CCA 200920044: TEFRA linkages could connect grantor-trust beneficiaries directly to the partnership

Plain-English summary

Chief Counsel explained how to establish TEFRA linkages when a grantor trust stood between a source partnership and the ultimate taxpayers. The usual approach linked the pass-through entity directly and then connected its Schedules K-1 to that entity rather than to the source partnership. Depending on the tax year, old and new trust beneficiaries could both require secondary links if each received flow-through items from the partnership proceeding. Only the new beneficiary would need the secondary link in later years. The trust had to forward notices to beneficiaries under section 6223(h), but section 6223(c)(3) also permitted the IRS to convert secondary links to direct links and bypass the intervening grantor trust.

Ruling snapshot

• Question: How should the IRS link a TEFRA source partnership, an intervening grantor trust, and beneficiaries who changed over time?
• Outcome: Advice given: link through the trust and relevant beneficiaries, or convert the beneficiary links to direct links under section 6223(c)(3).
• Key authorities: IRC §§ 6223(c)(3), 6223(h).

Full text (IRS public release)

ID: CCA_2009040208560137 Number: 200920044
Release Date: 5/15/2009
Office: --------------
UILC: 6223.02-00

From: -------------------
Sent: Thursday, April 02, 2009 8:56:04 AM
To: ------------------------------
Cc: -----------------------------------------------------------
Subject: RE: TEFRA question involving grantor trusts

What tax year are you linking? Generally we link directly to the pass-through entity. Then the Service Center links the Schedules K-1 of the pass-through entity directly to the pass-through entity itself rather than to the source TEFRA partnership. For ------- the direct link to the TEFRA partnership would be the trust with the original beneficiary of the trust being linked to the trust. For ------- the direct link would be to the trust and the secondary linkage would be to both the old and the new beneficiaries since, presumably, they both would receive flow through items from the ------- source partnership proceeding. For subsequent years only the new beneficiary would be subject to the secondary linkage.

The trust is required to forward all notices to the beneficiaries under section 6223(h). Alternatively, we are allowed to convert all of the secondary linkages to direct linkages under section 6223(c)(3), totally ignoring the grantor trust that stands between the ultimate taxpayers and the source partnership proceeding. --------------------------------------------------------------------------------------------------------------------------
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