CCA 200851090: A partner's note guarantee and the debt allocation it produces are partnership items

Plain-English summary

Two sentences answering a question that decides which consent the Service needs, and the answer turns on a classification rather than on the merits of the adjustment.

The underlying chain is familiar. A partner's share of partnership debt is added to the basis of their partnership interest, so a guarantee that shifts debt toward one partner raises that partner's basis. Basis in turn decides whether a cash distribution is tax free or produces gain, because a distribution is taxable only to the extent it exceeds basis. So a guarantee signed at the partnership level can be the reason a distribution years later is or is not taxable to one partner.

The question put here is whether that guarantee is a partnership item. It matters because of how the unified audit regime allocates both forum and limitations periods. Partnership items are determined in the partnership proceeding and the assessment period for them is extended by a partnership-level consent, the Form 872-P, signed by the tax matters partner. Items belonging to the partner's own return need their own consent from that partner, and if the examiner is holding only the partnership consent, a partner-level classification can mean the period has quietly run.

The answer is that the examiner is covered. Under Dakota Hills v. Commissioner, the note guarantee and the resulting allocation of debt are partnership items affecting the taxability of the distribution. That places them inside the partnership proceeding and inside the Form 872-P already in hand.

The phrasing repays attention. The guarantee and the debt allocation are the partnership items. The taxability of the distribution is what those items affect, which is the language of an affected item computed on the partner's return once the partnership items are fixed. So the partnership proceeding settles the guarantee and the allocation, and the consequence for the particular partner's distribution follows from them.

The case is cited as "Dakota Hills v. Commissioner" with no reporter citation, volume or year, so the release cannot be tied to a specific decision from its own text. It is reproduced here exactly as released rather than completed. The same pattern appears in CCA 0851103 in this batch, which cites a case as "Katz v. Commissioner, (8th Cir)" and nothing more.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: the subject line "RE: Guaranteed debt as basis a TEFRA item?", which is missing a word; and the case cited without a reporter citation or year.

Ruling snapshot

• Question: Is a partner's guarantee of a partnership note, and the debt allocation resulting from it, a partnership item covered by the Form 872-P?
• Outcome: Advice given. Yes. The examiner is covered by the Form 872-P, because under Dakota Hills v. Commissioner the note guarantee and the resulting allocation of debt are partnership items affecting the taxability of the distribution.
• Key authorities: IRC section 6231(a)(3); IRC section 6229; Dakota Hills v. Commissioner, cited in the release without a reporter citation or year; Form 872-P.

Full text (IRS public release)

ID: CCA-921549-08 Number: 200851090
Office: -------------- Release Date: 12/19/2008

UILC: 6231.00-00

From: -------------------
Sent: Tue 9/2/2008 3:49 PM
To: --------------
Cc: ---------------------------------------------------------------------------------------------------------------------------
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Subject: RE: Guaranteed debt as basis a TEFRA item?

You are covered by the Form 872-P. Under Dakota Hills v. Commissioner, the note guarantee (and the
resulting allocation of debt) are partnership items affecting the taxability of the distribution.