Too Picky

[Corduroy Frog]

Here is how you can lose clients by being too picky.

Father died in 2008, and all three surviving children have engaged me. One of them has been a client of mine for over 20 years.

This estate had some cash, securities, a farmhouse and land. Land is of considerable value, some $1.5MM. Heirs intend to rent out the farm, and rent out the farmhouse. There are barns, tractors, and some equipment as well. I estimate gross receipts from everything to be $8-$9K annually - and expenses somewhat less. In addition, there is acreage to be surveyed off and each heir to get 10 acres more or less. The road frontage varies, the water supply varies, etc. but the heirs are satisfied that their desires will be met if the planned split occurs.

I told the heirs that in order to avoid a Form 1041, they would have to transfer this real estate OUT of the estate and into their own names. This would mean 3 properties with individual names, and the farmhouse/farm into joint ownership amongst the heirs.

They don't want to do this for awhile. But they want to split the property taxes, split all the revenue, and split all the expenses individually on their own personal taxes. I told them I would accomplish this via the 1041 and K-1s. Now they have found a guy across town who is willing to do what they wish without a 1041.

I ask my comrades if I am being too picky. I have concern that over time, the heirs will start disagreeing on how to operate the farm, and then begin disagreeing on who should get which piece of land, disagreeing on who gets the farm equipment, etc.

The "guy across town" is apparently willing to file without a 1041 and doesn't care that the numbers will be skewed if the heirs later can't agree on anything. He is willing to deduct taxes on individual returns for property they don't own.

Is the "guy across town" really smarter than me because he knows how to please customers? He might get his hand slapped by an auditor but all of the thrust of IRS auditing seems to be in generating CP2000s, and legislating preparer penalties.

I know there are "purists" who disagree with the guy across town. But in the broader spectrum, my question about being too picky persists.

[outwest]

Here's what would work...

Do a single deed from dad to the heirs as "tenents in common with undivided interest" in farm land. Then you can proceed as they wish. I'm away from my cites, but mere sharing of expenses and income from property does not create a partnership and proportionate shares are reported on the individual returns.

The only pickiness you have is to fit them solidly in the rules.

[ChEAr$]

Not talking about

Do a single deed from dad to the heirs as "tenents in common with undivided interest" in farm land. Then you can proceed as they wish. I'm away from my cites, but mere sharing of expenses and income from property does not create a partnership and proportionate shares are reported on the individual returns.

The only pickiness you have is to fit them solidly in the rules.

a partnership. It's an estate, pure and simple. And yes, Frog, you did the right thing.

[outwest]

Maybe I should clarify

I'm not saying form a partnership.

Frog, I'm saying you are right: transfer the property out of the estate. But I wanted to point out that rather than take three deeds just take one step: deed the property to the heirs as tenants in common. No 1041 now required, no 1065 required, and and the sharing treatment will now work. Assuming I get through the snow to the office tomorrow, I'll post the citations.

But maybe pub 541 pages 2 and 4 would be a start:

" a joint undertaking merely to share expenses is not a partnership. For example, co-ownership of property maintained and rented or leased is not a partnership unless the co-owners provide services to the tenants."

Further, on page 4 in the section on exclusion from partnership rules is the section on investing "partnerships".

Maybe the question should not be headed "am I being to picky" but rather "Am I missing something?"

Now, this alternate solution has it's own problems. In my state, the only solution for disagreements is a court suit for partition of the property, not a pretty option.

[veritas]

A dilemma

How to protect owners in the same property?

Let's say one of the owners has gotten upside down and creditors are looking for assets. If the property is held as tenants in common what protection is afforded the other owners?

Maybe it's best to leave the property in the trust?

[Burke]

And while that strategy may work for the land, there is the problem of all the other assets, including equipment that OP mentioned. I do not understand the desire to "avoid the 1041." And I am not sure you can avoid the 1065 this way, either. If you rent out the farmhouse, how do you avoid "providing services to tenants?"

[Nashville]

Avoiding the 1041

Filing 1041s and K-1s equate to revenue for the tax preparer. He doesn't wish to avoid it.

However, after death of the decedent there was no farm income, house rent, and the heirs took all the cash so there was no interest. Tax practitioner advised heirs that if the property could be transferred OUT of the estate (and the estate closed) prior to renting the farm and the house and incurring expenses, then the 1041 could be avoided.

Another item peculiar to Tennessee, the 1041 bears a state income tax, whereas income filed by individuals does not.

[outwest]

It's good to remind clients..

of the pros and cons. Sometimes there are several options to handle a situation.

Note that "provide services" relates more to a hotel situation rather than renting bare ground or fixing the plumbing in a rental house. I think the example in the pub was chosen to address a common situation.

[taxea]

Frog
This is not being picky but, rather, keeping your clients legal and doing the best you can for them.
When a client doesn't want to use my services because he/she can see a way around doing the best thing...I let them go. My thought is they are losing the best they can get and in the future will regret it. I have had clients come back to me after being dissatisfied with the new person.
I foresee may infighting if this is not done by a written agreement among the owners as to exactly how things will be handled. In the long-run you may be glad they went elsewhere.taxea

[Corduroy Frog]

Update

Update on this situation. The reluctance to settle the estate was as I had secretly suspected all along -- the heirs were still bickering about how the land was to be divided amongst them. One tract doesn't have enough road frontage, another one doesn't perk, only one of them has a spring, etc, etc, and a thousand things I really don't want to be in the middle of.

So I asked one of the heirs if she wanted to take her taxes to someone stupid enough to file a division of income/expenses based on the possibility that it might change and shortchange one party or the other?? The response was "I hadn't thought of that, it's not very smart is it?" Bingo, they are back in my corner.

But my point is that I don't always win simply because I am doing it the right way. In fact, clients are so ill-informed on their tax matters that they can't discern which tax preparer is giving them authentic information. So it is a no-brainer that they believe whom they choose.

This will only get worse as IRS increases penalties and expectations for EAs and CPAs to enforce the tax code.

The proverbial "guy across town" has lots of customers, and has some of my former customers. I have some of his too, and for a complex return, it is like cleaning up a train derailment.

[geekgirldany]

I've got one customer that reminds me often that I am "too conservtative" in regards to taxes and that he could go to another accountant and get told something completely different. That all accountants are different in what they will tell you.

I finally told him that if following the tax laws is what you consider to be "to conservative" then yes I am. My job is to follow the tax laws and at the same time use those laws for him to pay as little tax as possible. As long as the tax laws are followed. I also told him if he wants to go to another accountant then he can go. Get another opinion. That I am not going to say that he won't get another answer than mine but I am sticking to what I say. This was more or less in regards to taking a reasonable salary. He did not want to take one... or take very little. Make it all distributions. I stated my case and stuck to my guns.

For whatever reason he has stayed with me. I've learned that it is not worth the money in the long run to have to deal with these people. Like was said before they often come back to you after they see how the "other accountant" treats them.

[outwest]

Just playing the devils advocate here..

but is all tax law black and white? Which of course would make it easy for us because it makes it clear what the proper rule is. But life is not always as clear as that.

No argument on clear tax guidance on a clean set of facts, but even the much discussed "more likely than not" vs "substantial authority" issue tells me the proper treatment is not always clear. How about "investment intent" or the extended discussions of roof repair vs capitalization treatment?

So, if you've looked at the facts, reviewed the guidance and authorities, (thank you TTB as a place to start) and applied your professional judgment to the facts, then by all means stick to your guns. But understand, other reasonable people may come to a different and defensible conclusion.

Too picky? Now that the thread has reached this point and we know a lot more about the situation, the alternatives, issues with TN taxes, and discussed the other assets in the estate, I don't think so. But we sure didn't know all that based on the first post.

I tend to be pretty much in tune with most of the members of this board in how I do taxes and where I end up on the issues. But I think that I see more legitimate variation and judgment as defensible (Or, put another way, has "substantial authority") than others do.