Attorney-at-Law

FOOLISH INCONSISTENCY

In Uncategorized on 05/01/2017 at 16:49

No, I’m not misquoting the Sage of Concord, rather I’m addressing the difficulties of Bernard P. Malone and Mary Ellen Malone, 148 T. C. 16, filed 5/1/17, as explained by Judge Buch.

Bernie and Mary Ellen are in a jurisdictional joust over the Section 6662(a) chops IRS handed out for Bernie’s and Mary Ellen’s inconsistent reporting of gain from a partnership. And they never bothered to file Form 8082 or otherwise tell IRS they were deviating from the K-1 they got.

Well, the income and the tax got taken care of five years ago; no partnership-level redetermination needed, just go straight to Bernie’s and Mary Ellen’s return and plug in the right numbers. Section 6222(a) says “be consistent,” and Section 6222(c) says “no SNOD necessary.”

OK for tax, but what about the chop? IRS gave Bernie and Mary Ellen a SNOD.

Judge Buch: “A partner who reports partnership items inconsistently with the partnership’s treatment of them may be subject to penalties.  Section 6222(d) refers to the applicable penalties for ‘disregard of the requirements of this section’.  The section 6662(a) and (b)(1) penalty for negligence is among those referenced.  Likewise, section 1.6662-3(b)(1), Income Tax Regs., states:  ‘Negligence is strongly indicated where–* * * (iii) A partner fails to comply with the requirements of section 6222, which requires that a partner treat partnership items on its return in a manner that is consistent with the treatment of such items on the partnership return (or notify the Secretary of the inconsistency)’. 148 T. C. 16, at p. 5 (Footnote omitted, but Judge Buch clarifies an apparent anomaly between additions to tax and penalties in Section 6222(d).)

We know that everything that isn’t a partnership item is a partner item, but some are computational and don’t require a SNOD, but others are factual and do.

A SNOD (and thus deficiency procedures) are needed where a partnership item is redetermined. But here there’s no need; the gains at issue were reported by the partnership and IRS didn’t touch them.

So the numbers from the partnership’s Form 1065 and the K-1 issued to Bernie and Mary Ellen go straight to Bernie and Mary Ellen’s Form 1040 for the year at issue.

“With respect to the facts at issue here, the Court must determine whether the deficiency procedures apply to a section 6662(a) accuracy-related penalty for negligence imposed solely because of a partner’s inconsistent reporting of partnership items.  We begin with an easy proposition that section 6662(a) penalties, such as the one asserted here, are found in subtitle F of title 26–not in subtitle A.  Because partnership items are limited to items arising under subtitle A, this penalty is not a partnership item; it is a nonpartnership item.  And unless it is a computational affected item, it is subject to deficiency proceedings.” 148 T. C. 16, at p. 11.

So Bernie and Mary Ellen win, because the issue is merely computational?

No.

“But in this case there are no adjustments to partnership items.  There is no dispute that the partnership items reported by MBJ were not adjusted—the Commissioner did not attempt to dispute the items as reported on MBJ’s Form 1065.  The Malones argue, however, that the inconsistently reported partnership items on their 2005 Form 1040 were ‘adjusted’ within the meaning of section 6230(a)(2)(A)(i).  We disagree.

“The adjustments made to the liability reported on the Malones’ … Form 1040 were computational adjustments to their tax liability to take into account the partnership items as originally reported by MBJ.  There were no adjustments to partnership items.  Accordingly, the section 6230(a)(2)(A)(i) exclusion from deficiency procedures is inapplicable to the section 6662(a) and (b)(1) negligence penalty before the Court in this case.” 148 T. C. 16, at p. 14.

Thus, whether computational or factual, deficiency procedures apply to the inconsistency chops, and Tax Court has jurisdiction.

Clear? Thought not.

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