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Although it may be true, in the words of Ralph Waldo Emerson, that “a foolish consistency is the hobgoblin of little minds,” an inconsistency between a law firm partner’s tax position on their personal tax return and one taken in a subsequent court proceeding may create a “hobgoblin” of another kind. As we approach April 15, it seems appropriate to examine some of the tax issues and doctrines that law firm partners and partnerships should be aware of that affect the tax treatment of partners by law firm partnerships and that may have ramifications on partners’ abilities to assert certain claims in the future that are at odds with their tax treatment by their respective firms. Although it is the hope of this article to highlight areas of possible concern to law firm partners, readers are strongly cautioned to consult with their own tax advisers concerning the issues raised here and concerning their own fact-specific situation. PARTNERS AND TAXES Multitiered partnerships are of course very common. Having both equity and nonequity partnership positions serves numerous purposes at law firms that can be good for both the partnership and its individual partners. Sometimes the tax treatment of these nonequity partners, however, raises questions. Although equity partners almost universally are taxed on their share of firm profits and receive IRS Schedule K-1s, the tax treatment of nonequity partners by their firms varies. Some firms elect to treat their contract partners as employees and provide them with Form W-2s; other firms provide their contract partners with the same IRS Schedule K-1s as they do their equity partners. In such cases, the K-1s often indicate that the compensation paid to a contract partner is a guaranteed or fixed payment. Partnerships that treat their contract partners as employees will often pay one-half of the contract partner’s self-employment or FICA taxes. In contrast, those treated as partners will pay all of their own self-employment taxes, as do equity partners. ( Internal Revenue Code �1401 provides that of the self-employment tax of 15.3 percent, an employee would be responsible for 7.65 percent while a partner would be responsible for the entire 15.3 percent.) Although this treatment may initially appear to be disadvantageous to those partners asked to pay the whole of their self-employment taxes, this is often not the case. Those contract partners would likely be permitted to properly deduct from their income certain business expenses not properly deducted by employees. For example, certain health insurance deductions would not be available to a partner receiving a W-2 but would be available to a contract partner receiving a Schedule K-1. Similarly, a K-1 recipient would be permitted to deduct certain unreimbursed expenses whereas a W-2 employee would not. It is important to note, however, that, regardless of what is more beneficial to the taxpaying contract partner, there are indicia or guidelines to determine whether an individual is a partner or an employee. Whether partnership status is enjoyed turns on various factors. As one New York state court indicated, these include sharing in profits and losses, exercising joint control over the business, making capital investment, and possessing an ownership interest in the partnership. I OBJECT Partners who receive Schedule K-1s but who disagree with the tax treatment therein are wise to object to the inconsistent K-1. To do so, such partners can file a Statement of Inconsistent Position with the Internal Revenue Service. IRS Form 8082 provides the means by which partners who receive K-1s that they contend are inaccurate can object to the IRS. The filing of this form provides notice to the IRS that the taxpaying partner objects to the K-1 and will file a personal return at odds with the Schedule K-1 issued by the partnership. The issuance of the form is limited depending on the size of the firm. In addition, the filing of the form may lead to an audit of the partnership and the partner by the IRS. A partner receiving a Schedule K-1 that differs from what they believe to be the correct allocation would of course be prudent to first raise the objection directly with the partnership. This objection may result in the partnership simply correcting the Schedule K-1. Unfortunately, however, partnerships sometimes use the Schedule K-1 as a weapon to harm departed partners so that the objection alone may not be fruitful. The Schedule K-1 of a departed partner sometimes reflects the litigation posture of the partnership or is aimed at penalizing the departed partner by burdening them with unsupportable tax liability. In such a case, the filing of the Form 8082 may be the departed partner’s only choice. BEWARE ESTOPPEL Partners who file personal tax returns as partners instead of as employees, or partners who fail to object to items in the Schedule K-1 and instead simply file their returns in accord with the Schedule K-1s issued by the partnership, may be estopped from taking a contrary stance in the future. Under federal tax law (26 U.S.C. �6222), a partner must either treat each partnership item on his own return consistently with the treatment of that item on the partnership’s return or notify the IRS of any inconsistency. Form 8082 is not optional in such cases but must be filed, as 26 C.F.R. �301.6222(b)-1(a) indicates. A taxpayer who receives a Schedule K-1 and fails to notify the IRS of inconsistent treatment by filing Form 8082 is bound by the partnership’s position on its return, including the partnership’s treatment of the taxpayer as a partner. By failing to file a statement identifying any inconsistency, a taxpayer is prohibited from later denying that he was a partner in the partnership and claiming he was an employee. In Blonien v. Commissioner of Internal Revenue (2002), the taxpayer was a former partner of Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey. He received Schedule K-1s for years and enjoyed benefits of filing his tax return as a partner. Significantly, he also never filed Form 8082s contesting his status as partner. The court held Blonien was prevented by the “duty of consistency” from now claiming that he was an employee of Finley, Kumble for tax purposes. In so doing the Tax Court stated: “A partner who receives a Schedule K-1 and fails to notify the commissioner of inconsistent treatment by filing Form 8082 is bound by the partnership’s position on its return.” Similarly, partners may be barred by the doctrine of quasi-estoppel from asserting that they were partners on their personal tax return and later asserting that they were not partners. Courts have consistently held that, in the words of one New York decision, a party is “estopped from adopting in court a position contrary to that previously asserted on his or her tax returns.” Quasi-estoppel, or estoppel against inconsistent positions, forbids a party from receiving the benefits of a transaction or statute, and then “subsequently taking an inconsistent position to avoid the corresponding effects.” So, tax time brings many a headache, but two headaches a law firm partner would be wise to avoid. First, make sure that you know and understand your Schedule K-1. Second, make sure that, if you disagree with your K-1, you report your objection to the firm or, if necessary, memorialize the inconsistency with the Form 8082. For, in the law firm partnership context, “foolish inconsistency is the hobgoblin of little minds.”
Arthur J. Ciampi is the co-author of the treatise Law Firm Partnership Agreements and is the managing member of Ciampi LLC. Maria Ciampi, of counsel to Ciampi LLC, assisted in the preparation of this article. This article first appeared in The New York Law Journal , an ALM publication.

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