Partnership basis audit

[Catherine]

 

Clients came to me to represent them in an audit of partnership basis, for the year before I started preparing the partnership return.

 

This partner funds the whole operation (runs a loss every year; *long* story - other partner is his son; that should tell you) and filed the return himself that year but put in no information on capital contributions for/from himself.  IRS wants to disallow the loss for lack of basis.  

 

I have, from the client, his full year of bank statements showing many checks from his personal account paying partnership expenses.  Statements include check images.  Will it suffice to bring the dated statement with listed checks and copies only of the pertinent checks?  Would it do more good or more harm to bring the full page of check images?

 

Also will be bringing copies of the ledgers of business expenses.  Client is an older gentleman who still keeps everything in (pristine!) paper ledgers.  Won't bring the ledger book; it has other years' info and I want to keep this limited to the one year in question.

 

 

[Lynn EA USTCP in Louisiana]

Have you reviewed his partnership agreement for the verbiage regarding the partners responsibility for paying partnership expenses out of their personal accounts? 

[BHoffman]

Catherine, it sounds like your client has substantiation but as Lynn points out, that doesn't always mean an auditor will agree immediately to allow the loss.  Was a balance sheet prepared?

It sure is nice to have a written partnership agreement with the correct UPE verbiage and all the CPE classes address this, but I have not ever been able to find a statute or cite that requires one.  Reg 1.761-1(c) does say that the agreement can be oral.  

From how you describe it, I think Dad might have had UPE if he paid partnership expenses directly from his personal account and not a capital contribution.

 

[BHoffman]

.....And, I'm not 100% positive but I'm 99% pretty sure UPE has no basis limitations.

[Catherine]

No formal partnership agreement; this is a dad funding his son's business venture.  They were told (by me) to get one -- even hand-written but signed by both -- when they came to me for subsequent-year's taxes.  Son does have a profit motive, and is operating the business AS a business.  But dad was shelling out for everything that first year.  (And for lots of things in subsequent years; there has been no profit yet.)

Thanks.  Will look at  UPE rules instead of basis loss.