of

partnership income without regard to whether the amount is

actually distributed to him).

     Petitioner argues, however, that the existence of a real

controversy between petitioner and Mr. Cohen rendered the amount

of his distributive share indefinite and that the partnership

receipts in escrow are “frozen” and therefore unavailable to

petitioner.   Petitioner cites section 703(a) for the proposition

that the taxable income of a partnership is computed in the same

manner as that of an individual and cites several cases to

support his argument that his dispute with his former partner

postpones the inclusion of his distributive share because he does

not have a claim of right to the income.    Petitioner chiefly

relies on:    North American Oil Consolidated v. Burnet, 286 U.S.

417 (1932) (taxpayer must include income to which he has a claim

of right); Estate of Fairbanks v. Commissioner, 3 T.C. 260 (1944)

(dispute between executors and decedent’s wife precluded

inclusion in the estate’s income); Madigan v. Commissioner, 43

B.T.A. 549 (1941) (taxpayer who placed funds in his personal

account pending outcome of an accounting was not required to

include the entire amount in income); Preston v. Commissioner, 35

B.T.A. 312 (1937) (dispute between two attorneys, who were not

partners, precluded inclusion in income).    Petitioner’s reliance

on the foregoing cases is misplaced for reasons discussed below.
                                - 10 -

Petitioner acknowledges that none of the cases he cites involves

a partnership.    Instead he argues that, because partnership

taxable income is computed in the same manner as that of an

individual, the existence of a partnership does not matter.

Petitioner argues that the combination of section 703(a) and the

cited cases leads to the conclusion that a taxpayer does not have

income if there are restrictions on its receipt.

     We disagree with petitioner’s argument for several reasons,

the first of which is that the cases petitioner cites do not

involve partnerships or partners’ distributive shares.    Cohen &

Burke was a partnership, and, therefore, the cases petitioner

cites do not apply.

     Secondly, section 703 describes how partnership income is

computed;3 i.e., how taxable income is calculated from gross


     3
          SEC. 703(a). Income and Deductions.--The taxable income
         of a partnership shall be computed in the same manner as
         in the case of an individual except that--

              (1) the items described in section 702(a) shall be
         separately stated, and

              (2) the following deductions shall not be allowed to
         the partnership:

                    (A) the deductions for personal exemptions
               provided in section 151,

                    (B) the deduction for taxes provided in section
               164(a) with respect to taxes, described in section
               901, paid or accrued to foreign countries and to
               possessions of the United States,
                                                      (continued...)
                               - 11 -

income.4    A partnership itself pays no taxes, sec. 701, but the

income of the partnership must be reported, and that income is

calculated generally in the same manner as an individual computes

his personal income, United States v. Basye, supra at 448.       In

Basye, the Supreme Court stated:

     For this purpose then, the partnership is regarded as
     an independently recognizable entity apart from the
     aggregate of its partners. Once its income is
     ascertained and reported, its existence may be
     disregarded since each partner must pay tax on a
     portion of the total income as if the partnership were
     merely an agent or conduit through which the income
     passed.

     The issue here is not whether the partnership itself was

entitled to income.    Instead, the issue is whether petitioner was

required to report for 1998 his distributive share of income that

was already earned by the partnership during that year.    The

income was earned by the partnership during 1998, and there was

nothing conditional or contingent about its receipt.    Petitioner,

     3
      (...continued)

                   (C) the deduction for charitable contributions
              provided in section 170,

                   (D) the net operating loss deduction provided
              in section 172,

                   (E) the additional itemized deductions for
              individuals provided in part VII of subchapter B
              (section 211 and following), and

                   (F) the deduction for depletion under section
              611 with respect to oil and gas wells.
     4
         See sec. 63(a) (defining taxable income as “gross income
         minus the deductions allowed by this chapter”).
                              - 12 -

therefore, was taxable on his distributive share of the

partnership’s profits for 1998, even though he did not receive

it.   See First Mechs. Bank v. Commissioner, 91 F.2d at 279.    It

is irrelevant that petitioner still may not know the full extent

of the partnership income because of the deposits stolen by his

partner, Mr. Cohen; the nonappearance of the deposits on the

partnership books is not determinative.   See Stoumen v.

Commissioner, 208 F.2d 903, 908 (3d Cir. 1953) (holding that the

taxpayer’s distributive share of partnership income was taxable

to him in the year of realization by the partnership, despite the

fact that his partner had embezzled funds which did not appear in

the partnership books, and despite the fact that the taxpayer was

unaware of the existence of the funds and never received any of

them), affg. a Memorandum Opinion of this Court.5

      Thirdly, a partner is taxable on his distributive share of

partnership income when realized by the partnership despite a

dispute among the partners as to their respective distributive

shares.   In De Cousser v. Commissioner, 16 T.C. 65 (1951), the

taxpayer argued that a controversy with his partner rendered the

amounts of his distributive share indefinite and impossible to

determine and that those amounts were not specifically


      5
       We recognize that this is a harsh rule, but the harshness
is mitigated somewhat by the theft loss deduction allowed under
sec. 165(e), which, in pertinent part, provides: “any loss
arising from theft shall be treated as sustained during the
taxable year in which the taxpayer discovers such loss.”
                                 - 13 -

established until a settlement was reached during the last of the

3 years in issue.   Id. at 71.    We rejected the taxpayer’s

argument that taxation of his distributive share should be

postponed on that account, and we noted that the purpose of his

suit against his partner was to claim one-half of the profits and

that the settlement seemed to have decided that question.      Id. at

74.   We held that the taxpayer’s distributive share of the

partnership profits had to be included in his income for the

years in which those profits were earned by the partnership.

Id.; see also First Mechs. Bank v. Commissioner, supra at 279

(holding the taxpayer liable for the higher amount of his

distributive share for the tax year in issue despite the fact

that the taxpayer had settled for a lesser amount in a later year

in order to end protracted litigation); Beck Chem. Equip. Corp.

v. Commissioner, 27 T.C. 840, 855 (1957) (holding that the

principles of scienter and actual receipt have no application to

the issue of whether partners are to be charged with their

distributive shares and rejecting the taxpayer’s argument that a

dispute with his partner made the calculation of his distributive

share impossible and that the amounts were not established until

a settlement was reached in a later year); Klein v. Commissioner,

25 T.C. 1045 (1956) (rejecting the taxpayer’s argument that a

dispute between the taxpayer and his partner over his
                              - 14 -

distributive share delayed inclusion until a later year when the

funds were actually received).

     On the basis of the foregoing, we conclude that petitioner

is taxable on his distributive share of partnership income for

1998 which includes the amounts in dispute between petitioner and

his former partner even though undistributed to petitioner.

Accordingly, respondent is entitled to summary judgment on the

issue of whether petitioner must include the disputed amounts in

his distributive share of partnership income for the 1998 taxable

year, and petitioner’s motion for partial summary judgment will

be denied.

2. Whether Respondent Properly Calculated Petitioner’s
   Distributive Share

     Under Rule 142(a)(1), respondent bears the burden of proving

an increased deficiency.   Respondent’s determination is based on

petitioner’s income analysis of the 1998 taxable year and the

Massachusetts State court jury’s finding in petitioner’s favor.

     Petitioner acknowledges that he prepared his income analysis

and that the jury found in his favor that the partners’

distributive shares should be allocated according to the new

agreement.   In his response to respondent’s motion for summary

judgment, however, petitioner does not state that respondent

incorrectly calculated his distributive share on the basis of the

income analysis and the new agreement, nor does his affidavit

create a genuine issue of fact in that regard.   Instead,
                              - 15 -

petitioner argues:   “The partnership received deposits.    To have

income the tests established by the Courts, the Internal Revenue

Code and the regulations must be met.   As is detailed in

Petitioner’s memorandum those tests were not met.”

     Petitioner’s burden on summary judgment is to set forth

specific facts which show that a genuine question of material

fact exists.   See Grant Creek Water Works, Ltd. v. Commissioner,

91 T.C. at 325; Casanova Co. v. Commissioner, 87 T.C. at 217.

Petitioner does not dispute the facts pertinent to the

calculation of his distributive share of the partnership’s income

for the year in issue.   Rather, petitioner argues that the

deposits to the partnership’s account for that year are not

income to him as a matter of law.   As we discussed above, a

partner must include his distributive share of partnership income

whether or not it is distributed to him.   Accordingly, we

conclude that respondent is entitled to summary judgment on the

issue of the calculation of petitioner’s distributive share.

3. Whether Petitioner May Deduct Certain Business Expenses

     Deductions are a matter of legislative grace.   INDOPCO, Inc.

v. Commissioner, 503 U.S. 79, 84 (1992).   The taxpayer bears the

burden of proving he is entitled to deductions and must present

adequate documentation to support any deductions claimed.      Welch

v. Helvering, 290 U.S. 111, 115 (1933); see also Nowland v.

Commissioner, 244 F.2d 450, 453 (4th Cir. 1957) (holding the
                               - 16 -

taxpayer bears the “burden of proving the amount of deductible

expenses since deductions are a matter of statutory privilege

and must be shown by substantial evidence”), affg. T.C. Memo.

1956-72.

     Viewing the factual inferences in the light most favorable

to the nonmoving party, as we must on a motion for summary

judgment, we do not find that a genuine issue of material fact

exists as to the business expense deductions.   See Craig v.

Commissioner, 119 T.C. at 260; Dahlstrom v. Commissioner, 85 T.C.

at 821; Jacklin v. Commissioner, 79 T.C. at 344.   Petitioner

claims $1,799 in additional trade or business expense deductions

that he did not include on his 1998 individual tax return.     In

response to respondent’s motion for summary judgment, petitioner

merely asserts that he is entitled to the deductions as trade or

business expenses and states that he has provided respondent with

evidence of those expenses.6   The party opposing summary judgment

must set forth specific facts which show that a genuine question

of material fact exists and may not rely merely on allegations or

denials in the pleadings.   Grant Creek Water Works, Ltd. v.

Commissioner, supra at 325; Casanova Co. v. Commissioner, supra



     6
       Petitioner claims that copies of certain checks in
respondent’s files substantiate these expenses. As respondent
points out, these checks total $3,790.29, and petitioner is
claiming only $1,799 as deductible trade or business expenses.
Moreover, these checks are not self-explanatory as to the nature
of the expenses claimed.
                                - 17 -

at 217.   Petitioner has failed to meet his burden to come forward

with specific facts showing a genuine issue of material fact

exists.   Petitioner has not provided adequate substantiation of

the expenses or provided any explanation or description of his

entitlement to deduct the expenses.      Accordingly, respondent is

entitled to summary judgment.

     To reflect the foregoing,


                                           An appropriate order and

                                    decision will be entered.
