NYS bills dissolved ptnrshp for WC. Now former ptnr has to pay

[schirallicpa]

My client is a small s-corp held by brother and sister. They own an adult home. Previously, the brother, who is the main shareholder of the corp, was a Partner in a partnership with sister and father. This partnership owned a large nursing home. The nursing home was sold a few years ago, the father passed away, his estate is closed, the partnership filed a final return in 2009.

In both operations, the adult care home, and the nursing home, were previously under a self-insured workers comp plan, which was a group plan, along with a number of other nursing homes.

Alas, someone was not paying their fair share of insurance, and being fraudulent in reporting, and now NYS is digging it all back up while the previous plans go insolvent. NYS is investing the fraud, but first it is assessing fees to all of these nursing homes that belonged in the plan.

In 2011 NYS assesses every nursing home and adult care home that was in this plan - and they had to be paid. My client was afraid that his accounts would be seized if he didn't pay. The attorney said to pay. He paid. He took a management fee from his current S-corp to pay the old partnerships assessment. (His sister, who is also involved, is insolvent, and declaring personal bankruptcy. He did not want to "share" the management fee with her, since he was afriad such money would not get turned around to NYS as it was supposed to be.)

So - the question is....how should we handle this so that he can at least get some sort of deduction for this. We considered opening up the partnership, and I don't want to do that, especially since it was really entangled with the estate of the father. We considered a new partnership. But without profit motive, that would be a lost cause. The management fee was the best we came up with, since at least the s-corp takes that deduction. However, he personally will pay tax on the fee, and he's the one footing the NYS bill for the old corp. Possible schedule A deduction?

I would appreciate any insight on this one.

[Lion EA]

Long ago I had a partner of a closed partnership that paid some late-arriving closing costs from his own checking account. I was with HRB then, so it was probably the Block hotline that told me to use Schedule E page 2 for UPE. Client stayed with HRB when I left, so don't know if he ever received any IRS correspondence. Now that K-1s are matched, that may no longer be the preferred method.

[schirallicpa]

I had thought of that as well, and had also thought that maybe that wouldn't work with the k1 not matching up. Or should I say - no k-1 at all from the partnership.

Thanks for your thoughts.

[schirallicpa]

I thought if I put a blub here I'd get this back towards the top and see if anyone else now logging on would have any suggestions.

[schirallicpa]

Still no takers on this one?

[jainen]

>>first it is assessing fees<<

First, what are those fees for? Just because he paid some government agency in connection with a fraud investigation, doesn't mean it was an ordinary and necessary expense of running a nursing home. If it was, why weren't the buyers liable for the obligations of the business they took over? If he didn't tell the buyer about the shady practices--apparently the state considers all participants to be responsible, so he at least knew or should have known--then maybe the price was too high and this can be an adjustment to capital basis or sales price. Maybe it's a personal investment expense, or maybe it's just nothing. Make him prove it.

I'm never very sympathetic to clients on the opposite side of fraud investigators. Anyway, even if UPE were right for an ordinary expense, would the tax effect be enough to risk attracting attention?. How good is the documentation, on this point and the rest of the return?

[schirallicpa]

NYS is a mess. The w/c insurance fund that a group of nursing homes belonged to went belly-up. The former partnership dissolved before the ins. fund folded. The former partnership had no idea that all this was going to happen. 3 years later, NYS steps in and says that every nursing home that had been part of the group must pay in to cover claims that have been made. My client, who is now the president of a different company (which is an adult care home, not a nursing home) paid the assessment. He really didn't have a choice with NY. He had his new company pay him a management fee, that he turned around and used to pay NY himself. He will obviously get taxed on the mgt fee. If the former partnership was still in existence, it would have been paid and expensed by the partnership, and he would have received the pass thru benefit of the expense. Like I said, the partnership is dissolved. So I'm trying to figure out how my client can receive any tax relief from making this payment.

My client has not been fraudulent. Other companies involved in the group fund were fraudulent.

[jklcpa]

It isn't unusual for liabilities to arise or be discovered after a business is liquidated. Had the business known about this liability and paid it prior to liquidation, it would have affected the partners' basis, and therefore most likely would have affected each partner's Schedule D for the reporting of the partnership's liquidation. This was the general premise of Arrowsmith v. Commissioner, a very old case that applied to corporations, and I honestly do not know if it could be used with a partnership. However, following the logic (who said tax law was ever logical), it would seem to me that you need to look back to how this would have affected the final reporting of the partnership if this debt's existence was known at the time. That should give you a start in determining its character.

[jainen]

>>My client has not been fraudulent.<<

That is why you must find out what the "fee" was for. All you have told us so far is that the state investigators determined the business owners were accountable for participation in a fraudulent scheme to cheat employees covered by the health plan, but they sold the business and dissolved the partnership before they were found out. Apparently without any documentation you have accepted their self-serving story that it was all somebody else's fault, although that argument obviously did not impress the investigators who DID have documentation.

For some reason, your client decided to settle with the state rather than contest its position, and now he wants your help getting reimbursed from the rest of us taxpayers. At least, that's how I see it.

[schirallicpa]

no, no. My client was not fraudulent, and I will stick to that. There were many nursing homes participating in a group fund. His nursing home signed a contract along with other nursing homes paying a fee for insurance based on the groups claims activities. When his partnership dissolved, they did not know that other homes had been filing fraudulent claims. How would he know? The partnership dissolved, and therefore ended their contract with the fund. Subsequently, the fund folded, and NYS footed the bill to cover claims. So NYS turned around and billed everyone formerly involved with a proportionate bill to cover their costs. Now NYS is investigating.

Documentation for a dissolved partnership. check.

Documentation for billed claims from NYS. check.

Documentation from the general attys office. check.

Documentation from the clients atty. check.

What other documentation would you ask for? I have no reason to believe that he was involved in any fraudulent scheme. And frankly I am not sure why you want to assume the worst? I'm not posting questions here to get beat up about it. I'm just asking if any one has had any similar experience or knows of reference to similar cases, that they might point me in the right direction.

[schirallicpa]

Thank you JklCPA for your help!