The Marital Partnership, the Joint Return, and the Non-Disregarded Entity

When husband and wife own a partnership together, a common misconception is that because a joint return is filed for the husband and wife, the partnership can be treated as a disregarded entity and not have to file its own return. Unfortunately for some, it is sometimes realized after the reliance on this erroneous fact, that a 1065 was required to have been filed by the partnership. This was the case for John Petito and his wife. John and his wife owned Argosy Technologies, LLC and had filed 1065 for years 2010 and 2011. 1 These returns were not filed timely and late filing penalties were assessed on the returns. However, on these returns, on the Form 1065 Schedules B-1 with Information on Partners Owning 50% or More of the Partnership, John and his wife were listed as owning 100%.

After assessment of the late filing penalties, Argosy timely submitted a Form 12153 requesting a collections due process (CDP) hearing. Argosy did not request any collection alternative, but instead contested the underlying liabilities stating it was not a partnership but instead a single-member limited liability company. Unsurprisingly, the IRS Appeals officer determined the levy should be sustained verifying through transcript analysis that the assessment was property for each tax year at issue.

Subsequently, the Tax Court also concluded Argosy was a partnership as well as liable for the late filing penalties. First, the Tax Court stated that since Argosy represented itself as a partnership on its tax returns, it could not then in turn argue it was indeed another entity. Then, Argosy took the position that Mr. and Mrs. Petito were one partner. Since there was no evidence of an election pursuant to Code Sec. 761(f) as a qualified joint venture, this argument also failed.

The above illustrates what can be a confusing but unfortunately common issue that can be easily resolved with proper planning on the front end.

Footnotes

  1. Argosy Technologies, LLC v. Comm’r, T.C. Memo 2018-35