This is a brief review of the TEFRA administrative procedures.
To remove the substantial administrative burden occasioned by duplicative audits and litigation, and to provide consistent treatment of partnership tax items among partners in the same partnership, Congress enacted the unified partnership audit and litigation procedures as part of the Tax Equity and Fiscal Responsibility Act of 1982, (TEFRA, P.L. 97-248 ).
Under the TEFRA partnership procedures, before assessing the tax liability of the partners, IRS determines the tax treatment of partnership items in a partnership-level proceeding. ( Code Sec. 6221 , Code Sec. 6225 )
During the ninety-day period after the mailing of the Notice of Final Partnership Administrative Adjustment (FPAA), the tax matters partner (the “TMP”) may file a petition for judicial review. ( Code Sec. 6226(a) ) If the TMP does not file a petition within that ninety-day period, any notice partner or any five percent group ( Code Sec. 6231(a)(11) ) may, within sixty days after the close of the TMP’s ninety-day period, file a petition for judicial review. ( Code Sec. 6226(b) )
A partnership item is any item required to be taken into account for the entity’s tax year under the Code’s income tax provisions to the extent IRS regs provide that the item is more appropriately determined at the partnership level than at the partner level. ( Code Sec. 6231(a)(3) ) Reg. § 301.6231(a)(3)-1 provides a list of such items.
A nonpartnership item is an item that is (or is treated as) not a partnership item. ( Code Sec. 6231(a)(4))
An affected item is any item to the extent the item is affected by a partnership item. ( Code Sec. 6231(a)(5) ) Although affected items by definition aren’t partnership items and thus aren’t determined in the partnership level proceeding, they depend on partnership-level determinations.
To file a readjustment petition with the Court of Federal Claims, the filing partner must deposit with IRS the amount by which the filing partner’s tax liability would increase if the partnership items on his return were treated in a manner consistent with the treatment of partnership items on the partnership return, as adjusted by the FPAA. ( Code Sec. 6226(e)(1) )
Code Sec. 6226(f) provides that, regardless of whether IRS raised adjustments in the FPAA, the Answer or in any other manner, the court has jurisdiction to determine: all partnership items of the partnership for the partnership tax year to which the notice of FPAA relates; the proper allocation of the partnership items among the partners; and the applicability of any penalty, addition to tax or additional amount that relates to an adjustment to a partnership item.
Defenses that are personal to the partner or are dependent upon the partner’s separate return are not properly determined at the partnership level. ( Reg. § 301.6221-1(d) )