The Court of Appeals for the District of Columbia Circuit has affirmed a Tax Court holding that tax matters partners’ agreements to extend the assessment limitations period for the tax year ended December 31, 2000, applied to partnership items from the partnerships whose tax year ended December 19, 2000.
Before it was repealed by the Bipartisan Budget Act of 2015 (PL 114-74), the Tax Equity and Fiscal Responsibility Act of ’82 (TEFRA, PL 97-248) provided the rules for auditing partnerships. Under TEFRA, the tax treatment of any partnership items, and the applicability of any penalty, addition to tax or additional amount that related to an adjustment to a partnership item, was generally determined at the partnership level. (former Code Section 6221)
Generally, a partnership’s partners are required to include on their own tax returns their distributive shares of the partnership’s income, gain, loss, deduction, or credit. (Code Sec. 702(a)) When computing the taxable income of a partner for a tax year, the inclusions required by Code Sec. 702 are based on the income, etc., of the partnership for the partnership’s tax year ending within or with the tax year of the partner. (Code Sec. 706(a))
Code Sec. 6501(a) provides, in general, that any tax deficiency must be assessed within three years after the return was filed. This limitations period applies to the return required to be filed by the taxpayer; it does not include the return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit.
However, a taxpayer and the IRS may, before the three-year limitations period expires, consent in writing to extend the limitations period so that tax may be assessed at any time prior to the expiration of the agreed-upon period. (Code Sec. 6501(c)(4)(A)) When extending the assessment limitations period for a TEFRA partnership, the extension must expressly provide that such agreement applies to tax attributable to partnership items. (former Code Section 6229(b)(3))
The assessment period with respect to tax attributable to any partnership item or affected item may be extended for all partners by an agreement entered into by IRS and either the tax matters partner (TMP) or any other person authorized by the partnership in writing to enter into the agreement before the expiration of the assessment period. (former Code Section 6229(b)(1)(B))
Forms 872-I, Consent to Extend the Time to Assess Tax as Well as Tax Attributable to Items of a Partnership, is used to extend the time to assess a partner’s tax liability. Form 872-I contains the following language “Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items (see [former Code] section 6231(a)(3), affected items (see [former Code] section 6231(a)(5)), computational adjustments (see [former Code] section 6231(a)(6)), and partnership items converted to nonpartnership items (see [former Code] section 6231(b)).”
In this consolidated case, the TMPs for two partnerships, Who515 Investment Partners and Inman Partners, signed Forms 872-I. The Forms 872-I provided that the “amount of any federal Income tax due on any return(s) made by or for the [partner] taxpayer(s) for the period(s) ended December 31, 2000 may be assessed at any time on or before June 30, 2005”. The Forms 872-I also expressly extend[ed] the period of limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items.
Before June 30, 2005, but after the ordinary three-year limitations period for submitting an FPAA, the IRS issued FPAAs with substantial proposed adjustments for the two partnerships. The partnerships argued that the proposed adjustments were time-barred because the partnerships had tax years ending on December 19, 2000, and the Forms 872-I applied to returns for the period ended December 31, 2000. Therefore, the Forms 872-I extended the limitations period for assessing the partners’ individual taxes for periods ending December 31, 2000, but did not extend the limitations period for assessing partnership items for the partnerships’ tax years that ended December 19, 2000.
The taxpayers admitted that they would lose under the Tax Court’s previous decision in WHO515, TC Memo 2012-316, but argued that case was only a Memorandum Opinion and asked the Tax Court to rethink its reasoning.
Tax Court proceedings
The Tax Court held that taxpayers’ signed Forms 872-I, extended the assessment period for the partners’ individual returns, and extended the assessment period for partnership items from the partnership’s tax year that ended December 19, 2000. (Inman Partners, TC Memo 2018-114)
The Tax Court rejected the taxpayers’ argument that the signed Forms 872-I didn’t include items from the partnership since its tax period ended on December 19, 2000, so it was not a return for the tax year that ended December 31, 2000.
The Tax Court said that, while the Forms 872-I may have extended the assessment limitations period only for the partners’ individual returns for tax years that ended December 31, 2000, Code Sec. 702(a) and Code Sec. 706(a) require those individual returns to report any income tax due to partnership items from any of their partnerships whose tax years ended on or before December 31, 2000. Thus, the Code required the partners to report their partnership items on their individual returns for the tax year ending on December 31, 2000, and the partners each consented to extend the limitations period for assessing the income tax due on those returns.
DC Circuit affirms
The Tax Court correctly determined that the Forms 872-I applied to the partnerships’ tax years, affirmed the Court of Appeals for the District of Columbia Circuit. The Forms 872-I extended the period for assessing adjustments on the partners’ tax returns for the tax year ended December 31, 2000, and the partnerships had tax years that ended within that tax year. Therefore, the partners were required to report their distributive shares of the partnerships’ gains and losses on their individual returns for the tax year that ended on December 31, 2000.
The DC Circuit noted that the amount of any federal income tax due from the partners necessarily included their distributive shares of the partnerships’ gains and losses. And, the Forms 872-I expressly stated that they extended the limitations period for assessing “any tax” attributable to “any partnership items” due within the reporting period as required by former Code Section 6229(b)(3).
To continue your research on consent to extend the assessment period, see FTC 2d/FIN ¶T-4419; United States Tax Reporter ¶65,014.04.
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