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ERRONEOUS K-1 WILL NOT EXTEND OTHERWISE EXPIRING STATUTE OF LIMITATIONS IN CIVIL DISPUTES

04 / 07 / 2015

Lefkowitz v. Wirta, Calf. Ct.App. April 1, 2015 (Unpub. Opinion)

 

Taxpayers who are litigating partnership and S corporation disputes have to be careful in placing untoward reliance on a K-1 proclaiming that they "own" an interest in an entity.  In an unpublished case out of California, the state appellate court confirms that if a litigant is otherwise on notice of an intention to treat them as being locked out of a partnership in an earlier year, he or she will not be able to argue that mere receipt of a later, erroneous K-1 identifying he or she as a "partner" will trigger the delayed discovery rule on the issue.  

 

NOTE:

 

On the one hand, taxpayers who choose to do nothing, in the face of an erroneous K-1 identifying themselves as a "partner" when believing that they are not must contest even favorable K-1s (i.e., those generating "losses") that are in error, using IRS Form 8082, Notice of Inconsistent Treatment, or having failed to do so, find themselves "estopped" by the IRS to contest such position (i.e., as a partner), if later asserting or filing a Form 8082 when receiving an unfavorable K-1 (i.e., producing pass-through gains).  See Blonien v. IRS.