CCA 200931054: TEFRA mitigation periods apply to affected-item basis changes

Plain-English summary

Chief Counsel advised that a partner's basis in later years can be affected by income or loss determinations from prior years adjusted under TEFRA procedures. If the partner sold the partnership interest after the adjusted year, a changed basis can change the gain or loss on the sale. The advice identifies a two-year period for a refund based on increased basis and a one-year period for an affected-item assessment based on decreased basis after completion of the TEFRA proceeding. It also notes that mitigation provisions apply to TEFRA partnership items but are relatively rare and must be analyzed case by case.

Ruling snapshot

• Question: How do TEFRA adjustments to partnership items affect later partnership-interest basis and mitigation periods?
• Outcome: Advice given
• Key authorities: IRC §§ 705, 6229(d), and 6230(c)(2)(B), (d)(3)

Full text (IRS public release)

ID: CCA_2009062911505237 Number: 200931054
Release Date: 7/31/2009
Office: -------------
UILC: 6231.05-00

From: --------------------
Sent: Monday, June 29, 2009 11:50:53 AM
To: --------------------
Cc: ------------
Subject: RE: Mitigation procedures

The basis of partners in subsequent years is affected by income/loss determinations in prior years that are adjusted under the TEFRA partnership procedures. See I.R.C. 705 (outside basis adjusted by allocable share of partnership gain/loss). Thus, if a partner sold his interest in the partnership after the partnership year being adjusted, his resulting changed basis will result in a changed gain or loss on the sale of his partnership interest. A refund due to an increased basis (and, thus, a reduced gain) should be made within two years under section 6230(d)(3) and (c)(2)(B). An affected item assessment based on a decreased basis, and resulting increased gain, should be made within one year of the completion of the TEFRA proceeding under section 6229(d).

The mitigation provisions apply to TEFRA partnership items. But this is fairly rare and they have to be analyzed on a case by case basis.