Page 261 - 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
Beginning of Year x
End of Year x (before allocation for year)
$320,000
$4,000,000 $6,000,000 $1,275,000
($6,807,692) $4,467,308 $4,787,308
$8,049,000 ($1,834,769) ($1,426,923) ($2,853,846)
$0 $4,787,308
Change
$20,000
$0
$0 $75,000 ($453,846) ($378,846) ($358,846)
$49,000 ($407,846) $0 $0 $0 ($358,846)
Assets
Cash $300,000 Fixed Assets
Land $4,000,000 Buildings $6,000,000
Furniture, Fixtures and Equipment Less: Accumulated Depreciation Fixed Assets after Depreciation
$1,200,000 ($6,353,846) $4,846,154 Total $5,146,154
Liabilities and Capital
Liabilities $8,000,000
Capital Marion Capital Kate
Subtotal Capital
Net Unallocated Income (Loss)
Total $5,146,154
($1,426,923) ($1,426,923) ($2,853,846)
After the allocations, these are the partners’ respective capital accounts for Real Estate Investors, LLC:
Capital Marion Capital Kate Total
($1,834,769) ($1,426,923) ($3,261,692)
By and by, Real Estate Investors, LLC is contacted by the Internal Revenue Service. Its return for year x is audited in a consolidated partnership audit under the new partnership audit rules. In the adjustment year [the year in which the audit concludes], the Internal Revenue Service reallocates $203,923 of Real Estate Investors, LLC loss from Marion to Kate. The Internal Revenue Service assesses an imputed underpayment of $80,754, plus interest and penalties.
 What is the effect of the reallocation on the bases of Marion and Kate’s Real Estate Investors, LLC partnership interest at the end of year x?
 What is the proper tax treatment to Marion, Kate, and Real Estate Investors, LLC of the $80,754 tax payment?
 What is the proper tax treatment of the interest and penalties?
The partnership audit rules do not change the normal tax rules of subchapter K. The tax law should disregard the loss allocation in the partnership agreement of Real Estate Investors, LLC if the allocation does not have substantial economic effect and is not in accordance with partners’
$0
© Terence Floyd Cuff and Jerald David August, 2016
192