Blog

The Tax Court has held that, where a partner omits a partnership item from his individual tax return, and the partnership itself was subject to a TEFRA audit, the Court has jurisdiction to determine that partner's resulting negligence penalty.

The Tax Court's jurisdiction generally is limited to the review of deficiencies asserted by IRS (and not paid when the 90-day letter is issued). (Code Sec. 6512(a)). 

The following rules apply to TEFRA (i.e., the Tax Equity and Fiscal Responsibility Act of 1982) unified audit and litigation procedures. These procedures generally apply to partnership tax years that begin before January 1, 2018.

Whether a tax item of a partnership or a partner is a “partnership item” or a “non-partnership item” governs whether it is addressed in partnership-level proceedings or partner-level proceedings.
 
A partnership item is “any item required to be taken into account for the partnership's tax year under any provision of subtitle A to the extent the regs provide that, for purposes of this subtitle, such item is more appropriately determined at the partnership level than at the partner level.” (Code Sec. 6231(a)(3)) Non-partnership items are defined in the negative to be “an item which is (or is treated as) not a partnership item.” (Code Sec. 6231(a)(4))

Affected items are further divided into two subcategories: computational affected items and factual affected items.

• A computational affected item is one that can be determined mathematically, such as the medical expense deduction just described. (Code Sec. 6231(a)(6)) 
• A factual affected item is an affected item that requires further factual determinations at the partner level. (Hambrose Leasing 1984-5 Ltd. P'ship, (1992) 99 TC 298)

Whether an affected item is factual or computational generally determines what procedures apply to the assessment of tax relating to that item.

• Computational affected items are not subject to deficiency procedures. (Code Sec. 6230(a)(1)) Following a TEFRA proceeding, IRS may assess tax attributable to those items, along with the tax attributable to partnership items, by way of computational adjustment. (Code Sec. 6231(a)(6))
• In contrast, affected items that require partner-level factual determinations are subject to deficiency procedures. (Code Sec. 6230(a)(2)(A)(i)).

The taxpayers were Mr. and Mrs. Malone who filed a joint return. Mr. Malone was a partner in MBJ, a partnership. The partnership reported gain from installment sales of partnership assets.

The Malones did not report the gain on their joint return and didn't file a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, or otherwise notify IRS that they were taking a position inconsistent with that reported by MBJ.

IRS issued a notice of deficiency with respect to the unpaid taxes and the penalty for negligence.

The only issue before the Court was whether it had jurisdiction to determine the applicability of the negligence penalty. More specifically, the Court considered whether the deficiency procedures apply to a Code Sec. 6662(a) accuracy-related penalty for negligence imposed solely because of a partner's inconsistent reporting of partnership items.

Tax Court had jurisdiction with respect to negligence penalty. The Court held that, because there were no adjustments to partnership items, deficiency procedures applied to the penalty.

The IRS has posted its tables entitled Controlled Foreign Corporations, Tax Year 2012, which consists of two new tables presenting data from Form 5471, Controlled Foreign Corporations, and Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities,which are now available on SOI’s Tax Stats Webpage.

The tables present data from the estimated population of returns filed for Tax Year 2012.

• One table presents number, assets, and earnings for controlled foreign corporations and their foreign disregarded entities classified by selected country of incorporation. and
• The other table displays number, assets, and earnings for controlled foreign corporations and their foreign disregarded entities classified by selected NAICS industrial sector.

The OECD's Centre for Tax Policy launched a disclosure facility for reporting schemes that aim to circumvent the internationally agreed Common Reporting Standard (CRS) for automatic exchange of taxpayers' account information.

The disclosure facility, which can be accessed through the Automatic Exchange Portal, is part of a three step process the OECD has created to deal with schemes that purport to avoid reporting under the CRS. Under the three-step process 'all actual or perceived loopholes that are identified' will be analysed in to help the OECD deal with them.

The process, the OECD says, has a wide scope in terms of the financial institutions that are required to report, the financial information to be reported and the scope of account holders subject to reporting duties.

Jurisdictions subscribing to the CRS will also have to put in place anti-abuse rules to prevent any practices intended to circumvent CRS reporting and due diligence procedures.

The three step process to deal with CRS avoidance schemes complements the ongoing peer reviews carried out by the Global Forum on Tax Transparency and Exchange of Information for Tax Purposes to ensure the effective implementation of the CRS in all jurisdictions, says the OECD.

On 27 January 2017, 7 additional countries signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of Countryby-Country (CbC) reports.  The signing took place at a ceremony held during the second meeting of the inclusive framework on BEPS on 26-27 January 2017.

1. Gabon,
2. Hungary,
3. Indonesia,
4. Lithuania,
5. Malta,
6. Mauritius and
7. the Russian Federation.

First automatic exchanges of information will start in 2017-2018 on 2016 information.

Have an International Tax Problem?  
 

Contact the Tax Lawyers at
Marini & Associates, P.A.
 

 for a FREE Tax Consultation Contact US at

www.TaxAid.com or www.TaxLaw.ms

or Toll Free at 888-8TaxAid (888 882-9243).