In general, the buyer of an disinterestedness absorption in a pass-through entity, such as a affiliation or an S corporation, charge amusement items of income, gain, loss, deduction, and acclaim attributable to the article on the owner’s tax acknowledgment in a abode that is constant with the assay of those items on the entity’s acknowledgment (IRC §§6222(a), 6037(a)). If the buyer takes an inconsistent position, the IRS may accomplish an acclimation to the owner’s tax accountability to accommodate to the assay by the entity, and the IRS may appraise tax attributable to that acclimation immediately, rather than through the arising of a apprehension of absence (see IRC §6213). The arising of a apprehension of absence provides a aborigine with rights to challenge the proposed absence afterwards acquittal of the tax that do not administer where, as in this case, no apprehension of absence is required.
If, however, the buyer of the disinterestedness absorption provides adapted notification to the IRS that an inconsistent position is actuality taken by the owner, the aphorism allowing a befitting acclimation to tax to be fabricated afterwards the arising of a apprehension of absence does not apply.
In the affiliation context, final and proposed regulations (as able-bodied as cases cited in the decisions discussed below) abode how the apprehension of inconsistent assay is to be provided and the after-effects of such notice. Those regulations could account from added clarification, as has been acclaimed in comments to the IRS on the new declared “Centralized Affiliation Audit Regime” (see, e.g., Document ID IRS-2018-0020-0002, submitted by Elliot Pisem and acquaint on www.regulations.gov on Aug. 28, 2018).
There are no regulations that abode how a apprehension of inconsistent assay is to be provided in the ambience of an S corporation. See about Pisem and Binder, “Lack of Consistency in S Association Reporting—How Onerous Are the Results?,” 113 Journal of Taxation 354 (2010).
Form 8082, blue-blooded “Notice of Inconsistent Assay or Administrative Acclimation Address (AAR),” has been issued by the IRS for use (1) in account of a affiliation or S corporation, to accommodate apprehension of inconsistent assay and (2) in account of a affiliation only, to book an “administrative acclimation request.” Use of that anatomy appears to be binding beneath regulations applicative to partnerships (see, e.g., Proposed Reg. §301.6222-1(c)(1)). Whether that anatomy is additionally adapted to be acclimated to accommodate apprehension of inconsistent assay in account of an S association was one of the issues addressed by the balloon cloister in Rubin v. United States (118 AFTR 2d 2016-6235 (D. Ct. Cal.), antipodal on added area by the Ninth Circuit (122 AFTR 2d 2018-5979)), discussed below.
Thomas Rubin was the sole actor of Focus Media, Inc., an S association that affianced in advertisement placement. Focus was ultimately affected into defalcation by its creditors in the year 2000, at a time back Focus had ample but about uncollectible receivables. The trustee in defalcation filed the Focus tax acknowledgment for 2000 in a abode that did not, in Rubin’s view, appropriately address abandoning of acknowledgment assets of Focus, and that did not affirmation bad debt deductions of $23 actor that could accept been claimed by acumen of the uncollectible receivables.
Rubin’s aboriginal claimed tax acknowledgment for the year 2000 was constant with the Focus acknowledgment filed by the trustee and the accompanying Schedule K-1 beatific to Rubin. In October 2004, Rubin filed an adapted claimed assets tax acknowledgment for 2000 and adapted allotment for two above-mentioned years, in a amalgamation beatific to the IRS beneath a distinct awning letter to facilitate collective assay of the returns. Those adapted allotment were accompanied by a account that declared his altercation with the 2000 tax acknowledgment filed by the trustee for Focus.
Included with the adapted alone allotment for 1998-2000 was a pro forma adapted acknowledgment for Focus that reflected added abandoning of acknowledgment assets and bad debt amount (attributable to the receivables), and a pro forma Schedule K-1 assuming the amounts that Rubin anticipation should accept been allocated to him by Focus. The adapted claimed assets tax allotment claimed a acquittance for 2000, and refunds for 1998 and 1999 on the base of a carryback of the losses to those years.
Apparently, no Anatomy 8082 was filed with Rubin’s aboriginal or adapted tax allotment for 1998-2000. That may accept been constant with the instructions to the form. Folio 2 of the instructions to the form, as revised in 2000, provides, beneath the branch “How and Back to File,” that, back the anatomy is filed as a apprehension of inconsistent treatment, it is to be absorbed to the accomplice or shareholder’s tax acknowledgment and filed “when you book your aboriginal return”—obviously not achievable back the inconsistent position is aboriginal set alternating on an adapted return.
The acquittance claims were alone by the IRS, on the claim of the claims (not contrarily discussed in the Rubin opinions) and afterwards any affirmation that Rubin had either bootless to abundantly analyze the inconsistencies amid his allotment and the allotment of Focus or that the IRS was ambiguous as to the attributes of Rubin’s claims.
Rubin additionally adapted his acknowledgment for 2001 and amid a Anatomy 8082 with the 2001 amendment, afterwards absolutely gluttonous any acquittance for that year. (Neither assessment in Rubin provides any adumbration as to why the 2001 alteration was filed; conceivably, it was careful in nature.)
Rubin filed a complaint in 2016 in a U.S. Commune Cloister to accompany the tax refunds. The government, afterwards filing an answer, fabricated a motion to aish the complaint afterwards leave to amend, on the area that the adapted allotment were not constant with the acknowledgment of Focus and that Rubin had not filed a “statement anecdotic the inconsistency” as adapted by §6037(c)(2)(A). More specifically, the government argued that the abortion to accommodate a Anatomy 8082 with the adapted alone tax allotment that claimed the refunds was baleful to Rubin’s claims.
The commune cloister assured that it was not bright that the case law apropos after-effects of a abortion to book Anatomy 8082 in a affiliation ambience was applicative in account of an S association shareholder, and beneath to adjudge whether the filing of a Anatomy 8082 by an S association actor was all-important to accommodated the claim beneath §6037(c)(2)(A) that inconsistencies with the accumulated acknowledgment be articular to the IRS. Instead, and afterwards cogent assay in the opinion, the cloister assured that the adapted allotment did not accommodate any “concise document” that annoyed this identification requirement.
Upon address by Rubin, the Cloister of Appeals antipodal the judgement of the commune cloister on this affair and adjourned the case for added proceedings.
Footnote 4 in the Cloister of Appeals accommodation states that the government did not argue, in its abrupt or in articulate altercation afore the Cloister of Appeals, that Rubin’s claims should be alone because he bootless to book the Anatomy 8082; accordingly, the Cloister of Appeals did not accede that argument. Rather, the government argued on address that the account included with the adapted allotment for 1998-2000 was amiss because it did not accurately analyze how Rubin’s adapted tax acknowledgment for 2000 was altered from the acknowledgment of Focus itself for 2000; and that it would be disproportionately crushing for the government to accept to assay the 20 folio pro forma adapted acknowledgment for Focus (included with Rubin’s adapted returns) to analyze the inconsistencies.
The Cloister of Appeals noted, however, that the government’s arguments were attenuate by the Anatomy 8082 itself. That anatomy requires the S association actor to account the assay of items (1) as appear on the Schedule K-1 issued by the S association to the actor and (2) as actuality appear by the shareholder. There was no advice in the Anatomy 8082 instructions or contrarily that accurate the government’s altercation to the cloister that the actor was adapted to analyze inconsistencies from the pages of the corporation’s acknowledgment (exclusive of the Schedules K-1 issued to shareholders).
Indeed, a non-management actor not complex with the alertness or beheading of the accumulated acknowledgment would not commonly accept a archetype of the accumulated return, although conceivably a archetype of the accumulated acknowledgment could be acquired by the actor from the IRS, acceptable afterwards some delay, by address pursuant to IRC §6103(e).
The Cloister of Appeals added assured that Rubin had fabricated able acknowledgment by including a pro forma Schedule K-1 in the adapted allotment and a account anecdotic the accordant inconsistencies. Accordingly, Rubin had complied with the claim of §6037 apropos to identification of inconsistencies.
Based on the affairs declared in the opinions of the commune cloister and the Cloister of Appeals in Rubin, the accomplishment by the government to abstain application of the actuality of acquittance claims by the S association shareholder, on the base of the declared abortion to abundantly analyze the aberration with the corporation’s advertisement treatment, seems to accept lacked abundant support—especially in ablaze of the absence of any adjustment beneath §6037 acknowledging the government’s account of the acknowledgment requirement.
Administration of, and acquiescence with the requirements of §6037(c) ability able-bodied be simplified through the arising of adapted regulations. Pending the arising of such regulations, however, any S association actor because positions inconsistent with the Schedule K-1 that he or she accustomed is forewarned to accomplish the acknowledgment of the aberration as bright as possible, and to accord austere application to including a Anatomy 8082 in the aboriginal or adapted claimed tax acknowledgment ambience alternating the inconsistent position, alike if that anatomy is not acutely required.
Elliot Pisem and David E. Kahen are associates of the law close of Roberts & Holland.
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