TEFRA Tax Matters Partner Consents to Extend the Statute of Limitations

In United States v. Martinez, ___ F.3d ___ (5th Cir. 2009), decided 4/3/09, the Fifth Circuit held that actions taken by the tax matters partner in a TEFRA partnership were not ineffective to toll the statute of limitations because of an alleged disabling conflict between the tax matters partner and the other partners. The specific actions involved executing consents to extend the statute of limitations and filing a Tax Court proceeding. Under the TEFRA scheme, both of these actions result in the extension of the statute of limitations at the partnership level and thus extension of the statute of limitations for the TEFRA partnership adjustments at the individual partner level.

The Fifth Circuit distinguished an earlier Second Circuit case which had found a disqualifying conflict between the tax matters partner and the partners that made it unreasonable and inappropriate for the IRS to rely upon consents given by the tax matters partner. The Fifth Circuit concluded that (i), unlike the facts in Transpac Drilling, the IRS had not sought consents from the partners and been denied the consents, (ii) the IRS did not have a pending criminal investigation against the tax matters partner, (iii) the tax matters partner’s request for a quid pro quo via relief from the preparer penalties was not disabling because the IRS had already determined not to seek the penalty, and (iv), although the IRS believed the tax matters partner was dishonest, that alone did not create a per se conflict between his interests and the limited partners’ interests sufficient to put the IRS' reliance unreasonable under the circumstances.