Revenue Reconciliation Act
page7
 
Partnerships and partners subject to large partnership
rules
Definition
of electing large partnership
An "electing large partnership" is any
partnership that elects under the provision, if the
number of partners in the preceding taxable year is
100 or more. The number of partners is determined by
counting only persons directly holding partnership
interests in the taxable year, including persons
holding through nominees; persons holding indirectly
(e.g., through another partnership) are not counted.
Regulations may provide, however, that if the number
of partners in any taxable year falls below 100, the
partnership may not be treated as an electing large
partnership. The election applies to the year for
which made and all subsequent years and cannot be
revoked without the Secretary's consent.
Special
rules for certain service partnerships
An election under this provision is not effective
for any partnership if substantially all the
partners are: (1) individuals performing substantial
services in connection with the partnership's
activities, or personal service corporations the
owner-employees of which perform such services; (2)
retired partners who had performed such services; or
(3) spouses of partners who had performed such
services. In addition, the term "partner"
does not include any individual performing
substantial services in connection with the
partnership's activities and holding a partnership
interest, or an individual who formerly performed
such services and who held a partnership interest at
the time the individual performed such services.
Exclusion
for commodity partnerships
An election under this provision is not effective
for any partnership the principal activity of which
is the buying and selling of commodities (not
described in sec. 1221(1)), or options, futures or
forwards with respect to commodities.
Special
rules for partnerships holding oil and gas
properties
Simplified
reporting treatment of electing large partnerships
with oil and gas activities
The bill provides special rules for electing large
partnerships with oil and gas activities that
operate under the simplified reporting regime. These
partnerships are collectively referred to herein as
"oil and gas large partnerships."
Generally, the bill provides that an oil and gas
large partnership reports information to its
partners under the general simplified large
partnership reporting regime described above. To
prevent the extension of percentage depletion
deductions to persons excluded therefrom under
present law, however, certain partners are treated
as disqualified persons under the bill.
The treatment of a disqualified person's
distributive share of any item of income, gain,
loss, deduction, or credit attributable to any
partnership oil or gas property is determined under
the bill without regard to the special rules
applicable to large partnerships. Thus, an oil and
gas large partnership reports information related to
oil and gas activities to a partner who is a
disqualified person in the same manner and to the
same extent that it reports such information to that
partner under present law. The simplified reporting
rules of the bill, however, apply with respect to
reporting such a partner's share of items not
related to oil and gas activities.
The bill defines two categories of taxpayers as
disqualified persons. The first category encompasses
taxpayers who do not qualify for the deduction for
percentage depletion under section 613A (i.e.,
integrated producers of oil and gas). The second
category includes any person whose average daily
production of oil and gas (for purposes of
determining the depletable oil and natural gas
quantity under section 613A(c)(2)) is at least 500
barrels for its taxable year in which (or with
which) the partnership's taxable year ends. In
making this computation, all production of domestic
crude oil and natural gas attributable to the
partner is taken into account, including such
partner's proportionate share of any production of
the large partnership.
A taxpayer that falls within a category of
disqualified person has the responsibility of
notifying any large partnership in which it holds a
direct or indirect interest (e.g., through a
pass-through entity) of its status as such. Thus,
for example, if an integrated producer owns an
interest in a partnership which in turn owns an
interest in an oil and gas large partnership, it is
responsible for providing the management of the
electing large partnership information regarding its
status as a disqualified person and details
regarding its indirect interest in the electing
large partnership.
Under the bill, an oil and gas large partnership
computes its deduction for oil and gas depletion
under the general statutory rules (subject to
certain exceptions described below) under the
assumptions that the partnership is the taxpayer and
that it qualifies for the percentage depletion
deduction. The amount of the depletion deduction, as
well as other oil and gas related items, generally
are reported to each partner (other than to partners
who are disqualified persons) as components of that
partner's distributive share of taxable income or
loss from passive loss limitation activities. The
bill provides that in computing the partnership's
oil and gas percentage depletion deduction, the
1,000-barrel-per-day limitation does not apply. In
addition, an oil and gas large partnership is
allowed to compute percentage depletion under the
bill without applying the
65-percent-of-taxable-income limitation under
section 613A(d)(1).
As under present law, an election to deduct IDCs
under section 263(c) is made at the partnership
level. Since the bill treats those taxpayers
required by the Code (sec. 291) to capitalize 30
percent of IDCs as disqualified persons, an oil and
gas large partnership may pass through a full
deduction of IDCs to its partners who are not
disqualified persons. In contrast to present law, an
oil and gas large partnership also has the
responsibility with respect to its partners who are
not disqualified persons for making an election
under section 59(e) to capitalize and amortize
certain specified IDCs. Partners who are
disqualified persons are permitted to make their own
separate section 59(e) elections under the bill.
Consistent with the general reporting regime for
electing large partnerships, the bill provides that
a single AMT adjustment (under either corporate or
non-corporate principles, as the case may be) is
made and reported to the partners (other than
disqualified persons) of an oil and gas large
partnership as a separate item. This
separately-reported item is affected by the
limitation on the repeal of the tax preference for
excess IDCs. For purposes of computing this
limitation, the bill treats an oil and gas large
partnership as the taxpayer. Thus, the limitation on
repeal of the IDC preference is applied at the
partnership level and is based on the cumulative
reduction in the partnership's alternative minimum
taxable income resulting from repeal of that
preference.
The bill provides that in making partnership-level
computations, any item of income, gain, loss,
deduction, or credit attributable to a partner who
is a disqualified person is disregarded. For
example, in computing the partnership's net income
from oil and gas for purposes of determining the IDC
preference (if any) to be reported to partners who
are not disqualified persons as part of the AMT
adjustment, disqualified persons' distributive
shares of the partnership's net income from oil and
gas are not to be taken into account.
Regulatory
authority
The Secretary of the Treasury is granted authority
to prescribe such regulations as may be appropriate
to carry out the purposes of the provisions.
Effective
Date
The provision s generally applies to partnership
taxable years beginning after December 31, 1997.
b.
Simplified audit procedures for electing large
partnerships (sec. 1022 of the bill and secs. 6240,
6241, 6242, 6245, 6246, 6247, 6249, 6251, 6255, and
6256 of the Code)
Present
Law
In
general
Prior to 1982, regardless of the size of a
partnership, adjustments to a partnership's items of
income, gain, loss, deduction, or credit had to be
made in separate proceedings with respect to each
partner individually. Because a large partnership
sometimes had many partners located in different
audit districts, adjustments to items of income,
gains, losses, deductions, or credits of the
partnership had to be made in numerous actions in
several jurisdictions, sometimes with conflicting
outcomes.
The Tax Equity and Fiscal Responsibility Act of 1982
("TEFRA") established unified audit rules
applicable to all but certain small (10 or fewer
partners) partnerships. These rules require the tax
treatment of all "partnership items" to be
determined at the partnership, rather than the
partner, level. Partnership items are those items
that are more appropriately determined at the
partnership level than at the partner level, as
provided by regulations.
Under the TEFRA rules, a partner must report all
partnership items consistently with the partnership
return or must notify the IRS of any inconsistency.
If a partner fails to report any partnership item
consistently with the partnership return, the IRS
may make a computational adjustment and immediately
assess any additional tax that results.
Administrative
proceedings
Under the TEFRA rules, a partner must report all
partnership items consistently with the partnership
return or must notify the IRS of any inconsistency.
If a partner fails to report any partnership item
consistently with the partnership return, the IRS
may make a computational adjustment and immediately
assess any additional tax that results.
The IRS may challenge the reporting position of a
partnership by conducting a single administrative
proceeding to resolve the issue with respect to all
partners. But the IRS must still assess any
resulting deficiency against each of the taxpayers
who were partners in the year in which the
understatement of tax liability arose.
Any partner of a partnership can request an
administrative adjustment or a refund for his own
separate tax liability. Any partner also has the
right to participate in partnership-level
administrative proceedings. A settlement agreement
with respect to partnership items binds all parties
to the settlement.
Tax
Matters Partner
The TEFRA rules establish the "Tax Matters
Partner" as the primary representative of a
partnership in dealings with the IRS. The Tax
Matters Partner is a general partner designated by
the partnership or, in the absence of designation,
the general partner with the largest profits
interest at the close of the taxable year. If no Tax
Matters Partner is designated, and it is impractical
to apply the largest profits interest rule, the IRS
may select any partner as the Tax Matters Partner.
Notice
requirements
The IRS generally is required to give notice of the
beginning of partnership-level administrative
proceedings and any resulting administrative
adjustment to all partners whose names and addresses
are furnished to the IRS. For partnerships with more
than 100 partners, however, the IRS generally is not
required to give notice to any partner whose profits
interest is less than one percent.
Adjudication
of disputes concerning partnership items
After the IRS makes an administrative adjustment,
the Tax Matters Partner (and, in limited
circumstances, certain other partners) may file a
petition for readjustment of partnership items in
the Tax Court, the district court in which the
partnership's principal place of business is
located, or the Claims Court.
Statute
of limitations
The IRS generally cannot adjust a partnership item
for a partnership taxable year if more than 3 years
have elapsed since the later of the filing of the
partnership return or the last day for the filing of
the partnership return.
Reasons
for Change
Present audit procedures for large partnerships are
inefficient and more complex than those for other
large entities. The IRS must assess any deficiency
arising from a partnership audit against a large
number of partners, many of whom cannot easily be
located and some of whom are no longer partners. In
addition, audit procedures are cumbersome and can be
complicated further by the intervention of partners
acting individually.
Explanation
of Provision
The bill creates a new audit system for electing
large partnerships. The provision defines
"electing large partnership" the same way
for audit and reporting purposes (generally, any
partnership that elects under the reporting
provisions, if the number of partners in the
preceding taxable year is 100 or more).
As under present law, electing large partnerships
and their partners are subject to unified audit
rules. Thus, the tax treatment of "partnership
items" are determined at the partnership,
rather than the partner, level. The term
"partnership items" is defined as under
present law.
Unlike present law, however, partnership adjustments
generally will flow through to the partners for the
year in which the adjustment takes effect. Thus, the
current-year partners' share of current-year
partnership items of income, gains, losses,
deductions, or credits will be adjusted to reflect
partnership adjustments that take effect in that
year. The adjustments generally will not affect
prior-year returns of any partners (except in the
case of changes to any partner's distributive
shares).
In lieu of flowing an adjustment through to its
partners, the partnership may elect to pay an
imputed underpayment. The imputed underpayment
generally is calculated by netting the adjustments
to the income and loss items of the partnership and
multiplying that amount by the highest tax rate
(whether individual or corporate). A partner may not
file a claim for credit or refund of his allocable
share of the payment. A partnership may make this
election only if it meets requirements set forth in
Treasury regulations designed to ensure payment (for
example, in the case of a foreign partnership).
Regardless of whether a partnership adjustment flows
through to the partners, an adjustment must be
offset if it requires another adjustment in a year
after the adjusted year and before the year the
offsetted adjustment takes effect. For example, if a
partnership expensed a $1,000 item in year 1, and it
was determined in year 4 that the item should have
been capitalized and amortized ratably over 10
years, the adjustment in year 4 would be $700, apart
from any interest or penalty. (The $900 adjustment
for the improper deduction would be offset by $200
of adjustments for amortization deductions.) The
year 4 partners would be required to include an
additional $700 in income for that year. The
partnership may ratably amortize the remaining $700
of expenses in years 4-10.
In addition, the partnership, rather than the
partners individually, generally is liable for any
interest and penalties that result from a
partnership adjustment. Interest is computed for the
period beginning on the return due date for the
adjusted year and ending on the earlier of the
return due date for the partnership taxable year in
which the adjustment takes effect or the date the
partnership pays the imputed underpayment. Thus, in
the above example, the partnership would be liable
for 4 years' worth of interest (on a declining
principal amount).
Penalties (such as the accuracy and fraud penalties)
are determined on a year-by-year basis (without
offsets) based on an imputed underpayment. All
accuracy penalty criteria and waiver criteria (such
as reasonable cause, substantial authority, etc.)
are determined as if the partnership were a taxable
individual. Accuracy and fraud penalties are
assessed and accrue interest in the same manner as
if asserted against a taxable individual.
Any payment (for Federal income taxes, interest, or
penalties) that an electing large partnership is
required to make is non-deductible.
If a partnership ceases to exist before a
partnership adjustment takes effect, the former
partners are required to take the adjustment into
account, as provided by regulations. Regulations are
also authorized to prevent abuse and to enforce
efficiently the audit rules in circumstances that
present special enforcement considerations (such as
partnership bankruptcy).
Administrative
proceedings
Under the electing large partnership audit rules, a
partner is not permitted to report any partnership
items inconsistently with the partnership return,
even if the partner notifies the IRS of the
inconsistency. The IRS may treat a partnership item
that was reported inconsistently by a partner as a
mathematical or clerical error and immediately
assess any additional tax against that partner.
As under present law, the IRS may challenge the
reporting position of a partnership by conducting a
single administrative proceeding to resolve the
issue with respect to all partners. Unlike under
present law, however, partners will have no right
individually to participate in settlement
conferences or to request a refund.
Partnership
representative
The bill requires each electing large partnership to
designate a partner or other person to act on its
behalf. If an electing large partnership fails to
designate such a person, the IRS is permitted to
designate any one of the partners as the person
authorized to act on the partnership's behalf. After
the IRS's designation, an electing large partnership
could still designate a replacement for the
IRS-designated partner.
Notice
requirements
Unlike under present law, the IRS is not required to
give notice to individual partners of the
commencement of an administrative proceeding or of a
final adjustment. Instead, the IRS is authorized to
send notice of a partnership adjustment to the
partnership itself by certified or registered mail.
The IRS could give proper notice by mailing the
notice to the last known address of the partnership,
even if the partnership had terminated its
existence.
Adjudication
of disputes concerning partnership items
As under present law, an administrative adjustment
could be challenged in the Tax Court, the district
court in which the partnership's principal place of
business is located, or the
Claims Court
. However, only the partnership, and not partners
individually, can petition for a readjustment of
partnership items.
If a petition for readjustment of partnership items
is filed by the partnership, the court with which
the petition is filed will have jurisdiction to
determine the tax treatment of all partnership items
of the partnership for the partnership taxable year
to which the notice of partnership adjustment
relates, and the proper allocation of such items
among the partners. Thus, the court's jurisdiction
is not limited to the items adjusted in the notice.
Statute
of limitations
Absent an agreement to extend the statute of
limitations, the IRS generally could not adjust a
partnership item of an electing large partnership
more than 3 years after the later of the filing of
the partnership return or the last day for the
filing of the partnership return. Special rules
apply to false or fraudulent returns, a substantial
omission of income, or the failure to file a return.
The IRS would assess and collect any deficiency of a
partner that arises from any adjustment to a
partnership item subject to the limitations period
on assessments and collection applicable to the year
the adjustment takes effect (secs. 6248, 6501 and
6502).
Regulatory
authority
The Secretary of the Treasury is granted authority
to prescribe regulations as may be necessary to
carry out the simplified audit procedure provisions,
including regulations to prevent abuse of the
provisions through manipulation. The regulations may
include rules that address transfers of partnership
interests, in anticipation of a partnership
adjustment, to persons who are tax-favored (e.g.,
corporations with net operating losses, tax-exempt
organizations, and foreign partners) or persons who
are expected to be unable to pay tax (e.g., shell
corporations). For example, if prior to the time a
partnership adjustment takes effect, a taxable
partner transfers a partnership interest to a
nonresident alien to avoid the tax effect of the
partnership adjustment, the rules may provide, among
other things, that income related to the partnership
adjustment is treated as effectively connected
taxable income, that the partnership adjustment is
treated as taking effect before the partnership
interest was transferred, or that the former partner
is treated as a current partner to whom the
partnership adjustment is allocated.
Effective
Date
The provision applies to partnership taxable years
beginning after December 31, 1997.
c.
Due date for furnishing information to partners of
electing large partnerships (sec. 1023 of the bill
and sec. 6031(b) of the Code)
Present
Law
A partnership required to file an income tax return
with the Internal Revenue Service must also furnish
an information return to each of its partners on or
before the day on which the income tax return for
the year is required to be filed, including
extensions. Under regulations, a partnership must
file its income tax return on or before the
fifteenth day of the fourth month following the end
of the partnership's taxable year (on or before
April 15, for calendar year partnerships). This is
the same deadline by which most individual partners
must file their tax returns.
Reasons
for Change
Information returns that are received on or shortly
before April 15 (or later) are difficult for
individuals to use in preparing their tax returns
(or in computing their payments) that are due on
that date.
Explanation
of Provision
The bill provides that an electing large partnership
must furnish information returns to partners by the
first March 15 following the close of the
partnership's taxable year. Electing large
partnerships are those partnerships subject to the
simplified reporting and audit rules (generally, any
partnership that elects under the reporting
provision, if the number of partners in the
preceding taxable year is 100 or more).
The provision also provides that, if the partnership
is required to provide copies of the information
returns to the Internal Revenue Service on magnetic
media, each schedule (such as each Schedule K-1)
with respect to each partner is treated as a
separate information return with respect to the
corrective periods and penalties that are generally
applicable to all information returns.
Effective
Date
The provision is effective for partnership taxable
years beginning after December 31, 1997.
d.
Partnership returns required on magnetic media (sec.
1024 of the bill and sec. 6011 of the Code)
Present
Law
Partnerships are permitted, but not required, to
provide the tax return of the partnership (Form
1065), as well as copies of the schedules sent to
each partner (Form K-1), to the Internal Revenue
Service on magnetic media.
Reasons
for Change
Most entities that file large numbers of documents
with the Internal Revenue Service must do so on
magnetic media. Conforming the reporting provisions
for partnerships to the generally applicable
information reporting rules will facilitate
integration of partnership information into already
existing data systems.
Explanation
of Provision
The bill provides generally that any partnership is
required to provide the tax return of the
partnership (Form 1065), as well as copies of the
schedule sent to each partner (Form K-1), to the
Internal Revenue Service on magnetic media. An
exception is provided for partnerships with 100 or
fewer partners.
Effective
Date
The provision is effective for partnership taxable
years beginning after December 31, 1997.
e.
Treatment of partnership items of individual
retirement arrangements (sec. 1025 of the bill and
sec. 6012 of the Code)
Present
Law
Return
filing requirements
An individual retirement account ("IRA")
is a trust which generally is exempt from taxation
except for the taxes imposed on income from an
unrelated trade or business. A fiduciary of a trust
that is exempt from taxation (but subject to the
taxes imposed on income from an unrelated trade or
business) generally is required to file a return on
behalf of the trust for a taxable year if the trust
has gross income of $1,000 or more included in
computing unrelated business taxable income for that
year (Treas. Reg. sec. 1.6012-3(a)(5)).
Unrelated business taxable income is the gross
income (including gross income from a partnership)
derived by an exempt organization from an unrelated
trade or business, less certain deductions which are
directly connected with the carrying on of such
trade or business (sec. 512(a)(1). In calculating
unrelated business taxable income, exempt
organizations (including IRAs) generally also are
permitted a specific deduction of $1,000 (sec.
512(b)(12)).
Unified
audits of partnerships
All but certain small partnerships are subject to
unified audit rules established by the Tax Equity
and Fiscal Responsibility Act of 1982. These rules
require the tax treatment of all "partnership
items" to be determined at the partnership,
rather than the partner, level. Partnership items
are those items that are more appropriately
determined at the partnership level than at the
partner level, including such items as gross income
and deductions of the partnership.
Reasons
for Change
Under present law, tax returns often must be filed
for IRAs that have no taxable income and,
consequently, no tax liability. The filing of these
returns by taxpayers, and the processing of these
returns by the IRS, impose significant costs.
Imposing this burden is unnecessary to the extent
that the income of the IRA has been derived from an
interest in a partnership that is subject to
partnership-level audit rules. In these
circumstances, the appropriateness of any deductions
may be determined at the partnership level, and an
additional filing is unnecessary to facilitate this
determination.
Explanation
of Provision
The bill modifies the filing threshold for an IRA
with an interest in a partnership that is subject to
the partnership-level audit rules. A fiduciary of
such an IRA could treat the trust's share of
partnership taxable income as gross income, for
purposes of determining whether the trust meets the
$1,000 gross income filing threshold. A fiduciary of
an IRA that receives taxable income from a
partnership that is subject to partnership-level
audit rules of less than $1,000 (before the $1,000
specific deduction) is not required to file an
income tax return if the IRA does not have any other
income from an unrelated trade or business.
Effective
Date
The provision applies to taxable years beginning
after December 31, 1997.
2.
Other partnership audit rules
a.
Treatment of partnership items in deficiency
proceedings (sec. 1031 of the bill and sec. 6234 of
the Code)
Present
Law
Partnership proceedings under rules enacted in TEFRA139
must be kept separate from deficiency proceedings
involving the partners in their individual
capacities. Prior to the Tax Court's opinion in
Munro v. Commissioner, 92 T.C. 71 (1989), the IRS
computed deficiencies by assuming that all items
that were subject to the TEFRA partnership
procedures were correctly reported on the taxpayer's
return. However, where the losses claimed from TEFRA
partnerships were so large that they offset any
proposed adjustments to nonpartnership items, no
deficiency could arise from a non-TEFRA proceeding,
and if the partnership losses were subsequently
disallowed in a partnership proceeding, the non-TEFRA
adjustments might be uncollectible because of the
expiration of the statute of limitations with
respect to nonpartnership items.
Faced with this situation in Munro, the IRS
issued a notice of deficiency to the taxpayer that
presumptively disallowed the taxpayer's TEFRA
partnership losses for computational purposes only.
Although the Tax Court ruled that a deficiency
existed and that the court had jurisdiction to hear
the case, the court disapproved of the methodology
used by the IRS to compute the deficiency.
Specifically, the court held that partnership items
(whether income, loss, deduction, or credit)
included on a taxpayer's return must be completely
ignored in determining whether a deficiency exists
that is attributable to nonpartnership items.
Reasons
for Change
The opinion in Munro creates problems for
both taxpayers and the IRS. For example, a taxpayer
would be harmed in the case where he has invested in
a TEFRA partnership and is also subject to the
deficiency procedures with respect to nonpartnership
item adjustments, since computing the tax liability
without regard to partnership items will have the
same effect as if the partnership items were
disallowed. If the partnership items were losses,
the effect will be a greatly increased deficiency
for the nonpartnership items. If, when the
partnership proceedings are completed, the taxpayer
is ultimately allowed any part of the losses, the
taxpayer will receive part of the increased
deficiency back in the form of an overpayment.
However, in the interim, the taxpayer will have been
subject to assessment and collection of a deficiency
inflated by items still in dispute in the
partnership proceeding. In essence, a taxpayer in
such a case would be deprived of a prepayment forum
with respect to the partnership item adjustments.
The IRS would be harmed if a taxpayer's income is
primarily from a TEFRA partnership, since the IRS
may be unable to adjust nonpartnership items such as
medical expense deductions, home mortgage interest
deductions on charitable contribution deductions
because there would be no deficiency since, under Munro,
the income must be ignored.
Explanation
of Provision
The bill overrules Munro and allow the IRS to
return to its prior practice of computing
deficiencies by assuming that all TEFRA items whose
treatment has not been finally determined had been
correctly reported on the taxpayer's return. This
eliminates the need to do special computations that
involve the removal of TEFRA items from a taxpayer's
return, and will restore to taxpayers a prepayment
forum with respect to the TEFRA items. In addition,
the provision provides a special rule to address the
factual situation presented in Munro.
Specifically, the bill provides a declaratory
judgment procedure in the Tax Court for adjustments
to an oversheltered return. An oversheltered return
is a return that shows no taxable income and a net
loss from TEFRA partnerships. In such a case, the
IRS is authorized to issue a notice of adjustment
with respect to non-TEFRA items, notwithstanding
that no deficiency would result from the adjustment.
However, the IRS could only issue such a notice if a
deficiency would have arisen in the absence of the
net loss from TEFRA partnerships.
The Tax Court is granted jurisdiction to determine
the correctness of such an adjustment as well as to
make a declaration with respect to any other item
for the taxable year to which the notice of
adjustment relates, except for partnership items and
affected items which require partner-level
determinations. No tax is due upon such a
determination, but a decision of the Tax Court is
treated as a final decision, permitting an appeal of
the decision by either the taxpayer or the IRS. An
adjustment determined to be correct would thus have
the effect of increasing the taxable income that is
deemed to have been reported on the taxpayer's
return. If the taxpayer's partnership items were
then adjusted in a subsequent proceeding, the IRS
has preserved its ability to collect tax on any
increased deficiency attributable to the
nonpartnership items.
Alternatively, if the taxpayer chooses not to
contest the notice of adjustment within the 90-day
period, the bill provides that when the taxpayer's
partnership items are finally determined, the
taxpayer has the right to file a refund claim for
tax attributable to the items adjusted by the
earlier notice of adjustment for the taxable year.
Although a refund claim is not generally permitted
with respect to a deficiency arising from a TEFRA
proceeding, such a rule is appropriate with respect
to a defaulted notice of adjustment because
taxpayers may not challenge such a notice when
issued since it does not require the payment of
additional tax.
In addition, the bill incorporates a number of
provisions intended to clarify the coordination
between TEFRA audit proceedings and individual
deficiency proceedings. Under these provisions, any
adjustment with respect to a non-partnership item
that caused an increase in tax liability with
respect to a partnership item would be treated as a
computational adjustment and assessed after the
conclusion of the TEFRA proceeding. Accordingly,
deficiency procedures do not apply with respect to
this increase in tax liability, and the statute of
limitations applicable to TEFRA proceedings are
controlling.
Effective
Date
The provision is effective for partnership taxable
years ending after the date of enactment.
b.
Partnership return to be determinative of audit
procedures to be followed (sec. 1032 of the bill and
sec. 6231 of the Code)
Present
Law
TEFRA established unified audit rules applicable to
all partnerships, except for partnerships with 10 or
fewer partners, each of whom is a natural person
(other than a nonresident alien) or an estate, and
for which each partner's share of each partnership
item is the same as that partner's share of every
other partnership item. Partners in the exempted
partnerships are subject to regular deficiency
procedures.
Reasons
for Change
The IRS often finds it difficult to determine
whether to follow the TEFRA partnership procedures
or the regular deficiency procedures. If the IRS
determines that there were fewer than 10 partners in
the partnership but was unaware that one of the
partners was a nonresident alien or that there was a
special allocation made during the year, the IRS
might inadvertently apply the wrong procedures and
possibly jeopardize any assessment. Permitting the
IRS to rely on a partnership's return would simplify
the IRS' task.
Explanation
of Provision
The bill permits the IRS to apply the TEFRA audit
procedures if, based on the partnership's return for
the year, the IRS reasonably determines that those
procedures should apply. Similarly, the provision
permits the IRS to apply the normal deficiency
procedures if, based on the partnership's return for
the year, the IRS reasonably determines that those
procedures should apply.
Effective
Date
The provision is effective for partnership taxable
years ending after the date of enactment.
c.
Provisions relating to statute of limitations
i.
Suspend statute when an untimely petition is filed
(sec. 1033(a) of the bill and sec. 6229 of the Code)
Present
Law
In a deficiency case, section 6503(a) provides that
if a proceeding in respect of the deficiency is
placed on the docket of the Tax Court, the period of
limitations on assessment and collection is
suspended until the decision of the Tax Court
becomes final, and for 60 days thereafter. The
counterpart to this provision with respect to TEFRA
cases is contained in section 6229(d). That section
provides that the period of limitations is suspended
for the period during which an action may be brought
under section 6226 and, if an action is brought
during such period, until the decision of the court
becomes final, and for 1 year thereafter. As a
result of this difference in language, the running
of the statute of limitations in a TEFRA case will
only be tolled by the filing of a timely petition
whereas in a deficiency case, the statute of
limitations is tolled by the filing of any petition,
regardless of whether the petition is timely.
Reasons
for Change
Under present law, if an untimely petition is filed
in a TEFRA case, the statute of limitations can
expire while the case is still pending before the
court. To prevent this from occurring, the IRS must
make assessments against all of the investors during
the pendency of the action and if the action is in
the Tax Court, presumably abate such assessments if
the court ultimately determines that the petition
was timely. These steps are burdensome to the IRS
and to taxpayers.
Explanation
of Provision
The bill conforms the suspension rule for the filing
of petitions in TEFRA cases with the rule under
section 6503(a) pertaining to deficiency cases.
Under the provision, the statute of limitations in
TEFRA cases is suspended by the filing of any
petition under section 6226, regardless of whether
the petition is timely or valid, and the suspension
will remain in effect until the decision of the
court becomes final, and for one year thereafter.
Hence, if the statute of limitations is open at the
time that an untimely petition is filed, the
limitations period would no longer continue to run
and possibly expire while the action is pending
before the court.
Effective
Date
The provision is effective with respect to all cases
in which the period of limitations has not expired
under present law as of the date of enactment.
ii.
Suspend statute of limitations during bankruptcy
proceedings (sec. 1033(b) of the bill and sec. 6229
of the Code)
Present
Law
The period for assessing tax with respect to
partnership items generally is the longer of the
periods provided by section 6229 or section 6501.
For partnership items that convert to nonpartnership
items, section 6229(f) provides that the period for
assessing tax shall not expire before the date which
is 1 year after the date that the items become
nonpartnership items. Section 6503(h) provides for
the suspension of the limitations period during the
pendency of a bankruptcy proceeding. However, this
provision only applies to the limitations periods
provided in sections 6501 and 6502.
Under present law, because the suspension provision
in section 6503(h) applies only to the limitations
periods provided in section 6501 and 6502, some
uncertainty exists as to whether section 6503(h)
applies to suspend the limitations period pertaining
to converted items provided in section 6229(f) when
a petition naming a partner as a debtor in a
bankruptcy proceeding is filed. As a result, the
limitations period provided in section 6229(f) may
continue to run during the pendency of the
bankruptcy proceeding, notwithstanding that the IRS
is prohibited from making an assessment against the
debtor because of the automatic stay provisions of
the Bankruptcy Code.
Reasons
for Change
The ambiguity in present law makes it difficult for
the IRS to adjust partnership items that convert to
nonpartnership items by reason of a partner going
into bankruptcy. In addition, any uncertainty may
result in increased requests for the bankruptcy
court to lift the automatic stay to permit the IRS
to make an assessment with respect to the converted
items.
Explanation
of Provision
The bill clarifies that the statute of limitations
is suspended for a partner who is named in a
bankruptcy petition. The suspension period is for
the entire period during which the IRS is prohibited
by reason of the bankruptcy proceeding from making
an assessment, and for 60 days thereafter. The
provision does not purport to create any inference
as to the proper interpretation of present law.
Effective
Date
The provision is effective with respect to all cases
in which the period of limitations has not expired
under present law as of the date of enactment.
iii.
Extend statute of limitations for bankrupt TMPs
(sec. 1033(c) of the bill and sec. 6229 of the Code)
Present
Law
Section 6229(b)(1)(B) provides that the statute of
limitations is extended with respect to all partners
in the partnership by an agreement entered into
between the tax matters partner (TMP) and the IRS.
However, Temp. Treas. Reg. secs.
301.6231(a)(7)-1T(1)(4) and 301.6231(c)-7T(a)
provide that upon the filing of a petition naming a
partner as a debtor in a bankruptcy proceeding, that
partner's partnership items convert to
nonpartnership items, and if the debtor was the tax
matters partner, such status terminates. These rules
are necessary because of the automatic stay
provision contained in 11 U.S.C. sec. 362(a)(8). As
a result, if a consent to extend the statute of
limitations is signed by a person who would be the
TMP but for the fact that at the time that the
agreement is executed the person was a debtor in a
bankruptcy proceeding, the consent would not be
binding on the other partners because the person
signing
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