Partner bad debt claim excluded from modification

Plain-English summary

Chief Counsel advised that an amended return modification under the centralized partnership audit rules may consider only partnership adjustments and partner tax attributes affected by those adjustments. A partner's possible bad debt deduction for money loaned to the partnership is neither, so it cannot be included in that modification. If the partner's assessment and refund limitation periods remain open, the partner may file a separate amended return for a deduction that does not depend on an adjustment to the item identified in the email as a PRI. The deduction could also be addressed in a closing agreement and then considered during modification.

Ruling snapshot

• Question: May a partner's bad debt deduction for loans to a partnership be included in an amended return modification?
• Outcome: Advice given, the deduction must be pursued separately unless covered by a closing agreement
• Key authorities: Treas. Reg. §§ 301.6225-2(d)(2), 301.6225-2(d)(8); IRC §§ 6501, 6511

Full text (IRS public release)

ID: CCA_2024063013412948 [Third Party Communication:

UILC: 6225.00-00
Date of Communication: Month DD, YYYY]

Number: 202433012
Release Date: 8/16/2024
From: --------------------
Sent: Tuesday, May 21, 2024 1:52:16 PM
To: ------------------------------------------
Cc: ------------------------------------------------- Bcc: Subject: RE: Question about NAV project and business bad debt deduction

As 301.6225-2(d)(2) states, amended return modification can only take into account partnership adjustments and partner tax attributes affected by the partnership adjustments. Whether a partner would be entitled to a bad debt deduction related to amounts the partner loaned the partnership is not a partnership adjustment or a partner tax attribute. Therefore, I do not think it can be included as part of amended return modification. However, if the partner’s 6501/6511 periods are open, the partner could file an amended return to claim any deduction to which the partner thinks he/she/it is entitled that is not dependent on an adjustment to a PRI as appears to be the case here.

If we entered into a closing agreement with the partner, it could also be included in the closing agreement and could be taken into account during modification under 301.6225- 2(d)(8).

Thanks,
Jenni
Jenni Black (she/her)
Senior Counsel
CC:PA:06
Phone: (202) 317-5216