CCA 200943036: TEFRA partnership proceedings address a corporate partner's dividends-received deduction

Plain-English summary

This Chief Counsel Advice considers which dividend-related determinations must be made at the partnership level in a TEFRA proceeding. The advice states that the partnership must determine the amount, allocation, and character of partnership income, including dividends covered by IRC §§ 1(h)(11) and 243(b). It explains that the dividends-received deduction for a corporate partner is at least an affected item whose statute is suspended during the TEFRA proceeding. The advice recommends making the relevant determinations in the partnership proceeding and assessing them afterward, while noting that the deduction may then be directly assessable as a computational affected item if the corporate returns make the affiliated-group relationship clear.

Ruling snapshot

• Question: Which determinations concerning a corporate partner's dividends-received deduction must be made in a TEFRA partnership proceeding?
• Outcome: Advice given
• Key authorities: IRC §§ 1(h)(11), 243(b), 6231, 702(a)(1) and (5), 703, and 705(a)(5)

Full text (IRS public release)

ID: CCA_2009081010262137 Number: 200943036
Release Date: 10/23/2009
Office: --------------
UILC: 6231.03-00

From: -------------------
Sent: Monday, August 10, 2009 10:26:24 AM
To: -------------------
Cc: ------------------------------------------------------------------------------------------------------------------- Subject: RE: Schedule K-1 Information Return for Partner which is a Corporation / Dividend Received Deduction (DRD) Reporting on TEFRA 1065 and Corporate Partner's K-1

Partnership items are limited to items that the partnership is required to determine under Subtitle A of the Code as provided by regulations. The regulations require the amount, allocation and character of income to be determined at the partnership level.

Section 703 and 702(a)(5) make the character of "dividends with respect to which section 1(h)(11) or Part VIII of subchapter B" partnership level determinations. Part VIII of subchapter B includes section 243(b).

Section 1(h)(11) address dividends taxable as capital gain from domestic corporation and qualified foreign corporations. Thus, the partnership must determine the amounts received from such corporations and report them to the partners.

Section 243(b) provides a corporation with a dividends received deduction for any dividends received from a corporation that is a member of the same affiliated group.

Thus, in a TEFRA proceeding, we must determine the amount of dividends and the portion of that dividend income that meets the criteria of section 1(h)(11).

Section 705(a)(5) would also seem to require us to determine the amount of such income that would qualify under section 243(b) for the corporate partner that is allocated such dividend income. Section 702(a)(1) requires this amount to be separately stated.

At least arguably, section 705(a)(5) and 702(a)(1) would not require the partnership to determine whether the corporation distributing the dividend is a member of the same affiliated group as the partner to whom the partnership allocates dividend income. This is the ultimate determination required to determine whether the receiving corporate partner gets a dividends received deduction under section 243(b).

Thus, at the partnership level, we should make all the determinations necessary to determine the taxability of the dividend to the corporate partner including whether the dividend issuing corporation is part of the same affiliated group as the corporate partner receiving the dividend. The dividends received deduction will at least be an affected item (affected by the amount, source, and allocation of the dividend) whose statute is suspended by the TEFRA proceeding. Following the partnership proceeding we should assess all such determinations. The dividends received deduction may be a directly assessable computational affected item at this point if it is clear from the consolidated corporate return that the corporation issuing the dividend and the corporation receiving the dividend are members of the same group------------------------------------------------------------------------------------------------------------------------------------
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