La RSC de NH Hotel Group

4. The Service determines that treating an item as a partnership item would interfere with enforcement. I.R.C. 6230(b)(l)(D).

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Non-partnership Items – Conversion –special circumstances

5. Special Enforcement Areas -items automatically convert to non-partnership items when:

a) a termination or jeopardy assessment is made (conversion occurs the moment before the assessment is made);

b) a criminal investigation is instituted (conversion occurs on the date written notice of conversion is received by the taxpayer);

c) an indirect method of proof is used (conversion occurs on the date the deficiency notice is mailed);

d) a petition in bankruptcy is filed or receiver is appointed (conversion occurs on the date the petition is filed or the receiver appointed);

e) a request for prompt assessment is filed (conversion occurs on the date the request is filed).

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Partnership Items, non-partnership items, & affected items

Non-partnership Items – Conversion –IRS Options

• The IRS may treat partnership items with respect to a partner as non-partnership items when:

1. The partner has:

◦ reported the item on his return inconsistently with its treatment by the partnership,

◦ has properly notified the Service of the inconsistency, and

◦ has not subsequently requested that his return be conformed to the partnership return. I.R.C. § 6231 (a)(2)(A),

2. Subsequent to the filing of his original return, the partner has filed an

administrative adjustment request ("AAR"), that would result in its treatment of the item being inconsistent with its treatment by the partnership. I.R.C. §§ 623 l(b)(l)(A) and (b)(2)(B).

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Non-partnership Items – Conversion –The Effect

• Generally, the tax treatment of items that become non-partnership items is determined under the regular audit, deficiency, and refund procedure instead of the TEFRA

procedures –thus regular procedures apply

• However, if the item is converted because of ―settlement‖, then the deficiency proceedings do not apply

• Instead, the settled items may be immediately assessed

• In this case, the Service Center TEFRA Unit prepares an RAR (including Form 4549 and accompanying schedules and explanations) and mails to partner

• Partner may not Protest or Petition, but may have brief opportunity to question the computation of effect of the settlement to the partner

• If questioned, IRS may still assess, leaving partner with only option of paying the deficiency and filing claim to correct the report See § 6230(c)

• Claim must be filed within six months of mailing of the ―notice of computational adjustment‖

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Partnership Items, non-partnership items, & affected items

Affected Items _ In General

• An "affected item" is defined in section 6231(a)(5) as any item to the extent such item is affected by a partnership item

• There are two types of affected items –

1. those that maybe directly assessed following the proceeding, i.e., a computational adjustment, and

2. those which require partner level determinations to be made once the partnership level proceeding is complete. See Maxwell v. Commissioner, 87 T.C. 783 (1986);

N.C.F. Enerrzv Partners v. Commissioner, 89 T.C. 741,744 (1987); Treas. Reg. § 301.623 1(a)(5)-1.

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Affected Items That May Be Immediately Assessed

• A computational adjustment is defined as the change in tax liability of a partner that properly reflects the treatment of a partnership item under ' Subchapter C of Chapter 63. I.R.C. §6231(a)(6).

• Assessment of tax pursuant to a computational adjustment is specifically excluded from the deficiency procedures of subchapter B of chapter 63 by section 6230(a)(l) unless a partner level determination is first required.

• A computational adjustment may also include any interest attributable to such tax. Treas. Reg. § 301.623 1(a)(6)-1(b).

• A computational adjustment may be immediately assessed at the conclusion of the partnership proceeding where the effect of the partnership item on the partner's tax liability can be computed mechanically or mathematically without further

determinations at the partner level. Olson v. United States, 172 F.3d 13 1 1 (Fed. Cir. 1999).

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Partnership Items, non-partnership items, & affected items

Affected Items That May Be Immediately Assessed

• Examples of computations that may be directly assessed after the partnership proceeding include:

a) Items unrelated to items on the partnership return, but which vary if there is a change in an individual partner's adjusted gross income, e.g., the threshold for the medical expense deduction under section 213 which varies with the amount

partnership income. Treas. Reg. § 30 1.6231 (a)(5)-l(a). b) Alternative Minimum Tax

• computational adjustment resulting in a refund may be made irrespective of the otherwise applicable period of limitations for filing claims under § 6511. See §

6230(d)(6) and Harris v. Commissioner, 99 T.C. 121 (1992). This should be done by the IRS without the necessity of the partner filing a claim.

• As mentioned, Section 6230(c) provides the exclusive means for challenging a directly assessed computational adjustment. Under certain circumstances, §6230(c) permits a partner to challenge the accuracy of a computational adjustment, but not its

substance, except for partner level defenses, by filing a claim for refund.

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Affected Items - which require partner level determinations to be made once the partnership level proceeding is complete:

• Affected items that generally require factual determinations at the partner level include at –

• risk limitations,

• a partner's basis in his partnership interest, and

• the application of the passive loss limitations.

• These types of affected items are subject to the deficiency procedures of subchapter B of chapter 63 of the Code. I.R.C. 6230(a)(2).

• The partnership proceeding may make determinations regarding aspects of those items, and to the extent determinable at the partnership level, those determinations are binding on the parties in the affected item proceeding.

• However, other aspects of the item are determined at the partner level and the ultimate conclusion of the item is determined in the affected item deficiency proceeding. For example outside basis of partner -see Domulewicz v. Commissioner, 129 T.C. No. 3 (August 8, 2007)

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