OAR 150-314-0475: Consistent Treatment of Partnership Items

(1) General Rule. (a) In general, the treatment of a partnership item on the partner’s return must be consistent with the treatment of that item by the partnership in all respects including the amount, timing, and characterization of the item. The following examples illustrate instances of inconsistent treatment: Example 1: B is a partner of Partnership P. Both B and P use the calendar year as the taxable year. In December 1993, P receives an advance payment for services to be performed in 1994 and reports this amount as income for calendar year 1993. However, B reports B’s distributive share of that amount on B’s income tax return for 1994 and not on B’s return for 1993. B’s treatment of this partnership item is inconsistent with the treatment of the item by P. Example 2: Partnership P incurred certain start-up costs before P was actively engaged in business. P capitalized these costs. C, a partner in P, deducted C’s proportionate share of these start-up costs. C’s treatment of the partnership expenditure is inconsistent with the treatment of the item by P. (b) If a partner does not treat a partnership item on the partner’s return in a manner that is consistent with the treatment of that item by the partnership, and the partner does not notify the department in the manner described in section (2) of this rule, the department may conform the partner’s return to the partnership return and assert against the partner a deficiency as described in ORS 305.265. The notice of deficiency may be issued in this case without the department opening a formal examination or an audit of either the partnership return or the partner’s return. (c) Partner notification of an inconsistent treatment of a partnership item does not bind the department into acceptance of the partner’s treatment of that item. (2) Manner of Notification of Inconsistency. If a partner does not treat a partnership item on the partner’s return in a manner that is consistent with the treatment of that item by the partnership, the partner must notify the department of the inconsistent treatment. Such notification shall be made by attaching a statement to the partner’s return. The statement must contain the following information: (a) Partner name and identification number; (b) Partnership name and identification number; (c) Beginning and ending date of partner’s tax year; (d) Beginning and ending date of partnership’s tax year; (e) A description of each inconsistently treated item. Include whether the inconsistent treatment is in the amount, timing or characterization of the item; (f) The amount of each inconsistent item as shown on Schedule K-1; (g) The amount of each inconsistent item as reported on the partner’s return; (h) A complete explanation as to the reason for treating the items in an inconsistent manner. (3) Multiple Inconsistencies. A partner who reports the inconsistent treatment of partnership items on the partner’s return is protected from computational adjustments under section (1) of this rule only with respect to those partnership items the inconsistent treatment of which is reported. Thus, if a partner notifying the department with respect to one item fails to report the inconsistent treatment of another item, the partner is subject to a computational adjustment with respect to that latter item. Example: Partner A of Partnership P treats a deduction and a capital gain arising from P and A’s return in a manner that is inconsistent with the treatment of those items by P. A reports the inconsistent treatment of the deduction but not of the capital gain. A is subject to a computational adjustment under section (1) of this rule with respect to the capital gain. (4) Adjustments Not Limited. If the department conducts a formal examination or audit of a return of a partner whose partnership items have been reported as being treated inconsistently, the department is not limited to making adjustments that merely conform the partner’s return to the partnership return. Example: Partnership P allocates to E, one of its partners, a loss of $8,000. E. however, claims a loss of $9,000 and reports the inconsistent treatment. As a result of an examination of E’s return, the department may issue a deficiency notice which could include reducing the loss to $3,000.