Page 258 - 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
We can speculate that the loss reduces tax basis in partnership interests under Section 705(a)(2)(B).
The partnership may want to allocate the capital account adjustment to those partners who received the benefit of the earlier underpayment. This requires a sensible formula that apportions the earlier underpayment among the partners, presumably based on calculating a notional underpayment amount for each partner based on the earlier mistake.
The allocation scheme should take into account the possibility that one or more partners has left the partnership since the reviewed year [the year under audit] or partnership percentage interests may have changed after the reviewed year.
Query: How is the adjustment allocated under partners’ interests in the partnership?
Partners may question whether a target allocation provision will work properly in allocating the Section 705(a)(2)(B) adjustment to capital accounts among the partners.
Query: How is assessment treated for tax purposes? The assessment may be treated as Section 705(a)(2)(B) adjustment. The adjustment also might be a constructive distribution to partners who otherwise would have had the corresponding ta liability.
The partnership might treat the adjustment as a demand loan to partners and prior partners from the reviewed year. This requires a mechanism to allocate the adjustment among the partners and prior partners during the reviewed year. The partnership agreement could contain a provision for securing the loan with partnership interests. The loan presumably should provide for interest. Distributions to the partner could be used to recoup the unpaid portion of the loan.
The partnership agreement might treat the adjustment as a recoupable draw to the partners and former partners. The partnership agreement could provide for clawback from partners and prior partners. The treatment as a draw should follow the considerations for a partner loan.
The partnership agreement could merely offset the partner’s share of the adjustment against future distributions to the partner.
The partnership agreement might merely provide a clawback from prior partners of their shares of the partnership payment of the assessment.
© Terence Floyd Cuff and Jerald David August, 2016
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