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partners for the additional tax owed because of the disallowed
deduction. One of JTA's other partners, Thomas Nehrlich, didn't
pay after being notified of the assessment, and he now challenges
the underlying liability.
Background
Thomas Nehrlich and Jonathan Yee founded JTA in 1990 to sell
computer consulting and programming services. Frank Wypychowski
joined JTA in 1994, and the partners adjusted their shares so
that each owned one-third. One year later, JTA donated dental-
practice-management software to the University of Iowa. JTA
valued the software at $6 million and deducted the donation as a
charitable contribution on its 1995 partnership return.
JTA's 1995 return designated Wypychowski as the firm's tax
matters partner (TMP), and the box under "Is this partnership
subject to the consolidated audit procedures of sections 6221
through 6233?" (the IRS's way of saying "TEFRA") was checked
"Yes".1 The return also listed two items, both for $12,850. The
first was an income adjustment for “guaranteed payments to
1 TEFRA is the Tax Equity and Fiscal Responsibility Act of
1982, Pub. L. 97-248, 96 Stat. 324, one part of which governs the
tax treatment and audit procedures for most partnerships. See
TEFRA secs. 401-406, 96 Stat. at 648-671. TEFRA requires the
uniform treatment of all “partnership items”--a term defined by
section 6231(a)(3) and (4), I.R.C.--and its general goal is to
treat all partners alike when the IRS adjusts partnership items.
Each TEFRA partnership is supposed to designate one of its
partners as the TMP to handle TEFRA issues and litigation for the
partnership. Congress frequently amends TEFRA, and though we
note the current law where relevant, all other section references
are to the Internal Revenue Code and regulations as in effect for
1995.
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Last modified: November 10, 2007