CCA: A second notice may cover converted partnership items

Plain-English summary

Chief Counsel advised that a second notice of deficiency could be issued for partnership items converted by a bankruptcy filing. The advice concerned a married couple, a TEFRA partnership interest, and whether the wife's items also converted when her husband filed for bankruptcy. The answer depended on whether the wife owned an interest directly or through community-property law, and whether the couple filed a joint return. The memorandum also noted that Treasury regulations address when a spouse is treated as owning a separate interest based on the partnership's Forms K-1.

Ruling snapshot

• Question: Could a second statutory notice of deficiency be issued for converted partnership items, and did the wife's partnership items convert?
• Outcome: Advice given
• Key authorities: IRC §§ 6212(c), 6230(a)(2)(B) and (C); Treas. Reg. § 301.6231(a)(12)-1(a)(2) and (a)(3); Calloway v. Commissioner, 231 F.3d 106 (2d Cir. 2000); Dubin v. Commissioner, 99 T.C. 325 (1992).

Full text (IRS public release)

                                                                                                        -

ID: CCA_2012032208494737 Number: 201215009
Release Date: 4/13/2012
Office: ----------
UILC: 6230.00-00

From: -------------------
Sent: Thursday, March 22, 2012 8:50:09 AM
To: -------------------
Cc: -----------------------------------
Subject: RE: Partnership question

The relevant facts:

Notice of deficiency to wife (and husband) for the ------- year on ----------------------.

---------------husband filed for bankruptcy converting this partnership items for -------.

---------------a converted item notice of deficiency was issued to wife and husband..

You asked whether this second stat notice was prohibited by section 6212(c).

Answer: Section 6230(a)(2)(B) and (C) allows a second stat notice to be issued for converted items.

A related issue is whether wife had any converted partnership items by virtue of her husband's
bankruptcy. If only her husband owned the TEFRA partnership interest and the couple did not live in a
community property state giving wife a community property interest in the partnerships, then wife's
partnership items converted to non-partnership items when her husband filed for bankruptcy (assuming
that they filed a joint return). Calloway v. Commissioner, 231 F.3d 106 (2d Cir. 2000). If on the other
hand, wife owned an interest in the partnerships directly (or under community property laws) then her
partnership items did not convert and the converted item stat notice is invalid as to her. Dubin v.
Commissioner, 99 T.C. 325 (1992). The above holdings have since been adopted by regulation with a
slight modification. Under Treas. Reg. 301.6231(a)(12)-1(a)(2) and - 1(a)(3), the wife will not be treated as
owning a separate interest if she is not listed on the Forms K-1 issued by the partnership.