CCA 200922044: Long-term contract loss was a partnership-level item

Plain-English summary

Chief Counsel viewed the collectability of a partnership's long-term contract, and the resulting allowable loss, as a partnership item. The determination applied equally to the partnership and its two partners, with no identified feature unique to the corporate partner. The partnership had to determine the loss on its return and report the partner's share on Schedule K-1. If the corporate partner claimed the full partnership deduction on Form 1120 rather than its smaller financial-accounting estimate, the IRS would need a TEFRA proceeding to disallow part of the loss.

Ruling snapshot

• Question: Was the contract loss determined at the partnership level or separately for the corporate partner?
• Outcome: Advice given: partnership-level determination, with a TEFRA proceeding needed for the described disallowance.
• Key authorities: Partnership-item rules under IRC § 6231; subtitle A and TEFRA procedures discussed in the email.

Full text (IRS public release)

ID: CCA_2009041010321937 Number: 200922044
Release Date: 5/29/2009
Office: --------------
UILC: 6231.03-00

From: -------------------
Sent: Friday, April 10, 2009 10:32:20 AM
To: ---------------------------------------------
Cc: ----------------------------------
Subject: RE: TEFRA Question

This looks like a pure partnership item to me. The likely-hood of collection on any portion of the partnership's long term contract and, thus, the amount that can be claimed as a loss, would be determined at the partnership level and would apply equally to the partnership and both partners. I don't see anything unique to the C corp partner in computing the deduction. Under subtitle A of the Code, the partnership would have to determine the loss in completing its partnership return and filling out the partner's Schedule K-1. If the partner claimed the entire deduction for tax purposes on its Form 1120, rather than limiting it to its GAAP estimate which is lower than the partnership's deduction, we would have to open a TEFRA proceeding to disallow any portion of the loss.