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August 16, 2018
2018-1648

IRS withdraws and re-proposes regulations on centralized partnership audit regime to reflect technical corrections

The IRS has released new proposed regulations under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) that withdraw and re-propose various previously-issued proposed regulations to reflect technical corrections included in Title II of the Consolidated Appropriations Act of 2018 (TTCA) and certain other clarifications.

Background

The BBA overhauled the manner in which partnerships are audited and how any resulting tax liability is computed, assessed and collected. Before the BBA, a partnership audit generally was conducted in accordance with the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), which did not provide any statutory mechanism for collecting income tax at the entity level. Rather, the IRS generally had to seek payment of underpaid tax directly from the partners that would have owed such tax had the partnership properly reported the items on its tax return. The BBA adopted a new regime that allows for assessment and collection of tax at the partnership level under centralized audit procedures, along with a number of other changes to the partnership audit process. These new rules are generally effective for most partnerships for tax years starting after December 31, 2017.

BBA regulations

The IRS has issued multiple sets of regulations relating to the BBA.

Temporary regulations on early elections. On August 4, 2016, the IRS released temporary (TD 9780) and proposed (REG-105005-16) regulations addressing the election to apply the BBA to tax years beginning after November 2, 2015, and before January 1, 2017. For a detailed discussion, see Tax Alert 2016-1344.

June 2017 proposed regulations. On June 13, 2017, the IRS released proposed regulations (REG-136118-15) providing guidance on the applicable procedures, the determination of the amount of taxes, interest and penalties owed, and other consequences of an adjustment to a partnership tax return. Among other provisions, these proposed regulations included procedures for electing out of the new regime, designating a partnership representative, filing administrative adjustment requests, and determining amounts owed by a partnership or its partners from adjustments following a partnership exam. For a detailed discussion, see Tax Alerts 2017-0168 and 2017-1002.

November 2017 proposed regulations. On November 30, 2017, the IRS issued proposed regulations (REG-119337-17) providing guidance on the application of certain international tax rules under the BBA centralized partnership audit regime. For a detailed discussion, see Tax Alert 2017-2056.

December 2017 proposed regulations. On December 19, 2017, the IRS published proposed regulations (REG-120232-17; REG-120233-17) addressing Section 6226 push-out elections in tiered partnership structures. These proposed regulations also addressed certain procedural issues, including tax assessment and collection, penalties and interest, periods of limitations, and judicial review of partnership adjustments. These proposed regulations would allow an upper-tier partnership to make the Section 6226 push-out election, an issue reserved in the June 2017 proposed regulations. See Tax Alert 2017-2184.

Final regulations on electing out. On January 2, 2018, the IRS issued final regulations (TD 9829) on electing out of the BBA partnership audit regime. See Tax Alert 2018-0013.

February 2018 proposed regulations. On February 2, 2018, the IRS issued proposed regulations (REG-118067-17) addressing the adjustment of tax attributes to reflect partnership adjustments under the centralized partnership audit regime. See Tax Alert 2018-0355.

Final regulations issued August 2018. On August 6, 2018, the IRS issued final regulations (TD 9839) adopting, with some changes, proposed regulations (REG-136118-15) under Section 6223 on the designation of a partnership representative and rules regarding the authority of the partnership representative under the BBA regime. The final regulations also adopted, without substantive change, the temporary rules (TD 9780) allowing a partnership to elect to apply the new partnership audit regime to tax years beginning after November 2, 2015, and before January 1, 2018. See Tax Alert 2018-1606.

TTCA technical corrections

The TTCA, enacted on March 23, 2018, amended the partnership audit rules established by the BBA. It addressed a number of procedural and substantive rules under the BBA, including the scope, netting, push-out election and special enforcement matters. The provisions in the TTCA are very similar to the bipartisan technical corrections that were introduced in both the House and Senate in December 2016, and many of its provisions are consistent with the former proposed regulations. The amendments are effective for tax years that are subject to the BBA (i.e., tax years that begin after December 31, 2017, or an earlier tax year for which the partnership has elected to apply the BBA rules). See Tax Alert 2018-0867.

New proposed regulations

The new proposed regulations withdraw, to the extent not already finalized, the proposed regulations issued in June 2017, November 2017, December 2017 and February 2018. The new proposed regulations re-propose these rules with certain changes to reflect amendments made by the TTCA and various other, unrelated clarifications. Nonetheless, the IRS states that the "Explanation of Provisions" sections of the withdrawn proposed regulations remain relevant, and the new proposed regulations incorporate them by reference to the extent not inconsistent with the rules therein or with rules otherwise already finalized. The new proposed regulations do not respond to comments received on the withdrawn proposed regulations, but the IRS generally plans to do so upon publication of final regulations.

Scope of the centralized partnership audit regime and "partnership-related item"

Reg. Section 301.6221(a)-1

Former proposed Reg. Section 301.6221(a)-1, as included in the June 2017 and November 2017 proposed regulations, discussed the scope of the BBA audit regime. Because the TTCA added a new defined term, "partnership-related item," however, the majority of the rules under former proposed Reg. Section 301.6221(a)-1(b) that addressed the scope of what is adjusted at the partnership level are now incorporated into proposed Reg. Section 301.6241-6, which defines the term "partnership-related item." New proposed Reg. Section 301.6221(a)-1(a) provides the general rule that, except as otherwise provided, any adjustments to partnership-related items and the applicability of any penalty, addition to tax or additional amount that relates to an adjustment to any such items are determined at the partnership level. In addition, any consideration necessary to make a determination at the partnership level under the centralized audit regime would be made at the partnership level.

Reg. Section 301.6241-6

As mentioned immediately prior, proposed Reg. Section 301.6241-6 includes the definition of the new term "partnership-related item." Specifically, it includes a general rule that a partnership-related item is any item or amount with respect to the partnership that is relevant in determining the tax liability of any person under chapter 1 and any partner's distributive share of any such item or amount. It also includes a number of more specific rules, as well as a list of examples of partnership-related items and examples illustrating application of these rules.

Partner's return must be consistent with partnership return

Reg. Section 301.6222-1

Proposed Reg. Section 301.6222-1, previously included in the June 2017 proposed regulations, addresses consistency between a partner's return and the partnership return. The new proposed regulations update the language to refer to "partnership-related item" to reflect the TTCA changes.

Imputed underpayments

Reg. Sections 301.6225-1, 301.6225-2 and 301.6225-3

Proposed Reg. Sections 301.6225-1, 301.6225-2 and 301.6225-3 — previously included in the June 2017, November 2017 and December 2017 proposed regulations — include various rules relating to imputed underpayments.

The new proposed regulations reorganize Reg. Section 301.6225-1 to clarify the process for determining an imputed underpayment. It includes rules addressing the calculation of the imputed underpayment, the different groupings in which adjustments are placed for purposes of determining an imputed underpayment, the treatment of certain partnership adjustments, and other related issues.

Proposed Reg. Section 301.6225-2 includes guidance on procedures to modify the imputed underpayment. The IRS specifically requests comments on various issues in this area and how to best implement the modification procedures.

Proposed Reg. Section 301.6225-3 includes rules regarding adjustments that do not result in an imputed underpayment.

Reg. Section 301.6225-4

Proposed Reg. Section 301.6225-4, previously included in the February 2018 proposed regulations, sets forth rules under which a partnership and its partners must adjust specified tax attributes to take into account partnership adjustments and the partnership's payment of an imputed underpayment. In the new proposed regulations, the section includes changes throughout to conform to the changes to the definition of "tax attribute" under proposed Reg. Section 301.6241-1(a)(10). In addition, the definition of "specified tax attributes" now includes earnings and profits under Section 312.

Election for the alternative to payment of the imputed underpayment

Reg. Sections 301.6226-1, 301.6226-2 and 301.6226-3

Proposed Reg. Sections 301.6226-1, 301.6226-2 and 301.6226-3 — previously included in the June 2017, November 2017 and December 2017 proposed regulations — include rules related to the election for the alternative to payment of the imputed underpayment (frequently referred to as the push-out method).

Reflecting statutory changes to Section 6226(a), the new proposed regulations add language to Reg. Section 301.6226-1(b)(2) to clarify that, if a partnership makes a valid election under Section 6226 with respect to an imputed underpayment, the IRS may not assess such imputed underpayment, levy, or bring a proceeding in any court for the collection of that imputed underpayment against the partnership. A similar change has also been made to Reg. Section 301.6226-1(c)(2) (regarding invalid elections).

Reflecting statutory changes to Section 6226(b), new proposed Reg. Section 301.6226-3 now refers to "correction amount" instead of "adjustment amount," as appropriate, and now provides that a reviewed year partner's chapter 1 tax for the reporting year may be increased or decreased by the additional reporting year tax. Proposed Reg. Section 301.6226-3(c)(1) further includes rules on the calculation of interest on correction amounts. Various additional clarifying and conforming changes were made to proposed Reg. Section 301.6226-3.

Reg. Sections 301.6226-1, 301.6226-2 and 301.6226-3 — changes unrelated to TTCA

The new proposed regulations contain some changes to Proposed Reg. Sections 301.6226-1, 301.6226-2 and 301.6226-3 in addition to those needed to conform to the TTCA amendments, including the following:

1. Proposed Reg. Section 301.6226-1(b)(2) now provides that only those adjustments that do not result in an imputed underpayment that are associated with an imputed underpayment for which an election under Section 6226 is made are included in the reviewed year partner's share of the partnership adjustments reported to the partner. Any adjustments that do not result in an imputed underpayment and are not associated with an imputed underpayment for which an election under Section 6226 is made are taken into account under Section 6225.

2. Proposed Reg. Section 301.6226-1(c)(1) provides that an election under Section 6226 is only valid if all the provisions under proposed Reg. Section 301.6226-1 (regarding making the election) and Reg. Section 301.6226-2 (regarding the furnishing of statements) are satisfied, and an election made under Section 6226 is valid until the IRS determines that the election is invalid.

3. Several sections of the new proposed regulations under Section 6226 include changes to clarify that the partnership must provide correct information to make a valid election under Section 6226 and for statements to be properly furnished either under proposed Reg. Section 301.6226-2 or proposed Reg. Section 301.6226-3(e)(3).

4. Proposed Reg. Section 301.6226-3(c)(2) now provides that interest on any penalties, additions to tax or additional amounts is calculated from each applicable tax year until the penalty, addition to tax or additional amount is paid.

Reg. Section 301.6226-4

Proposed Reg. Section 301.6226-4, previously included in the February 2018 proposed regulations, sets forth rules for adjusting reviewed year partners' tax attributes to take into account partnership adjustments when a partnership makes an election under Section 6226. To reflect the addition of Section 6226(b)(4), proposed Reg. Section 301.6226-3(e)(4) now provides that a reviewed year partner that is a pass-through partner must pay an imputed underpayment if the pass-through partner does not furnish statements as required under the Section 6226 push-out method rules.

Administrative adjustment requests

Reg. Sections 301.6227-1, 301.6227-2a and 301.6227-3

Proposed Reg. Sections 301.6227-1, 301.6227-2 and 301.6227-3 — previously included in the June 2017, November 2017 and December 2017 proposed regulations — contain rules related to the filing of administrative adjustment requests (AARs) to correct errors on a partnership return for a prior year.

Proposed Reg. Section 301.6227-2(a)(1) provides the rules for determining whether an imputed underpayment results from adjustments requested in an AAR by referring to the rules under proposed Reg. Section 301.6225-1. Under proposed Reg. Section 301.6227-2(a)(2), in the case of an AAR, a partnership may reduce an imputed underpayment as a result of certain modifications permitted under proposed Reg. Section 301.6225-2. Proposed Reg. Section 301.6227-2(a)(2) provides that other types of modification are not available in the case of an AAR. Although any modifications in connection with an AAR are subject to IRS approval, the rules under proposed Reg. Section 301.6227-2(a)(2)(i) provide that the partnership is not required to obtain the approval from the IRS before applying modifications when calculating the amount of the imputed underpayment the partnership needs to pay when filing the AAR.

Reg. Sections 301.6227-1, 301.6227-2a and 301.6227-3 — changes unrelated to TTCA

New proposed Reg. Section 301.6227-1(a) coordinates the rules regarding the filing of an AAR and the revocation of a designation of the partnership representative under Reg. Section 301.6223-1. In addition, under the new proposed regulations, when the partnership changes the designation of the partnership representative or the appointment of a designated individual in conjunction with the filing of an AAR, the change in designation or appointment would be treated as occurring before the filing of the AAR.

Notices of proceedings and adjustments

Reg. Section 301.6231-1

Proposed Reg. Section 301.6231-1, previously included in the December 2017 proposed regulations, contains rules related to notices of proceedings and adjustments. Other than some conforming changes, the new proposed regulations in this section are generally consistent with the former proposed regulations.

Assessment, collection and payment of imputed underpayments

Reg. Section 301.6232-1

Proposed Reg. Section 301.6232-1, previously included in the December 2017 proposed regulations, contains rules related to the assessment, collection and payment of imputed underpayments. Other than some conforming changes, the rules in the new proposed regulations in this section are generally consistent with the former proposed regulations.

Interest and penalties related to imputed underpayments

Reg. Sections 301.6233(a)-1 and 301.6233(b)-1

Proposed Reg. Sections 301.6233(a)-1 and 301.6233(b)-1, previously included in the December 2017 proposed regulations, contain rules on interest and penalties related to imputed underpayments. Specifically, proposed Reg. Section 301.6233(a)-1 provides rules for determining interest and penalties from the reviewed year, and proposed Reg. Section 301.6233(b)-1 provides rules for determining interest and penalties from the adjustment year. The new proposed regulations would make various clarifying amendments to these sections.

Judicial review of partnership adjustments

Reg. Section 301.6234-1

Proposed Reg. Section 301.6234-1, previously included in the December 2017 proposed regulations, contains rules related to judicial review of partnership adjustments. To reflect TTCA changes regarding the amount to be deposited with the IRS before filing a petition with a court for readjustment of any partnership adjustment, proposed Reg. Section 301.6234-1(b) now provides that the amount required to be deposited is the amount (as of the date of the filing of the petition) of any imputed underpayment and any penalties, additions to tax and additional amounts with respect to such imputed underpayment

Period of limitations on making adjustments

Reg. Section 301.6235-1

Proposed Reg. Section 301.6235-1, previously included in the December 2017 proposed regulations, now reflects amendments to Section 6235 to provide an exception for Section 905(c) and removes the reference to Section 6235(d).

Definitions and special rules

Reg. Section 301.6241-1

Proposed Reg. Section 301.6241-1, previously included in the June 2017 proposed regulations, has been amended to make conforming and clarifying revisions to various definitions.

Reg. Section 301.6241-2

Proposed Reg. Section 301.6241-2, previously included in the June 2017 proposed regulations, provides for coordination between Title 11 of the US Code (which deals with bankruptcy) and the centralized partnership audit regime. These rules are unchanged in the new proposed regulations.

Reg. Sections 301.6241-3, 301.6241-4 and 301.6241-5

Proposed Reg. Sections 301.6241-3, 301.6241-4 and 301.6241-5 — previously included in the June 2017 proposed regulations — include new clarifying and conforming amendments to certain definitions and special rules.

Coordination with other chapters of the Code

Reg. Section 301.6241-7

New proposed Reg. Section 301.6241-7(a)(1) and (2) includes rules and examples previously included under former proposed Reg. Section 301.6221(a)-1(d) and (f) relating to concepts now codified in Section 6241. Specifically, proposed Reg. Section 301.6241-7(a)(1) provides that the centralized partnership audit regime does not apply with respect to any tax imposed (including any amount required to be deducted or withheld) under any chapter of the Code other than chapter 1, including chapter 2, 2A, 3, or 4 of the Code. Proposed Section 301.6241-7(a)(2) provides corresponding examples.

Proposed Reg. Section 301.6241-7(b) provides rules for coordinating the centralized partnership audit regime with chapters 3 and 4 of the Code.

Implications

The release of new proposed regulations reflecting the technical corrections made in the TTCA is the last key step before the IRS and Treasury Department can finalize all of the applicable BBA regulations that will generally apply to most partnerships for tax years starting after December 31, 2017. The IRS and Treasury Department have publicly stated that they intend to finalize these regulations by the end of 2018. Partnerships should consider the effects of the new proposed regulations and how they want to address certain issues with their partners, e.g., modifications to legal documents and terms surrounding a future potential assessment of tax.

The IRS has requested comments be submitted by October 1, 2018, and a public hearing has been scheduled for October 9, 2018.

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Contact Information
For additional information concerning this Alert, please contact:
 
Tax Policy and Controversy
Alice Harbutte(720) 931-4011;
Matthew S. Cooper(202) 327-7177;
Partnerships and Joint Ventures Group
Jeff Erickson(202) 327-5816;
Barksdale Penick(202) 327-8787;
 

 


 

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