The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established a unified procedure for determining the tax treatment of partnership items at the partnership level rather than the partner level. The TEFRA-partnership refund procedures differ from the refund claim procedures that apply to other taxpayers. For a TEFRA partnership, a refund claim is an administrative adjustment request (AAF) and a notice of deficiency is a notice of final partnership administrative adjustment (FPAA). Procedures for the assessment of additional tax attributable to partnership items have received much attention in recent years, but the procedures concerning refunds are complex and full of traps.
The tax matters partner (TMP) plays a key role in protecting the partners’ rights, but the TMP’s interests may differ significantly from those of other partners. Because of potential conflicts of interest, an individual partner should not rely entirely on the TMP. This article recommends five steps a taxpayer should take to protect its rights in a TEFRA partnership.
First, file an AAR before the IRS issues an FPAA; otherwise, it will be too late. Outside of the TEFRA-partnership context, taxpayers can simply default on a notice of deficiency, pay the resulting assessment, and then file a refund claim. With a TEFRA-partnership, the partners may no longer file an AAR after the IRS issues an FPAA so the only way to pursue a taxpayer-favorable adjustment on other issues is to contest the FPAA in court. Failing to do so will permanently forfeit any such favorable adjustments.
Second, review the complex statute of limitations for AARs carefully. There are significant differences between the statute of limitations concerning refund claims and refund suits, outside the TEFRA-partnership context, and the statute of limitations for AARs and related judicial review. Assumptions based on other statutes of limitations could easily result in forfeiting claims.
Third, file a separate AAR and do not rely entirely on the AAR filed by the TMP. Individual partners can always contest an FPAA in court, even if the TMP chooses not to, so their rights are protected. But if the IRS disallows an AAR filed by the TMP, only the TMP can file a petition for judicial review and redetermination. Individual partners should consider filing their own AAR and not relying on the TMP’s. The duplicative AAR will likely be rejected but would preserve the partner’s right to judicial review if the TMP’s AAR is disallowed and the TMP does not file a petition in Tax Court.
Fourth, consider extending the partner-level statute of limitations for assessments to avoid forfeiting potential refund claims. If the TMP consents to an extension of the statute of limitation for the assessment of tax attributable to partnership items, that will extend the statute of limitations for filing an AAR. If the TMP has not extended the statute of limitations, and an individual partner needs more item to prepare an AAR, the partner may need to extend the partner-level statute of limitations.
Fifth, if beyond the statute of limitations for an AAR, consider alternative methods of recovery. For example, the partner may request a discretionary adjustment by the IRS under Section 6230(d). In appropriate circumstances, a partner can seek to apply the statutory mitigation provisions or the judicial doctrine of equitable recoupment.
The TEFRA procedures for AARs provide all partners a way to recover overpayments attributable to partnership items. The procedures are complex, however, with many potential pitfalls. Any partner who identifies a potential refund item for the partnership should thoroughly review all of the applicable requirements and carefully assess what it must do to preserve its rights. In particular, a partner may find it beneficial to file its own AAR, or include refund items in a petition for readjustment of an FPAA, in case the TMP cannot or will not act in the partner’s interests. Under some circumstances, it may even be appropriate for a partner to extend its own statute of limitations to protect its interests.
W G & L Financial Reporting & Management Research
Mary A. McNulty, Robert D. Probasco & Carla C. Crapster,
TEFRA-Partnership Refunds: Five Steps to Protect a Partner’s Rights,
Available at: https://scholarship.law.tamu.edu/facscholar/1230