Interplay of SOLs raised in TEFRA case.

• Author: Madden, David
• Position: Statutes of limitations - Tax Equity and Fiscal Responsibility Act of 1982

As part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress implemented procedures to promote uniform resolution of issues arising in cases involving large partnerships. TEFRA provides rules for partnership-level audits and litigation for "partnership items" (i.e., items of income and deduction more properly determined at the partnership, rather than the partner, level). It provides additional rules for the treatment at both the partnership and partner levels of "affected items" (i.e., items affected by partnership items but determined at the partner level (e.g., an individual's medical expense deduction)) and, at the partner level, of "nonpartnership items" (i.e., items unrelated to (and unaffected by) the partnership).

Although the TEFRA partnership rules appeared to be all-encompassing, there are situations they do not cover. For example, the absence of any direct authority relating to the interplay of the partnership statute of limitations (SOL), under Sec. 6229, and the partners' SOL, under Sec. 6501, leads to confusion. TEFRA fails to provide for the situation in which a partnership files the partnership return, but a partner does not file his own return. In this situation, it is clear that the partner's limitation period for nonpartnership items would remain open under Sec. 6501(c)(3). However, no special provisions keep the partner's limitation period open for the partnership and affected items, even when the partner does not file his required return. Similarly, there are no provisions applying the Sec. 6501(e) six-year limitation period when a partnership files the partnership return but the partner, on his own return, omits more than 25% of the income from partnership or affected items.

The lack of clear statutory guidance in this area led the Tax Court to a strained result in Rhone-Poulenc Surfactants and Specialties, 114 TC 533 (2000). A partnership filed its 1990 return either on Sept. 15 or 17, 1991. GAF Corporation, a partner in the partnership, filed its return on Sept. 15, 1991. On Sept. 12, 1997, after the three-year period for assessing tax attributable to partnership or affected items under Sec. 6229(a) had passed, the IRS issued a notice of final partnership administrative adjustment (FPAA) (essentially, the partnership-level equivalent of a deficiency notice). GAF filed a motion for summary judgment on the basis that the limitation period on assessment had expired when the FPAA was issued. GAF...