Partner examination may determine a contributed note's partnership treatment

Plain-English summary

Chief Counsel advised that a partner's outside basis is not a partnership-related item when it is neither reported on Form 1065 nor maintained in the partnership's books and records. The contribution of a note to the partnership is a partnership-related item, however. Under the special enforcement rule, the IRS may determine that item's amount during a partner-level examination when the determination is part of adjusting non-partnership items and the partnership relied on information supplied by the examined partner. The IRS must notify the partner in writing, but the regulation specifies no form or timing, and the determination does not bind or change the partnership's own treatment. A partnership-level examination could instead reduce the note to zero, produce an imputed underpayment, and affect partner outside basis if the partnership pushes out the adjustment.

Ruling snapshot

• Question: May the IRS determine the partnership treatment of a contributed note while examining a partner's outside basis and gain?
• Outcome: Advice given, the special enforcement rule permits the determination if its conditions and written-notice requirement are met
• Key authorities: Treas. Reg. § 301.6241-7(b), (h)(2)

Full text (IRS public release)

ID: CCA_2024032108335943 [Third Party Communication:

UILC: 6221B.00-00, 6225B.01-00 Date of Communication: Month DD, YYYY]

Number: 202444006
Release Date: 11/1/2024
From: --------------------
Sent: Thursday, March 21, 2024 8:33:59 AM
To: -------------------------------------------------------------------- Cc: --------------------------------------------------------------------- Bcc: Subject: RE: OB as a PRI--Contribution Case

Hi ------------,

As an initial matter, there is nothing in this email that suggests to me outside basis is a PRI. It’s not on the Form 1065 nor is there any indication that Dad’s outside basis was required to be maintained in the partnership’s books/records so it is not a PRI. From the email below it looks like you are asking whether the contribution of the note which generated the alleged outside basis is a PRI. As you note, contributions are PRIs. While this seems to relate to whether the note was bona fide before it was contributed to the partnership, ----------------------------------------------------------------------------------------------------
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BUT, we have a special enforcement provision for this. Under 301.6241-7(b), the IRS may adjust/determine the amount of a PRI as part of an adjustment to a non-PRI if the following conditions are met:

1. There is an exam being done of someone other than the partnership a. Check
2. A determination regarding a PRI is made as part of an adjustment to a non-PRI a. Check, adjusting a contribution as part of outside basis/gain (which are non-PRIs) 3. The treatment of the PRI by the partnership on its return/books/records is based in whole or in part on information provided by the person under audit a. Check, Dad contributed the loan and the partnership based its inside basis and the contribution amount on what Dad told it

The example in 301.6241-7(b)(2) is a contribution of property -----------------------------------
------------------------------------------------. In this scenario, the adjustment actually being made at the partner level is to non-PRIs like his outside basis and how much his gain/loss is on the sale of the partnership interest. To utilize the special enforcement provision the IRS would need to notify the partner in writing. There is no specified form or time -----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------- We do not have a standard form/letter for this. It is clear that any determination about a PRI made at the partner

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level is not binding on the partnership. Treas. Reg. 301.6241-7(h)(2). So this will not change anything at the partnership level. Of course, the partner is free to tell the partnership and the partnership can voluntarily adjust it’s books/records.

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Another note – it can be adjusted at the partnership level, just not as outside basis. If the IRS had the partnership open for audit, the adjustment would be to reduce the ------- loan to zero, which would result in an IU of ----------. If the partnership elected to push out, this would result in a change in outside basis at the partner level which would impact his gain. It comes to the same thing, just from a different point of view.

Please let me know if you have any questions.

Thanks,
Jenni

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