Opinion ID: 71496
Heading Depth: 2
Heading Rank: 1

Heading: The Tax Equity and Fiscal Responsibility Act of 1982

Text: Partnerships file informational tax returns, but partnerships are not subject to federal income taxes. 26 U.S.C. § 701. Instead, a partnership is treated as a conduit through which income passes to its partners, who are responsible for reporting their pro rata share of tax on their individual income tax returns. Id. Before 1982, examining a partnership for federal tax purposes was a tedious process. A partnership filed an informational tax return on a Form 1065, which reflected the distributive shares of partnership income, gains, deductions, and credits attributable to the partners. If the IRS sought to adjust an item on a partnership return, the IRS had to examine each partner's individual return. As a result, the IRS could not ensure consistent adjustments of partnership items among partners. In response, Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982, Pub.L. No. 97-248, 96 Stat. 324, 648-671 (TEFRA). TEFRA consolidated the partnership-level audit and adjustment procedures by requiring that the tax treatment of any partnership item shall be determined at the partnership level. 26 U.S.C. § 6221. TEFRA created a single unified procedure for determining the tax treatment of all partnership items at the partnership level, rather than separately at the partner level. In re Crowell, 305 F.3d 474, 478 (6th Cir.2002). After TEFRA, the IRS could adjust partnership items at a singular proceeding, and then subsequently assess all of the partners based upon the adjustment to that particular item. The IRS would not have to conduct individual `partner level' proceedings for each member of a partnership. Prati v. United States, 81 Fed.Cl. 422, 427 (Fed.Cl.2008). TEFRA defines a partnership item as any item required to be taken into account for the partnership's taxable year under any provision of Subtitle A to the extent regulations prescribed by the Secretary provide that, for purposes of [subtitle F], such item is more appropriately determined at the partnership level than at the partner level. 26 U.S.C. § 6231(a)(3). The regulations provide that items more appropriately determined at the partnership level include the gains, losses, deductions, and credits of a partnership. 26 C.F.R. § 301.6231(a)(3)-1. The term partnership item also includes the accounting practices and the legal and factual determinations that underlie the determination of the amount, timing, and characterization of items of income, credit, gain, loss, deduction, etc. 26 C.F.R. § 301.6231(a)(3)-1(b). A nonpartnership item is an item which is (or is treated as) not a partnership item. 26 U.S.C. § 6231(a)(4). The tax treatment of nonpartnership items requires partner-specific determinations that must be made at the individual partner level. See Crnkovich v. United States, 202 F.3d 1325, 1328-29 (Fed.Cir.2000). TEFRA also includes a hybrid category of affected items. An affected item is any item to the extent such item is affected by a partnership item. 26 U.S.C. § 6231(a)(5). For example, a taxpayer-partner's medical expense deduction under 26 U.S.C. § 213(a) is an affected item. Because a taxpayer can only deduct medical expenses to the extent those expenses exceed 7.5% of adjusted gross income, a change in the partnership's income affects the amount of the partner's deduction. Affected items can have both partnership-item and nonpartnership-item components. For example, determining a limited partner's amount at risk for purposes of 26 U.S.C. § 465 may require a partnership-item determination of the amount of partnership debt and a nonpartnership-item determination of the amount of that debt assumed by the limited partner. There are two different types of affected items. The first type of affected items requires only a computational adjustment at the partner level, which can only be made at the conclusion of the partnership level proceeding. Woody v. Comm'r of Internal Revenue, 95 T.C. 193, 201-02, 1990 WL 121140 (1990) (citing N.C.F. Energy Partners v. Comm'r of Internal Revenue, 89 T.C. 741, 744, 1987 WL 45298 (1987)). The term `computational adjustment' means the change in the tax liability of a partner which properly reflects the treatment under this subchapter of a partnership item. 26 U.S.C. § 6231(a)(6). A computational adjustment may include a change in tax liability that reflects a change in an affected item where that change is necessary to properly reflect the treatment of a partnership item. 26 C.F.R. § 301.6231(a)(6)-1T(a). Such a computational affected item may be applied to the individual partner without any factual determination at the partner level. The other type of affected item is one that is dependent upon factual determinations (other than a computation) relating to an adjustment made at the partner level. Woody, 95 T.C. at 202; N.C.F. Energy Partners, 89 T.C. at 744-75. These affected items require fact-finding particular to the individual partner. If the IRS decides to adjust any partnership items on a partnership's informational income tax return, it must notify the individual partners of the adjustment by issuing a Notice of Final Partnership Administrative Adjustment (FPAA). 26 U.S.C. § 6223; see also Kaplan v. United States, 133 F.3d 469, 471 (7th Cir.1998). A Notice of FPAA sets out the proposed adjustments, e.g. disallowing all or part of partnership's deductions, and lists the grounds for the adjustments. Id. For ninety days after a Notice of FPAA issues, the Tax Matters Partner [1] has the exclusive right to challenge the proposed adjustments in Tax Court, the Court of Federal Claims, or a United States District Court. 26 U.S.C. § 6226(a). If the TMP does not file suit challenging the proposed adjustments within this period, other partners have sixty days to file a petition for read-justment. Id. § 6226(b)(1). If a partnership level challenge is filed, each partner in the partnership is deemed a party to the case. 26 U.S.C. § 6226(c)(1). If a partner settles his tax liability with the IRS, the partner will not be able to participate in the partnership-level suit and will be bound by the settlement agreement terms. Id. § 6228(a)(4), § 6226(c)(1). If the IRS enters into a settlement agreement with any partner with respect to partnership items, other partners are entitled to a consistent settlement as to those partnership items. 26 U.S.C. § 6224(c)(2). The TMP may bind non-notice partners to a settlement agreement resolving partnership items if the TMP expressly states in the agreement that it shall bind the other partners. 26 U.S.C. § 6224(c)(3)(A). A non-notice partner is a partner with less than a 1% interest in a partnership that has more than 100 partners. See 26 U.S.C. §§ 6231(a)(8), 6223(b)(1). In a partnership-level proceeding, the Tax Court has jurisdiction to determine all partnership items for the tax year to which the FPAA relates. The Tax Court also has jurisdiction to determinate the proper allocation of the partnership items among the partners. 26 U.S.C. § 6226(f). For tax years before 1997, the Tax Court does not have jurisdiction over nonpartnership items or over affected items. [2] Id. The TMP and the IRS may reach an agreed decision in the Tax Court as to partnership items. TAX COURT R. 248(b). In a partner-level refund action, courts do not have jurisdiction over partnership items. 26 U.S.C. § 7422(h). But a court does have jurisdiction in a partner-level refund action over partnership items that were converted to nonpartnership items through a settlement with the IRS. Id. § 6231(b)(1)(C).