CCA 200851092: Who is a partner waits for the partnership proceeding, but ordinary deductions do not

Plain-English summary

A short answer on sequencing, in a case where the partners of record were S corporations and the Service wanted to propose adjustments to the individuals behind them.

The unified audit regime then in force split every issue into two categories, and the category decided both the forum and the timing. Partnership items were determined once, in a proceeding at the partnership level, binding every partner. Affected items were items on a partner's own return whose treatment depends on the outcome of the partnership items, and they could not be resolved until the partnership proceeding finished. The practical effect is a queue. Nothing downstream can be settled while the upstream determination is open.

The question here was whether the Service could proceed against the individuals on the theory that they, rather than the S corporations, were the real partners. The answer puts that question in the queue. Partner identity is either a partnership item or an affected item. If it is an affected item, it cannot be addressed until after the partnership proceeding is complete. The release cites GAF v. Commissioner, 114 T.C. 519 (2000).

Note what the advice does not do. It declines to say which of the two categories partner identity falls into, and the answer is the same either way for the examiner's immediate purpose. A partnership item belongs in the partnership proceeding, so it is not available in a partner-level adjustment. An affected item has to wait for that proceeding to end. Either classification puts the identity question outside a separate proceeding against the individuals right now.

Then comes the carve-out, which is the useful half for the examiner. Deductions that are otherwise allowable would not seem to be affected by the above. If a partner deducts partnership related deductions, the writer says it would not seem to matter whether they claimed them through a pass-through S corporation or directly on their own return. The reasoning is that a deduction which stands on its own merits does not depend on resolving who the partner is, so holding it hostage to the partnership proceeding accomplishes nothing. The hedged phrasing, twice using "would not seem," marks this as the writer's read rather than a settled position.

A substantial redacted block sits between the two halves of the email, so the facts that connect the identity question to the deduction question are not in the release.

This is a clean digital release rather than a scan, so no OCR correction was needed. Kept as released: "directly on this own," where "his" is expected; "pass-thru entity S corp"; and the close of the document, which breaks off mid-sentence at the end of the released page rather than reaching a conclusion.

Ruling snapshot

• Question: Can the Service address the identity of a partnership's partners, and the deductions they claimed, before the partnership proceeding concludes?
• Outcome: Advice given. Partner identity is either a partnership item or an affected item, and affected items cannot be addressed until the partnership proceeding is complete. Deductions that are otherwise allowable do not appear to be affected, and it should not matter whether the partner claimed them through a pass-through S corporation or directly.
• Key authorities: IRC section 6231(a)(3), (a)(5); GAF v. Commissioner, 114 T.C. 519 (2000), as cited in the release.

Full text (IRS public release)

ID: CCA-920924-08 Number: 200851092
Office: -------------- Release Date: 12/19/2008

UILC: 6231.03-00

From: -------------------
Sent: Tue 9/2/2008 9:24 AM
To: ------------------------
Cc: ---------------------------------------------------------------------------------------------------------------------------
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Subject: RE: Sub S corp partners proposed adjustment

Partner identity is either a partnership item or affected item. Affected items cannot be addressed until after the partnership proceeding is complete. GAF v. Commissioner, 114 T.C. 519 (2000).

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Deductions that are otherwise allowable would not seem to be affected by the above. If a partner deducts partnership related deductions, it would not seem to matter whether he claimed them through a pass-thru entity S corp or directly on this own