United States: IRS Practice And Procedure - May 5, 2015

'Nominal' partnership interest by pass-through insufficient to fall under small partnership exception to TEFRA

The Tax Court ruled April 7 that a pass-through partner's interest in a partnership, while nominal, still did not qualify the partnership to fall under the small partnership exception to the TEFRA procedures.

In Brumbaugh v. Commissioner, T.C. Memo 2015-65 (April 7, 2015), the petitioner, Brumbaugh, was an individual partner in a partnership (Panorama LLC), holding a 59.99% interest. Another individual partner held a 39.99% interest, while a third partner, a partnership (Lynx), held a 0.02% interest. On his 2007 income tax return, Brumbaugh claimed an interest deduction, which was disallowed by the IRS. The IRS also determined certain losses were subject to the Section 469 passive activity loss rules and asserted an accuracy-related penalty under Section 6662(a). None of the adjustments set forth in the notice of deficiency to Brumbaugh related to deductions claimed by Panorama.

Brumbaugh argued that he was allowed to deduct additional losses from Panorama that were not on his Schedule K-1 and that he had erroneously claimed the disallowed interest deduction. Rather, his interest deduction should have been reported by Panorama and flowed up to him.

Brumbaugh did not seek an administrative adjustment under Section 6227(a). The Tax Court said the time for an administrative adjustment had now expired. Accordingly, the tax treatment of the partnership items — such as an interest deduction — became final in accordance with the partnership return filed by Panorama, under the Tax Equity and Fiscal Responsibility Act (TEFRA) rules.

In Tax Court, Brumbaugh argued that the TEFRA rules did not apply, because in substance, Lynx's ownership in Panorama was nominal. Accordingly, he argued, Panorama should qualify under the small partnership exception to TEFRA.

The Tax Court ruled that there is no "de minimis exception" for pass-through partners. The court also pointed to Panorama's Form 1065, which answered "yes" to the question "Are any partners in this partnership also partnerships?" The court also pointed to the Schedule K-1 issued to Lynx, which identifies Lynx as a partnership.

IRS memorandum rejects stacking of statutes of limitation for refund or credit

In a chief counsel advice (CCA) memorandum released April 24 (CCA 201517005), the IRS Office of Associate Chief Counsel (Procedure and Administration) said a taxpayer could not use two separate statutes of limitation, either together or separately, to obtain a refund in a closed tax year, because the statutes of limitation were mutually exclusive related to a given overpayment.

Under the facts of the memorandum, the taxpayer claimed a foreign tax credit under Section 901 in Year 4. In Year 13, the taxpayer filed an amended return for Year 4, seeking to change its election from a credit to a deduction for foreign taxes paid under Section 164. The deduction would serve to reduce the taxpayer's income in Year 4, resulting in a net operating loss (NOL). On the same day, the taxpayer filed an amended return for Year 2, carrying back the NOL.

The IRS said the claim for refund in Year 2, when made in Year 13, was not timely under both Sections 6511(d)(2) and 6511(d)(3). Under Section 6511(d)(2), the general three-year statute of limitations for credit or refund is extended for refunds "attributable to" an NOL. In such a case, the claim for refund is timely if it is filed within three years of the due date (including extensions) for the return for the loss year. In this case, the loss year was Year 4, and Section 6511(d)(2), the claim for refund, should have been filed by Year 7.

Section 6511(d)(3) provides for a 10-year statute of limitations for a claim of credit or refund related to an overpayment that can be attributed to any foreign taxes paid for which a credit under Section 901 is "allowed." The IRS explains that in this circumstance, there is an important distinction between whether a credit is allowed or allowable. Section 275(a)(4), as well as the regulations under Sections 164 and 901, state that a credit is allowable unless a deduction is taken, and a deduction is allowable unless a credit is taken. Under Treas. Reg. Sec. 1.901-1(h), a credit is allowed only when chosen, and is not allowed when a deduction is taken in lieu of that credit.

As a result, the extended statute of limitations under Section 6511(d)(3) applies only to overpayments that can be attributed to foreign taxes for which a credit is allowed, and not for overpayments that can be attributed to foreign taxes claimed as a deduction, the IRS said.

The IRS further said that even if Section 6511(d)(3) could be construed to apply to overpayments that could be attributed to foreign tax deductions, the overpayment in Year 2 couldn't be attributed to a foreign tax paid or accrued; rather, it could be attributed to an NOL deduction carried back from Year 4.

Finally, the IRS said taxpayers may not stack Sections 6511(d)(2) and 6511(d)(3) to provide a longer period of limitations. The periods key-off of specific dates, and the plain language of the statutes indicates that the periods are mutually exclusive related to any given overpayment, the IRS said.

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