Page 151 - 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
the imputed underpayment.74 Many partnerships take aggressive positions concerning partnership allocations. Some partnerships apply Section 704(c)(1)(A) in an aggressive manner. Some partnerships make aggressive or uncertain reverse Section 704(c)(1)(A) allocations. Other partnerships take aggressive positions on allocations when partners are redeemed. Other partnerships use targeted allocations. Other partnerships take aggressive positions concerning partners’ interests in the partnership. Many partnerships take aggressive positions concerning the allocation of tax credits. These partnerships could have exposure under the new partnership audit rules.
Any adjustment that reallocates the distributive share of any item from one partner to another is taken into account in this manner:
 The computation disregards any decrease in any item of income or gain.
 The computation disregards any increase in any item of deduction, loss, or credit.75
The situation is loaded against the partnership so that the reallocation can only increase tax liability. The reallocation can increase but can not decrease tax liability. The partnership’s imputed underpayment is increased on account of the amount of income that is reallocated from one partner to another. The imputed underpayment is not decreased on account of the reduction in the income of the partners from whom income is reallocated. This may seem unfair to the partnership.
This procedure is subject to possible adjustment as provided in regulations. Many are hopeful that the regime will be modified when proposed regulations are issued.
The Internal Revenue Service will have to weigh competing considerations. The partnership audit regime is supposed to produce a reasonable result. The most reasonable result looks through to partnership attributes in the reviewed year. Nevertheless, looking through to partner attributes will complicate the procedures. The theme of the partnership audit rules thus far has been ignoring individual partner attributes.
74 I.R.C. § 6225(b)(2) (“(2) Adjustments to distributive shares of partners not netted. – In the case of any adjustment which reallocates the distributive share of any item from one partner to another, such adjustment shall be taken into account under paragraph (1) by disregarding – (A) any decrease in any item of income or gain, and (B) any increase in any item of deduction, loss, or credit.”)
75 I.R.C. § 6225(b)(2).
© Terence Floyd Cuff and Jerald David August, 2016
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