It is a tax truism that a partner must report his/her distributive share of partnership taxable income, whether or not the partner got anything, whether cash, money’s worth, or even a K-1. That’s why any properly drafted partnership agreement or organic documents of any entity taxable as a partnership will always contain a provision that the partnership must distribute to all partners enough cash to pay taxes.

If it doesn’t, things can get dirty.

And that’s the story of Nik Lamas-Richie and Shayne Lamas-Richie, 2016 T. C. Memo. 63, filed 4/11/16.

Nik was a blogger, but his blog, unlike mine, was fantastically successful. He posted local gossip and then branched out nationally. As his gossip blog took off, Nik finally went into partnership with Investor Jim, and formed an entity taxable as a partnership and fetchingly named Dirty World, LLC. If there was a written agreement, it never got into the record.

Judge Lauber dishes: “To reflect the venture’s intended breadth of scope, the URL for the Web site was changed to ‘thedirty.com.’ Petitioner operated the Web site much as he had before, essentially functioning as an editor.  People would upload gossip to the site for posting, and petitioner would filter out material he deemed salacious or otherwise unfit for publication.  He would often append amusing notations to the gossip he published.  Not infrequently, Dirty World was sued by the people who were the subject of this gossip, and petitioner spent a fair amount of time dealing with these lawsuits.” 2016 T. C. Memo. 63, at p. 3.

Nik finally entered into an employment agreement with another of Investor Jim’s pocket LLCs, and used a competent tax preparer to report his salary and wages. He missed $300 of unemployment, $9 of wages he forgot, and $13 of interest, and he concedes that, but wants to fight over the $25K that was his share of the Dirty World dirty money.

True, Investor Jim was a wee bit casual when it came time to file a Form 1065 and send out K-1s. But that avails not Nik.

Nik owes the tax, but he does escape the 20% five-and-ten chop on the dirty $25K.

Nik”… credibly testified that he viewed himself as an employee of Dirty World, and he properly reported the wages…that he received…for his editorial and related services.  He had not received a Schedule K-1 from Dirty World at the time petitioners filed their…return, and he credibly testified that Dirty World had not previously earned income that he would have been required to report.  Petitioners supplied their return preparer with all tax-related documents relevant to this issue, and we find that they reasonably relied on his assurance that the return in that respect was correct as filed.” 2016 T. C. Memo. 63, at p. 11.

I console myself with the thought that, once again, virtue is its own reward.

However, I cannot in good conscience entitle this blog “Dirty Taxes.”