Page 140 - 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
partnership tax year ending December 31, 2020. Section 6225(a) applies, of course. The partnership does not consider a 45 day after notice of the FPAA “push-out” election.69 The Internal Revenue Service reallocates the income reported by Manning and Newton to reflect application of Section 704(c). Accordingly, the partnership realizes a “positive” adjustment attributable to Newton of $500x of pre-contribution gain as to the distribution rights sold and then 50% of the post-contribution gain of $500x or $1,000x. There is a positive adjustment of $250x ($500x (§ 704(c)) + $500x (§702(a)) or $1000x less the $750x previously reported by Newton). Manning’s gain is reduced from $750x to $500x. The adjustment represents his reduced share of the gain after application of Section 704(c). Manning’s increase in taxable income of $250x is offset by the $250x reduction in Newton’s income from 2020. The negative adjustment does not offset the positive adjustment by application of the “one- way upward adjustment rule.” NMSP has a net positive adjustment of $250x on which it must pay in 2021 (the adjustment year) the imputed underpayment. The payment of the imputed underpayment is nondeductible. Based on the long term capital gain treatment, the modification rules would permit to imputed underpayment to be computed as 20% of $250x or $50x.
Presumably, the partnership representative for NMSP, Mr. Gruden, will inform Newton of his overpayment in federal income tax for 2020. He should file a claim for refund for the overpayment. The statute of limitations for filing the claim for refund for 2020 has not yet expired. In some situations, the statute of limitations might have expired if the audit to continue for a significant period of time.
The one-way upward adjustment rule may have some benefit with respect to large funds in multi-investor partnerships, including tiered partnerships, where a misallocation of income among the partners may result in only a small adjustment. Still, in many instances the one-way adjustment rule is exactly that, “heads the government wins, and tails, there is no time left to file a claim for refund for a prior overpayment of tax in the reviewed year [the year under audit].” Consider the potential reallocation issues and problems associated with use of targeted allocations or preferred interests or “waterfall” provisions that the government wants to reallocate for one or more reviewed years. The one way adjustment rule undoubtedly is going to make some “noise” among the partners and will further generate revenue for the fisc.
69 Under I.R.C. § 6226(b).
© Terence Floyd Cuff and Jerald David August, 2016
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