Limited Partner incorrectly designated General Partner on K1, should I correct prior years too?

[TT-Business-User]

Family limited partnership was set up in 2013, with an LLC formed to be designated General Partner and family members to be Limited Partners. However, the accountant I used for my tax preparation in 2013 insisted that I was the GP, not a limited partner. So I have been issuing K1 firms with incorrect partnership designation all these years, exposing myself to liability based on the ignorance of the accountant. I can correct this on the 2017 K1 forms I'm doing now, but should I amend prior year 1065s for this partnership and file amendments with IRS to be on the safe side? Thank you

[TaxGuyBill]

Are you doing any work for the Partnership?  If so, the accountant was right, and you would not be a Limited Partner.

If you are a Limited Partner, yes, I would amend everything.  Depending on the circumstances, it may or may not affect things.

[Rick19744]

Let's hold on a moment.  Let's get some more facts here.
1) An LLC was formed.  Is this a single member LLC?
2) If 1 is "yes" who owns the single member LLC?
3) Are you saying you (personally) are now going from GP to LP?
4) If  3 is "yes" how has the allocation worked in all these years?
5) Give me some details on ownership; GP and each individual LP / currently and what it should be.
6) Respond to TGB's question on your activity for the partnership

[TaxGuyBill]

@Rick19744   I interpret it as a separate SMLLC is one of the Partners (the General Partner) of a Family Partnership.

[Rick19744]

Concur, I just want more detail instead of guessing.

[TT-Business-User]

It is correct that the GP LLC was formed to be the General Partner. I am the owner of the LLC. I am not"going from GP to LP." I am an original LP in the partnership creation. Accountant doing taxes coded it differently... I don't know if he just didn't understand partnerships. He said he did. I am the"tax matters person" so maybe that is why he did it. He is now retired and that was 4 years ago, haven't used him since then. But I think the GP LLC could, and should, be the tax matters partner. It would still be me. The other LPs are my son and my mother.  To answer TGB's question, no I do not work for the company. The partnership and LLC were set up by a competent lawyer, but that lawyer's fees are out of our price range now. Thanks

[Rick19744]

So what I am seeing here is that all along the partnership has reflected the correct individuals as LP's, it is just that the returns have reflected you as an individual as the GP instead of the LLC as the GP.  Is that what you are saying?

Does your LLC have an EIN?
I assume that the LLC has no activity other than hold the interest in the partnership?
Who is the decision maker for the partnership?

[TT-Business-User]

Regarding your summary, you are correct.
To answer the second part, each entity does have an EIN. There are workers who make decisions. I ok any large capital expenditures. That's it. What's your opinion about the K1 GP designation then?

[TT-Business-User]

My bad, the GP LLC is technically owned by my mother. I checked the documents more carefully. Since it is a disregarded entity and doesn't file a tax return I got confused. My mother is not the tax matters partner. Is that why you're saying what the accountant did was ok for the tax return?Thanks a lot for drilling into this with me.

[Rick19744]

Ok.  So my original answer below will change somewhat due to late breaking facts as past returns appear incorrect:

1) The TMP must be a GP.  This should be changed as well.
2) My biggest concern here, based on the updated facts, is whether or not the allocation of income or loss has been correct in the past.  Your initial facts indicate that you were designated as the GP, which means you were allocated the GP's percentage instead of your Mom.  So my assumption is the past allocations have been incorrect.
3) Generally in a limited partnership the GP has a 1% interest.  If that is the case here, then if the prior allocation was incorrect as noted above, then technically amended tax returns need to be filed.
4) Amending partnership returns is not as straight forward as other returns.  Some just file a form 1065X, but that is not always correct.  Generally, form 8082 should be filed and this form will set off some bells and whistles at the IRS.  When filing this form and requesting an Administrative Adjustment Request, the IRS technically needs to respond with an approval or denial.  This process adds a level of scrutiny that generally is best to avoid, but may unfortunately be the correct avenue.
5) The form 1065 definitely needs to be corrected for 2017.
6) The decision is yours as to how you will handle past years if the allocation was incorrect.

[TT-Business-User]

Thanks a lot for all your help. You are knowledgeable and I appreciate it. I have paid the taxes according to my percentage, and all taxes have been properly paid as they should have been allocated. I will decide what to do from now. Again, thank you.

[Rick19744]

Welcome.

[Rick19744 · Accepted solution]

Got it.

Edit [This answer was technically correct based on original facts, however, those facts changed and so parts of this response was updated in comments above]

This will be a somewhat long response, however, I think it is important to understand the reasoning and the ultimate end result.

All limited partnerships are formed under the applicable state statutes.  States will follow either the Uniform Limited Partnership Act (ULPA) or the Revised Uniform Limited Partnership Act (RULPA).

Regardless of which Act the state follows, all limited partnerships MUST have at least one general partner that bears personal liability for partnership obligations.

So in your case, you set up an LLC owned by you, which by default is a disregarded entity under the check-the-box regulations.

Any entity who is required to file an information return with the IRS should be obtaining a form W-9 from all taxpayers.  In this case, the partnership would be requesting these from the partners.

For the GP, the W-9 instructions are not the model of clarity, but in the end, the IRS indicates it "encourages" the use of a SSN when the entity is disregarded and owned by an individual.

Having said that, it is really a moot issue who you use for the GP in your case.  This is because whether you reflect the single member LLC and its EIN or you individually and your SSN, at the end of the day:

• The K-1 gets reflected on your individual tax return
• You are still ultimately liable for all partner obligations

So the accountant made a decision to use you individually on the K-1 as GP which is not incorrect.  The decision could have been made to use the single member LLC and its EIN, but as noted above, the end result for all purposes would be the same.

Also, keep in mind, the presentation on the K-1 is for federal income tax purposes.  Having said that, also keep in mind that setting up a single member LLC that has no assets or real substance, while technically a separate legal entity, will certainly be pierced by the judicial system.  If it were that easy, all GP's would be set up as shell organizations.

[JScott7]

If you are the "tax matters person" then you would not qualify for limited partner treatment regardless of how the partnership agreement is written.  

First, the partnership would need to be a Limited Partnership (LP) under state law.  Only a Limited Partnership can have Limited Partners.  The difference comes down to passive income (no self-employment tax) vs. ordinary income (earned income, self-employment tax).  

Even if the business is registered and files as a Limited Partnership, a partner listed as a Limited Partner in the paperwork might still be treated as a general partner for self-employment tax purposes.  With the proposed regulations 1.1402(a)-2 being on hold indefinitely, the IRS determines Limited Partner status based on case law in your particular state.  If someone can sign contracts, including signing off on the tax return, then they would have involvement in management of the business.  It would be difficult to support a position that your role is that of a Limited Partner.  

There are ways to have a Limited Partner that can get paid for services either to the partnership or on behalf of the partnership. These services cannot be   This needs to be laid out in the partnership agreement and make the statement that it is a guaranteed payment without regard to income and that the guaranteed payment is in exchange for the partner's services.  In that case, the guaranteed payments would be subject to self-employment tax but the remaining income(loss) would be passive.  

If this is still an issue, there have been several recent court cases.  Have your CPA, or other qualified tax professional, look into these recent cases. 

- Soroban Capital Partners v. Commissioner, 161 TC No.12

- Renkemeyer v. Commissioner (136 T.C. 137)

https://www.thetaxadviser.com/issues/2024/may/limited-partners-and-self-employment-tax-a-new-test.ht...

https://www.thetaxadviser.com/issues/2024/mar/sec-1402a13-and-limited-partnerships.html