Casey IRACs are produced by an AI that analyzes the opinion’s content to construct its analysis. While we strive for accuracy, the output may not be flawless. For a complete and precise understanding, please refer to the linked opinions above.

Keywords

attorneyburden of prooftrustgood faith

attorneyliabilitytrustpartnershipgood faith

Related Cases

Castigliola v. Commissioner of Internal Revenue, T.C. Memo. 2017-62, 2017 WL 1372505, 113 T.C.M. (CCH) 1296, T.C.M. (RIA) 2017-062, 2017 RIA TC Memo 2017-062

Facts

The taxpayers, who were attorneys, reorganized their law practice as a PLLC and reported guaranteed payments as self-employment income. They did not remit self-employment tax on the excess of their distributive shares over guaranteed payments. The IRS determined deficiencies in their income tax and imposed accuracy-related penalties, leading the taxpayers to petition for redetermination. The PLLC had no written operating agreement, and the members participated in the management of the business.

Issue

Whether the taxpayers, as member-managers of a PLLC, are entitled to the self-employment income exclusion for limited partners, whether undistributed funds in a trust account constitute income, and whether the taxpayers are liable for accuracy-related penalties.

The issues for decision are whether: (1) Mr. Castigliola, Mr. Banahan, and Mr. Mullen, as member-managers of a limited liability company, are each entitled to benefit from the self-employment income exclusion for limited partners under section 1402(a)(13) for a portion of their partnership distributions; (2) Mr. Castigliola, Mr. Banahan, and Mr. Mullen had additional income in 2010 in the form of undistributed funds held in a trust account; and (3) petitioners are liable for accuracy-related penalties under section 6662(a) for 2008, 2009, and 2010.

Rule

Section 1402(a)(13) excludes the distributive share of any item of income or loss of a limited partner from self-employment income, except for guaranteed payments for services rendered. The burden of proof lies with the taxpayer to show that the IRS's determinations are erroneous.

Section 1402(a) defines net earnings from self-employment as the gross income derived by an individual from any trade or business carried on by such individual, less the deductions allowed by this subtitle which are attributable to such trade or business, plus his distributive share (whether or not distributed) of income or loss described in section 702(a)(8) from any trade or business carried on by a partnership of which he is a member.

Analysis

The court determined that the taxpayers were not limited partners because they participated in the management of the PLLC, which is inconsistent with the definition of a limited partner. The court also found that the undistributed funds in the trust account did not belong to the taxpayers and thus were not income. Regarding the penalties, the court concluded that the taxpayers acted with reasonable cause and in good faith based on their reliance on their CPA's advice.

Conclusion

The court ruled that the taxpayers could not exclude any part of their distributive shares from self-employment income and that the undistributed funds were not income. The court also held that the taxpayers were not liable for accuracy-related penalties.

Who won?

The taxpayers prevailed in part as they were not liable for accuracy-related penalties due to their reasonable reliance on professional advice.

You must be

Log In to Casey

Sign Up to Casey

Reset Your Password

Keywords

Related Cases

Security Bank & Trust Co. v. Wilbur, 56 Cal.App. 604, 205 P. 886

Thompson Engineering Co., Inc. v. C.I.R., 751 F.2d 191, 55 A.F.T.R.2d 85-576, 85-1 USTC P 9126

Dunn Trust v. C.I.R., 86 T.C. No. 46, 86 T.C. 745, Tax Ct. Rep. (CCH) 42,998

Henry T. Patterson Trust by Reeves Banking & Trust Co. v. U.S., 729 F.2d 1089, 53 A.F.T.R.2d 84-1042, 84-1 USTC P 9315

Grabowski Trust v. Commissioner on Internal Revenue, 58 T.C. 650