Interplay of SOLs Raised in TEFRA Case

As part of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress implemented procedures to promote uniform resolution of issues arising in cases involving large partnerships. TEFRA provides rules for partnership-level audits and litigation for "partnership items" (i.e., items of income and deduction more properly determined at the partnership, rather than the partner, level). It provides additional rules for the treatment at both the partnership and partner levels of "affected items" (i.e., items affected by partnership items but determined at the partner level (e.g., an individual's medical expense deduction)) and, at the partner level, of "nonpartnership items" (i.e., items unrelated to (and unaffected by) the partnership).

Although the TEFRA partnership rules appeared to be all-encompassing, there are situations they do not cover. For example, the absence of any direct authority relating to the interplay of the partnership statute of limitations (SOL), under Sec. 6229, and the partners' SOL, under Sec. 6501, leads to confusion. TEFRA fails to provide for the situation in which a partnership files the partnership return, but a partner does not file his own return. In this situation, it is clear that the partner's limitation period for nonpartnership items would remain open under Sec. 6501(c)(3). However, no special provisions keep the partner's limitation period open for the partnership and affected items, even when the partner does not file his required return. Similarly, there are no provisions applying the Sec. 6501(e) six-year limitation period when a partnership files the partnership return but the partner, on his own return, omits more than 25% of the income from partnership or affected items.

The lack of clear statutory guidance in this area led the Tax Court to a strained result in Rhone-Poulenc Surfactants and Specialties, 114 TC 533 (2000). A partnership filed its 1990 return either on Sept. 15 or 17, 1991. GAF Corporation, a partner in the partnership, filed its return on Sept. 15, 1991. On Sept. 12, 1997, after the three-year period for assessing tax attributable to partnership or affected items under Sec. 6229(a) had passed, the IRS issued a notice of final partnership administrative adjustment (FPAA) (essentially, the partnership-level equivalent of a deficiency notice). GAF filed a motion for summary judgment on the basis that the limitation period on assessment had expired when the FPAA was issued. GAF first argued that the limitation period for assessing the tax attributable to partnership items is found only in Sec. 6229, and not in Sec. 6501. The Service, contrary to its previous litigating position set forth in Litigation Guideline Memorandum No. TL-81, argued that Secs. 6229 and 6501 present alternative, not separate, periods for assessing the tax attributable to partnership items.

Sec. 6229(a) states that, except as otherwise provided, the period for assessing a tax attributable to a partnership or affected item "shall not expire before" three years after the date the partnership filed its return. Under Sec. 6501(a), except as otherwise provided, the amount of tax "shall be assessed within 3 years after the return was filed." The Tax Court found that Sec. 6229 provided a minimum period of time in which the tax attributable to partnership items could be assessed, notwithstanding that Sec. 6501 generally provides a maximum period for assessment, and that Sec. 6229(a) held open the Sec. 6501 limitation period for partnership items. The court reasoned that if it were otherwise, the language of Sec. 6229 would mirror that of Sec. 6501.

The court failed to consider the purpose of Sec. 6229, which ensures a uniform limitation period for partnership items. Because of Sec. 6229, the limitation period for partnership items does not expire for some partners while remaining open for others, simply because the partners and partnership filed returns on different dates.

In response to GAF's argument, the court addressed whether the FPAA suspended the Sec. 6501 limitation period. Sec. 6229(d), on its face, is clear; the issuance of an FPAA suspends the "period specified in subsection (a)." Under a straightforward reading of this section, the FPAA suspends the three-year period for assessing tax attributable to partnership items provided in Sec. 6229(a). The Tax Court, apparently unsatisfied with this result, determined that, if this only referred to the "minimum period" established by Sec. 6229, the FPAA would not suspend the Sec. 6501 limitation period. To support its argument, the court decided that Sec. 6229(d) did not refer to the minimum period (which it had just determined was the period specified in Sec. 6229(a)), but that it meant the "'period for assessing any tax...attributable to any partnership item' which period 'shall not expire before' 3 years after the subsequent partnership-level litigation would suspend the running of any applicable period of limitation." Using this reasoning, the court concluded that the issuance of an FPAA suspended any open limitation period applicable to GAF, including the six-year period in Sec. 6501(e).

The Tax Court supported its conclusion by using the example of a partnership that filed a partnership return and a partner who failed to file his individual return. In the court's example, the partnership is under examination and most of the partners agree to extend the limitation period for partnership items; the nonfiling partner, however, is not available and, therefore, does not execute an extension. According to the court, Congress could not have intended for the limitation period to run on partnership items for nonfiling partners, but not for filing partners. The example, however, does not take into account the mechanics of the TEFRA partnership provisions. Congress enacted TEFRA in part to relieve the IRS of the burden of securing extensions from every partner in a partnership, a cumbersome and ineffective process. Therefore, under TEFRA, a tax matters partner (TMP) would act on behalf of all the partners. Under Sec. 6229(b)(1), the TMP can extend the limitation period for all partners. Moreover, when the Service begins an administrative proceeding at the partnership level, the TMP, under Sec. 6230(e), must furnish the IRS with the name, address, profits interest and taxpayer identification number of each person who was a partner during the year under consideration. If the TMP fails to do this, Sec. 6229(e) extends the limitation period for partnership items until one year after the Service receives the information.

The Tax Court also found support for its conclusion in Sec. 6229(d)'s legislative history. It emphasized that the Conference Committee report referred to the "period for assessment" and interpreted this as meaning any limitation period applicable to a taxpayer. The court, however, apparently did not look at the full text, which used "period of assessment" as shorthand only after a long-winded reference to the "period for assessment for partnership items." All subsequent references are to "period for assessment." There is no reason to think that the legislative history is referring to any limitation period, because it never refers to the general limitation period in Sec. 6501.

Congress probably did not intend for the limitation period to run on partnership items for a nonfiling partner or a partner who made a substantial omission of partnership income on his individual return. While the courts can interpret laws, they should not enact tax laws where none exist.

From Nancy Galib, J.D., LL.M., Washington, DC