Parent bankruptcy did not convert subsidiary partnership items

Plain-English summary

Chief Counsel advised that a parent's bankruptcy does not convert the partnership items of a nonbankrupt subsidiary that is the actual partner. The IRS could assess the subsidiary after the TEFRA partnership proceeding, using the consolidated return to compute its several liability. Alternatively, it could issue a converted-item notice of deficiency to the parent and assess the parent after that proceeding. The liability could be collected only once, with the collection target depending on which entity still had assets.

Ruling snapshot

• Question: How may the IRS assess partnership liability when a parent is bankrupt but its subsidiary partner is not?
• Outcome: Advice given. Assessment may proceed against the subsidiary or, through a converted-item deficiency case, the parent.
• Key authorities: IRC § 6231; TEFRA partnership procedures

Full text (IRS public release)

ID: CCA_2014072208183101 [Third Party Communication:

UILC: 6231.13-00 Date of Communication: Month DD, YYYY]

Number: 201432019
Release Date: 8/8/2014
From:
Sent: Tuesday, July 22, 2014 8:18:31 AM
To:
Cc:
Bcc:
Subject: RE: Bankruptcy of Parent

A parent’s bankruptcy does not convert the partnership items of a non-bankrupt
subsidiary corporation for the partnership in which the subsidiary is a partner. In such
case, we would have to assess only the subsidiary based on the outcome of the TEFRA
partnership proceeding using the consolidated return to compute the several liability to
be assessed against the subsidiary.

Alternatively, we can issue a converted item notice of deficiency to the parent and make
the assessment against the parent based on the outcome of that deficiency proceeding.

We would collect the several liability only once of course, but who we collect against
may depend on who still has assets to satisfy the collection.