CCA 200848070: IRS may use an affected-item notice without a TEFRA audit

Plain-English summary

Chief Counsel advised that the IRS could skip a TEFRA partnership audit and issue an affected-item notice of deficiency treating an S corporation as a C corporation on its partnership-interest sale. The IRS still had to protect the limitations period at the S corporation or C corporation level with a Form 872-I that specifically referenced tax attributable to partnership items. In calculating the corporation's basis and gain, the IRS would be bound by the partnership items as reported. The email also agreed that the IRS could adjust the partnership's stepped-up basis when the partnership later sold its real estate.

Ruling snapshot

• Question: May the IRS address the shareholder-level tax consequence without a TEFRA audit, and preserve related basis adjustments for a later partnership sale?
• Outcome: Advice given. Use an affected-item notice and a specifically worded Form 872-I, while accepting the reported partnership items for the current computation.
• Key authorities: Ginsburg v. Commissioner.

Full text (IRS public release)

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ID: CCA-820914-08 Number: 200848070
Office: --------------
Release Date: 11/28/2008

UILC: 6229.02-00

From: -------------------
Sent: Wed 8/20/2008 9:14 AM
To: -----------------
Cc: ---------------------------------------------------------------------------------------------------------------------------
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Subject: RE: Partnership redemption transaction variation

We could forgo doing a TEFRA audit and just issue an affected item notice of deficiency stating that the S corp is taxable as a C corp on the sale of their partnership interest. We would need to protect the statute at the S corp/C -corp level, however, using a Form 872-i that specially references tax attributable to partnership items under Ginsburg v. Commissioner. We would be bound by all of the partnership items as reported in computing the C corp's basis and gain.

I agree that we could adjust the partnerships' stepped up basis when they sell the real estate in a later year.