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Preparer liability extended.

An attorney who prepared the partnership returns and the Schedules K-1 for the three partnerships is deemed the preparer of the individual returns filed by the limited partners and is subject to the penalty for negligent preparation of those returns. The regulations to this effect are valid.

An attorney/CPA helped organize three tax shelter limited partnerships. He was the sole preparer of each partnership's information tax returns (FORM 1065, Schedule K, Schedule K-1), which he signed as "paid preparer." The Schedule K-1s were distributed to each limited partner and the limited partners used the numbers on it as deductions in filling out their individual returns. The attorney had no contact with the limited partners, gave them no tax advice and did not physically prepare their tax returns. In preparing the partnership returns he improperly increased the amount listed for each limited partner to deduct by listing nondeductible start-up expenses/ losses, taking excess depreciation by including in basis contingent debt, and increasing each limited partner's basis in the partnership beyond the allowable amount by including debt the limited partner had only guaranteed. All of this resulted in the entry of one number, a deduction, on each limited partner's return.

The Internal Revenue Service imposed negligent preparation penalties against the attorney, asserting that he was the preparer of each limited partner's return. The district court upheld the penalties, holding that he was properly treated as the preparer under the regulations and that his negligence had resulted in substantial understatements on the limited partner's returns. The appellate court had affirmed, upholding the regulations as valid interpretations of the law.

The regulations permit the Service to treat the preparer of one return as the preparer of another return that directly reflects an entry or entries of the return actually prepared. The directly reflected entries must comprise a substantial portion of the other return, based on the length and complexity of the issues involved. The attorney argued that the single entry on a partner's return that came from the returns he prepared cannot constitute a substantial portion of the partner's return. While agreeing that the attorney's work boiled down to only one entry on each partner's return, the court said that it represented a complicated analysis of the partnership's earnings upon which each partner necessarily had relied.

The court viewed the complicated nature of the analysis resulting in the Schedule K-1 in light of the special relationships resulting from the partnership form. The attorney's analysis of income that was directly taxable to the partners and of losses directly deductible by them was incorrect. Further, since a partnership is both an entity and an aggregate of the partners, the attorney in reality was paid for his legal services and prepared the partnership returns for the partners. This relationship defeated the attorney's allegation that he was not a "paid preparer."

This decision should be taken as a warning that the preparer penalty is very broadly construed. Here the court determined that a professional was to be penalized for the preparation of a tax return that he never even saw. (Goulding v. US, CA7, March 18, 1992)
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Title Annotation:tort liability of tax consultants
Author:Berkery, Peter M., Jr.; Green, Gary L., Jr.
Publication:The National Public Accountant
Date:Jun 1, 1992
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