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partnerships. This would impose an excessive administrative
burden both on the Service and on taxpayers.
Petitioners respond as follows:
Respondent claims that following statutory mandate of
Code section 702(c) would cause an “excessive administrative
burden” on the IRS and taxpayers. Incredibly, respondent
states that adopting a “look-through” rule to lower-tier
partnerships “might require an audit of each of those
partnerships.” In this case, respondent was able to make
computations of gross income of the Upper-Tier Partnerships
without an audit. There is no reason to suggest an audit of
the Lower-Tier Partnerships would be required.
The record in the instant cases thus far does not disclose
either the magnitude of the problem respondent warns against or
the extent of respondent’s activities with regard to the gross
income stated in the 1st-tier partnerships’ information returns.
We note that the parties’ stipulations deal with the components
of the gross incomes stated on the partnership information
returns of 16 entities, and there are only three 2d-tier
partnerships involved in the instant cases. Thus, whatever the
level of effort that respondent expended, it does not appear that
including the 2d-tier partnerships would cause that level to be
substantially increased in the instant cases.
In addition, the Supreme Court’s opinion in Colony, Inc. v.
Commissioner, 357 U.S. at 36-37, suggests that respondent is not
obligated to audit or otherwise examine beyond what is disclosed
on the tax return, for purposes of applying the amount of the
denominator in the 25-percent fraction. Clearly, it is now
accepted that respondent must deal with the 1st-tier
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