Despite the New Partnership Audit Rules, TEFRA Still Matters By Robert S. Horwitz
Despite the fact that the new partnership audit rules are effective for tax years that began after December 31, 2017, TEFRA will remain relevant for a number of years, as can be seen by several recent decisions.
Foster v United States, Dkt. 1:06-cv-00818 (W.D. TX June 19, 2018), involved a TEFRA partnership’s 1984 tax year. The taxpayers were partners in two farming partnerships set up by American Agri-Corp (“AMCOR”). The partnerships filed timely 1984 partnership returns that were signed by an officer of AMCOR. The taxpayers filed their 1984 returns and reported their share of partnership losses. In 1991, the IRS issued Final Partnership Administrative Adjustments (“FPAA”) to the partnerships. The taxpayers were non-notice partners and were not notified of the FPAAs. Petitions were filed in Tax Court. Among other things, the petitions asserted that the FPAAs were untimely. The two partnerships in which plaintiffs’ invested agreed to be bound by proceedings in other AMCOR cases. The Tax Court ultimately held that the returns were not valid returns since they were not signed by the tax matters partner. As a result, the FPAAs were timely because. In 2002, the tax matters partner agreed to an entry of a decision that resulted in decreasing expenses reported by the partnerships.
Since the adjustments did not require partner level determinations, the IRS assessed taxes against the taxpayers, who paid and, two years later, filed refund claims. In 2006, they filed refund suits in district court. The cases were stayed pending resolution of related litigation. After the stay was lifted, the taxpayers and the Government filed for summary judgment. The taxpayers argued that the assessments were untimely because the timeliness of an assessment at the partner level is an affected item which is determined by whether the FPAA was issued while the statute of limitations for both the partnership and the partner was open and while the statute of limitations against the partnership was open. The court rejected this argument. Because the returns were invalid, the FPAA was timely; in any event, whether the FPAA was timely was a partnership item that had to be raised in partnership level proceedings. Thus, regardless of whether it had been litigated in the partnership-level proceedings, the taxpayers could not challenge the timeliness of the FPAA in their individual proceeding.
The court also held that the refund suit was untimely. Under TEFRA, a partner who is assessed additional tax as a result of a partnership adjustment can only challenge the computation of the amount owed. To do so, he must file a refund claim within six months of mailing of the notice of computational adjustment. Since the taxpayers did not file a refund claim until two years after issuance of the notice, the refund claim was untimely.
In Dynamo Holdings Limited Partnership v Commissioner, 150 T.C. No. 10 (May 7, 2018), the tax years in issue were 2005, 2006, and 2007. The FPAAs were issued in 2010. A trial was held in early 2017. Subsequent to the Tax Court’s opinion in Graev v. Commissioner, 149 T.C. ___, holding that part of the Commissioner’s burden of production as to penalties is to present evidence of written supervisor approval, the Commissioner moved to reopen the record to present evidence of supervisory approval and the taxpayer moved to dismiss as to penalties on the ground that the Commissioner failed to offer evidence of written supervisory approval.
Sec. 7491(c) places the burden of production on the IRS with respect to the liability of an individual for penalties and additions to tax. This was a case that the Tax Court had not squarely addressed. The Court noted that under the plain language of the statute, a partnership-level proceeding is not with respect to the liability of an individual. The Tax Court’s jurisdiction is to determine to the tax treatment of partnership items. It does not determine the liability of any partner. Once the partnership-level proceeding is over, the partner’s individual liability is determined either by a computational adjustment or a notice of deficiency. If a penalty is assessed, the partner can raise any individual defenses to liability.
The Court further held that §7491(c) is inconsistent with partnership level proceedings, which does not focus upon liability of any partner for tax or penalties. Requiring the Commissioner to bear the burden of production would require the Court to look through the partnership to the individual partners who may be liable for the tax, which would adversely affect judicial and administrative efficiency. Because reopening the record would not affect the outcome the Commissioner’s motion to reopen was denied. And because the Commissioner does not bear the burden of production, the partnership’s motion to dismiss as to penalties was denied.
These cases are only two examples of recent decisions in TEFRA cases involving tax years that are more than ten years old. See also RB-1 Investment Partners v. Commissioner, T.C. Memo. 2018-64 (involving the 2000 tax year). Thus, we will have to deal with, and remain conversant with, TEFRA for a long time to come.
ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – email@example.com or 310.281.3200 Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.