Texas: need to dissolve partnership and preclude the use of the miscalculated K1s

[texasbizinvestor]

texas

this is a dissolution dispute (with no written resolution, no operating agreement) many problems with the way it was ran as a partnership over the last 50+ years

Background: A family ran about 10 million$ worth of their commonly inherited property through a non registered partnership. One of the 3 partner (defendant) only commissioned a CPA to do the tax returns as a partnership, no reports or meeting none of that, she basically did part of the managing and her part was signing the return prepared by others

Plaintiff is the sisters of the defendant, She claims she is not a managing partner in their own words however, wrote leases and directly collected and depositing rents

Defendant: Managing partner (The side I am trying to assist) did the same but also signed the partnership tax returns. Although she did spend more time on the maintenance items

The problem is the K1's only recorded some of the income by the plaintiff. Most of the rents and deposits by the plaintiff just by passed the partnership there by was not recorded against her capital account on the K1's . The managing partner never knew the K1s are used to dissolve the company at a later date. All the "managing partner" (defendant) knew was when her plaintiff took their share of the deposits to their own personal return, it made the partnership tax liability less.. so hse had no problem with it what they were doing.

I can see this happening before, I know there is some case history outlining how to handle a dissolution when the K1s are grossly wrong even if the plaintiff likes the K1s just the way they are. These K1s are so far off and so difficult to recreate accurately, we need to not use them at all.

The k1's go back to the 1950's and started being miss calculated as far back as I can see records in the 1990's

I need to disparage any use of these K1's outlined above..

Also a factor is there was never quarterly reports of K1s sent to partners, members or lenders, just the IRS form once a year .. I need usable parallel case law from TEXAS does that does just that.

 

[Zigner]

The involved parties need attorneys - an internet forum is not going to be able to help.

 

[Whoops2u]

texasbizinvestor, hold on to your pants, but, you don't want this to go into court. This is going to be a negotiated settlement. I can imagine the forensic accounting would require a expert who would essentially redo almost 70 years of tax accounting to come up with some justifiable numbers. Start searching for pennies under the cushion as such an engagement is certainly going to be in the high five figures and would not blow my mind if the fees were in the six figure range.

That's just for the accounting expert for one side.

Bottom line, how bad does the sister think she is getting harmed? What is her basis for thinking that?

 

[Taxing Matters]

If the parnership returns and the related K-1s are wrong then the partnership has the obligation to fix them, at least for the last several years in which the statute of limitations is still open for the IRS to adjust the returns for the partners of the partnership. Hopefully even though they are now evidently quite inaccurate the IRS will not consider this an issue of fraud. The defendant, who evidently signed the returns, is on the hook here if the IRS does think the returns were fraudulent. I'd suggest that the defendant start by hiring a tax attorney to advise on how best to correct the returns. It may not end up costing nearly so much at Whoops2u fears. There is no way to really estimate that without seeing what the books and records of the partnership are like and what it is going to take to fix it.

 

[quincy]

Texasbizinvestor, it is fine to gather information for the defendant in the case. That can be helpful.

But, if you are not an attorney, you should avoid assisting the defendant with filling out and filing legal documents or advising him on legal issues. That is considered the practice of law. He would need an attorney licensed to practice in his area.

 

[Whoops2u]

If the parnership returns and the related K-1s are wrong then the partnership has the obligation to fix them, at least for the last several years in which the statute of limitations is still open for the IRS to adjust the returns for the partners of the partnership. Hopefully even though they are now evidently quite inaccurate the IRS will not consider this an issue of fraud. The defendant, who evidently signed the returns, is on the hook here if the IRS does think the returns were fraudulent. I'd suggest that the defendant start by hiring a tax attorney to advise on how best to correct the returns. It may not end up costing nearly so much at Whoops2u fears. There is no way to really estimate that without seeing what the books and records of the partnership are like and what it is going to take to fix it.

Basis is forever. Like an NOL or properties exchanged into, just because the event that was in error was past the statute of limitations date does not mean using numbers past that date can't be audited. The partnership still has to prove up its numbers. How do they do that without going all the way back? Not only that, this was not asked as a taxation question but is about liquidating distributions based on inside basis.

 

[FlyingRon]

I'm not sure what K-1s (properly completed or not) have to do with basis. You probably need to take the whole mess to a tax professional (perhaps even an attorney). Operating losses don't change basis. Property's exchanged don't appear on K-1s (other than those distributed to the parnters).

 

[Taxing Matters]

Basis is forever. Like an NOL or properties exchanged into, just because the event that was in error was past the statute of limitations date does not mean using numbers past that date can't be audited. The partnership still has to prove up its numbers. How do they do that without going all the way back?

Yes, basis lasts as long as the property is held, which could be decades. But how far back they have to go depends on the details of the partnership, which I don't know. How long has the property that the partnership has been held? It's not a given that it goes back 50 years, after all. Property could have been sold, transferred, etc., and new property obtained. It is also not clear when the erroroneus treatment started. That may not go back all 50 years either. The OP stated that it went back to the 1990s at least, but I have no way of knowing if it goes further than that. I also do not know how good the records they have are. If the records themselves are very good, then reconstructing how the books would be easier and less expensive then if they are a mess. Nor do I know how active this partnership was. If there were just a few pieces of property held for investment that would be considerably easier than a very active partnership with lots of different property and lots of income being generated. In short, how much it may cost will depend on a whole lot of things I don't know. It is possible that it wouldn't end up costing as much as you indicate, though it is certainly possible too. The details matter a lot. So I wouldn't assume the cost until I knew those details.

 

[Whoops2u]

I'm not sure what K-1s (properly completed or not) have to do with basis. You probably need to take the whole mess to a tax professional (perhaps even an attorney). Operating losses don't change basis. Property's exchanged don't appear on K-1s (other than those distributed to the parnters).

The basis is reported on the K-1. At least the dreaded concept of "inside" basis. That can be affected by any of a number of things. Contributions, distributions over profits, inheritance with a 754 election or the recourse debt brought on are some examples. Because of the change in rules, I bet there are a lot of partnerships re-evaluating reported basis this and last year. Some are beginning to believe the IRS might actually match up partnership accounting soon as the new ability to collect directly against the partnership makes auditing them easier.

The OP cares as they are dissolving the partnership but don't have an agreement on the allocation to the partners.

Sec. 152.706. DISPOSITION OF ASSETS. (a) In winding up the partnership business, the property of the partnership, including any required contributions of the partners under Sections 152.707 and 152.708, shall be applied to discharge its obligations to creditors, including partners who are creditors other than in the partners' capacities as partners.

(b) A surplus shall be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under Section 152.707.

Sec. 152.707. SETTLEMENT OF ACCOUNTS. (a) Each partner is entitled to a settlement of all partnership accounts on winding up the partnership business.

(b) In settling accounts among the partners, the partnership interest of a withdrawn partner that is redeemed under Section 152.610 is credited with a share of any profits for the period after the partner's withdrawal but is charged with a share of losses for that period only to the extent of profits credited for that period.

(c) The profits and losses that result from the liquidation of the partnership property must be credited and charged to the partners' capital accounts.

(d) The partnership shall make a distribution to a partner in an amount equal to that partner's positive balance in the partner's capital account. Except as provided by Section 152.304(b) or 152.801, a partner shall contribute to the partnership an amount equal to that partner's negative balance in the partner's capital account.

 

[texasbizinvestor]

If the parnership returns and the related K-1s are wrong then the partnership has the obligation to fix them, at least for the last several years in which the statute of limitations is still open for the IRS to adjust the returns for the partners of the partnership. Hopefully even though they are now evidently quite inaccurate the IRS will not consider this an issue of fraud. The defendant, who evidently signed the returns, is on the hook here if the IRS does think the returns were fraudulent. I'd suggest that the defendant start by hiring a tax attorney to advise on how best to correct the returns. It may not end up costing nearly so much at Whoops2u fears. There is no way to really estimate that without seeing what the books and records of the partnership are like and what it is going to take to fix it.

well before 4 years, you got capital account already screwed up so really the statue of limititions are only so helpful in that event. and of course we are considering ammeneding the last 4 years of taxes

 

[texasbizinvestor]

Texasbizinvestor, it is fine to gather information for the defendant in the case. That can be helpful.

But, if you are not an attorney, you should avoid assisting the defendant with filling out and filing legal documents or advising him on legal issues. That is considered the practice of law. He would need an attorney licensed to practice in his area.

assiting her with an attorney of coarse and we would both like to find some case history in our favor

 

[texasbizinvestor]

The basis is reported on the K-1. At least the dreaded concept of "inside" basis. That can be affected by any of a number of things. Contributions, distributions over profits, inheritance with a 754 election or the recourse debt brought on are some examples. Because of the change in rules, I bet there are a lot of partnerships re-evaluating reported basis this and last year. Some are beginning to believe the IRS might actually match up partnership accounting soon as the new ability to collect directly against the partnership makes auditing them easier.

The OP cares as they are dissolving the partnership but don't have an agreement on the allocation to the partners.

Sec. 152.706. DISPOSITION OF ASSETS. (a) In winding up the partnership business, the property of the partnership, including any required contributions of the partners under Sections 152.707 and 152.708, shall be applied to discharge its obligations to creditors, including partners who are creditors other than in the partners' capacities as partners.

(b) A surplus shall be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under Section 152.707.

Sec. 152.707. SETTLEMENT OF ACCOUNTS. (a) Each partner is entitled to a settlement of all partnership accounts on winding up the partnership business.

(b) In settling accounts among the partners, the partnership interest of a withdrawn partner that is redeemed under Section 152.610 is credited with a share of any profits for the period after the partner's withdrawal but is charged with a share of losses for that period only to the extent of profits credited for that period.

(c) The profits and losses that result from the liquidation of the partnership property must be credited and charged to the partners' capital accounts.

(d) The partnership shall make a distribution to a partner in an amount equal to that partner's positive balance in the partner's capital account. Except as provided by Section 152.304(b) or 152.801, a partner shall contribute to the partnership an amount equal to that partner's negative balance in the partner's capital account.

its this rule that biting the defendant , thanks for copy pasting that.. however, laws written and laws ratified are not always the same. this rule does not have a "whit if the K1 is wrong"

 

[texasbizinvestor]

assiting her with an attorney of coarse and we would both like to find some case history in our favor

and what i find i give to the attorny not the defendndant directly.

 

[texasbizinvestor]

Yes, basis lasts as long as the property is held, which could be decades. But how far back they have to go depends on the details of the partnership, which I don't know. How long has the property that the partnership has been held? It's not a given that it goes back 50 years, after all. Property could have been sold, transferred, etc., and new property obtained. It is also not clear when the erroroneus treatment started. That may not go back all 50 years either. The OP stated that it went back to the 1990s at least, but I have no way of knowing if it goes further than that. I also do not know how good the records they have are. If the records themselves are very good, then reconstructing how the books would be easier and less expensive then if they are a mess. Nor do I know how active this partnership was. If there were just a few pieces of property held for investment that would be considerably easier than a very active partnership with lots of different property and lots of income being generated. In short, how much it may cost will depend on a whole lot of things I don't know. It is possible that it wouldn't end up costing as much as you indicate, though it is certainly possible too. The details matter a lot. So I wouldn't assume the cost until I knew those details.

you are spot on: the records are only tax returns, leases, closing statments, and bank records of he plaintiff that the bank has to provide. that can get spendy. We have. Still the capital account will never be accurate 100% and there never was a practice of counting all the income to the capital account as far back as we can find records of so far. Thats why I was looking for a magic bullet with case history totally ignoring the capital accounts as if the partnership was ran with out them

 

[Whoops2u]

Thats why I was looking for a magic bullet with case history totally ignoring the capital accounts as if the partnership was ran with out them

Your problem has no magic bullet. At best, the capital accounts are merely evidence. More probably, they will have some presumption in their favor that has to be overcome.

The only possible bullet here are facts as to what the basis should be that overcomes any presumptions, waivers, statute of limitations, statute of repose, or other legally favorable issues the K-1 basis numbers provides.