Recent Developments Concerning TEFRA Partnerships
All partnerships are TEFRA partnerships, except for those whose ownership consists of 10 or fewer individuals or C Corporations (an interest owned by a grantor trust is treated as not owned by an individual for this purpose). TEFRA refers to a 1982 tax law that introduced new procedural rules for partnership audits and court cases. Two recent developments illustrate the attention to detail necessary to comply with the IRS's procedures concerning TEFRA partnerships. The failure to comply with these seemingly arcane procedures could be costly for some partners of TEFRA partnerships that file amended partnership returns, or that are under IRS examination.
In CCA 201236028, the IRS stated that it will follow the U.S. Tax Court's 2009 decision in Samueli v Commissioner. 132.T.C. 16 (2009). In Samueli. the taxpayer did not attach Form 8082, Notification of Inconsistent Treatment, to his amended income tax return, which was filed to claim a refund resulting from an amended K-1 received by the taxpayer from a TEFRA partnership. Consequently, his refund was denied. In the above CCA, the IRS applied this rationale to an amended corporate income tax return, and rejected a corporation's refund claim resulting from an amended TEFRA partnership K-1.
It is important to attach Form 8082 to any federal income tax return, including original or amended returns, if a TEFRA partnership issues an amended K-1 to a partner. In addition, a copy of Form 8082 must be filed with the IRS Service Center where the partnership files its return. The failure to comply with these procedures will cause the IRS to reject the return.
In Gaughf Properties L.P. v. Commissioner. 139 T.C. 7 (2012), the U.S. Tax Court upheld the IRS's 2007 income tax assessment resulting from a failed listed transaction that occurred in 1999. The Tax Court's opinion cited Section 6229(e), indicating that if the partnership does not notify the IRS of its unidentified partners (including indirect partners) with its Form 1065, or by filing a statement with the IRS Service Center where the partnership files its return, then the period for assessing tax of partnership items remains open until one year after such information is provided. If the partnership has received a Notice of Beginning of Administrative Proceeding, such information that identifies all of its unidentified partners needs to be filed with the IRS office that issued the Notice.
In Gaughf. the partner in question was an S corporation wholly owned
by the Gaughfs. Consequently, the Gaughfs were indirect partners of Gaughf Properties L.P. The partnership did not comply with the notification procedures required by Section 6229 to identify the Gaughfs as unidentified partners more than one year before the IRS issued the notice of final partnership administrative adjustment.
In addition, the Gaughfs failed to file Form 8082, required to notify the IRS of any inconsistent treatment of any partnership item as originally reported by the partnership versus how such item is reported on the partner's income tax return. The Tax Court stated that the partnership netted long and short options in reporting capital contributions made by the Gaughfs’ S Corporation to the partnership, while the S corporation's income tax return reported only long options as its capital contribution to the partnership. This subsequently created an overstated basis for stock distributed by the partnership and not accounted for.
The Tax Court upheld the IRS's assessment of income tax as a result of the above failures to comply with the TEFRA partnership procedures by the partnership, the Gaughfs, and their S Corporation.
These two recent examples illustrate the negative consequences of failing to follow TEFRA's strict notification and disclosure rules. Contact your local CBIZ MHM tax advisor to discuss whether your partnership investments are subject to these rules.
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