Mitigation Provisions Apply to TEFRA Procedures

2. If so, are the mitigation requirements met in this case so that the AAR filed by the TMP for the partnership will be considered timely.

2. Yes, the TMP is entitled to mitigation with respect to the time period for filing an AAR for the partnership's * * * taxable year.

[5] The former tax matters partner ("TMP") for the * * * taxable year had filed a Form 843 claim on * * * for the * * * partnership taxable year in order to "keep the * * * partnership years open with respect to the rehabilitation credit." A newly designated TMP, which was selected by the Service for the * * * year at issue, has filed an AAR (Form 8032) for the * * * partnership year on * * * claiming the credit for the * * * year. The TMP argues that this is a timely AAR due to the mitigation provisions as it was filed prior to the decision of the Tax Court. The TMP for the * * * partnership taxable year has not filed an AAR for that year.

[6] The mitigation provisions found in I.R.C. section 1311- 1314 of the Code "were designed to prevent a windfall, in specified circumstances, either to the taxpayer or the government arising. out of the treatment of the same item in a manner inconsistent with its erroneous treatment in a closed year." Bolten v. Commissioner, 95 T.C. 399, 402 (1990). Specifically, if an error is made in the inclusion or exclusion of income, in the allowance or disallowance of deduction or credit, or in the tax treatment of a transaction affecting the basis of property, the error is permitted to be corrected even though the period of limitations has run for that year. O'Donnell v. Belcher, 414 F.2d 833 (5th Cir. 1969). One of the basic premises of the mitigation provisions is to "attribute income or deductions to the right year and the right taxpayer. . ." S. Rep. No. 1567, 75th Cong., 3d Sess., 49-50 (1938). If the specific conditions for mitigation are met, correction of the error is permitted in the barred year through an "adjustment". I.R.C. section 1314. Since the party relying on the mitigation provisions is invoking an exception to the period of limitations, that party bears the burden of establishing that the provisions are applicable. Bolten, 95 T.C. at 403. However, this does not mean that the statute should be strictly or narrowly interpreted so as to defeat its apparent purpose. United States v. Rosenberger, 235 F.2d 69, 73 (8th Cir. 1956).

[7] The statutory scope of the mitigation provisions is broadly drafted and applies to the correction of any error "prevented by the operation of any law or rule of law" other than the mitigation provision themselves and I.R.C. section 7122 (relating to compromises). See I.R.C. section 1311 and Treas. Reg. section 1.1311(a)(2)(a). The regulations provide as examples of such laws I.R.C. sections 6511, 6501, 6532 and 6512. Treas. Reg. section 1.1311(a)-2(a).

[8] At issue in this case is whether the mitigation provisions may also apply to the various periods of limitation found in the TEFRA provisions, mainly I.R.C. section 6229 (relating to assessment of tax attributable to partnership items affected items, and converted items); I.R.C. section 6227 (relating to AARs); and I.R.C. section 6230(d) (relating to credit or refund of overpayment attributable to partnership items and to suits for refund from disallowed AARs and/or computational errors). Specifically, partners in * * * made two attempts to claim the credit for the partnership's * * * year--one by way of a claim for refund filed by the purported TMP on * * * and one by way of an AAR filed by another purported TMP on * * * Both were filed after the period for filing an AAR had expired. ¹

[9] Our position is that the mitigation provisions do apply to the various periods of limitation found in the TEFRA provisions and specifically apply to I.R.C. section 6227(a). We take this position for two reasons. The first is the broadly drafted language of I.R.C. section 1311. This section states that the provisions apply to mitigate "any law or rule of law" other than I.R.C. sections 1311- 1314 and 7122. As a matter of statutory construction, mitigation would certainly apply to any bar found in the Internal Revenue Code so long as the other requirements of mitigation are met and no express exception from mitigation was otherwise provided. Such an interpretation is supported by the legislative history of the mitigation provisions. See S. Rep. No. 1567, 75th Cong., 3d Sess. 49- 50 (1938) ("correction. . . prevented by some provision of the internal-revenue laws"); Conference Committee Rep. No. 2330 75th Cong., 3d Sess. 57 (1938) ("correction of the effect of such error is prevented by the operation of one or more provisions of the internal- revenue laws"); In this regard, we note that Congress was careful to modify the various refund and overpayment provisions to account for the TEFRA unified procedures. See I.R.C. sections 6501(o)(2), 6511(g), 6512(a)(4), 7244(h). We are of the opinion that if Congress intended that the mitigation provisions were not to apply to TEFRA, it would have stated so either in the mitigation provisions themselves or in the TEFRA provisions.

[10] A second reason that mitigation applies to TEFRA is that the provisions are not inconsistent with the intent of Congress in the enactment of the TEFRA audit and litigation procedures. One of the more significant reasons for the enactment of the TEFRA procedures was to have consistent treatment of items of partnership income, deduction, loss, and credit among the partners. See generally, I.R.C. section 6222 (partner must treat partnership items consistently with treatment on partnership return); I.R.C. section 6226 (partnership items are determined in one unified proceeding). Such a desire for consistent treatment among partners is also found in the mitigation provisions themselves. I.R.C. section 1313(c) allows a determination with respect to one taxpayer to apply to another taxpayer if they are "related taxpayers" in the same taxable year as defined in the statute. Partners in a partnership formed under applicable state law are such related taxpayers. I.R.C. section 1313(c). Mitigation, therefore, potentially applies to improper allocations of partnership income, deduction, credit, and loss between members of a partnership regardless of whether the partnership is subject to the TEFRA provisions. Cf. Taxeraas v. United States, 269 F.2d 283 (8th Cir. 1959). Thus, both procedures, albeit by very different methods, effectuate the same desire of consistent treatment of partnership income, deduction, loss, and credit among the partners.

[11] The use of mitigation in the context of the TEFRA procedures will, however, be limited to certain partners under I.R.C. sections 1312 and 1313. Under these provisions, a mitigation adjustment is allowed where there has been a double inclusion or exclusion of income or the double allowance or disallowance of a deduction or credit to the taxpayer or a related taxpayer. I.R.C. section 1312(1)-(4). A "taxpayer" is defined as any person subject to tax under the applicable revenue law. I.R.C. section 1313(b). In the context of partners in a partnership, a "related taxpayer" is a taxpayer who is a partner, along with the taxpayer with respect to whom a determination was made, for the same taxable year in which there was an inclusion, exclusion, allowance, or disallowance. I.R.C. section 1313(c). Therefore, a mitigation adjustment concerning multiple partnership taxable years will only be available to a partner who was a partner both in the partnership taxable year of the determination as well as the partnership taxable year where correction is barred. In the present case, only those partners who were parties, as defined in I.R.C. sections 6226(c) and (d), to the * * * TEFRA proceeding may obtain a mitigation adjustment for the * * * partnership taxable year through an AAR.

Issue 2

[12] The second issue raised is whether those partners who were parties to the * * * partnership proceeding of * * * may obtain an adjustment to the * * * partnership return under the mitigation provisions despite the bar of the period of limitations for filing an AAR under I.R.C. section 6227(a).

[13] To obtain the benefits of the mitigation provisions, the party seeking to invoke I.R.C. sections 1311-1314 bears the burden of proving that the requirements of these sections have been met. Longiotti v. United States, 819 F.2d 65, 68 (4th Cir. 1987); O'Brien v. United States, 766 F.2d 1038, 1042 (7th Cir. 1985). I.R.C. section 1311(a) states that:

[15] The first requirement is that of a determination as defined in I.R.C. section 1313. Under I.R.C. section 1313(a)(1), a decision of the Tax Court that has become final is a determination. The Tax Court's decision in docket no. * * * satisfies the first requirement.

[16] Second is the requirement of I.R.C. section 1312, which describes the circumstances under which I.R.C. section 1311 provides for a tax adjustment. I.R.C. section 1312(4) describes the circumstances in which the determination disallows a credit which should have been allowed to, but was not allowed the taxpayer for another year. This section "covers the situation in which a taxpayer claims a deduction which is ultimately disallowed on the ground that it should have been claimed in a different year." J.B.N. Telephone Company, 638 F.2d at 235. In * * * the Tax Court has disallowed the rehabilitation credit claimed by the partners for the * * * tax year which should have been allowed to, but was not allowed to, the partners for the * * * tax year. The determination therefore, meets the requirement of I.R.C. section 1312(4) but only with respect to those partners who were both parties to the * * * action and partners in * * * for the * * * partnership taxable year.

[17] This conclusion is in accord with the Service's position in Rev. Rul. 73-82, 1973-1 C.B. 375. In Rev. Rul. 73-82, a taxpayer erroneously carried an unused investment credit from its 1967 tax year to its 1968 and 1969 tax years rather than carrying it back to its 1964, 1965, and 1966 tax years, as required by section 46(b). Claiming the unused credit in taxable years 1964-1966 was barred by the period of limitations when the determination was made that the credit was not allowable in 1968 and 1969. The Service characterized these facts as meeting the requirement of I.R.C. section 1312(4).

[18] The third requirement is that correction of the effect of the error described in I.R.C. section 1312(4) was prevented by rule of law on the date of the determination. The "error" was * * * failure to claim the credit in the year the property subject to the credit was placed in service. At the time the decision in the Tax Court became final, I.R.C. section 6227(a) barred the TMP, or any partner, from filing an AAR for the partnership's * * * taxable year. Therefore, the facts of this case satisfy the third requirement.

[19] The fourth requirement is that the conditions of I.R.C. section 1311(b)(2)(B) have been met. I.R.C. section 1311(b)(2)(B) provides, in pertinent part, that:

[20] The final requirement is that the taxpayer followed the procedure provided in I.R.C. section 1314(b) for obtaining the tax "adjustment". I.R.C. section 1314(b) provides, in pertinent part, that:

[21] We note that under the TEFRA procedures claims for refund are generally not allowed since deficiencies are generally not determined, and only adjustments are made to the partnership return. However, credit or refund of overpayments attributable to partnership items is allowed under certain specific circumstances. I.R.C. section 6230(d). A claim for refund may be accomplished by the filing of an AAR. I.R.C. section 6230(d)(2) and 6227. Such a request may be treated in certain situations in the same manner as a normal claim for refund. See I.R.C. sections 6227(b)(2)(A)(i), 6227(c)(1), and 6228(b)(1)(A). It is our position that the requirement of I.R.C. section 1314(b) with respect to an "adjustment" that relates to a TEFRA partnership return may be satisfied by the filing of an AAR by the TMP for the year to be adjusted pursuant to I.R.C. section 6227(b) within one year from the date the determination is made.

[22] In the present case the two documents filed do not constitute AARs since the partners who signed those documents were never and are not currently the TMP for the * * * partnership taxable year. Only the TMP may file an AAR on behalf of the partnership, although individual partners may make such requests on their own behalf. Accordingly, we have advised you to contact counsel for the partnership and instruct them to file an additional AAR for the partnership's * * * taxable year signed by the proper TMP. Such an AAR must be filed before * * * one year from the date of the determination (i.e., * * *

[23] Assuming this requirement is met, we conclude that the TMP of * * * is entitled to the benefit of the mitigation provisions in order to file a timely AAR, so as to "adjust" the * * * partnership return in the amount of the rehabilitation credit. Once accomplished, refunds or credits may be applicable to those partners entitled to the credit by way of computational adjustment.

[24] This document may include confidential information subject to the attorney-client and deliberative process privileges, and may also have been prepared in anticipation of litigation. This document should not be disclosed to anyone outside the IRS, including the taxpayer(s) involved, and its use within the IRS should be limited to those with a need to review the document in relation to the subject matter or case discussed herein.

[25] If you should have any questions, please contact Keith Troxell on FTS 202-566-3233.