Page 80 - 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
partnership issues that required partnership-level proceedings and determination. The Internal Revenue Service also was concerned about its ability to pursue partners for deficiencies after adjustments had been determined. The Internal Revenue Service particularly perceived difficulties with TEFRA when working with large partnerships with many partners and when working with tiered partnerships.
Partnership items under the TEFRA rules, as defined under Section 6231(a)(3) and accompanying regulations, can be adjusted only through a TEFRA partnership proceeding. A partnership item is an item that is more appropriately determined at the partnership-level than at the partner-level.13 In general, partnership items can include the existence of the partnership as a taxpayer and the tax characterization of partnership income and losses.
An “affected item” is “any item to the extent such items is affected by a partnership item.”14 There are, in general, two species of affected items: (1) those items which are substantively related to items reflected on the partnership such as a partner’s basis in his or her partnership interest;15 and (2) items unrelated to partnership items but interdependent on a computational basis, such as the limitation on itemized deductions based on adjustments to a partner’s adjusted gross income, or the investment interest
13 I.R.C. § 6231(a)(3). Treas. Reg. § 301.6231(a)(3)-1(a) sets forth what items “are more appropriately determined at the partnership level”, including: (i) items of income, gain, loss, deduction or credit of the partnership; (ii) non-deductible expenditures in computing taxable income of the partnership, e.g., charitable donations; (iii) items of tax preference as to any partner; (iv) tax-exempt income of the partnership; (v) determinations of the amount, character of and changes in partnership liabilities; and (vi) other amounts determinable at the partnership level with respect to partnership assets, transactions, and operations required to enable the partnership or the partners to determine matters such as tax credits and recapture of tax credits, application of the at-risk rules, depletion allowance and application of the I.R.C. § 751 “hot asset” rules. Case law as well as guidance issued from the Service has extended the reach of the term partnership item to: (i) application of the sham transaction doctrine; (ii) items under a partnership settlement agreement or affected by the statute of limitations; (iii) application of the disguised sales rules; (iv) application of the deficit restoration rules; and (v) whether the tax matters partner is properly designated. Treas. Reg. § 301.6231(a)(3)-1(a)(1)(v) provides that amounts determinable at the partnership level from partnership level events which allow the partners to determine amounts at risk in an activity are partnership items. The same approach is identified in the regulations with respect to applying the passive loss rules. Treas. Reg. § 301.6231(a)(5)-1(d). See Ginsburg v. Commissioner, 172 T.C. 75 (2006); Hambros Leasing 1984-5,Ltd. Partnership v. Commissioner, 99 T.C. 298 (1992) (partners’ at-risk amount not partnership item but “affected” item for which court lacks jurisdiction in TEFRA entity-level audit proceeding).
14 As defined under I.R.C. § 6231(a)(5).
15 Treas. Reg. § 301.6231(a)(5)-1(b)(basis of a partner’s partnership interest is an “affected item” to the extent it is not a “partnership item”). Penalties and additions to tax are also treated under the regulations as “affected items.” Treas. Reg. § 301.6231(a)(5)-1(e).
© Terence Floyd Cuff and Jerald David August, 2016
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