Page 93 - 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, if a partnership had eight partners, the Internal Revenue Service would have to audit each of the eight individual partners separately. Where one of the partners, for example, was a pass-through entity, then the audit would ultimately have to focus on the ultimate individual partners or partner- taxpayers directly subject to the reporting and payment of federal income tax. Where the partners resided in different geographical areas and therefore in different venues for determining applicable judicial precedent purposes, inconsistent treatment of the same item was always more than simply a theoretical possibility.36
As a matter of effective tax administration, the individual partner-by- partner audit approach handicapped the Internal Revenue Service from effectively auditing partnerships. Particularly upsetting were the problems associated in auditing partnerships which were engaged in transactions perceived to be abusive by the Internal Revenue Service, such as the tax shelter partnerships that were devised by syndicators and promoters during the 1970s and early 1980s. Some highly leveraged tax shelter partnerships, for example, threw off tax deductions in the form of cost recovery allowances and investment tax credits which yielded current tax savings substantially in excess of a partner’s out-of-pocket cash investment, including fees to the promoters. In challenging the partnership’s reporting of the underlying transactions, the IRS was forced to search out each partner and make timely tax assessments (or proposed assessments) on an individual basis. In many cases the Internal Revenue Service may have been unable to timely issue notices of deficiency. Ironically, the new legislation will greatly increase the number of partnerships that will be able to elect-out of the consolidated audit rules and fall back to the pre-TEFRA rules that the Internal Revenue Service had convinced Congress over 30 years ago were unworkable. It appears that those working on the new rules were purposely ignoring the past or were suffering from an unfortunate lapse of memory. 37
36 Under the Tax Court’s long-standing, adopted rule of adjudicative convenience, the Tax Court will follow a Court of Appeals decision which is squarely on “all fours” where appeal from the case lies with that Court of Appeals in which the taxpayer-petitioner resides, even if the Tax Court would apply a different rule to cases subject to review in different circuits. Golsen, 54 T.C. 742 (1970), aff’d without discussion, 445 F2d 985 (10th Cir., 1971). For more background and problems encountered with the TEFRA partnership audit rules see August, “Entity-Level Audit Rules Continue to Pose Challenges for Partners,” Parts I and II, 16 BET 4 (November/December 2014) and 17 BET 4 (July/August 2015).
37 It is pure conjecture on the authors’ part to suggest that the Treasury, Internal Revenue Service and the tax-writing committees in Congress should be expected to reassess the 100 or fewer partner election-out rule that was put into the recent legislation.
© Terence Floyd Cuff and Jerald David August, 2016
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