## Facts

- Randall Goulding, an attorney with accounting training, was hired by several limited partnerships to prepare partnership informational tax filings.
- He prepared the partnerships’ Form 1065 and the related Schedule K and partner-specific Schedules K-1.
- The K-1s allocated partnership items to each limited partner and provided figures that partners copied onto their individual income tax returns.
- Goulding did not prepare any partner’s Form 1040 and did not provide individualized tax advice to the partners.
- In computing partnership losses, Goulding treated certain expenses as deductible; the IRS later determined the expenses were nondeductible, inflating losses passed through to partners.
- Relying on Treas. Reg. § 301.7701-15(b)(3), the IRS treated Goulding as the “income tax return preparer” of the partners’ returns and assessed penalties under 26 U.S.C. § 6694 for negligent preparation.

## Issues

1. Whether Treas. Reg. § 301.7701-15(b)(3) validly permits treating a person who prepares schedules used in another taxpayer’s return as the preparer of that return.
2. Whether Goulding, who prepared partnership Schedules K-1 but did not prepare or see the partners’ Form 1040 returns and was paid only for partnership work, could be treated as an “income tax return preparer” for § 6694 purposes.
3. Whether Goulding’s reporting of nondeductible expenses as deductible (increasing pass-through losses) constituted negligent preparation under § 6694.

## Decision

- The Seventh Circuit affirmed the district court’s judgment upholding the IRS penalties.
- The court held Treas. Reg. § 301.7701-15(b)(3) was a valid interpretation of the statutory definition of “income tax return preparer” in 26 U.S.C. § 7701(a)(36).
- The court held Goulding fell within the regulation because the K-1s were used directly in preparing the partners’ returns and constituted a substantial portion of the relevant return items.
- The court upheld the finding that Goulding’s treatment of the expenses reflected negligence (or disregard of rules or regulations) within the meaning of § 6694.

## Legal Principles

- Treasury may, by regulation, treat a person who prepares a schedule or other component that is used directly in another taxpayer’s return as the preparer of that other return when the component is a substantial portion of the return.
- “Income tax return preparer” status under § 7701(a)(36) and Treas. Reg. § 301.7701-15(b)(3) does not depend on signing, assembling, viewing the final return, or being paid specifically for preparing it.
- A preparer subject to § 6694 may be penalized when an understatement results from negligent preparation or disregard of tax rules, including mischaracterizing nondeductible expenses as deductible and thereby overstating pass-through losses.

## Conclusion

An attorney who prepared partnership Schedules K-1 that partners used directly on their individual returns could be treated as an “income tax return preparer” of those returns under Treas. Reg. § 301.7701-15(b)(3) and was properly assessed § 6694 penalties for negligent reporting that overstated deductible losses.


Goulding v. United States, 957 F.2d 1420 (7th Cir. 1992)