Untimely Claim for Refund May Reflect Original K-1 Deductions

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The taxpayer waited until * * *, more than three years after the partnership return was filed, to file an amended corporate return claiming the partnership deductions. The amended corporate return claimed $* * * in partnership deductions consistent with the amount reported on its Form K-1 from the partnership. No audit of the TEFRA partnership took place. The period for assessment of partnership items under section 6229 has expired for this partnership. The period under section 6501 remains open for * * *, however. The Examination Division has no reason to believe that the partnership items are incorrect.

The net refund proposed by appeals, based on audit adjustments and timely non-TEFRA refund claims, is approximately $* * *. This amount does not give taxpayer credit for its claimed partnership deduction of $* * * because the claim was untimely under section 6227(a). The appeals officer also intends to deny the claim because section 6230(d)(1) appears to prohibit any refund attributable to partnership items after the period under section 6229 has expired.

Since the validity of the partnership deduction is not disputed we recommend that the Appeals Division include the correct amount of partnership items as reported on the partner's Form K-1 in computing the net refund for the * * * taxable year. We recommend doing so for two reasons. First, the mission of the Service is to collect the correct amount of tax due.¹ Since we are permitted to compute the correct amount of tax under section 6222(c)(2), we should do so in keeping with our mission.

Secondly, there are significant hazards that taxpayer would prevail based on a claim under section 6230(c). Section 6230(c) allows a claim for refund when the Service has erroneously computed any computational adjustment necessary to make partnership items on the partner's return consistent with the treatment of those items on the partnership return. I.R.C. § 6230(c)(1)(A)(i). Section 6231(a)(6) defines a computational adjustment as the "change in the tax liability of a partner which properly reflects the treatment of under this subchapter [subchapter C of Chapter 63] of a partnership item." Section 6222(a) under this subchapter mandates that the correct treatment [in the absence of a partnership proceeding] is the treatment reflected on the partnership return. Arguably the Service would erroneously compute a computational adjustment necessary to make partnership items on the partner's return consistent with the treatment of those items on the partnership return if it fails to take the correct amount of partnership items into account when it computes the refund in this case. Taxpayer would then have six months to file a timely claim for refund upon receipt of the computation. I.R.C. § 6230(c)(2)(A).

Analogous support for such a taxpayer claim may be found in Harris v. Commissioner, supra. The court indicated that previously determined partnership items should be included in the computation of a non-TEFRA deficiency stating: "Once substantive partnership level determinations have been made, the congressional objective in enacting the TEFRA partnership provisions has been accomplished. Consequently, the provisions mandating the separation of partner and partnership level proceedings can be relaxed." Id. at 126. No "determination" as such has occurred here with respect to the partnership items in issue. However, the Court in Roberts v. Commissioner, 94 T.C. 853 (1990), treated the expiration of the period under section 6229 without the issuance of a notice of final partnership administrative adjustment as the equivalent of the completion of a prior TEFRA proceeding for purposes of computing a deficiency in a related proceeding. Thus, a court could possibly treat the present items on the Form K-1 as if they had been "determined" for purposes of computing a non-TEFRA refund. Section 6222 requiring conformity with the partnership return supports this approach. In light of the above technical arguments and the equities favoring the taxpayer these are not favorable facts for litigation.

If you have any questions or need further assistance, please contact Bill Heard at 202-622-7830.