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I was the designated TMP (Tax matters person) for an LLC. We

hired a CPA to do...
I was the designated TMP (Tax matters person) for an LLC. We hired a CPA to do our taxes for 2011 and 2012. We are in the construction phase and we are about to complete the construction. Our CPA deducted some of these costs as expenses which passed through our individual tax returns through the LLC K1's(partnership based LLC).
The losses he took were something like $40K and $80K per LLC member.
My co owner went to another CPA to get our tax returns reviewed. This CPA found several errors in the tax returns and said that our CPA shouldn't have deducted any costs as we are still in the startup phase. I immediately told my co owner that we should go ahead and amend the LLC tax returns.
My co owner is very mad at me since I was the one who signed the tax returns. He contends that I should have reviewed the returns before signing. Since I know nothing about partnership taxes, I trusted our CPA and didn't review the returns.
He still blames me for breach of fiduciary duty and has threatened action against me.
What action can he take? Can he remove me from the LLC?
Since I have invested my life savings in this project, I don't want to loose my investment.
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Answered in 1 hour by:
9/13/2013
TexLaw
TexLaw, Attorney
Category: Business Law
Satisfied Customers: 4,430
Experience: Internationational Commercial Attorney
Verified
Hi,

Thank you for your question.

As the TMP of your company, you have a duty to verify the taxes that are being filed. This means that you may have in fact violated your fiduciary duties if you have caused your other members harm through any failure. However, you have a defense to this claim if you were justified in relying on your CPA's advice. That is, if you were diligent in your selection of the CPA, then you are entitled to be able to rely on his advice in the fulfillment of your fiduciary duties.

If you were sued, you would need to counter-sue your CPA and claim that owes you indemnity for any damage claim asserted against you by the other members of the LLC.

In regard to your co-members, the co-members may sue you directly for damages, or the company may sue you. However, you can only lose your membership and be removed from the LLC pursuant to the terms of the operating agreement. Generally, operating agreements always provide that a member must be given the value of his membership before the membership can be terminated, if termination is allowed at all.
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Customer reply replied 4 years ago

 


Yes. The CPA we hired is rated as one of the best in our area.


We have already amended both LLC and individual tax returns.


Would this make a difference in the breach of fiduciary duty claim?


 


 


Our operating agreement doesn't mention anything about termination.


Also we are deadlocked (50% each). Can my co owner still terminate me?


If I get terminated from the LLC, would I get all my contribution (mentioned in my K1) back would it be much below what I have invested?

If the operating agreement does not state anything about termination, then your partner cannot do anything but file a dissolution suit in the court. Then the court would split the company up, which would include you getting your investment back.

In regard to already amending the taxes, what really matters is if you were hit with any penalties. If you have caused damage through extra taxes, then this is something that needs to be paid for, and it is the CPA's responsibility.

Have you contacted the CPA and told him that this is going on?
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Customer reply replied 4 years ago

If my partner files a does file a suit to dissolve under California code 17351, would he be successful? How long and how much would this cost him? If he does file a suit, would I be allowed to defend the suit?


 


Yes. I contacted the original CPA and he still says he is correct.



Regarding penalties, are you referring to the LLC taxes or individual taxes?


When I amended my personal returns, I paid penalties and interest on penalties. I applied for request for abatement of penalties, Would IRS normally accept the request?

These are not the type of questions that have answers. The lawsuit for dissolution is a lawsuit, and it has chances of success or failure just like any other lawsuit. You would have the right to defend and show why dissolution would not be in your best interests and would not be fair.

In regard to how much it will cost him, the average attorney in California charges $450 per hour for commercial litigation like this, so I would guess that a lawsuit would cost at least $40,000.

If the CPA says he is correct, then have you would have to sue the CPA and get another CPA to come and testify as to why the first CPA was incorrect and caused you and your partner to incur the interest and penalties.

In regard to abatements, these are within the discretion of the IRS. I cannot tell you that they normally give them out, which I do not think they do freely, as each case is different.
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Customer reply replied 4 years ago

Would the dissolution offer any benefit to my partner, if he is going to spend that kind of money?


 


As a TMP, I think I missed out sending the tax returns to my partner on time, though I sent his K1's as soon as we filed the LLC tax returns. Would this be considered serious lapse of duty on my part?

1. Would the dissolution offer any benefit to my partner, if he is going to spend that kind of money?

I would be speculating if I were to answer that question. But if the business is making money, then I do not see the benefit.

2. As a TMP, I think I missed out sending the tax returns to my partner on time, though I sent his K1's as soon as we filed the LLC tax returns. Would this be considered serious lapse of duty on my part?

Yes, this is the main duty you have as the TMP. But remember, when you breach a duty, you are only liable for damages. That means you would be liable for penalties and interest that he had to pay, if any.
TexLaw
TexLaw, Attorney
Category: Business Law
Satisfied Customers: 4,430
Experience: Internationational Commercial Attorney
Verified
TexLaw and 87 other Business Law Specialists are ready to help you
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Customer reply replied 4 years ago

The business is not making money yet as it's not opened yet.


However the business potential is enormous. So, by dissolving the LLC I guess offers no benefits to my partner.


 


Regarding the penalties and interest, I thought the CPA who prepared the returns is liable, assuming IRS doesn't accept the abatement request. Is that correct?

The CPA is liable if the CPA has committed malpractice, or if as a result of the CPA's actions, you are audited. In this case, you changed your tax filings on the advice of a second CPA. It was not as the result of an audit. That means to force the first CPA to pay out, you will have to make a claim against him for malpractice and establish that he was wrong.
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TexLaw
TexLaw
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Category: Business Law
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