David Bruner and Eneas Kaner were equal partners in a partnership in Arizona. They had an original partnership agreement that had been amended five times over the years.
In 2011 and 2012 the partnership paid large amounts to a defined benefit pension plan with 92% of the 2011 contribution and 100% of the 2012 contribution allocated to Mr. Bruner.
IRS audited Mr. Bruner’s 2011 and 2012 returns. A deficiency notice was issued March 23, 2016 for both years because the partnership agreement allocated profits, losses and deductions 50% to each partner.
During the audit, IRS repeatedly requested various documents, including amendments to the partnership agreement. The partnership provided the original agreement and five amendments but did not provide any evidence of written or oral amendments for the defined benefit plan contributions.
Dec. 6, 2016 Mr. Bruner gave the IRS Appeals Office a declaration by Mr. Kane. The declaration said the partnership agreement had been orally amended to allocate the contributions to the pension plan. It said the special allocations were reflected in the capital accounts; Mr. Kane agreed with the allocations and it was consistent with their economic sharing arrangements. IRS accepted Mr. Kane’s declaration and the parties began discussing how to do a settlement.
The issue for the court was whether Mr. Bruner was entitled to be paid for litigation and administrative costs since the deficiency notice was substantially reduced and cancelled.
The court found no payment was owed to Mr. Bruner because the IRS position was substantially justified – the declaration by Mr. Kane was not provided in a timely manner.
An award can be paid if the taxpayer (who has the burden of proof) can show he is the “prevailing party” (IRS was basically wrong); he has exhausted administrative remedies within the IRS; he did not unreasonably drag out the proceedings and he claimed reasonable costs.
If Mr. Bruner had provided the declaration by Mr. Kane during the audit or shortly after the deficiency notice was received, he might have been paid for his attorney fees and related expenses. IRS was found to have acted in a reasonable manner so no award was allowed to Mr. Bruner.
It is important to keep a record of all amendments to the partnership agreement and respond to any IRS Notice in a timely manner.
Did you hear “The essence of genius is knowing what to overlook.” William James