-9-
amount of income that would be NESE in the hands of the ultimate
recipients if those recipients were in fact individuals. Cf.
Hambrose Leasing v. Commissioner, 99 T.C. 298, 310 (1992). Thus,
as to the issue at hand, LTD was excused by subtitle A (and the
1999 instructions to Form 1065) from reporting separately that
portion of its ordinary income that was not NESE because that
portion was allocated to direct partners which were limited
partners, estates, trusts, corporations, exempt organizations, or
IRAs. See, e.g., the 1999 Instructions to Form 1065, supra at
23-24. Whether an individual actually was a member of one or
more of the passthrough entities (LLCs) at issue, and thus was an
indirect partner of LTD, was not a determination that LTD was
required to make under subtitle A. Where as here a partnership
interest is held by a direct partner that is an LLC, the
partnership must state that its ordinary income is NESE, without
consideration of the nature or identity of the actual or reported
owners of the LLC. The actual taxability of the separately
stated amount as NESE, if later disputed by the Commissioner, is
then determined at the indirect partner level through an affected
item notice of deficiency issued after the TEFRA partnership-
level proceeding is complete.
Petitioner seeks a contrary conclusion by focusing on the
definition of NESE set forth in section 1402(a). Petitioner
notes that this definition requires the presence of an individual
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