Field Attorney Advice 20162901F points out that even adjustments that take the position that a purported TEFRA partnership was not actually a partnership or that certain individuals weren’t partners still has the statute of limitations for tax against the partners potentially lengthened by the TEFRA partnership statute of limitations found at IRC §6229.

The memorandum notes:

Partnership items flow through and appear in the computation of the taxable income of the partners and affect non-partnership items on a partner's tax return. I.R.C. §§ 6230(a)(1) and 6231(a)(4)-(a)(6); Treas. Reg. § 301.6231(a)(5)-1. There are two types of affected items, those that require only a computation of the tax immediately assessable; and those that require partner-level determinations made through a notice of deficiency. I.R.C. § 6230(a); Treas. Reg. § 301.6231(a)(6)-1; Petaluma FX Partners, LLC v. Commissioner, 131 T.C. 84, 90 (2008) aff'd in part, 591 F.3d 649 (2010).

In the partnership in question the IRS Agent is proposing to reallocate items regarding a partnership with the rationales outlined below:

The agent anticipates making adjustments to * * * that would reallocate all profits, losses, and credits to the general partner * * *. The agent would disallow section 45 refined coal tax credits and ordinary losses for * * * and * * * on the basis of three theories. One, that * * * is not a valid partnership. Two, that * * * and * * * do not have a bona fide partnership interest in * * *. Third, that the refined coal transactions lacked economic substance for * * * and * * *.

In the case, the agent had obtained a Form 872-P from the partnership to extend the statute of limitations on partnership items. It would appear the agent become concerned that if he took the position that there was not partnership or that certain individuals weren’t actually partners that he would need to look to the normal statute of limitations for assessing tax against the individual partners, a statute that presumably is no longer open (thus leading to this FAA).

The Advice concludes this is not an issue, as the taxpayers had taken the position they had a partnership and were partners, so even if those turn out not to be the case, the TEFRA statute still controls.

If a partnership return is filed for a year but it is determined that no partnership exists, the subchapter that governs the procedure for taxing partnership items still applies to the extent provided in the regulations. IRC § 6233. The regulations provide that the TEFRA provisions will generally continue to apply if a purported partnership files a partnership return. Treas. Reg. § 301.6233-1T(a). “The determination of whether a partnership should be disregarded for tax purposes under a legal doctrine such as sham or economic substance is a partnership item.” Petaluma FX Partners, LLC, 131 T.C. at 93.

The Advice concludes:

All three of the agent's proposed adjustments would be partnership items. The period of limitations for assessing any tax attributable to any partnership item for a partnership taxable year shall not expire before the date which is three years after the later of the date on which the partnership return for such taxable year was filed, or the last date for filing such return for such year, without regard to extensions. IRC § 6229(a). The adjustments are attributable to a partnership items and the period of limitations is determined by section 6229. Therefore, the period of limitations for assessing tax is based on * * *, period of limitations and not the individual partners', because the adjustments are attributable to partnership items.