West Ventures L.P., fka Sleiman Ventures, L.P., et al. v. Commissioner of Internal Revenue

A partnership does not pay income tax to the U.S. Treasury. Unlike a corporation, which is subject to tax on its earnings, partnerships report items of income, deduction, gain, loss, and other tax attributes on a partnership income tax return, but these tax items flow through to the partners of the partnership. The partners report their allocable share of the partnership items and are ultimately responsible for the payment of any tax arising from the activities of the partnership. The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 26 U.S.C. §§ 6221-6234 (2000) provides for a unified partnership proceeding, meaning, the IRS can examine the items of income, deduction, gain, loss, and other tax attributes reported on a partnership tax return by conducting an examination of the partnership itself, rather than having to examine each and every partners’ income tax return separately. At the conclusion of the partnership examination, the partners are notified of any changes made by the IRS that flow from the partnership return through to the partners’ income tax returns. There are generally three types of adjustments that the IRS makes during the examination of the partnership. First, adjustments are made to items of income, deduction, gain, loss, and other tax attributes on the partnership return, these are referred to as “partnership items.” Once adjustments to partnership items are made at the partnership level, these items are next reflected on each partners’ income tax return.