IRS may conform an inconsistent indirect partner return without an FPAA

Plain-English summary

An indirect partner reported inconsistently with the partnership's Schedule K-1 without filing Form 8082. Chief Counsel advised that both the partner and the IRS were bound by the partnership return and underlying records absent a partnership proceeding or notice of inconsistent treatment. The IRS could assess tax resulting from conforming the indirect partner's return without first issuing a final partnership administrative adjustment. A direct assessment was proper if no partner-level determinations were needed, while an affected-item deficiency notice was required if partner-specific facts had to be determined. Any computational or affected-item notice had to go to the ultimate taxable partners, not to a pass-through entity with no tax liability.

Ruling snapshot

• Question: How may the IRS correct an indirect partner's unreported inconsistency with a partnership return?
• Outcome: Advice given, the IRS may conform the return without an FPAA, subject to affected-item procedures when partner-level facts are needed.
• Key authorities: IRC §§ 6222, 6230(a), and 6231(a)(6); Treas. Reg. § 301.6231(a)(6)-1; Roberts v. Commissioner, 94 T.C. 853

Full text (IRS public release)

ID: CCA_2015041709591801 [Third Party Communication:

UILC: 6222.03-00 Date of Communication: Month DD, YYYY]

Number: 201520007
Release Date: 5/15/2015
From:
Sent: Friday, April 17, 2015 9:59:18 AM
To:
Cc:
Bcc:
Subject: RE: TEFRA partnership adjustment

A partnership item is any item the partnership is required to determine
under subtitle A. This includes any underlying accounting at the
partnership level that computes partnership taxable income and book
income. In the absence of a partnership proceeding, and in the absence of
a notice of inconsistent treatment (Form 8082), both the partner and the
Service are bound by the partnership K-1 and underlying records. I.R.C.
6222 and Roberts v. Commissioner, 94 T.C. 853, 860-62.

If a taxable indirect partner filed inconsistently with the partnership K-1
without filing a Form 8082 Notice of Inconsistent Treatment, we may
assess any tax that results from conforming the taxable indirect partner’s
return to the partnership return without first issuing an FPAA. Id.

The tax may be directly assessed if no partner level determinations are
required to compute the tax. I.R.C. 6222(c), 6230(a) and Treas. Reg.
301.6231(a)(6)-1. If partner-level factual determinations must be made in
order to compute the tax, we must issue an affected item notice of
deficiency to the taxable partner to assess the difference in the
inconsistently reported items. Id. ------------------------------------------------------

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Section 6231(a)(6) defines “computational adjustment” as the change in tax
liability. Since the pass-thru partner is not a taxable entity, we can neither
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send it a notice of computational adjustment nor an affected item notice of
deficiency. Such notices can only be sent to the ultimate taxable indirect
partners since only they will have a change in actual tax liability.

AAR procedures are not applicable to an original partner return. They are
only applicable to amended returns which are not at issue here. The Form
8082 is a dual purpose form. It serves as a Notice of Inconsistent
Treatment if filed with the original partner return. It serves as an AAR if
filed with an amended partner return.