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Relator v. Commissioner of Revenue

Supreme Court of Minnesota

May 3, 2017

Germaine F. Harmon, Relator,
v.
Commissioner of Revenue, Respondent.

         Tax Court Office of Appellate Courts

          Eric Johnson, Saint Paul, Minnesota, for relator.

          Lori Swanson, Attorney General, Kathryn M. Woodruff, Assistant Attorney General, Saint Paul, Minnesota, for respondent.

         SYLLABUS

         1. The tax court did not err by determining that relator failed to overcome the presumption of validity of respondent's assessment of taxes.

         2. The tax court did not err by determining that there was no dispute regarding relator's federal tax liability that required respondent to delay the assessment of relator's Minnesota tax liability.

         Affirmed.

         Considered and decided by the court without oral argument.

          OPINION

          ANDERSON, Justice.

         After the foreclosure of mortgage debt on a real-estate investment property triggered taxable gains to the investors, respondent Commissioner of Revenue requested that appellant Germaine Harmon file a 2010 Minnesota income-tax return. Three years later, Harmon still had not filed a return. Accordingly, the Commissioner assessed Harmon's 2010 Minnesota income-tax liability based on a Schedule K-1 filed by the partnership in charge of the foreclosed real-estate investment. Harmon appealed to the tax court, challenging the Commissioner's assessment. On cross motions for summary judgment, the tax court granted summary judgment in favor of the Commissioner. We affirm.

         FACTS

         This tax dispute arises out of a failed real-estate investment that resulted in substantial tax consequences for the widow of one of the original investors. The trail leading to those consequences began in May 1984, when a group of general partners at Goldman Sachs formed City Center Investors (CCI), a real estate partnership. CCI's sole investment was a 49.475% proportional share in a parent partnership, City Center Associates (CCA). CCA's only asset was the City Center building (City Center), a mixed-use office and retail property in downtown Minneapolis. Because City Center was located in Minneapolis, all income flowing from the investment, and therefore from CCA, was generated in Minnesota. Harmon, the widow of one of the initial investors, acquired her husband's share of CCI upon his death in 1997.

         City Center was encumbered by two mortgage loans. One was a purchase-money mortgage, used by CCA to purchase the building, and another was an underlying nonrecourse first mortgage. By 2007, due to various factors including depreciation, interest, and anemic rental revenue, the principal balance of the mortgage loans exceeded the market value of City Center.

         In January 2007, CCI issued a memorandum to its partners, including Harmon, outlining CCI's financial situation. The memorandum warned that because the amount of mortgage debt from the two mortgage loans encumbering City Center exceeded the value of the property, a foreclosure sale would "trigger a taxable gain to the partners of CCI."[1]Therefore, CCI warned its partners of a "significant 'built-in' tax gain to be realized upon foreclosure" of either mortgage loan, amounting to each partner's "allocable ...


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