Partnership Taxation: A Purported Investment Is Treated As a Disguised Sale

partnership taxationPartnership taxation is animated by two conflicting goals: Subchapter K of the Internal Revenue Code simultaneously seeks to provide individuals operating as a partnership with freedom to structure their affairs as they see fit and to constrain that freedom when they structure their affairs in ways that seem abusive.

Where there has been a perceived abuse of the partnership form, the IRS has a variety of tools to address it; these tools include judicial doctrines, such as the substance over form doctrine, as well as statutory provisions. For example, the Fourth Circuit recently addressed a partnership case and concluded that what the taxpayers characterized as an investment was actually a disguised sale under Section 707 of the Code.… Read More

And Now for Something Completely Different: New Rules for Partnership Audits

Partnership TaxationSuddenly, TEFRA died.

It remains to be seen if it will be missed. On November 2, 2015, the President signed the Bipartisan Budget Act of 2015, Pub. L. 114-74. Title XI of the legislation brings radical change to the world of partnership taxation.

Starting with the 2018 tax year, when a partnership audit results in adjustments, the default rule will be that the partnership pays the tax, not the partners. Consequently, someone entering a partnership may be subject to taxes that historically would have been someone else’s headache. There are two ways out of that predicament, but first a bit of history is in order.… Read More

Partnerships, Interest, and Refund Claims: A Recipe for Misfortune, Part II

tax refund, general millsThis will continue coverage of the refund claim by General Mills that went awry. For a detailed review of the facts, look at my earlier post.

The case involved a series of overlapping audits of General Mills and an affiliated LLC, General Mills Cereals, LLC (the “Partnership”). To summarize, the situation was as follows:

  • As a C Corporation, General Mills was subject to what is known as LCU interest, a two percent increase in the underpayment rate that applies to underpayments by C Corporations that exceed $100,000. See I.R.C. § 6621(c).
  • There were gaps between the time when the IRS issued proposed deficiency notices in the corporate audits and the time when it outlined the impact on General Mills of the adjustments made in the audits of the Partnership.
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Partnerships, Interest, and Refund Claims: A Recipe for Misfortune

tax refund, general millsLast week, General Mills, Inc., the cereal maker, lost a significant refund case because its administrative claim was deemed untimely. General Mills, Inc. v. United States, No. 14-89T, 2015 U.S. Claims LEXIS 1311 (Fed. Cl. Oct. 14, 2015). The case involves the intersection of complex facts with confusing statutory provisions; not surprisingly, a partnership was involved.

General Mills is the parent of a number of subsidiary corporations, which were partners in General Mills Cereals, LLC (the “Partnership”), a limited liability company that was taxed as a partnership. General Mills, 2015 U.S. Claims LEXIS 1311 at *1. The refund claim related to interest accruals on tax items addressed in parallel audits of General Mills and the Partnership.… Read More

Refund Claims for Holders of Partnership Interests, a Cautionary Tale.

What would you do if you realized that a tax return filed in the past three years treated an item as ordinary income that qualified for capital gains treatment? Generally, if you decided that the  amount was worth the trouble, you would file an amended return and seek a refund.

But there is one situation where that is not the right move: when the income came from a partnership covered by TEFRA. The Fifth Circuit recently issued an opinion that illustrates the point nicely. Rigas v. United States, 2012 U.S. App. LEXIS 17636 (5th Cir. Aug. 21, 2012).

In Rigas, the taxpayers had an interest in a limited liability company known as Odyssey Energy Capital, LLC (“Odyssey”) that managed oil and gas assets and had elected to be taxed as a partnership.Read More