Partnership-level loss character controls later passive-loss proceedings

Plain-English summary

Chief Counsel advised that the amount and character of partnership losses determined on the return or through an FPAA are binding in later partner-level proceedings under section 469. A no-change FPAA can establish those partnership items, as can expiration of the period for issuing an FPAA when the IRS accepts the partnership reporting. The advice nevertheless recommends issuing an FPAA so partners can contest the partnership-level characterization. A final FPAA determination also gives the IRS the section 6229(d) one-year extension to issue affected-item notices limiting individual partners' losses.

Ruling snapshot

• Question: How should partnership-level loss character be established before later section 469 affected-item proceedings?
• Outcome: Advice given: issue an FPAA even if no change is proposed.
• Key authorities: IRC §§ 469 and 6229(d); Roberts v. Commissioner, 94 T.C. 853; Estate of Quick v. Commissioner, 110 T.C. 172 (1998).

Full text (IRS public release)

ID: CCA_2015040216273601 [Third Party Communication:

UILC: 469.00-00, 6231.03-00
Date of Communication: Month DD, YYYY]

Number: 201515032
Release Date: 4/10/2015
From:
Sent: Thursday, April 02, 2015 4:27:37 PM
To:
Cc:
Bcc:
Subject: RE: TEFRA question

The amount of the losses and their character as trade or business, rental or portfolio income on a partnership return, or as redetermined through an FPAA, is binding under section 469 for purposes of any later partner stat notice proceeding limiting deductions of the partners based on their material participation. A no change FPAA can serve this purpose as well as allowing the statute to expire for issuing an FPAA if we agree with the partnership level reporting. See Roberts v. Commissioner, 94 T.C. 853, 860-62 and Estate of Quick v. Commissioner, 110 T.C. 172, 188 (1998). It is better to issue an FPAA since this gives the partners the opportunity to contest any partnership-level characterization and gives the Service one year after this determination becomes final is issue any partner-level stat notices limiting a partner’s losses under section 469. Otherwise we would have to issue the affected item stat notices just before the statute expires without benefit of the one year extension under section 6229(d).