Schedule C or Partnership - Does it matter?

Technical topics regarding tax preparation.
#1
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I just a read case, Zampa v. Commr (T.C. Memo 1990-561), where a husband/wife Amway distributorship was determined to be a partnership. The taxpayer filed a Schedule C since 1981 showing the husband as the owner. In the years under audit, 1984 and 1985, the wife was paid wages from the husband's Schedule C.

https://www.leagle.com/decision/1990119260hytcm11321960

The Tax Court ruled, "We find that petitioners Mr. and Mrs. Zampa were partners for self-employment tax purposes under sections 1401 and 1402." The Tax Court commented, "...we dismiss petitioners' argument that because respondent did not object to petitioners' characterization of the distributorship as Mr. Zampa's sole proprietorship on their 1981, 1982, and 1983 tax returns, the distributorship's earlier status should govern its tax status for 1984 and 1985."

I'm confused because there is no mention of not filing partnership tax returns for any of the years nor the penalties that result therefrom. All the Tax Court (and the IRS) were concerned with is getting additional SE tax. Moreover, the court wasn't bothered whatsoever that 1981-1983 tax returns were Schedule C and not filed as a partnership.

My biggest concern with an Amway client I have is failure to file penalties if a partnership tax return is not filed. I considered treating them as a qualified joint venture (QJV) but not convinced they each can satisfy one of the seven material participation requirements needed to elect to be treated as a QJV. I recently had a thread about this:

viewtopic.php?f=8&t=14338

Can anyone make sense of the IRS and Tax Court lack of concern for filing partnership tax returns?
 

#2
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RP 84-35 would have allowed them to avoid all late filing penalties.
~Captcook
 

#3
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With RP 84-35 no longer in effect for tax years 2018 and beyond (I believe this is the case) that means substantial penalties can be levied. Do you think the courts will take an increasing interest in the proper classification?

Other than the case above, I read 17 tax cases all of which involved husband/wife and a partnership was only mentioned once in Guadagno TC Summary Opinion 2003-88 where the court footnoted, "From petitioners' trial presentation, it appears to us that, technically, petitioners conducted their Amway distributorship as a partnership, the income and expenses of which are not properly reportable on a Schedule C, Profit or Loss From a Sole Proprietorship, under any circumstance. See secs. 701 through 777. Nevertheless, because the parties ignored this technicality, we do likewise."

Correct me if I am wrong but this is a land mine waiting to explode for the unwary?
 

#4
Noobie  
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Partnership tax returns are mere informational returns, so there is not much to go after there. They are obviously worried about the FICA taxes.

Partnerships do not absolutely have to file 1065's. They are more or less pointing out that there were self employment wages on both the husband and the wife. IF they would have filed two Schedule C's, instead of one, each spouse having their own allocated income, I believe they would not have had any issues.

Most of the time when I see a partnership without a return is a Schedule E rental property. Perhaps they consider that a Joint venture?
 

#5
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Noobie wrote:Partnership tax returns are mere informational returns, so there is not much to go after there. They are obviously worried about the FICA taxes.


Agreed, but understand that even information returns have penalties associated with non or improper filing.

Noobie wrote:Partnerships do not absolutely have to file 1065's.


Completely disagree.

Noobie wrote:Most of the time when I see a partnership without a return is a Schedule E rental property. Perhaps they consider that a Joint venture?


That means they are not considered a partnership for tax purposes, which is why they don't have to file a 1065.
A business considered to be a partnership for tax purposes must file Form 1065.
~Captcook
 

#6
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As I mentioned above, in the nineteen TC cases I found, the Tax Court only twice addressed the partnership issue. All the IRS was interested in was getting SE tax regardless of whether the taxpayers filed one or two Schedule C's.

Captain is correct. There was no geld in the game for the IRS to try to penalize the taxpayer for failure to file a partnership return when waiving the Rev. Proc. 84-35 wand would have made them disappear.

Now, starting with the 2018 tax year, it's different and I bet we'll start seeing IRS audits of the partnership issue in the next few years.
 

#7
jon  
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I agree with the CAPT, BIG penalties and possibly at both the federal and state levels. Yes, you can form a partnership by just how you operate and not necessarily have any papers showing it was formed.
 


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