CCA 201103042: Counsel addresses partnership items involving an LLC and indirect partners

Plain-English summary

Chief Counsel advised that determining an LLC partner is not a partner and receives no deductions is a partnership item. That determination binds the LLC and indirect partners who hold interests through it. The advice states that, if losses are disallowed, the indirect partners may be assessed through a directly assessable computational adjustment. It distinguishes cases involving a person who was not listed as a partner but whom the IRS seeks to treat as a partner.

Ruling snapshot

• Question: How should a determination about an LLC partner's status and deductions affect indirect partners in a TEFRA proceeding?
• Outcome: Advice given
• Key authorities: IRC §§ 6231 and 6233; Treas. Reg. § 301.6233-1(b); Katz v. Commissioner, 335 F.3d 1121, 1129 (10th Cir. 2003)

Full text (IRS public release)

ID: CCA_2010120913573737 Number: 201103042
Release Date: 1/21/2011
Office: ----------
UILC: 6231.02-00

From: -------------------
Sent: Thursday, December 09, 2010 1:57:49 PM
To: -----------------------
Cc: -----------
Subject: RE: TEFRA Issue

The determination that the LLC partner is not a partner and gets no deductions is a partnership item that is binding on both it and the indirect partners holding an interest through it. See Sente Investment Club (binding on indirect partners) and Katz v. Commissioner, 335 F.3d 1121, 1129 (10th Cir. 2003) (partner identity is a partnership item); Blonien v. Commissioner, (determination of whether listed partner gets any allocation is a partnership item). See also. Treas. Reg.301.6233-1(b)(determination that no partnership exists [i.e., between the disregarded LLC and the other two partners] is made in TEFRA proceeding including the taxable amounts). So if losses are being disallowed, we should be able to simply assess the indirect partners though a directly assessable computational adjustment.

There is other case law that states that, where a person is not listed as a partner and we want to make him a partner, we have to issue a notice of deficiency. See Grigoraci v. Commissioner (characterizing the issue as an affected item that had to await an affected item notice of deficiency issued after the partnership proceeding was over under GAF v. Commissioner) and Hang v. Commissioner (assignment of income from a partnershhip to a nonpartner is subject to separate deficiency procedures). Those do not seem to be your facts, however.