CCA 200916031: One partnership proceeding can unwind circular allocations

Plain-English summary

Chief Counsel advised how to handle a partnership that indirectly held an interest in itself through a tier partner. An FPAA issued to the source partnership could disregard income or losses that left the partnership, flowed through the tier partner, and returned through the circular ownership interest. Those excluded amounts should instead be reallocated among the tier partner's remaining members according to their profit-and-loss interests. Counsel viewed that reallocation as a computational consequence of the source partnership proceeding, so a second TEFRA proceeding against the tier partner should not be necessary.

Ruling snapshot

• Question: Could one FPAA address income or losses that circulated from a partnership through a tier partner and back to the originating partnership?
• Outcome: Advice given: disregard the circular allocation, reallocate it among the other tier-partner members, and treat that result as computational.
• Key authorities: TEFRA partnership-level proceeding rules; IRC § 6221.

Full text (IRS public release)

ID: CCA_2009022310093437 Number: 200916031
Release Date: 4/17/2009
Office: --------------
UILC: 6221.00-00

From: -------------------
Sent: Monday, February 23, 2009 10:09:36 AM
To: --------------------
Cc: ------------------------------------
Subject: RE: Circular Linkage RAR

I forwarded them to ----- for substantive comment. Jurisdictionally our primary position should be that the FPAA to the partnership entity that indirectly owns an interest in itself should be sufficient to deal with the issue. Specifically, the FPAA would disregard any income or losses that originate from the entity being included again when it flows to a tier partner and then back to the originating partnership through its small interest in the tier-partner.

The excluded income or loss that is initially allocated back to the source TEFRA partnership should, instead, be reallocated to the remaining members of the tier-partners in accordance with their proportionate profit/loss interest.

We should not have to initiate a second TEFRA proceeding for the tier-partner since we should be able to treat the reallocation as a purely computational issue resulting from the source TEFRA partnership proceeding.