return or claim for refund." Therefore, a preparer is not only the person who physically prepares an income tax return. The question therefore arises: what constitutes a "substantial portion of a return"?
Treasury regulation § 301.7701-15(b)(2) supplies a two-step process for determining what constitutes a "substantial portion." Under subsection (b)(2) Of the regulation, a given entry (or schedule or other portion of a tax return) is de minimus if it is less than $ 2000 and is less than 20% of the taxpayer's adjusted gross income. Pursuant to the regulation, a de minimus entry cannot, by definition, be a substantial portion of the return. If the entry is not de minimus, subsection (b)(1) requires that the length and complexity of the entry be compared with the length and complexity of the rest of the return. The regulatory interpretation of "substantial portion" is supported by the legislative history of § 7701(a)(36), which suggests that "substantial portion" should be defined both by looking to the length and complexity of a given entry or schedule as well as by looking to the amount involved. H.R.Rep. No. 658, 94th Cong., 2d Sess. 275 (1976), reprinted in U.S.Code Cong. & Admin.News 2897, 3171.
Congress sheds a little more light on the nebulous term, when it includes in the legislative history the admonition that the filling out of a single schedule will not generally be considered the preparation of a substantial portion, "unless that particular schedule was the dominant portion of the entire tax return." Id. Even someone who acts solely as an advisor may be considered a preparer according to the legislative history, although "an individual who gives advice on particular issues of law or IRS policy relating to particular deductions or items of income will not have prepared a return with respect to those issues if the advice does not directly relate to any specific amounts which are to be placed on the return of the taxpayer." Id. at 275-76, 1976 U.S.Code Cong. & Admin.News at 3171 (emphasis added). These excerpts from the legislative history support the Government's general contention that the preparer of a Schedule K-1 may be penalized under § 6694. Clearly, however, preparer liability will only be assessed if the Schedule K-1 is a dominant portion of the tax return, and if it meets the length and complexity requirements. See, e.g., Goulding, 717 F. Supp. at 550-551.
The plaintiffs' objections to the report and recommendation presently before the Court focus on what they term the Magistrate Judge's lip service to the required findings of substantiality. After examining the exhibits submitted along with the summary judgment briefs, the Magistrate Judge concluded that the deductions taken as a result of the Schedule K-1s prepared by the plaintiffs were not de minimus. This does not automatically push the deductions into the "substantial portion" category, however. The original submissions by the parties gave the Court no clue as to the length and complexity of the various personal income tax returns. Therefore, the Court was unable to determine whether the Schedule K-1s were a dominant portion of each tax return. The record contained no exhibits, and, in fact, no statements at all, regarding the individual returns of each of the limited partners. Thus, although the Government provided the Court with the adjusted gross income (AGI) of each limited partner and with the percentage of the AGI deducted as losses as a result of the Schedule K-1s, the Court had no sense of what other complexities might have been involved in calculating the tax liability of each investor. Accordingly, the Court ordered the parties to provide the 1979 individual tax return of each investor at issue for an in camera review.
The Court has now reviewed the Form 1040s and attachments for each investor and cannot agree with the Magistrate Judge's conclusion that the plaintiffs' were preparers within the meaning of § 7701(a)(36), and so subject to liability under § 6694. Although the Court agrees with the Magistrate Judge's analysis of the relevant sections of the tax code and the applicable legislative history, it does not agree that the plaintiffs were responsible for preparing a substantial portion of each return. All of the returns submitted to the Court were complicated. Each contained one or more of the following: computations for self-employment tax, capital gains and losses, deductions for charitable giving, and interest income. In some instances, the taxpayers attached Schedule Cs, dealing with business income and losses. Moreover, in many cases the Schedule E deductions, which include partnership losses, went significantly beyond the deductions arising out of the ventures promoted by the plaintiffs.
In light of the complexities of each of the individual returns, this Court cannot find that the preparation of the Schedules K-1, on which plaintiff Drobny wrote a single figure signifying the partnership losses, constituted the preparation of a substantial part of the 1040s submitted by the investors for tax year 1979. To find otherwise would be to make a mockery of the "substantial portion" requirement and place undue emphasis on the language in the legislative history allowing that the preparer of a single schedule might be a preparer.
Accordingly, the Court declines to accept the report and recommendation of the Magistrate Judge. Instead, the Court grants the plaintiffs' motion for summary judgment and denies the Government's cross-motion. The individual tax returns, submitted to the Court in camera are hereby placed under seal and preserved for possible appeal.
JOHN A. NORDBERG
United States District Judge
DATED: March 23, 1992
EDITOR'S NOTE: The following court-provided text does not appear at this cite in 792 F. Supp. 579.
JUDGMENT IN A CIVIL CASE
IT IS ORDERED AND ADJUDGED that plaintiffs' motion for summary judgment is granted and defendant's cross-motion for summary judgment is denied.
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