Category: Tax Returns, Examinations & IRS Procedure; Partnerships & LLCs
Subject: Examinations
Title: Statute of Limitations for Partnership Examinations
IRC Sections: 6229, 6231
Filename: 1358.html
Date Produced: 12/93

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The taxpayer (TP) is a partnership. TP's calendar 1982 and 1983 were examined by the IRS, and an adjustment was proposed substantially increasing income reportable to TP's partners. The returns for the partners are statute-barred. The returns for TP may still be open as a result of waivers. The issue is whether the TP's or the partner's statute of limitations controls the IRS's ability to assess tax at this point.

There are two possible answers depending on TP's facts.

1. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), enacted partnership level audit procedures which, in general, allow the IRS to treat a partnership as a separate taxable entity for purposes of audit. Incidentally, these are the rules that created the need for a tax matters partner to be the spokesperson for the partnership relative to IRS examination matters. Partnerships subject to these rules are referred to as TEFRA partnerships.

For TEFRA partnerships, Internal Revenue Code (IRC) Section 6229 provides a three year statute of limitations for partnership items. It is the partnership tax return that triggers the three year statute of limitations period. Accordingly, if TP is a TEFRA partnership, the statute of limitations for the partnership controls whether the IRS can assess additional tax at this point.

It should be noted that the rule of IRC §6229 literally applies only to so-called partnership items, items which the partnership must state separately. There is some confusion as to whether non-partnership items are treated the same way. This may be an issue to follow up later when all the facts and issues become fully known.

Not all partnerships are TEFRA partnerships. First, the TEFRA partnership rules apply to partnerships with taxable years beginning after September 4, 1982. This would appear to put the calendar 1982 partnership return out of reach of the TEFRA partnership rules. Second, there is a small partnership rule whereby certain small partnerships are excluded from the TEFRA partnership rules. IRC §6231(a)(1)(B). The requirements for this rule are as follows.

1. The partnership must have ten or fewer partners.

2. All partners are estates or natural persons who are citizens or residents of the U.S.

3. Each partner's share of each partnership item is the same as the share of every other partnership item.

The small partnership rules are applied separately to the facts of each tax year such that it is possible to fall under the small partnership exception in some years and not in others.

2. For non-TEFRA partnerships, the partner's statute of limitations controls. Gary Siben v. Commr., 91-1 USTC ¶50,215 (1991, CA2) and Thomas Charlton v. Commr., 93-1 USTC ¶50,239. The Charlton and Siben cases are consistent with the Supreme Courts's holding in the case of Sheldon Bufferd v. Commr., 92-1 USTC ¶50,031 (USSC, 1993) which reached the same conclusion with respect to S corporation examinations. More importantly, the IRS has agreed to follow Siben (Action on Decision, 1991-01, 2/11/92).

The rule of Siben seems to be good law for partnerships which fall out from under the TEFRA partnership rules either because the year in question precedes the effective date of the TEFRA rules or because the partnership is excluded from the TEFRA partnership rules for whatever other reason.