Morris Ziegler (collectively, "the sponsors"), Goulding decided which patents to acquire. Id. Then he negotiated the purchase price and the terms of the purchase agreements. Id. Once the patents were acquired, Goulding and the other sponsors determined the amounts spent on research and development. Id. at P19.
7. In addition to his role as legal counsel and investment advisor, Goulding prepared the partnerships' federal income tax returns. Id. at PP28, 29; Government Ex. H-M.
8. A partnership tax return is a document known as "Form 1065." Id. This form reports partnership gains or losses in a given taxable year. Id. Form 1065 contains two additional documents that detail the partnership's financial activity: a "Schedule K" that computes the partnership's profit or loss, and a "Schedule K-1" that allocates the partnership's profit or loss among the limited partners in proportion to their original investment.
Id. There is a Schedule K-1 for each limited partner. Id.
9. From 1979 through 1981, Goulding completed a Form 1065 for each partnership. Stipulation para. 35; Government Ex. H-M. On each return, Goulding signed his name in a space indicating that he was the partnership's "paid preparer." Id.
10. The partnerships made substantial investment expenditures in these years without receiving any income and incurred aggregate losses of $ 13,357,134. n2 Government Facts para. 13. The losses claimed by each partnership for the years 1979 through 1981 are as follows:
Partnership 1979 1980 1981
Mercon $ 1,631,040 $ 1,413,358 $ 1,409,754
LaSala 2,011,469 1,771,298 1,769,978
Jonquil 1,214,449 1,071,066 1,064,722
Totals: $ 4,856,958 $ 4,255,722 $ 4,244,454
Government Ex H-M.
11. Goulding computed these losses and allocated them among approximately 260 limited partners. Government Facts para. 13; Stipulation para. 35; Government Ex. H-M.
12. In each year that Goulding prepared a Form 1065, he received compensation from the partnerships. Stipulation para. 19. From 1979 through 1981, Goulding earned $ 250,000. Id. These earnings came from the partnerships' capital, that is, from funds originally supplied by the limited partners. Id.
13. Once Goulding completed a partnership return, he delivered the Schedule K-1's to the general partner. Id. at P31.
14. The general partner disseminated these schedules to the limited partners. Id.
15. The limited partners claimed the Schedule K-1 losses computed by Goulding as tax deductions on their individual returns. Id. at P40.
16. Aside from preparing the Schedule K-1's, Goulding had no contact with the limited partners. Id. at P39. He gave them no advice regarding the use of their losses, and had nothing to do with the preparation of any limited partner's individual return. Id. at PP37, 38.
17. The IRS disallowed the loss deductions claimed by the limited partners for the tax years 1979 through 1981.
Id. at P32.
18. The IRS assessed an income tax return preparer penalty against Goulding under 26 U.S.C. § 6694(a) for the losses claimed by the limited partners.
Id. at P33.
19. Pursuant to 26 U.S.C. § 6694(c), Goulding paid the IRS 15 percent of each assessment, and then commenced this action for a refund. Goulding Facts para. 10.
20. The issue of whether Goulding is a preparer under Section 6694(a) was tried before this court without a jury on December 22, 1988.
21. By agreement of the parties, only seven limited partner tax returns were offered into evidence. For each of these limited partners, Goulding prepared a Schedule K-1 reflecting a deductible loss of more than $ 2,000 and constituting an amount greater than 20 percent of the limited partner's adjusted gross income. Government Facts para. M; Government Ex. A-G.
CONCLUSIONS OF LAW
1. The court has jurisdiction over this action. 28 U.S.C. § 1346(a)(1).
2. This is a case of first impression. The issue raised is whether Goulding, by preparing a Schedule K-1 for each limited partner, "prepared" the limited partners' individual income tax returns within the meaning of Section 6694(a).
3. Section 6694(a) penalizes the income tax return preparer whose negligent or intentional disregard of rules or regulations results in an understatement of liability.
Brockhouse v. United States, 749 F.2d 1248, 1251 (7th Cir. 1984). The purpose of Section 6694(a) is to deter preparers from engaging in abusive practices that reduce taxable income. Id. Because Section 6694(a) imposes a penalty, its terms must be construed strictly. Commissioner v. Acker, 361 U.S. 87, 91, 4 L. Ed. 2d 127, 80 S. Ct. 144 (1959); F.C.C. v. American Broadcasting Co., 347 U.S. 284, 296, 98 L. Ed. 699, 74 S. Ct. 593 (1954); Brockhouse, 749 F.2d at 1255.
4. Goulding bears the burden of production and of persuasion as to whether preparation of the limited partners' Schedule K-1's renders him a "preparer" under Section 6694(a). United States v. Janis, 428 U.S. 433, 440, 49 L. Ed. 2d 1046, 96 S. Ct. 3021 (1976); Ruth v. United States, 823 F.2d 1091, 1093 (7th Cir. 1987).
5. The definition of "income tax preparer" is contained in 26 U.S.C. § 7701(a)(36).
This section defines a preparer as a person who is paid to prepare another individual's income tax return, or at least a substantial portion of the return. 26 U.S.C. § 7701(a)(36); United States v. Ernst & Whinney, 735 F.2d 1296, 1299 n.3 (11th Cir. 1984), cert. denied, 470 U.S. 1050, 84 L. Ed. 2d 814, 105 S. Ct. 1748 (1985).
6. The Treasury Regulations provide that the sole preparer of a partnership tax return can also be a preparer of the limited partners' returns:
The sole preparer of a partnership return of income or a small business corporation income tax return is considered a preparer of a partner's or a shareholder's return if the entry or the entries on the partnership or small business corporation return reportable on the partner's or shareholder's return constitute a substantial portion of the partner's or shareholder's return.