Page 191 - 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
Example 4. Assume partner M of the equal M&N partnership is of the view that the partnership should have deducted an item in Year 1, instead of Year 2, and files its return showing a corresponding lesser distributive share of income in Year 1. Partner M prevails, in Year 4, in its separate proceeding against the Internal Revenue Service. The partnership deducted the item in Year 2. If the partnership prevails in its Year 2 position, the same item will be deducted twice. If the Internal Revenue Service successfully challenges (e.g., in Year 5) the M&N partnership’s Year 2 deduction, Partner N loses out. Due to the statute of limitations, the partnership may be unable to file an amended return for Year 1 but even if it could, the result is a deduction for AB in Year 5 (versus Year 1 for B)—a deduction which includes the amount Partner M deducted in Year 1 (again, resulting in the same item being deducted twice with respect to Partner M). This sort of problem with the consistency rules will require further thought and consideration in the forthcoming guidance.
The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016) also clarifies:
If the partnership has filed a return but the partner’s treatment on the partner’s return is (or may be) inconsistent with the partnership’s return, or if the partnership has not filed a return, the math error treatment and nonabatement treatment do not apply if the partner files a statement identifying the inconsistent position.193 [193 Sec. 6222(c).] Further, a partner is treated as having complied with the obligation to file a statement identifying the inconsistent position in the circumstance in which the partner demonstrates to the satisfaction of the Secretary that the treatment of the item on the partner’s return is consistent with the treatment of the item on the statement furnished to the partner by the partnership, and the partner elects the application of this rule.
b. Final Decision.
Any final decision in an administrative or judicial proceeding under the consolidated partnership audit rules is binding on the partnership and all partners of the partnership.105 On the other hand, a final determination in an administrative or judicial proceeding with respect to a partner’s identified inconsistent position is not binding on the partnership where and provided that the partnership is not a party to such proceeding.106 The GENERAL EXPLANATION OF TAX LEGISLATION ENACTED IN 2015 (JCS-1-16, March 2016)
105 I.R.C. §6223(b). 106 I.R.C. § 6222(d).
© Terence Floyd Cuff and Jerald David August, 2016
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