CCA 201141019: TEFRA treatment of unreported partnership asset characterizations

Plain-English summary

This Chief Counsel Advice discusses how section 6222 applies when a partner reports an item inconsistently with a TEFRA partnership return or fails to file a notice of inconsistent treatment. It considers whether the IRS could make a computational adjustment when a partnership failed to disclose hot assets connected with the sale of a partnership interest. The advice states that a notice of deficiency may make the issue moot, but that a TEFRA partnership proceeding and an FPAA are needed to conclusively establish asset character when the partnership books and return do not do so.

Ruling snapshot

• Question: What procedures apply when a partnership does not characterize hot assets and a partner reports inconsistently?
• Outcome: Advice given
• Key authorities: IRC § 6222; Roberts v. Commissioner, 94 T.C. 853, 860 (1990)

Full text (IRS public release)

ID: CCA_2011093012013337 Number: 201141019
Release Date: 10/14/2011
Office: ----------
UILC: 6222.03-00

From: -------------------
Sent: Friday, September 30, 2011 12:01:42 PM
To: ---------------------
Cc: ------------------------------------------------------------ Subject: RE: TEFRA question

Section 6222 requires a partner to file consistently with a TEFRA partnership return. If he fails to do so, and does not file a notice of inconsistent treatment, we may make a computational adjustment of the inconsistently reported item without issuing an FPAA. If a partnership is required to file a Form with its partnership return disclosing "hot assets" subject to ordinary gain treatment upon the sale of a partnership interest, but fails to do so, it is unclear whether we could deem the partnership to have no hot assets for purposes of a section 6222 computational adjustment.

This issue may be moot, however, to the extent we issue a notice of deficiency recalculating gain on the sale of the partnership interest. Under Roberts v. Commissioner, 94 T.C. 853, 860 (1990), the parties will be bound by how the partnership books and records characterize the assets if they are not characterized on the partnership return.

If the partnership books and records make no characterization of the assets either way, then the only way to conclusively establish the character is to open a TEFRA partnership proceeding and issue an FPAA to make that determination.