Partners in Peril

K-1 and Form 8082 Consultation

The Tufts Law Firm knows that shareholders (of closely-held S corporations), partners (of partnerships, joint ventures and LLPs) or limited or general partners (of limited partnerships or LLLPs) or members or managing members (of LLCs) may come to doubt that they have received accurate and correct information on the K-1 that they have received from management and its tax return preparer.  Far too many tax return preparers of IRS Forms 1120S or Form 1065 prepare K-1s without appropriate regard to the terms of the parties true economic relationship, as intended, or as set forth in the governing shareholder, partnership or operating agreement.  If you or your tax advisor are concerned about the information appearing anywhere on a K-1 that you have received, now is the time to act.  The IRS has enacted a K-1 matching program and further provides for the scanning of these forms, to enable them to more efficiently tag items and look for inconsistencies or mismatches.  If you do not take prompt action with regard to an erroneous K-1, you may not have an opportunity to challenge any adjustment made of your return in the future.  A duty of consistency may apply.  A proper filing of IRS Form 8082 may need to be made, to note an inconsistent position being maintained.  An administrative adjustment request (AAR), using IRS Form 8082, may also need to be filed, seeking permission from the IRS to make amendments to previously filed, but erroneous partnership tax returns.   In these settings, careful attention must be given to the terms of the governing shareholders’ agreement and bylaws, organizational documents, partnership or operating agreements, plus any and all side agreements and understandings.  Special procedures and filing obligations may exist under the Federal tax law. 

Business disputes may arise, and often times, parties are encouraged to pursue mediation or arbitration or other alternative dispute resolution techniques so that the complex tax issues and erroneous K-1s may be addressed in an efficient manner.   We have found that many times confusion can arise over whether the person receiving K-1 forms is the proper owner and therefore, recipient of the K-1, in whole or part.  Promises or just the circumstances or dealings between the parties may give rise to claims that another person had become an owner, whether beneficial or otherwise.  Eventually, courts may have to weigh in and resolve the matter.  See, e.g., Garvey v. Lemle, 2005 Mass. Super. LEXIS 336 (Sup.Ct. Mass. 2005)(after 11 day trial, court discusses how the K-1s issued were never meant to be the final determinant for identifying the shareholders, but instead, as temporary place holders until the parties could reach agreement as to what additional investments had been made, what payments were loans, and what payments were intended to be equity, but then again, after 13 years, the parties never reached agreement as to a different identity or percentage).  

Careful negotiations and deliberations that must go into resolution of disputes involving erroneous K-1s.  Often times, the IRS Form 8082 cannot be filed without giving due regard to more than just tax concerns.  Much will depend on the parties, the quality of their tax advisor, and the terms set forth in the governing documents.  At the Tufts Law Firm, we try and encourage the parties in these situations to look to resolve matters early on, by taking an approach similar to the one pursued in Wolgin v. Kennington Ltd., Inc., 84 A.F.T.R.2d 99-6855 (E.D.Pa. 1999).  In these matters, the parties can work with a mediator and coordinate resolution of disputes over how to make proper allocations of each partner or member’s distributive share, consistent with the parties’ agreement and Federal tax law, with proper adherence to the additional requirements of reporting under TEFRA, if applicable, using IRS Form 8082.

Practitioners and taxpayers alike must also understand how to approach squeeze-out mergers, conversions, and other techniques or strategies that can threaten any individual, non-managing member or partner.  If an effort is made to compel any such member or partner to accept things, without regard to a proper adherence to the underlying agreements and Federal tax law, such efforts may be challenged.  Under TEFRA, a partner or member may find that they have the right to take an inconsistent position to a position taken by the majority interest holders, and even if the IRS concurs with the majority’s position, elect to pursue an administrative adjustment or result favoring his or her position.  For e.g., Harbor Cove Marina v. Commissioner, 123 T.C. No. 4 (2004); see also, Tufts, “It Ain’t Over ‘Til It’s Over; When Partnership Tax Vessels Make Ill-Advised Journeys and Wind-Up at Harbor Cove,” 6 J. of Bus. Ent. No. 5, at 26 (Sept./Oct. 2004)(author tells the story of an unhappy voyage taken by a partnership tax vehicle that could not rid itself of an unwanted 10% limited partner interpleaded a pay-out of cash that was handed to him, and filed IRS Form 8082 when the limited partnership did not dissolve in accordance with the terms of the limited partnership agreement by selling its assets and liquidating).

If you are interesting in learning how to invoke dispute resolution techniques, with proper adherence to the additional requirements under TEFRA, using IRS Form 8082, please contact us.