Tier partnership bankruptcy does not end TEFRA treatment for indirect partners

Plain-English summary

Chief Counsel advised that a tier partnership's bankruptcy does not convert partnership items belonging to indirect partners or make the TEFRA partnership procedures inapplicable. The memorandum reasoned that the tier partnership acts only as an agent for its partners. An agent's bankruptcy does not change the character of partnership items held through that agent. The resulting assessments therefore should not be treated as non-TEFRA assessments.

Ruling snapshot

• Question: Does a tier partnership's bankruptcy convert the partnership items of indirect partners and remove the assessments from TEFRA procedures?
• Outcome: Advice given: no, the indirect partners' items and assessments remain subject to TEFRA
• Key authorities: IRC § 6231; Third Dividend Dardanos v. Commissioner, 96-2 USTC ¶ 50,386 (9th Cir.); American Principles Leasing, 904 F.2d 477 (9th Cir. 1990)

Full text (IRS public release)

ID: CCA_2015061716352001 [Third Party Communication:

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

Number: 201530021
Release Date: 7/24/2015
From:
Sent: Wednesday, June 17, 2015 4:35:20 PM
To:
Cc:

Bcc:
Subject: RE: Significant TEFRA Case - Summary of 6/15 Status Call

The bankruptcy of a tier partnership does not convert the partnership items for the indirect partners or make TEFRA inapplicable. Third Dividend Dardanos v. Commissioner, 96-2 USTC P50,386 (9th Cir.) See also American Principles Leasing, 904 F.2d 477 (9th Cir. 1990) That is because the partnership is merely an agent for its partners. In other words, the bankruptcy of an agent does not serve to convert the partnership item of partners holding an interest through an agent.

So the assessments are not treated as non-TEFRA as you suppose below.