Greetings from Maquoketa, Iowa, home of the Cardinals and the largest cave complex in the state. Today is Day 1 of the second session of the Iowa State University Center for Agricultural Law and Taxation Farm and Urban Tax School. I’m on the Day 1 panel with Roger McEowen and Kristy Maitre, updating practitioners on 2014 developments and the upcoming ACA reporting nightmares. There is still time to register for the schools in Sheldon, Red Oak, Ottumwa, Mason City, Denison and Ames. Register today!
Emotional stress can have strange effects. But maybe not that strange. A married couple operated two LLCs as partnerships owned entirely between them. They paid a preparer to put together the 1065s and K-1s. But they apparently figured they could handle things from their, self-preparing the 1040s.
Their son took ill on a foreign trip, and they traveled overseas from October 4, 2011, to November 4. Perhaps as a result, they missed the extended return deadline for 2010 and filed late. Better late, than never, of course.
There was a small problem with the self-prepared return. The K-1s showed about $129,000 in ordinary losses and $553,000 in long-term capital gains. The losses made it on to the self-prepared 1040s, but the capital gains somehow did not.
The IRS notices that sort of thing, and they assessed the additional tax on the gain, as well as a 20% “accuracy-related penalty” on the underpayment. The case ended up in Tax Court, where the taxpayer pleaded — well, I’m not sure how to describe this. From the Tax Court decision:
Petitioners reported in their 2010 return all of the information reflected in [Husband]‘s K-1 and [Wife]‘s K-1 except for the information relating to “[n]et long-term capital gain (loss)”. At trial, the Court attempted to focus [Husband] on petitioners’ inconsistent reporting in their 2010 return of the information that MMIT reflected in [Husband]‘s K-1 and [Wife]‘s K-1 by asking him about [the preparer’s} September 15, 2011 letters. The following exchange between the Court and [Husband] took place:
THE COURT: Now, what does it mean to you when a letter to you and to your wife says, this information reflects the amounts you need to complete your income tax return?
THE WITNESS: To be truthful, I never read it.
THE COURT: You never read it?
THE WITNESS: Yes.
THE WITNESS: Yes.
That sort of blew the “reliance on the preparer” defense. The taxpayer fell back on emotional trauma:
We consider now petitioners’ contention that [Husband] was so emotionally distraught about his son’s health at the time that he prepared petitioners’ 2010 return that he was unable to prepare that return properly. We are sympathetic that petitioners’ son was experiencing certain medical problems around the time petitioners’ 2010 return was due and that petitioners were seriously concerned about their son’s health. Nonetheless, on the record before us, we find that petitioners have failed to carry their burden…
Indeed, petitioners reported in their 2010 return, which [Husband] prepared, all of the information reflected in [Husband]‘s K-1 and [Wife]‘s K-1 except for the information relating to “[n]et long-term capital gain (loss)”.
Adding the income lines to the 1040 after having to deal with a seriously ill son overseas would seem like emotional piling-on, but that means nothing to the tax law.
The Moral? As traumatic as reporting a K-1 capital gain may be, you have to report what’s there. And maybe if your tax situation is complex enough to require hired help to prepare your pass-through returns, you might want to spring to have the preparer handle the 1040 too. The fee surely would have been less than the $12,000 penalty.
Kyle Pomerleau, Most of the Private Sector Workforce is Employed by Pass-through Businesses (Tax Policy Blog):
In the past three decades, the importance of “pass-through” businesses has grown substantially. The combined net income of sole proprietors, LLCs, Partnerships, and S corporations has increased fivefold and now accounts for more than 50 percent of all business income. C corporations now earn less than half of all business income.
It you jack up taxes on “the rich,” you jack up taxes on employers. If you tax something more, you get less of it.
Friday is Thursday this week at Robert D. Flach’s place – with an early Buzz covering the AICPA’s loss on its suit against the “voluntary” IRS preparer program and on IRS cash seizures.
Peter Reilly, Government Coming Down Harder On Kent Hovind. Bad science isn’t a tax crime.
Joseph Thorndike, Can Jeb Bush Save Conservatism by Compromising It? (Tax Analysts Blog). If recent polls are any indication, having their opponents in power seems to be “saving” conservatism already.
Steve Warnhoff, Senator Rob Portman: Case Study in Radical, Rightwing Arguments for Slashing Corporate Taxes (Tax Justice Blog). Remember, TJB is part of Citizens for Tax Justice, a “non-partisan” exempt organization.
Cara Griffith, Benefit Corporations: The Corporate Entity of the Future? (Tax Analysts Blog):
Those who shop at Patagonia or Etsy are likely aware of a new type of business entity that is growing in popularity. These companies and a thousand more have chosen to organize as either B corporations or benefit corporations…
Still, the number of benefit corporations is relatively small. The reason for this is – ironically – a lack of benefits. Benefit corporations are not given tax, incentive, or procurement preferences by state or federal lawmakers. While nonprofits receive substantial benefits for their chosen entity type, benefit corporations receive no such benefits. They are taxed like c corporations – at least for now.
This is new to me. A business structure built around moral vanity seems implausible to me, but I’ve never shopped Etsy.
TaxProf, The IRS Scandal, Day 539.
News from the Profession. Let’s Talk About Creative Accounting Themed Halloween Costumes (Adrienne Gonzalez, Going Concern)