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assess the liability only against the QSub or QRS and, in the event of a failure to pay the liability
after notice and demand, may file a federal tax lien only against the QSub's or QRS's property
and rights to property. 45

Another instance in which a DRE is recognized for federal tax purposes arises when the IRS is
seeking to collect a tax liability from the sole member of a SMLLC. In CCA 199930013, the IRS
Chief Counsel advised that the IRS could not levy on an LLC's assets, because under state law
the sole member of the LLC did not own the property of the LLC. The Chief Counsel stated that
the mere fact that an LLC is disregarded as an entity separate from its sole member (the
taxpayer in that case) for federal tax purposes does not entitle the IRS to disregard the LLC for
collection purposes. 46 The Chief Counsel added that state law determines a taxpayer's property
interests for purposes of tax collection, 47 but the IRS could levy on the taxpayer's distributive
interest in the LLC and sell that interest or file suit to foreclose the federal tax lien against the
ownership interest. 48 In addition, depending on the facts of the case, the IRS might collect from
an LLC's assets on the basis that it is the alter ego of its single-member or pursuant to a
nominee or transferee liability theory. 49

TEFRA Rules.

Another exception to the general rule arises in the context of the Code's audit rules for
partnerships, which were enacted by the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA). TEFRA radically changed the way in which the IRS audits partnerships for errors in
reporting partnership income. 50 TEFRA's basis is found in Section 6221, which provides that "the
tax treatment of any partnership item (and the applicability of any penalty, addition to tax, or
additional amount which relates to an adjustment to a partnership item) shall be determined at
the partnership level."

Section 6231(a)(1)(B) excludes "small partnerships" from the TEFRA rules by excluding from the
definition of a "partnership" any partnership with ten or fewer partners, each of whom is a U.S.
individual, a C corporation, or an estate of a deceased partner. The small partnership exception
does not apply, however, to a partnership for a tax year if any partner in the partnership during
that tax year is a "pass-thru partner." 51 A pass-thru partner means a partnership, estate, trust,
S corporation, nominee, or other similar person through whom other persons hold an interest in
the partnership. 52

The issue that arises in this context is whether a DRE that is a partner of a partnership is
disregarded when determining whether the small partnership exception to TEFRA applies. The
IRS has looked at this issue on at least two different occasions and, in both cases, treated an
SMLLC as a separate entity. That is, the IRS determined that the SMLLC—not its individual sole
member—was the partner in applying the small partnership exception to the TEFRA audit rules. 53
Because the SMLLC was treated as the partner and was a "pass-thru partner," as defined in
Section 6231(a)(9), the small partnership exception did not apply in either case.

In CCA 200250012, IRS Chief Counsel reasoned that the statutory language indicated that
Congress intended that the small partnership exception to TEFRA would not apply whenever, as
a factual matter, ownership in the partnership is held through another person, regardless of the
legal classification of that person. Rev. Rul. 2004-88 reached the same result, but the IRS
reasoned there that state law dictated the holding. The IRS based its holding on the fact that the
sole member of the SMLLC partner was not a partner of the partnership under state law; rather,
the IRS found that the sole member held his partnership interest in the partnership indirectly
through the SMLLC (i.e., was an indirect partner via the "pass-thru partner").

Sharing of Partnership Liabilities under Code Section 752.

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