In general, the owner of an equity interest in a pass-through entity, such as a partnership or an S corporation, must treat items of income, gain, loss, deduction, and credit attributable to the entity on the owner’s tax return in a manner that is consistent with the treatment of those items on the entity’s return (IRC §§6222(a), 6037(a)). If the owner takes an inconsistent position, the IRS may make an adjustment to the owner’s tax liability to conform to the treatment by the entity, and the IRS may assess tax attributable to that adjustment immediately, rather than through the issuance of a notice of deficiency (see IRC §6213). The issuance of a notice of deficiency provides a taxpayer with rights to contest the proposed deficiency without payment of the tax that do not apply where, as in this case, no notice of deficiency is required.

If, however, the owner of the equity interest provides appropriate notification to the IRS that an inconsistent position is being taken by the owner, the rule permitting a conforming adjustment to tax to be made without the issuance of a notice of deficiency does not apply.