PrescottG[at]TaxTechCPA.com (Gene Prescott) wrote:

- quote -

I can't comment on the statute of limitations. While it
doesn't sound like it will help much, if at all, look at
Notice 89-35 regarding allocation of loan proceeds in a
partnership setting.

This client sounds like he/she needs to get to a tax
attorney ASAP.

- quote -

I don't think he can argue consistency or something else to
continue deducting interest on the loans used to make
distributions. Perhaps there should be loans setup on each
entities' books for the amounts taken from one entity and
used in another entity. This could eliminate the
distributions in excess of basis problem. Then I suppose
you could add to the loan each year for the amount of
interest paid by one entity for the other.

You have a real mess on your hands and I don't have any
cases or rulings to cite.

Drew Edmundson, CPA (NC)
e-mail is my first name at nccpa dot com

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We have a prospective client that has some issues with
previously filed tax returns. Potential client has multiple
LLCs and SubS corps, all in some way connected to real
estate construction and/or rental activities. Construction
for sale is primarily multi-family condominiums. Rental
properties are primarily multi-family apartments, but also
include a mobile home park and a shopping center.

These activities are in multiple geographic locations,
generally with an entity per activity per location. Some of
the rental properties have been held for 20 plus years
(generally being transferred to LLCs in late 1990s.) All
LLCs have elected to be taxed as partnerships, and all have
two owners, generally a 99.9% owner/member and a .1%
owner/member. So some of these entities have extinguished
the original construction related debt, and have appreciated
substantially over time. They have subsequently been
refinanced, often with the borrowed proceeds being withdrawn
to finance some newer activity/entity. So some of these
partnership LLCs have significant deficit capital accounts.
Interest on the refinanced debt has been deducted on the LLC
partnership as rental interest. No taxable income has been
attributed to owners related to basis or tax losses limited
for lack of basis.

Some of the refinancing/withdrawal activity happened over 3
years ago.

So we are interested in notions regarding:

Does the statute of limitation protect anything that is
beyond the normal statute dates? Taxpayer has had CPA
employee internally for many years (but not at the present)
and outside CPA has prepared most (but not all) of the
affected returns. No one has alerted the taxpayer of these
issues.

Regarding any issues not sheltered by the statute of
limitations on already filed returns, if taxpayer elects NOT
to amend open year returns, what impact does that have on
the preparer of a future return, as to:

Lack of basis for future claimed losses

Withdrawals in excess of basis

Presumed investment interest reported as rental interest

Inter entity loans in excess of $10K without any actual or
deemed interest computations

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