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Aiding and abetting penalty: $1,000 per K-1.

Mitchell operated an S corporation tax shelter with 34 investors. He prepared or assisted in preparing the S corporation return and the 34 related forms K-1.

A bankruptcy court determined Mitchell was liable for an Internal Revenue Code section 6701 aiding and abetting penalty.

The only matter in dispute was the amount of the penalty. The IRS claimed the penalty imposed on Mitchell should have been $34,000--$1,000 for each of the 34 K-l's. However, the bankruptcy court imposed a penalty of only $10,000, the amount applicable in a corporate tax liability case. The district court upheld the bankruptcy court's order.

Section 6701 imposes a penalty on a person who "aids or assists in ... the preparation... of any portion of a return... ," and who knows such portion of a return will result in an understatement of some other person's tax liability.

Section 6701(b)(1) says the amount of the penalty is generally $1,000. However, section 6701(b)(2) says the amount is $10,000 when a return or other document "relates to the tax liability of a corporation." Further, the statute says preparers may not be subject to more than one penalty per taxpayer per period.

Result: For the IRS. It was the investors' "return portions" (K-I 's) and tax understatements that were involved, and not the corporation's. Thus, the $10,000 corporate amount does not apply, and Mitchell owes $1,000 per K-I, or $34, 000. In re Mitchell (9th Cir., 1992).
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Article Details
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Title Annotation:In re Mitchell
Author:Wagenbrenner, Anne
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jan 1, 1993
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