Page 138 - The TEFRA Partnership Audit Rules Repeal:

ALI CLE Live Video Webcast / “The TEFRA Partnership Audit Rules Repeal: Partnership and Partner Impacts” June 7, 2016, Jerald David August and Terence Floyd Cuff
In an examination of the partnership’s taxable year 2019, the Secretary adjusts these items as follows and finds:
 ordinary income of $500 (a $200 adjustment)
 long-term capital gain of $200 (a $75 adjustment) and long- term capital loss of <$25> (a <$50> adjustment), for a net long-term capital gain of $175 (a $125 adjustment)
 depreciation deduction of <$70> (a <$30> adjustment)
 tax credit of $3 (a <$2> credit adjustment)
These are netted under the provision as follows. The adjustments to ordinary income and to the ordinary depreciation deduction are netted: $200 minus <$30> yields $230. The adjustments to long-term capital gain and loss are netted: $75 minus <$50> yields $125. The adjustments total $355. Assume that the highest rate of Federal income tax applicable to individuals or corporations in 2019 is 39.6 percent. The product of $355 and 39.6 percent is $140.58. The credit adjustment of <$2> increases that figure, yielding an imputed underpayment of $142.58 (not taking into account possible modifications further described below). The partnership pays the imputed underpayment in the adjustment year [the year in which the audit concludes].
Determining imputed underpayment amount: adjustments to distributive shares
In determining an imputed underpayment, any adjustment that reallocates the distributive share of any item from one partner to another is taken into account by disregarding any decrease in any item of income or gain and disregarding any increase in any item of deduction, loss, or credit.204 [204 Sec. 6225(b)(2).]
Example
For example, assume that a partnership has two partners, L and M. Under the partnership agreement, $100 of rental income is allocated to L and $70 of depreciation and interest deductions are allocated to M for the taxable year. The Secretary notifies the partnership and the partnership representative of an administrative proceeding initiated at the partnership level with respect to the partnership’s return for 2024. Assume that the Secretary determines that the $70 distributive share of depreciation and interest deductions should be reallocated from M to L.
© Terence Floyd Cuff and Jerald David August, 2016
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