[Federal Register Volume 74, Number 29 (Friday, February 13, 2009)]
[Proposed Rules]
[Pages 7205-7209]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-3069]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG-138326-07]
RIN 1545-BH22


Tax Avoidance Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations under section 6231 
of the Internal Revenue Code that allow the IRS to convert partnership 
items to nonpartnership items when the application of the unified 
partnership audit and litigation procedures of sections 6221 through 
6234 (TEFRA partnership procedures) with respect to certain tax 
avoidance transactions interferes with the effective and efficient 
enforcement of the internal revenue laws. The regulations affect 
taxpayers who have engaged in a listed transaction through an entity 
subject to the TEFRA partnership procedures. This document also 
provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by May 14, 2009. 
Outlines of topics to be discussed at the public hearing scheduled for 
June 4, 2009, at 10 a.m. must be received by May 15, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138326-07), room 
5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
138326-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC 20224, or sent electronically via the 
Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-
138326-07). The public hearing will be held in the Auditorium, Internal 
Revenue Service Building, 1111 Constitution Avenue, NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

[[Page 7206]]

Robert T. Wearing at (202) 622-4570; concerning submissions of 
comments, the hearing, or to be placed on the building access list to 
attend the hearing, [email protected] of the 
Publications and Regulations Branch at (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to the Procedure and 
Administration Regulations (26 CFR Part 301) under section 6231(c) of 
the Internal Revenue Code. Section 402 of the Tax Equity and Fiscal 
Responsibility Act of 1982, Public Law 97-248 (96 Stat. 324) added 
sections 6221 through 6231 to the Internal Revenue Code to provide 
unified audit and litigation procedures for determining the tax 
treatment of partnership items at the partnership level rather than at 
the partner level. Sections 6233 and 6234 were subsequently added by 
section 714(p)(1) of the Tax Reform Act of 1984, Public Law 98-369 (98 
Stat. 494) and section 1231(a) of the Taxpayer Relief Act of 1997, 
Public Law 105-34 (11 Stat. 788), respectively.
    Ordinarily, under the TEFRA partnership procedures, the IRS must 
adjust a partner's treatment of partnership items only through 
partnership-level proceedings. There are several exceptions that allow 
adjustments to be made through partner-level proceedings. The small 
partnership exception set forth in section 6231(a)(1)(B) provides that 
partnerships having ten or fewer partners, each of whom is an 
individual, a C corporation, or an estate, are not subject to the TEFRA 
partnership procedures. Section 6231(b) provides that items cease to be 
partnership items subject to the TEFRA partnership procedures in 
several different situations. Section 6231(c) allows the Treasury 
Department and the IRS to determine and provide by regulations that 
treating items as partnership items in areas that present special 
enforcement considerations will interfere with the effective and 
efficient enforcement of the internal revenue laws and that, 
consequently, the items shall be treated as nonpartnership items. 
Section 6231(c) also allows the Treasury Department and the IRS to 
prescribe by regulations rules necessary to achieve the purposes of the 
TEFRA partnership procedures with respect to special enforcement areas. 
Section 6231(c) lists several specific special enforcement areas, 
including criminal investigations and indirect methods of proof of 
income, and provides that the Treasury Department and the IRS may 
determine others. The Treasury Department and the IRS previously have 
determined and provided by regulations that bankruptcy, receivership, 
and prompt assessment requests interfere with the effective and 
efficient enforcement of the internal revenue laws and designated them 
as special enforcement areas. See Sec. Sec.  301.6231(c)-7 and -8 of 
the Procedure and Administration Regulations.

Explanation of Provisions

    One of the principal purposes behind the enactment of the TEFRA 
partnership procedures was to provide for the more efficient use of the 
IRS's resources by reducing multiple proceedings with respect to 
partnership items. The abusive tax shelters of the 1970s often used a 
single partnership to generate tax benefits for dozens, if not 
hundreds, of investors. Before the enactment of the TEFRA partnership 
procedures, the partnership items of each investor were subject to 
separate partner-level proceedings. The TEFRA partnership procedures 
effectively brought the partnership item components of these 
proceedings together in a single proceeding. Unlike the tax shelters of 
the 1970s, however, the recent generation of tax avoidance transactions 
often uses combinations of trusts, S corporations, limited liability 
companies, partnerships, and other entities, many times arranged in 
tiers, for the tax benefit of a single investor or a small group of 
investors. The application of the TEFRA partnership procedures to these 
tax avoidance transactions often results in multiple proceedings that 
complicate the ultimate determination of the investors' tax liabilities 
and consume significant administrative resources.
    For example, in a typical transaction described in Notice 2000-44 
(2000-2 CB 255) (September 5, 2000), see Sec.  601.601(d)(2)(ii)(b), in 
which the ultimate noneconomic loss or deduction is taken at the 
partner level by a single individual, the IRS first needs to initiate 
timely partnership-level proceedings to determine, among other things, 
whether the partnership is a sham and the amount and character of 
contributions and partnership liabilities. Following the partnership-
level proceedings, the IRS often still must issue an affected items 
notice of deficiency to disallow the noneconomic loss or deduction at 
the partner level. Conducting both entity-level and partner-level 
proceedings in these cases to determine the tax liabilities of only a 
single individual or small group of related persons places an 
unnecessary burden on taxpayers, the IRS, and the federal courts.
    Other tax avoidance transactions use multiple tiers of partnerships 
making coordinated partnership elections for the benefit of a single 
individual. Two or more separate partnership proceedings, as well as a 
partner-level proceeding, may need to take place before an assessment 
can be made against the individual. Again, conducting entity-level 
proceedings in these and similar cases in which a single individual or 
small group of related persons control multiple entities and receive 
all the tax benefits is inefficient and imposes a significant 
administrative burden.
    The need to conduct partnership-level proceedings to determine the 
tax liabilities of a single individual or small group of related 
persons also generates complex and burdensome procedural issues that do 
not contribute to the determination of the individuals' tax 
liabilities. For example, the application of the TEFRA partnership 
procedures may raise complicated issues concerning the segregation and 
aggregation of partnership items, affected items, and nonpartnership 
items. Often, the TEFRA partnership procedures make the identification 
and examination of the transactions more complicated and difficult. As 
a result, the Treasury Department and the IRS have determined that 
special enforcement considerations, within the meaning of section 
6231(c)(1)(E), are present in the case of transactions that the 
Treasury Department and the IRS have publicly identified as tax 
avoidance transactions. Specifically, the Treasury Department and the 
IRS have determined that treating items related to listed transactions 
within the meaning of Sec.  1.6011-4(b)(2) of the Income Tax 
Regulations as partnership items interferes with the effective and 
efficient enforcement of the internal revenue laws.
    The proposed regulations are limited to tax avoidance transactions 
that are publicly identified by the Treasury Department and the IRS as 
listed transactions under Sec.  1.6011-4(b)(2) of the Income Tax 
Regulations. Under the proposed regulations, the transaction must be a 
listed transaction on the date the IRS sends written notification to 
the partner that the partner's partnership items will be treated as 
nonpartnership items. Accordingly, the fact that a transaction becomes 
a listed transaction after the date on which the taxpayer engages in 
the transaction does not preclude the conversion of items under

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the proposed regulations. This limitation promotes taxpayer awareness 
of the transactions that can subject their partnership items to removal 
from the TEFRA partnership procedures. The Treasury Department and the 
IRS also have determined that the limitation will provide for the more 
efficient use of the IRS's resources.
    Under the proposed regulations, the IRS will make determinations 
regarding whether to convert partnership items to nonpartnership items 
on a partnership-by-partnership and partner-by-partner basis. Thus, if 
a taxpayer is a partner in two partnerships with partnership items 
related to listed transactions and a third partnership that has no 
partnership items related to listed transactions, the IRS could convert 
the taxpayer's partnership items in either or both of the first two 
partnerships but could not convert the taxpayer's partnership items in 
the third partnership. Similarly, if a taxpayer engages in a listed 
transaction through a tier of TEFRA entities, the IRS could convert the 
taxpayer's partnership items in any or all of the tier entities with 
partnership items related to the listed transaction.
    Although, consistent with section 6231(c)(2), the Secretary has 
determined that treating items related to listed transactions as 
partnership items will interfere with the effective and efficient 
enforcement of the internal revenue laws and has so provided in the 
proposed regulations, the proposed regulations further provide that the 
partnership items related to listed transactions remain subject to the 
TEFRA partnership procedures unless and until the IRS sends written 
notification to the partner that the items will be treated as 
nonpartnership items. In this regard, the proposed regulations are 
consistent with the rules that are already in place with respect to 
sending notices under section 301.6231(c)-5 of the Procedure and 
Administration Regulations relating to partners under criminal 
investigation. See Phillips v. Commissioner, 272 F.3d 1172, 1176 (9th 
Cir. 2001). Specifically, the IRS will send written notification under 
the circumstances described in the proposed regulations using 
procedures similar to the procedures used under Sec.  301.6231(c)-5 of 
the Procedure and Administration Regulations, and will make conforming 
changes to the Internal Revenue Manual and Delegation Order 4-19, as 
necessary.
    If the IRS concludes that a particular partner's partnership items 
should be treated as nonpartnership items under the circumstances 
described in the proposed regulations, the IRS will send written 
notification to the partner identifying each partnership for which the 
partner's partnership items will be treated as nonpartnership items. In 
the case of an indirect partner (as defined in section 6231(a)(10)) 
having an interest in a partnership through one or more pass-thru 
partners (as defined in section 6231(a)(9)), the IRS may send a written 
notification to the indirect partner identifying only the lower-tier 
partnership and not the pass-thru partners. In those circumstances, the 
partnership items attributable to the lower-tier partnership that flow 
through to the indirect partners will convert to nonpartnership items 
of the notified partner, even though the pass-thru partners were not 
identified in the written notification. Any partnership items 
originating with the pass-thru partners, that is, partnership items 
that are not attributable to the lower-tier partnership, will not 
convert to nonpartnership items unless the IRS identifies the pass-thru 
partner in the written notification (in which case all the partnership 
items directly attributable to the pass-thru partner also will convert 
to nonpartnership items of the notified partner).
    As of the date that the IRS sends written notification of the 
conversion to the partner, all of the partner's partnership items 
attributable to the identified partnership will be treated as 
nonpartnership items for all of the identified partnership's taxable 
years that (1) ended on or before the date written notification is sent 
by the IRS to the partner and (2) for which the partner has items 
attributable to that partnership that are related to the listed 
transaction. The deficiency procedures in subchapter B of chapter 63 
will apply, pursuant to section 6230(a)(2)(A)(ii), as of the date of 
the notice.
    The proposed regulations incorporate existing rules under Sec.  
301.6231(c)-3 of the Procedure and Administration Regulations, which 
provide that the partnership items of a partnership may not be 
converted if a notice of final partnership administrative adjustment 
(FPAA) with respect to those partnership items has been mailed to the 
tax matters partner of the partnership and either (1) the period for 
bringing an action with respect to the FPAA has expired and no judicial 
action has been brought or (2) the decision of the court in an action 
brought with respect to the FPAA has become final. This rule allows the 
IRS to send notification converting partnership items to nonpartnership 
items after the commencement of a judicial proceeding related to the 
converted partnership items. The Treasury Department and the IRS 
recognize, however, that it is not in the best interest of taxpayers, 
the Treasury Department, the IRS, or the courts to unnecessarily delay 
conversion of partnership items to nonpartnership items. Consistent 
with its existing practices under section 6231(c), the IRS intends to 
make a decision regarding whether to convert partnership items to 
nonpartnership items before the commencement of any judicial 
proceeding, although on isolated and unusual occasions changed 
circumstances may require the IRS to revisit that decision after the 
commencement of a judicial proceeding. In addition, judicial doctrines 
such as collateral estoppel and res judicata may preclude litigating 
issues in a partner-level proceeding that were previously litigated in 
a partnership-level proceeding prior to conversion of partnership items 
to nonpartnership items. Finally, the partnership items of any partners 
to whom the IRS does not send written notification will not convert to 
nonpartnership items.

Proposed Effective Date

    The regulations, when finalized, are proposed to apply to any 
taxable period ending on or after the date of publication of these 
rules as proposed regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and, because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and the IRS request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. The Treasury Department and the IRS also

[[Page 7208]]

request comments that identify additional transactions or activities 
that present appropriate grounds for converting partnership items to 
nonpartnership items. All comments will be made available for public 
inspection and copying.
    A public hearing has been scheduled for June 4, 2009, beginning at 
10 a.m. in the Auditorium of the Internal Revenue Service Building, 
1111 Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic (signed original and eight (8) 
copies) by May 15, 2009. A period of 10 minutes will be allotted to 
each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Drafting Information

    The principal author of these regulations is Robert T. Wearing of 
the Office of the Associate Chief Counsel (Procedure and 
Administration).

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR Part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

    Paragraph 1. The authority citation for part 301 is amended by 
adding the entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 301.6231(c)-9 is also issued under 26 U.S.C. 6230(k) and 
6231(c)(1) and (c)(3). * * *

    Par. 2. Section 301.6231(c)-3 is amended by revising paragraphs (a) 
introductory text and (b) to read as follows:


Sec.  301.6231(c)-3  Limitation on applicability of Sec. Sec.  
301.6231(c)-4 through 301.6231(c)-9.

    (a) In general. A provision of Sec. Sec.  301.6231(c)-4 through 
301.6231(c)-9 shall not apply with respect to partnership items arising 
in a partnership taxable year if, as of the date on which those items 
would otherwise begin to be treated as nonpartnership items under that 
provision.
* * * * *
    (b) Effective/applicability date. The rules of this section, when 
adopted as final regulations in the Federal Register, will apply to 
partner taxable years ending on or after the date of publication of 
these proposed regulations in the Federal Register.
* * * * *
    Par. 3. Section 301.6231(c)-9 is added to read as follows:


Sec.  301.6231(c)-9  Tax avoidance transactions.

    (a) In general. The treatment of items that relate to a listed 
transaction, as defined in Sec.  1.6011-4, as partnership items will 
interfere with the effective and efficient enforcement of the internal 
revenue laws. Accordingly, if a partner has partnership items that 
relate to a listed transaction and are attributable to a partnership 
that is identified in a written notification described in this 
paragraph, the partner's partnership items that are attributable to the 
identified partnership shall be treated as nonpartnership items as of 
the date on which the written notification is sent by the Internal 
Revenue Service to the partner. The determination whether to treat the 
partnership items of a partner as nonpartnership items shall be made by 
the Internal Revenue Service on a partnership-by-partnership and 
partner-by-partner basis. The partnership items of a partner shall not 
be treated as nonpartnership items under this section unless and until 
the Internal Revenue Service sends the partner written notification 
that the partner's partnership items attributable to the identified 
partnership will be treated as nonpartnership items. The written 
notification shall identify each partnership in which the partner holds 
an interest, directly or indirectly, with respect to which all the 
partner's partnership items will be treated as nonpartnership items. 
All partnership items of a partner that are attributable to a 
partnership that is identified in a written notification shall be 
treated as nonpartnership items for all taxable years of the identified 
partnership ending on or before the date the Internal Revenue Service 
sends written notification to the partner in which the partner has 
partnership items attributable to the identified partnership that 
relate to the listed transaction. Partnership items of a partner that 
are attributable to a partnership that is not identified in a written 
notification sent by the Internal Revenue Service to that partner shall 
not be treated as nonpartnership items of the notified partner, except 
that if the notified partner holds an interest in the identified 
partnership through one or more pass-thru partners (as defined in 
section 6231(a)(9)), the partnership items attributable to the 
identified partnership that flow through the pass-thru partners to the 
indirect partners (as defined in section 6231(a)(10)), will be treated 
as nonpartnership items of the notified partner even if the written 
notification does not identify the pass-thru partners.
    (b) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. PS1 and PS2 are unrelated partnerships subject to the 
provisions of subchapter C, chapter 63 of the Internal Revenue Code. 
A is one of the partners of PS1 and one of the partners of PS2. PS1 
and PS2 have partnership items that relate to a listed transaction, 
as defined in Sec.  1.6011-4(b)(2). The IRS sends written 
notification to A that his partnership items in PS1 will be treated 
as nonpartnership items, but the IRS does not send written 
notification to A that his partnership items in PS2 will be treated 
as nonpartnership items. As a result, A's partnership items in PS1 
are treated as nonpartnership items as of the date that the IRS sent 
written notification of the conversion to A, and A's partnership 
items in PS2 remain as partnership items.
    Example 2. PS3 and PS4 are partnerships subject to the 
provisions of subchapter C, chapter 63 of the Internal Revenue Code. 
B is one of the partners of PS3 and PS3 is one of the partners of 
PS4. B is an indirect partner in PS4 within the meaning of section 
6231(a)(10). Both PS3 and PS4 have partnership items related to a 
listed transaction, as defined in Sec.  1.6011-4(b)(2). The IRS 
sends written notification to B that his partnership items in PS4 
will be treated as nonpartnership items. As a result, all of B's 
partnership items flowing from PS4 are treated as nonpartnership 
items of B as of the date that the IRS sent written notification of 
the conversion to B. However, since the IRS did not send written 
notification to B that his partnership items in PS3 will be treated 
as nonpartnership items, B's partnership items in PS3 that are not 
attributable to PS4 will remain partnership items.

    (c) Effective/applicability date. The rules of this section, when 
adopted as final regulations in the Federal Register, will apply to 
partner taxable years

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ending on or after the date of publication of these proposed 
regulations in the Federal Register.

    Dated: February 9, 2009.
Linda M. Kroening,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E9-3069 Filed 2-12-09; 8:45 am]
BILLING CODE 4830-01-P