CCA 1219022: IRS advice on whether a subsidiary affects the TEFRA small-partnership exception

Plain-English summary

Chief Counsel Advice considers whether a partnership can qualify for the small-partnership exception to the TEFRA rules when an S corporation owns a subsidiary. The advice says that if the S corporation made the subsidiary a qualified subchapter S subsidiary before the year at issue, the subsidiary is disregarded for federal tax purposes and its items are reported on the parent S corporation's return. Because a disregarded entity is treated as a partner, the partnership does not qualify for the small-partnership exception. The analysis relies on section 1361, Treasury Regulation § 1.1361-3, and Rev. Rul. 2004-88.

Ruling snapshot

• Question: Does a disregarded subsidiary as a partner prevent a partnership from qualifying for the TEFRA small-partnership exception?
• Outcome: Advice given
• Key authorities: IRC §§ 1361 and 6231; Treas. Reg. § 1.1361-3; Rev. Rul. 2004-88

Full text (IRS public release)

ID: CCA_2012041613514737 Number: 201219022
Release Date: 5/11/2012
Office: ----------
UILC: 6231.01-01

From: -------------------
Sent: Monday, April 16, 2012 1:51:56 PM
To: -------------------
Cc: -------------------------------------------------------------------------
Subject: RE: Tefra or Non Tefra?

If the S corporation elected to make its subsidiary a qualified subchapter S subsidiary under section
1361(b)(3)(B) and Treas. Reg. 1.1361-3, before the year in issue, then the subsidiary would be treated
as a disregarded entity whose items are reported on the parent S corporation return. The existence of a
disregarded entity as a partner takes the partnership out of the small partnership exception to TEFRA
under Rev. Rul. 2004-88.