Page 263 - 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
amount of $80,754, the amount of the underpayment paid by Real Estate Investors, LLC. (We will defer the question of the treatment of penalties and interest.)
If Marion’s revised tax liability (including adjustments) would have been $20,000, we can ask, what should be the treatment of the $60,754 in excess of Marion’s potential revised tax liability? The tax law then might treat $20,000 of the imputed underpayment as a distribution by Real Estate Investors, LLC to Marion,
If Real Estate Investors, LLC’s payment of the imputed underpayment is not a distribution to Marion, we can ask whether the payment is perhaps a Section 705(a)(2)(B) loss. The payments may constitute “expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital account.” If so, the Section 705(a)(2)(B) loss from the imputed payment (or perhaps part of the imputed underpayment) become an allocate to allocate in the adjustment year [the year in which the audit concludes].
The tax law will allocate the Section 705(a)(2)(B) loss in accordance with partners’ interests in the partnership. The trouble is that the rules of partners’ interests in the partnership are anything but well known.
As a matter of speculation, the allocation in the adjustment year [the year in which the audit concludes],
 Should include the decrease in partnership income in computing Net Income allocable to the partners for the adjustment year.
 Should include the Section 705(a)(2)(B) adjustment as part of Net Profits and Net Income for the year.
 Should not specially allocate the Section 705(a)(2)(B) to any particular partner.
We can speculate that the allocation of Net Profits in the adjustment year [the year in which the audit concludes] should equalize the capital accounts of the two partners, since equal capital accounts best reflect the true economics of the partnership. This, at least, is a common apprehension of partners’ interests in the partnership.
The partnership incurs penalties and interest in the adjustment year [the year in which the audit concludes] with the imputed payment. A portion of the
© Terence Floyd Cuff and Jerald David August, 2016
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