Partner-level review may determine the source of reported dividends

Plain-English summary

Chief Counsel advice addressed whether the IRS could issue a partner-level notice of deficiency disallowing a corporate partner's dividend received deduction when the partnership return and the partner's return did not clearly match. The advice states that section 6222 applies when the partner files inconsistently with the partnership return, but the reported amount here did not conclusively establish an inconsistency because the source of the dividends was unclear. It explains that the IRS could instead treat the matter as a substantiation issue, with the partnership return and its books and records controlling the source of the dividends in the partner-level proceeding. The advice also notes that a notice would need to be issued within the partner's section 6501 period, or under a valid extension, and that section 6222(b)(1)(A)(i) supports proceeding without a TEFRA case when the reporting is or may be inconsistent.

Ruling snapshot

• Question: Can the IRS use a partner-level deficiency proceeding to determine the source of dividends and disallow a dividend received deduction when the partner's reporting may be inconsistent with the partnership return?
• Outcome: Advice given
• Key authorities: IRC §§ 6222 and 6501; Roberts v. Commissioner, 94 T.C. 853, 860 (1990)

Full text (IRS public release)

ID: CCA_2009081209224037 Number: 201003020
Release Date: 1/22/2010
Office: --------------
UILC: 6222.00-00

From: -------------------
Sent: Wednesday, August 12, 2009 9:22:44 AM
To: -------------------
Cc: ---------------------------------------------------------------------------------------------------------------------------
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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 ---------

Your suggested approach could work - but not precisely on the grounds you propose.

Section 6222 only applies if the partner has filed inconsistently with the partnership return. In --------- case, where nothing is reported on line 6b, ----- agreement with---------would conclusively establish an inconsistent filing. In your case it would not. You have an amount reported on line 6b. We just don't know which portion came from domestic affiliated corporations and qualified foreign corporations.

Under Roberts v. Commissioner, 94 T.C 853 at 860, however, you could issue a notice of deficiency disallowing the DRD. In determining the DRD, the court and the parties would by bound by the partnership return "and the partnership books and records." So this would be purely a substantiation issue. Whatever the partnership books and records reflected as to the source of the dividends would be binding on both the government and the taxpayers absent a separate TEFRA proceeding. The source of the dividends shown on the partnership books and records could not be changed in your partner-level deficiency proceeding.

Any such stat notice would have to be issued within the partner's section 6501 period or, if issued under an extension, the extension would have to be on a Form 872-i or equivalent. See Ginsburg v. Commissioner.

Section 6222(b)(1)(A)(i) also supports this approach by providing that a TEFRA proceeding is not necessary if the partner's reporting "is (or may be) inconsistent". (emphasis supplied)