A partnership was a partner in a Cayman Islands partnership - that investment made up most of its assets. The Cayman Islands partnership did not file a Form 1065 income tax return and did not give a Form K-1 to the taxpayer partnership, because it was determined that the partnership accounting records were such a mess that it would cost several million dollars to put them in good shape and meanwhile the Cayman Islands partnership was liquidating.
Thus, the taxpayer partnership did not have the information it needed to file its own Form 1065, and did not file one. The IRS sought to impose a failure to file penalty under Section 6698. This penalty is only $195 multiplied by the number of partners - but this partnership had about 1600 partners. That would put the penalty at $312,000! And this went on for 3 years.
The taxpayer partnership claimed reasonable cause. The partnership tried, but failed, to obtain information it needed.
The government claimed that the partnership should have obtained the inaccurate data from the Cayman Islands partnership, prepared a return based on that, and included a disclosure. The court was not convinced that filing an clearly erroneous return was the required course of action.
In the end, the bankrutpcy court hearing the tax penalty issue determined that the partnership had done enough to escape the penalty.
Interestingly, the court included consideration of Section 6721 and 6724 - they should not have applied here since those sections relate to information return and a Form 1065 is not an information return.
In re: Refco Public Commodity Pool LP, 118 AFTR 2d ¶ 2016-5085 (Bktcy Ct DE 8/2/2016)
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