Tax Matters Partner.

• Author: Laffie, Lesli S.

In Richard K. Phillips, 114 TC No. 7, the Tax Court upheld the validity of Temp. Kegs. Sec. 301.6231(c)-5T. Under that rule, partnership items of a partner under criminal tax investigation become nonpartnership items if and when the IRS notifies the partner in writing that the items will be treated as nonpartnership items. Thus, a person's status as a tax matters partner (TMP) is not revoked merely because he is under criminal investigation. The Tax Court also held that the mere existence of a TMP's criminal tax investigation does not necessarily create a disabling conflict of interest that would cause termination of his designation.

Hoyt was the designated TMP for a multitude of tax shelter partnerships in the 1980s. At the IRS's request, he executed Forms 872, Consent to Extend the Time to Assess Tax, extending the limitations periods for various tax years. Hoyt had been the subject of criminal tax investigations that ended before he executed most of the extensions.

Phillips and his wife were limited partners in several of the partnerships. They contended that Hoyt's extensions of the assessment periods were invalid, because he was not the partnerships' TMP when he executed them.

Temp. Regs. Sec. 301.6231(c)-5T provides that partnership items of a partner under criminal tax investigation shall be treated as nonpartnership items, but only as of the date on which the partner is notified that he is under criminal investigation, and only after he receives written notification from the IRS that his partnership items are treated as nonpartnership items. The rule provides that items are not treated as nonpartnership items unless and until the partner receives written notification to that effect from the IRS. The Service never notified Hoyt that his partnership items were going to be treated as nonpartnership items.

The taxpayers challenged the validity of the...