Partnership-Related Items: Staying Relevant
by Jenni Black
Jenni Black is a managing director in Citrin Cooperman’s national tax office and the practice leader of the tax procedure and controversy practice. She is also a contributing author for Procedurally Taxing.
In this post, Black considers what it means for an item or amount to be a partnership-related item, including whether something is relevant for determining chapter 1 liability.
This post reflects the author’s personal views and not necessarily those of Citrin Cooperman.
The centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 is a procedural regime under which adjustments are made to partnership-related items (PRIs). To be a PRI, an item or amount must be (1) with respect to the partnership, and (2) relevant to determining the tax liability of any person under chapter 1.1 The definition of PRI is broad and would include not only items of income, gain, loss, deduction, or credit but items that are not that, such as adjustments to items on a balance sheet or informational items (non-income items).
Part 1 of this post discusses what it means for an item or amount to be a PRI, including whether
1 Section 6241(2)(B) defines the term “partnership-related item” as “any item or amount with respect to the partnership (without regard to whether or not such item or amount appears on the partnership’s return and including an imputed underpayment and any item or amount relating to any transaction with, basis in, or liability of, the partnership) which is relevant (determined without regard to this subchapter) in determining the tax liability of any person under chapter 1, and any partner’s distributive share of any item or amount described [above].”
something is relevant in determining the chapter 1 liability of any person (that is, one of the two factors in determining whether something is a PRI). In a post-Loper Bright world, everyone is focused on what the “best” interpretation of a statute is (and everyone has become an armchair quarterback regarding what that “best” interpretation is). The “best” interpretation of a statute must take into account context and not just read the words of the statute in a vacuum.2 This means looking at the statute’s place in the Internal Revenue Code, why the statute is there, and the statute’s relationship to other statutes to which it relates. Above all, the “best” interpretation must be workable. So, in the words of Tina Turner, what interpretation of the definition of PRI is “simply the best, better than all the rest”?
As stated previously, the definition of PRI has two parts to it: An item or amount must be “with respect to the partnership” and it must be relevant in determining the chapter 1 liability of any person outside of BBA. Reg. section 301.62411(a)(6)(iii) provides that an item or amount is with respect to the partnership if the item is on the partnership return (or required to be there if it isn’t) or required to be maintained in the partnership’s books and records. The partner’s reporting of the item or amount on the partner’s return is not with respect to the partnership if it is based on the partner’s facts and circumstances (for example, the partnership’s noncash charitable contribution is with respect to the partnership but whether the partner can deduct it is not). Under section 6241(2)(B)(i), an item or amount is with respect to the partnership “without regard to whether or not such item or amount appears on the partnership’s return and including an imputed
2 See North Wall Holdings LLC v. Commissioner, 165 T.C. No. 9, 3, 11 (2025).
underpayment and any item or amount relating to any transaction with, basis in, or liability of, the partnership.” With the broad language in section 6241(2)(B)(i), it would appear as if an item or amount can be with respect to the partnership if it breathes in the vicinity of the partnership. Given its inclusion of things such as basis and liabilities (which are not items of income, gain, loss, deduction, or credit) in the parenthetical modifying “with respect to the partnership,” it seems clear that Congress treats non-income items as “with respect to the partnership.” But that probably wasn’t seriously up for debate.
Although the things included in the parenthetical arguably are not per se PRIs, as that’s only the first part of the test, the reference to those items heavily suggests that Congress thought about these types of items as at least potential PRIs. Congress would not have expressly referenced those items unless it intended to signal that those are items that would be adjusted at the partnership level under BBA. After all, look at what’s not in that parenthetical — items of income, gain, loss, deduction, or credit. It appears Congress carefully (ha!) chose the examples to highlight items that may be . . . less obviously included in the definition. But that’s just step 1.
In order to be a PRI, an item or amount must be “relevant” to determining the tax liability of any person under chapter 1. Under reg. section 301.6241-1(a)(6)(iv), an item or amount is relevant to determining the tax liability of any person under chapter 1 if it is possible for the item to impact chapter 1 liability under the code, not whether it does in the particular situation at issue. Under this definition, an item or amount is a PRI for all partnerships equally, and makes whether something is a PRI more of a “bright line” test that is not dependent on the facts and circumstances of a particular case. Some have taken aim at the regulatory explanation of what it means to be “relevant to determining the tax liability of any person under chapter 1,” arguing that, if there is no actual impact on chapter 1 liability of any person, it can’t be a PRI. While this has primarily been brought up with respect to non-income item adjustments, this same issue would apply to all items in general (for example, all partners could have net operating losses or be tax exempt). Part 2
of this article discusses the problems that could arise if that interpretation is adopted.
What Does It Mean to Be ‘Relevant’?
Section 6241(2)(B) states that PRIs are “relevant” to determining the tax liability of any person under chapter 1. What does it mean to be relevant? Black’s Law Dictionary defines “relevant” as “logically connected and tending to prove or disprove a matter in issue; having appreciable probative value — that is, rationally tending to persuade people of the probability or possibility of some alleged fact.”3 The Federal Rules of Evidence say evidence is relevant if it “has any tendency to make a fact more or less probative than it would be without the evidence and the fact is of consequence in determining the action.”4 In a nonlegal context, “relevant” has been defined as “bearing upon or connected with the matter at hand,” “pertinent,” and “closely connected or appropriate to what is being done or considered.”5 None of those definitions suggests that, to be relevant, something has to be dispositive of the issue at hand. In fact, the definitions seem to suggest that something is “relevant” if it is helpful in figuring something out, not whether it actually does.
Something Similar, Maybe?
Aside from evidentiary matters and dictionaries, are there other code sections one could look to for inspiration? One such statute may be section 7701(o). Under section 7701(o)(1), “in the case of a transaction to which the economic substance doctrine is relevant,” the transaction has economic substance if it meets two criteria that are not important for this discussion. Section 7701(o)(5)(C) says that whether the economic substance doctrine is “relevant” is determined in the same manner as if section 7701(o) had not been enacted. So what does “relevant” mean in this case? Well, it depends. (Doesn’t it always?) There are two recent cases that analyzed what it
3 I’m quoting from the third pocket edition of Black’s Law Dictionary, published in 2006. It was one of the first things my dad bought me when I was admitted to law school.
4 Fed. R. Evid. 401.
5 Relevant, Dictionary.com (last visited Aug. 4, 2025). I also Googled it, so it must be accurate.
2026 Tax Analysts. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content.
means for the economic substance doctrine to be relevant to a particular transaction — Patel6 and Liberty Global7 — and they came out differently. In Liberty Global, the district court held that the economic substance doctrine is “relevant” when it is applicable (that is, if a transaction fails one of the two tests, the economic substance doctrine is both applicable and relevant). In other words, the district court conflated relevancy and applicability, holding that there is no separate relevancy determination, just the determination of whether the transaction met both of the tests set forth in section 7701(o)(1).
Contrast this with Patel. In Patel, a unanimous Tax Court held that the economic substance doctrine is “relevant” to a particular transaction if the economic substance doctrine had been applied in the type of situation at issue prior to the enactment of section 7701(o) (or, I presume, at least something “close enough”). The Tax Court held the relevancy test is separate from whether the taxpayer met both of the tests and you don’t get to the test if the doctrine is not relevant. In making its determination it looked at section 7701(o)(5)(C), which says that relevancy is determined “in the same manner as if [section 7701(o)] had never been enacted.”
Do Patel and Liberty Global help determine what it means to be relevant in determining the tax liability of any person under chapter 1? I guess it depends on if you are in Team Liberty Global or Team Patel.8 Taking Liberty Global at face value, which holds that relevancy is the same as whether the substantive test is met, this would suggest that whether something is relevant to determining liability under chapter 1 is the same as whether it actually impacts chapter 1 liability. But the difference between a BBA proceeding and the economic substance doctrine is that, in BBA, the impact on chapter 1 liability isn’t at issue in the BBA proceeding. In an economic substance doctrine case, the underlying substantive tax issue that would meet (or not meet) the test is at issue in the same proceeding where whether the
6 Patel v. Commissioner, 165 T.C. No. 10 (2025).
7 Liberty Global Inc. v. United States, No. 1:20-cv-03501-RBJ (D. Colo. Oct. 31, 2023).
8 This is a trap. I’m sure many would prefer Patel for the economic substance doctrine but Liberty Global for BBA.
transaction has economic substance is also being determined. In a BBA proceeding, only the partnership’s non-chapter 1 liability is at issue, and “any person’s” chapter 1 liability is not at issue. They are separate, more like the holding in Patel. In Patel, the Tax Court held that relevancy is a threshold determination where you look to whether or not the economic substance doctrine had been applied in that type of circumstance before you determine whether the particular transaction at issue actually has economic substance or not. Applied to BBA, this would suggest that you determine whether something could impact chapter 1 liability first, before you determine the actual adjustment. But section 7701(o) does something different than section 6241.
So must the adjustment have an actual impact on some identifiable person’s chapter 1 tax in order to be “relevant” in determining the tax liability of any person under chapter 1? That does not seem to be what “relevant” means, especially in the ordinary meaning of the word. Section 6241(2)(B) says that something must be “relevant” in determining the tax liability of any person under chapter 1. It does not say that the item must impact a person’s chapter 1 tax liability. Something can be relevant to determining something without an actual impact. For example, if the IRS audits Taxpayer alleging Taxpayer failed to report $X in interest income and the Taxpayer successfully demonstrates that the interest income is not taxable to him (for whatever reason, including that it may be income to someone other than the Taxpayer), is the information the Taxpayer proffered not relevant in determining Taxpayer’s tax liability simply because it did not actually change Taxpayer’s liability? Of course not. So why would it not be relevant here? It seems to me that requiring an adjustment to have an actual impact on a discernable person’s liability under chapter 1 is not consistent with the plain language of the statute, which only requires that something be “relevant” in determining the tax liability of any person under chapter 1. As stated above, reg. section 301.6241-1(a)(6)(iv) states that an item or amount is relevant to determining the tax liability of any person under chapter 1 if it is possible for the item to impact chapter 1 liability under the Internal Revenue Code, regardless of
whether it actually does or not. If something can impact chapter 1 liability, isn’t it, therefore, relevant in determining chapter 1 liability? It would certainly tend to “prove or disprove” someone’s chapter 1 liability.
Probably a Bad Analogy
When I think about what it means to be “relevant,” my first thought goes to section 6103. (I know, right?) The case law dealing with whether something is “relevant” for purposes of discovery is legion. But those cases, generally, do not provide any more analysis as to what it means to be “relevant”; they just determine a specific piece of evidence is, or is not, relevant in a specific case. It’s a very facts and circumstances-based analysis.
But the case law under section 6103 gives us a little more of insight as to what it may mean to be “relevant.”9 At this point you’ve probably pulled up section 6103 online and searched for “relevant” to see where I’m going with this. If you did, you’ll notice that the only places the term “relevant” is used are places with little to no case law, like section 6103(i) (using return information for nontax criminal case), section 6103(l)(4) (using return information in personnel or claimant matters), and a couple of very specific ones dealing with interagency disclosures under section 6103(l). But I’m not talking about any of those. What?
Under section 6103(h)(4)(B) and (C), the IRS can disclose third-party returns and return information in an administrative or judicial proceeding involving tax administration if the third-party’s return or return information directly relates to or affects the resolution of an issue in the proceeding (plus some other requirements not important to this discussion). So how does this help us figure out whether something is relevant to determining the tax liability of any person under chapter 1? In interpreting what it means to be directly related to resolving an issue in the
9 I fully acknowledge that I am using something I know very well instead of spending hours upon hours reading every treatise and case on relevance to try to pick out a few interpretive nuggets here and there. But I did research cases on relevance (including reading many of the seminal cases) before going to section 6103. Plus, this is a different and creative way to think about it, and you get a bonus section 6103 lesson. Don’t judge me. But hey, I did research section 7701(o).
proceeding, courts have held that “directly related” means more than “relevant” and, to be directly related, a piece of information must have a direct relationship to the resolution of the issue in the proceeding.10 But “directly related” also doesn’t mean the information has to be dispositive of the issue, it just needs to affect the resolution of the issues in the proceeding.11
In addition to case law, the legislative history of section 6103(h)(2) is helpful here (I promise). Under section 6103(h)(2)(B) and (C),12 third-party return information may be disclosed to the Justice Department if the return information may be related or may affect (as opposed to being directly related to) the resolution of an issue in a proceeding. The Senate report explaining these provisions states that the returns of passthrough entities may be disclosed to the Justice Department under section 6103(h)(2)(B) and (C) because “the returns of subchapter S corporations, partnerships, estates and trusts may reflect the treatment of certain items which may be relevant to the resolution of the taxpayer’s liability because of some relationship (i.e., shareholder, partner, beneficiary) of the taxpayer with the corporation, partnership, estate, or trust.”13 Accordingly, at least in the context of section 6103, information on a partnership’s return “may be related to,” “may be relevant,” or “may affect” a partner’s tax liability. If something may be related or may affect a partner’s tax liability, it is not required to have a direct relationship to the resolution of the partner’s liability.14
10 See, e.g., In re United States, 669 F.3d 1333, 1338-1339 (Fed. Cir. 2012) (also comparing section 6103(h)(2)’s requirement that the information “may be related” to section 6103(h)(4)’s requirement that the information be “directly related”); Vons Companies v. United States, 51 Fed. Cl. 1, 18-19 (Fed. Cl. 2001) (holding that “relevant” under the Federal Rules of Evidence is “much broader” than “directly related”).
11 E.g., First Western Government Securities Inc. v. United States, 578 F. Supp. 212, 218 (D. Col. 1984), aff’d, 796 F.2d 356 (10th Cir. 1986).
12 Section 6103(h)(2)(B) and (C) authorizes the disclosure of thirdparty return information to the Justice Department using “looser” standards than those under section 6103(h)(4)(B) and (C) for disclosure of third-party return information in administrative or judicial proceedings.
13 S. Rep. No. 94-938, at 325 (1976).
14 In re United States, 669 F.3d at 1338 (holding that, to be directly related, the information must have a direct relationship to the resolution of the issue but information that may be related to the resolution of the issue does not have to have a direct relationship).
If “directly related” means something must have a direct relationship to resolving an issue in the proceeding but not dispositive of the issue, and “directly related” means “more than relevant,” then how can “relevant” to determining the tax liability of any person under chapter 1 require something to have an actual impact on a specific person’s chapter 1 tax? In addition, if information on the partnership return “may be related to” or “may affect” a partner’s tax and that is less than “more than relevant” why would “relevant” in section 6241(2) require more? I agree that courts’ interpretations of “directly related” under section 6103, just like section 7701(o), isn’t terribly relevant (ha ha) to whether something is “relevant” for purposes of section 6241(2). But I find it interesting to see how courts have used the term “relevant” in other places to try to divine some tidbits on how a court might analyze the word as opposed to an “I know it when I see it” type of analysis that seems to be the staple of discovery disputes.
While we may only be incrementally closer in determining what it means to be relevant in determining the chapter 1 tax liability of any person, we’ve found several places to look for inspiration. In part 2 of this article, I discuss what would happen if, to be a PRI, an item or amount (including a non-income item) had to have an actual impact on a specified person’s chapter 1 liability.
