‘Nominal’ partnership interest by pass-through insufficient for exception to TEFRA

The Tax Court ruled April 7 that a pass-through partner’s interest in a partnership, while nominal, still did not qualify the partnership to fall under the small partnership exception to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) procedures.

In Brumbaugh v. Commissioner, T.C. Memo 2015-65 (April 7, 2015), the petitioner, Brumbaugh, was an individual partner in a partnership (Panorama LLC), holding a 59.99% interest. Another individual partner held a 39.99% interest, while a third partner, a partnership (Lynx), held a 0.02% interest. On his 2007 income tax return, Brumbaugh claimed an interest deduction, which was disallowed by the IRS. The IRS also determined certain losses were subject to the Section 469 passive activity loss rules and asserted an accuracy-related penalty under Section 6662(a). None of the adjustments set forth in the notice of deficiency to Brumbaugh related to deductions claimed by Panorama.

Brumbaugh argued that he was allowed to deduct additional losses from Panorama that were not on his Schedule K-1 and that he had erroneously claimed the disallowed interest deduction. Rather, his interest deduction should have been reported by Panorama and flowed up to him.

Brumbaugh did not seek an administrative adjustment under Section 6227(a). The Tax Court said the time for an administrative adjustment had now expired. Accordingly, the tax treatment of the partnership items — such as an interest deduction — became final in accordance with the partnership return filed by Panorama, under the TEFRA rules.

In Tax Court, Brumbaugh argued that the TEFRA rules did not apply, because in substance, Lynx’s ownership in Panorama was nominal. Accordingly, he argued, Panorama should qualify under the small partnership exception to TEFRA.

The Tax Court ruled that there is no “de minimis exception” for pass-through partners. The court also pointed to Panorama’s Form 1065, which answered “yes” to the question “Are any partners in this partnership also partnerships?” The court also pointed to the Schedule K-1 issued to Lynx, which identifies Lynx as a partnership.

David Auclair
+1 202 521 1515

Shamik Trivedi
+1 202 521 1511

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