The tax law may be “unfair and unjust” but that doesn’t allow a taxpayer to ignore the law to arrive at what he may believe is a more just result.  That’s the key lesson the case of Walter S. Mack Jr. et ux. v. Commissioner, T.C. Memo. 2016-229 provides.

Mr. Mack was a partner in a law firm.  He received K-1s from two law firm related partnerships for 2011 that showed total income of $479,473.  However, he only reported income of $75,000 from the partnerships on his Form 1040 for that year. 

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While philosophers may still debate the question of whether a noise is made if a tree falls in the forest and no one hears it, the Tax Court has no doubt that if a person does not receive a K-1 from a partnership that had income, nor receive a cash distribution that indicates there was income allocable to him, the taxpayer nevertheless must recognize the income.  The reality of this was discovered by a blogger in the case of Lamas-Richie v. Commissioner, TC Memo 2016-63.

Nik Lamas-Richie had founded a gossip blog about Scottsdale, Arizona.  As the Court described, “[t]his Web site initially posted gossip about local topics, including ‘the cool kids in Scottsdale who thought they were celebrities.’”  Discovering success, he decided good gossip wasn’t limited to the west’s most western town, expanding the site to cover regional and then national gossip.

The Bipartisan Budget Act of 2015 at Title XI provides for changes to be made to partnerships.  The most significant is a major change in how examinations of partnerships will be handled by default, while a second change attempts to clarify the family partnership provisions of the IRC.