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Widely Held Partnerships:
Compliance and Administration Issues

A Report to The Congress

Department of the Treasury
March 1990

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March 1990

The Honorable Dan Rostenkowski
Committee on Ways and Means
House of Representatives
washington, D.C. 20515

Dear Mr. Chairman:

Enclosed is a study of the compliance and administrative
issues posed by publicly traded and other large partnerships.
The study is required by section 10215 of P.L. 100-203, the
Omnibus Budget Reconciliation Act of 1987, and has been prepared
jointly by the Treasury Department and the Internal Revenue
Service. The study concludes that the requirements of current
law, as they apply to large partnerships, their partners and the
Service, are overly complex and inefficient and that a new system
to address these concerns is warranted. It is strongly believed
that such a new system will significantly benefit all parties.

A copy of the study and a similar letter are being sent
to Representative Bill Archer.

Assistant Secretary
(Tax Policy)


Fred T. Goldberg,
Internal Revenue Se vice

' i

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should be given to amending the regulations so that widely held
partnerships will be able to comply.

Commissioner's Penalty Study, Internal Revenue Service, 1989, at

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A. overview

Much of the administrative inefficiency and complexity
facing the Service in the administration of widely held
partnerships stems from the fact that a deficiency must be
assessed against taxpayers who were partners in the year in which
the understatement of tax liability arose. This requires the
Service to locate and monitor the returns of all taxpayers who
were partners in that year, and eventually assess each former
partner's share of the deficiency. If an adjustment covers
several .years, the complexity of the task is compounded.

These administrative burdens could be partially alleviated,
from the point of view of the service, by requiring the
partnership to perform many of the tasks required to convert a
partnership level adjustment into assessments with respect to
individual partners. The partnership could be required to file
amended returns for the years to which the adjustment relates,
and issue amended Form 1099-Ks, including penalties and interest,
to the partners in those years. The filing of amended returns
and the issuance of amended Form 1099-Ks would be required within
a reasonable period from the date of the final determination. As
under current law, taxpayers who had related adjustments in sub-
sequent years would be entitled to file refund claims based on
their overpayments of tax in those years.

This approach cannot be viewed as a satisfactory means of
improving the administration of widely held partnerships.
Although part of the burden of tax administration would be
shifted to partnerships and partners under this approach, the
Service would still face the prospect of handling claims for
refund from thousands of partners upon an adjustment with respect
to any sizable partnership, and would be responsible for
monitoring compliance by both partnerships and partners.
Furthermore, there would be no net reduction in the overall
effort necessary to achieve assessment and collection of
deficiencies with respect to widely held partnerships.

The key to streamlining the assessment of deficiencies with
respect to widely held partnerships is to devise an assessment
system that significantly reduces this overall effort. This
section of the report reviews proposals for achieving this goal.
The first proposal discussed was considered in connection with
the formulation of the 1987 Revenue Act; this report concludes
that this proposal would not materially reduce complexity and
thus should not be enacted. Other proposals, the Partnership
Collection Proposal and the alternative current assessment
proposals, have been developed in the preparation of this report.
While this report concludes that the Partnership Collection


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conduct ~ unified partnership proceeding; or (3) not act on the
request. 4

If any partner individually files an Administrative
Adjustment Request, the Service may: (1) process the request in
the same manner as a claim for refund with respect to items that
are not partnership items; (2) assess any additional tax
resulting from the request; (3) mail to the partner a notice that
all partnership items of the partner for the partnership taxable
year to which such request relates shall be treated as

34If the Service fails to act on an Administrative
Adjustment Request made on behalf of the partnership, the TMP may
file a petition for judicial review of the request. I.R.C.
S 6228(a) (1). Such a petition can be filed only after the
expiration of six months from the date of the filing of the
Administrative Adjustment Request and before two years have
elapsed from the filing date. I.R.C. S 6228(a) (2)(A). However,
no petition may be filed after the Service has issued a notice of
the Beginning of an Administrative Proceeding (unless after
issuance of such notice the Service fails to issue notice of a
Final Partnership Administrative Adjustment, in which case the
partner may file a petition within the six-month period following
the expiration of the applicable statute of limitations). I.R.C.
S 6228(a)(2)(B) and (C). These limitation periods may be
extended by agreement of the parties. I.R.C. 6228(a)(2) (D).
Generally, a court in which a petition is filed will only have
jurisdiction over items covered by the Administrative Adjustment
Request that were not allowed by the Service and over items
raised by the Service as offsets to the requested adjustments.
I.R.C. § 6228(a) (5).

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nonpartnership items; 35 or (4) conduct a unified partnership
proceeding with respect to the items covered in the request. 36

35If the partner is mailed a notice that all of his or her
partnership items for the partnership taxable year to which an
administrative adjustment request relates will be treated as
nonpartnership items, the Administrative Adjustment Request is
treated as a claim for credit or refund of an overpayment
attributable to nonpartnership items and the partner may bring a
refund action under section 7422 with respect to such claim
within two years of the mailing of such notice. I.R.c.
§ 6228(b)(l). If the Service fails to grant the request in whole
or in part and does not issue a notice converting the partner's
partnership items to nonpartnership items, the partner may
initiate a refund action within the period starting six months
following the filing of the request and ending two years after
such filing. I.R.C. § 6228(b)(2) (B). Upon the commencement of
such an action, the partner's partnership items are treated as
nonpartnership items. I.R.c. § 623l(b) (l)(B). No refund actions
may be brought in a federal district court or the Claims court
with regard to partnership items except as provided above or as
provided in section 6230(c) (relating to computational adjustment
disputes). I.R.c. § 7422(h).

36 I.R.C. § 6227(c),

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