The Tax Court ruled against a gossip site founder in a case involving taxes on partnership income.
Nik Lamas-Richie started a gossip blog on a website in 2007, originally posting gossip about “the cool kids in Scottsdale who thought they were celebrities.”
The site was successful, and he later branched out by posting gossip of regional and national interest. As the site gained viewers, it attracted the attention of investors. One of them, James Grdina, suggested the formation of a partnership that would take over the website and supply capital to help it expand. Grdina and his company Intrigue Investment Co. loaned the partnership, which they named “Dirty World LLC, $650,000.
Dirty World filed its Form 1065 return for the calendar year 2011 reporting $62,000 as ordinary business income from the Web site, consisting chiefly of advertising revenue. Lamas-Richie’s share reported in the K-1 was $25,400, but he did not receive a copy of the K-1 and was not aware of the contents of the Form 1065 until the IRS began its examination of his 2011 return. Dirty World had never previously reported any net profit.
Lamas-Richie reported his salary of $74,500 and separately reported on Schedule C sole proprietorship income of $46,000. The return did not include any other income or loss stemming from his limited partnership interest in Dirty World.
The Tax Court, in T.C. Memo 2016-63 (filed April 11, 2016), found Lamas-Richie taxable on his distributive share of partnership income, even though it was not distributed to him in 2011. The court found him not liable for the penalty with respect to this item.
A partnership is not subject to federal income tax, the court noted. After items of income and expense are determined at the partnership level, each partner is required to take into account separately in his return his distributive share, whether or not he received it, and whether or not he was aware it existed at the time it was earned.
“Each partner is taxed on their distributive share without regard to whether the amount is actually distributed to him,” the court said.
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