Personal Taxes, Tax Court

Didn’t know about your ownership in a partnership? Doesn’t excuse you from paying tax on income from the partnership.

Divorces can be nasty. Just ask Mrs. M. (a prominent Dallas family (aka, divorce) lawyer with whom I live). In this Tax Court Memorandum decision, you get an idea of how ugly things can get, particularly when you drag the IRS into the fray.

Vince (not Vance) and Ann Carrino were married in 1990 and legally separated in June 2002. Their divorce dragged on for four more years. The Tax Court described Vince as “an exceptionally skilled financial manager.” He was a hedge fund guru. He was also crafty.

Vince initiated a new hedge fund in January of 2002 – CR LP. He did not tell Ann about it. The new hedge fund started business later in 2002. CR LP did really well in 2003. Ann was not listed as a partner in legal documents, did not get a K-1, and did not know about CR LP until quite a bit later.

When Ann got wind of CR LP, she took action. The California divorce court ruled that she owned a piece of the partnership under community property law and she received over $6 million to liquidate her interest in CR LP in November 2006. In December 2006 the divorce was granted.

On what appeared to be the last day to file a 2003 amended return for CR LP (April 15, 2007), Vince filed an amended partnership return and sent Ann a 2003 K-1 in 2007 showing her share of income of over $750,000 and reduced his general partner entity share of income by the same amount. She did not file an amended return for 2003 to report her income on the K-1. The IRS noticed that omission. The parties went to Tax Court.

Ann tried to argue that she was not really a partner under California community property law. She lost that argument. The Tax Court said she owed the money.

Of course, Vince filed an amended return for 2003 seeking a refund. Apparently his refund claim was disallowed by the IRS. It seems that Vince filed a Tax Court petition pro se seeking relief from an IRS determination to disallow his refund claim. He did not go through the right channels to appeal the initial disallowance, so he lost the right to get a refund.

Just to add a little salt to the wounds of Vince and Ann, the Tax Court decision contained some dicta. It pointed out that the California divorce court, while criticizing Vince’s hasty and unilateral action, slapped him with all of Ann’s penalties, interest, fees and costs above the actual federal and state taxes she owes. Then the Tax Court mentioned in a footnote to the case that Ann and her lawyers did not argue innocent spouse relief, hinting that she may have received some tax relief from those provisions. The Court pointed out that it can’t address arguments not made.

Did I say that divorces can be nasty?

VKM

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