Beware Of Partnership Status Sneaking Up On Your Business Venture

William Holdner and his son, Randall, had a fairly substantial agricultural operation.  They chose to report their arrangement as separate businesses.  All income and expenses were reported on one return or the other.  The thing that probably bothered the IRS more than anything else was that although the income was divided 50/50, the expenses were disproportionately allocated to William.  William had significant income from an accounting practice, while day to day operation of the farm were handled by Randall.  In order to avoid being whipsawed the IRS took a rather draconian approach in its notice of deficiency. It taxed each of them on 100% of the income and denied all the deductions.  Over the three years in question the operation produced about $80,000 in taxable income, which had been reported.  The deficiency notices totalled over $1,000,000 in tax.

http://www.forbes.com/sites/peterjreilly/2012/10/21/beware-of-partnership-status-sneaking-up-on-your-business-venture/