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Bridges v. Commissioner (T.C. Memo. 2020-51)

On April 27, 2020, the Tax Court issued a Memorandum Opinion in the case of Bridges v. Commissioner (T.C. Memo. 2020-51). The issue before the court in Bridges was whether the IRS appropriately relied on IRC § 6231(g)(2) in determining that TEFRA procedures did not apply to the petitioner’s LLC.

TEFRA’s Application to Partnerships Appearing “Small”

IRC § 6231(a)(1)(A) generally applies the TEFRA provisions to any entity that is required to file a partnership return. Under IRC § 6231(a)(1)(B)(i), however, TEFRA provisions do not apply to small partnerships, which include any partnership having 10 or fewer partners each of whom is an individual (other than a nonresident alien), a C corporation, or an estate of a deceased partner.

TEFRA provisions do apply, however, if any partner in the partnership is a “pass-thru partner.” Treas. Reg. § 301.6231(a)(1)-1(a)(2). A “pass-thru partner” is a “partnership, estate, trust, S corporation, nominee, or other similar person through whom other persons hold an interest in the partnership with respect to which proceedings under this subchapter are conducted.” IRC § 6231(a)(9). A pass-thru partner includes disregarded entities such as single-member LLCs. See, e.g., Seaview Trading, LLC v. Commissioner, 858 F.3d 1281 (9th Cir. 2017); Bedrosian v. Commissioner, 143 T.C. 83, 104 (2014), aff’d, 940 F.3d 467 (9th Cir. 2019); see also Rev. Rul. 2004-88.

Erroneous Conclusion Forgiven Based on IRS’s Reasonable Belief

Due to the incomprehensible nature of the partnership returns, the IRS believed the partners to be two individuals. Therefore, the small partnership exception applied, and TEFRA formalities did not apply. Upon further review during the audit, it came to be understood that the actual partners were trusts, not individuals.

The IRS confessed error, but they argued even if the small partnership exception did not apply, he may still rely on IRC § 6231(g)(2), which provides that if on the basis of a partnership return the IRS reasonably determines that TEFRA does not apply, but such determination is ultimately erroneous, TEFRA will not apply for such years and to such partners. See Bedrosian, 143 T.C. at 106.

Original opinion: (T.C. Memo. 2020-51) Bridges v. Commissioner

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