The U.S. Tax Court today in a “reviewed opinion” held that in a TEFRA partnership-level proceeding, the IRS does not bear the burden of production under section 7491(c) with respect to penalty assessments.
The Tax Court reached its conclusion because section 7491(c), by its terms, shifts the burden of production for penalties to the IRS only with respect to the liability of individuals. TEFRA partnership-level proceedings do not determine the liability of individuals, only adjustments to partnership items. Even when the applicability of a penalty with respect to an adjustment is determined at the partnership level, the penalty might not apply to a particular partner because of partner-level defenses or because the tax on a partner’s share of an adjustment did not cross a threshold for the penalty to apply. Consequently, because partnership-level proceedings do not determine the liability of an individual for any penalties, the burden of production does not shift under section 7491(c), and the partnership bears the burden of establishing defenses to the assertion of penalties at the partnership level.
The case is: Dynamo Holdings Ltd Partnership v. Commissioner, 150 T.C. No. 10 (May 7, 2018). Read the Tax Court’s opinion [PDF 94 KB]
A corporation and a partnership shared common ownership. During the years at issue, the corporation transferred property to the partnership.
The IRS asserted that the transfers were gifts among the ultimate beneficial owners, or alternatively that the transfers were for less than fair market value and that the amounts of the discount were subject to withholding tax. The IRS also determined that accuracy-related penalties under section 6662(a) applied to the adjustments in the partnership-level proceedings as well as additions to tax and penalties against the corporation.
The Tax Court noted that in the past, it had questioned whether the IRS bears the burden of production with respect to penalties in a partnership-level proceeding but had never expressly ruled on the issue.
The Tax Court concluded that:
It is worth noting that although none of the direct or indirect partners in the partnership in this case was an individual, the Tax Court’s rationale would apply even if one or more of the partners were individuals. The Tax Court focused on the nature of a TEFRA partnership-level proceeding as a proceeding to determine adjustments to partnership items, rather than a proceeding to determine liability of the partners with respect to tax or penalties. So the Tax Court’s rationale would reach the same result in a case in which one or more partners were individuals.
<p>© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.</p> <p>KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.</p>
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.