The Tax Equity and Fiscal Responsibility Act (TEFRA) was enacted in 1982 to govern partnership audits. Despite its age, TEFRA still generates novel issues for courts. On June 7th, the Ninth Circuit affirmed the dismissal of a Tax Court petition brought by a taxpayer who owned his partnership interest through a limited liability company that was disregarded for tax purposes, ruling that form controls over substance, at least in this narrow context. Seaview Trading LLC v. Comm’r, No. 15-71330, 2017 U.S. App. LEXIS 10109 (9th Cir. June 7, 2017).
Robert Kotick and his father formed Seaview Trading, LLC, a Delaware limited liability company that was taxable as a partnership.… Read More
TEFRA died in 2015, but the wake is still going on.
While the Bipartisan Budget Act of 2015 repealed TEFRA (or the Tax Equity and Fiscal Responsibility Act of 1982) for tax years ending after December 31, 2017, courts continue to grapple with cases governed by its partnership audit and assessment procedures. Tuesday, the Tenth Circuit issued an interesting opinion on when a good faith/reasonable cause defense to a penalty determination can be raised by an individual partner in a refund action. McNeill v. United States, No. 15-8095, 2016 U.S. App. LEXIS 16343 (10th Cir. Sept. 6, 2016).
TEFRA’s audit process works like this:
- There is a partnership-level audit that results in a final partnership administrative adjustment.
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Theoretically, The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) is simple:
- The partnership is audited, and partnership items are subject to adjustment at the partnership level. I.R.C. § 6221.
- Assessments are made at the conclusion of the partnership proceeding. I.R.C. § 6225(a).
- Adjustment to partnership items are typically implemented at the partner level through “computational adjustments” that usually do not require a notice of deficiency. I.R.C. § 6230(a)(1).
Actually, however, TEFRA quickly becomes complicated when applied to a particular fact pattern.
On November 24, 2015, a case in the Court of Federal Claims demonstrated that the theoretically simple process of making “computational adjustments” is anything but simple.… Read More
Suddenly, 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