Cableado Horizontal

There is some question as to whether the TEFRA rules truly were needed by the time of their enactment in 1982,380 _{but let us}

assume they were. That necessity has evaporated as a result of post- 1982 developments.

In 1986, Congress enacted § 469, the passive activity loss rules, and strengthened the § 465 at-risk rules. Section 469 especially struck at the core of tax shelter marketing. It prevented taxpayers from using losses from passive activities (tax shelters) to offset their income from other sources.381 _{It was no longer necessary to examine}

tax shelters individually and to disallow their alleged benefits on technical or substantive grounds.

377. See Steve R. Johnson, The E.L. Wiegand Lecture: Administrability-Based Tax Simplification, 4 NEV.L.J. 573, 589-96 (2004); Philip F. Postlewaite, I Come to Bury Sub-

chapter K, Not to Praise It, 54 TAX LAW. 451 (2001).

378. See, e.g., Peter A. Prescott, Jumping the Shark: The Case for Repealing the TEFRA Partnership Audit Rules, 11 FLA.TAX REV. 503 (2011); Burgess J.W. Raby & Wil-

liam L. Raby, TEFRA Partnership Rules: The Solution Becomes the Problem, 88 TAX NOTES

795 (2000); see also N. Jerold Cohen & William E. Sheumaker, When It’s Broke, Fix It! It’s Time for TEFRA Reform, 136 TAX NOTES 815 (2012) (expressing concerns about the TEFRA rules but stopping short of urging their repeal).

379. Johnson, supra note 377, at 596-602; Steve R. Johnson, Letter to the Editor,

TEFRA: No Fix Possible, Just Get Rid of It!, 136 TAX NOTES 964 (2012).

380. In the time before Congress acted in 1982, the IRS and the courts developed im- proved techniques for identifying, processing, and managing tax shelter cases. See John- son, supra note 377, at 601. Of course, in the decades since 1982, technological capacities have improved greatly, further undermining the bureaucratic necessity of the TEFRA rules. See Prescott, supra note 378, at 562-64.

381. See generally Boris I. Bittker, Martin J. McMahon, Jr. & Lawrence A. Zelenak, A Whirlwind Tour of the Internal Revenue Code’s At-Risk and Passive Activity Loss Rules, 36 REAL PROP.,PROB.&TR.J. 673 (2002); Robert J. Peroni, A Policy Critique of the Section 469 Passive Loss Rules, 62 S.CAL.L.REV. 1 (1988); Lawrence Zelenak, When Good Prefer- ences Go Bad: A Critical Analysis of the Anti-Tax Shelter Provisions of the Tax Reform Act of 1986, 67 TEX.L.REV. 499 (1989).

As a result and in short order, the old tax shelter market col- lapsed. After some years, shelter promoters found new strategies, and new tax shelter vehicles were marketed in the 1990s and early 2000s. Critically, however, that second wave differed fundamentally from the first wave, in ways that makes the TEFRA rules obsolete. Before 1986, shelters were mass marketed to upper middle class as well as rich taxpayers—thousands of shelters, most of which were sold to scores or hundreds of “investors” each. Now, shelters are rifle shots, not shotgun blasts. There are far fewer of them, and typically each shelter partnership or LLC has only a few “investors,” mainly large corporations or extremely high-wealth individuals, who are likely to be audited in any event. The audit and litigation challenges posed by current shelters are barely a shadow of challenges posed by pre-1986 shelters.

Moreover, investors in current shelters typically can avoid the TEFRA regime if they wish. In general, the regime does not apply to “any partnership having 10 or fewer partners each of whom is an in- dividual . . . , a C corporation, or an estate of a deceased partner.”382

Since very few current tax shelter partnerships have over 10 inves- tors, the TEFRA regime adds little to the IRS’s ability to combat current shelters.

This observation leads to a broader point about the demography of partnerships. At the “small” end of the spectrum, the TEFRA rules have little applicability as a result of the “10 or fewer partners” ex- ception.383 _{Depending on the year studied, partnerships have on av-}

erage only five or six partners,384 _{well within the exception. At the}

“large” end of the spectrum, “electing large partnerships” with 100 or more partners and “publicly traded partnerships” (which may have thousands of partners) also are outside of TEFRA.385 _{Thus, TEFRA is}

potentially meaningful only in the middle of the partnership spec- trum, but that middle is not densely populated. Less than ten percent

382. I.R.C. § 6231(a)(1)(B)(i). This exclusion, if applicable, is automatic unless the partnership affirmatively elects into TEFRA treatment. Id. § 6231(a)(1)(B)(ii). Many cur- rent shelters do elect in. At least sometimes, this decision is motivated by the harms caused by TEFRA described in the following subpart. In a number of important respects, the TEFRA rules are unpredictable in their application, so electing into TEFRA treatment gives the taxpayers additional opportunities to prevail if the IRS “messes up” or guesses incorrectly how the reviewing court eventually will interpret TEFRA’s requirements. 383. This exception has been in the TEFRA rules from the start, and Congress has shown little inclination to repeal or modify it. Id. § 6231(a)(1)(B).

384. See Prescott, supra note 378, at 558.

385. Electing large partnerships are outside of TEFRA under I.RC. § 6240(b)(1). With narrow exceptions, publicly traded partnerships are treated as corporations for federal tax purposes and so are outside of TEFRA. Id. § 7704.

of partnerships are in this range,386 _{and, as noted above, current tax}

shelter partnerships typically are not there.

In the main, therefore, the TEFRA procedures are dispensable. There are three particular rules that should be retained, though. First, in general, partners are required on their returns to treat items derived from partnerships consistently with the way those items are treated on the partnership’s return.387 _{Inconsistency allows}

the IRS to automatically assess any resulting deficiency388 _{and may}

expose the partner to a penalty.389

Second, if the IRS settles some or all partnership items with some partners, the other partners are generally entitled to settle their items on similar terms.390 _{Both of these consistency rules—the con-}

sistent reporting rule and the consistent settlement rule—advance the Second-Order Value of process efficiency and should be retained. Third, § 6229 sets out limitation periods for IRS assessment of partnership items. There was initial uncertainty as to the relation- ship between these periods and the general assessment limitation periods prescribed by § 6501. It is now settled that the § 6229 rules may extend the period allowable under § 6501 but may not contract it.391 _{This rule too should be retained to protect audits in case of late}

filed partnership returns.392