Rev. Rul. 81-270, 1981-2 CB 250


Section 7701.--Definitions

26 CFR 301.7701-15: Income tax return preparer.

(Also Section 6694; 1.6694-1.)


The penalty for negligent or intentional disregard of rules and regulations may be imposed on a general partner who prepares the partnership return, if an understatement of liability on the individual income tax return of a limited partner is due to negligent or intentional disregard of rules and regulations by the general partner in preparing schedule K-1 of the partnership return and the entries on that schedule constitute a substantial portion of the limited partner's return.


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ISSUE


May the penalty for negligent or intentional disregard of rules and regulations be imposed on a general partner who prepares the partnership return if an understatement of liability on the individual income tax return of a limited partner is due to the negligent or intentional disregard of rules and regulations by the general partner in preparing the partnership return?


FACTS


GP is the promoter of and a general partner in a tax shelter partnership, P. LP is a limited partner in P. GP prepared the Form 1065, U.S. Partnership Return of Income, of P, including a schdule K-1 (Form 1065),Partner's Share of Income, Credits, Deductions etc., for each of the partners. Preparing the partnership return is one of the general partner's duties for which GP is compensated.


Upon examination of LP's individual income tax return, the Service determined that there was an understatement of liability due to the negligent or intentional disregard of rules and regulations by GP in preparing the Schedule K-1 (Form 1065). The entries on the Schedule K-1 (Form 1065) constituted a substantial portion of LP's return.


LAW AND ANALYSIS


Section 6694(a) of the Internal Revenue Code provides that if any understatement of liability with respect to any return is due to the negligent or intentional disregard of rules and regulations by any person who is an income tax return preparer with respect to the return, that person shall pay a penalty of $100 with respect to the return.


Section 7701(a)(36) of the Code provides that the term "income tax return preparer" means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by subtitle A. Preparing a substantial portion of a return is treated as if it were the preparation of the return. However, a person is not an income tax return preparer merely because the person prepares a return of the employer (or of an officer or employee of the employer) by whom the person is regularly and continuously employed.


Section 301.7701-15(a) of the Regulations on Procedure and Administration provides that an income tax return preparer is any person who prepares for compensation, or who employs (or engages) one or more persons to prepare for compensation, other than for the person, all or a substantial portion of any return. A person who furnishes to a taxpayer or other preparer sufficient information and advice so that completion of the return is largely a mechanical or clerical matter is considered an income tax return preparer even though that person does not actually place or review placement of information on the return.


Section 301.7701-15(b)(1) of the regulations provides that only a person (or persons acting in concert) who prepares all or a substantial portion of a return shall be considered to be a preparer (or preparers) of the return. A person who renders advice that is directly relevant to determining the existence, characterization, or amount of an entry on a return will be regarded as having prepared that entry.


Section 301.7701-15(c)(1)(i) of the regulations provides that a return of tax under subtitle A includes a partnership return of income.


Section 301.7701-15(d)(2) of the regulations provides that a person shall not be considered to be a preparer of a return if the person prepares a return of a person, or an officer, general partner, or employee of a person, by whom the individual is regularly and continuously employed or in which the individual is a general partner.


Under section 301.7701-15(d)(2) of the regulations GP is not a preparer of the partnership return, nor would GP be considered to be the preparer of another general partner's return or the return of an employee. However, thissection does not preclude a general partner from being the preparer of a limited partner's return. Because GP rendered advice directly relevant to determining the existence, characterization and amounts of entries that constitute a substantial portion of LP's return, and because GP was compensated for preparing the partnership return and Schedule K-1, from which these entries were derived, GP is a preparer with respect to LP's return.


HOLDING


The penalty for negligent or intentional disregard of rules and regulations may be imposed on GP for the understatement of liability on LP's return.