IRS not bound to sec. 6222 procedures by notice of inconsistent treatment.

• Author: Rogers, Linda

The Tax Court recently considered the Service's alternatives after a Notice of Inconsistent Treatment has been filed by a partner under Sec. 6222.

Aimed at partnerships and S corporations, Secs. 6221 through 6233 (which define audit procedures) were added to the Internal Revenue Code by the Tax Equity and Fiscal Responsibility Tax Act of 1982 (TEFRA). This part of TEFRA had two goals:

1. Consistent treatment among all partners of a partnership.

2. Administrative and judicial economy due to unified audit procedures.

   These Code sections apply to most partnerships, S corporations and real estate mortgage investment conduits (REMICs), although small organizations are exempted. "Small" is defined differently for each type of entity; however, each exemption is based on the number of owners.

   Four categories of items are defined by TEFRA:

1. Partnership items: The tax treatment of the item is more appropriately determined at the partnership level.

2. Affected items: Either items computationally affected by partnership items (e.g., the amount of deductible medical expense changes when partnership income changes) or items that require substantive partner-level determinations.

3. Nonpartnership items: Other items on the tax return.

4. Converted items: Items that were once partnership items but have become nonpartnership items.

   Sec. 6222 requires that a partner treat all partnership items consistently with the way the items were treated on the partnership tax return. According to Temp. Regs. Sec. 301.6222(b)-2T, if the partner notifies the IRS of the inconsistent treatment of a partnership item, the Service generally may not make an adjustment with respect to that partnership item unless it conducts a partnership-level proceeding or notifies the partner that all partnership items arising from that partnership will be treated as nonpartnership items.

   In a recent Tax Court decision, Jenkins, 102 TC No. 21 (1994), it was held that the inconsistent treatment must be of a partnership item, rather than of an affected item, to require that the Service conduct a partnership-level proceeding or notify the partner that all partnership items will be treated as nonpartnership items.

   In this case, a partner in a law partnership was disabled during 1988. The firm paid her $75,000 in exchange for her agreement not to exercise her rights under the waiver-of-premium...