Centralized Partnership Audit Regime, 27334-27402 [2017-12308]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 82, Number 113 (Wednesday, June 14, 2017)]
[Proposed Rules]
[Pages 27334-27402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-12308]



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Vol. 82

Wednesday,

No. 113

June 14, 2017

Part II





 Department of the Treasury





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 Internal Revenue Service





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26 CFR Part 301





 Centralized Partnership Audit Regime; Proposed Rule

Federal Register / Vol. 82 , No. 113 / Wednesday, June 14, 2017 / 
Proposed Rules

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

RIN 1545-BN77
[REG-136118-15]


Centralized Partnership Audit Regime

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking, notice of public hearing, and 
withdrawal of notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations regarding 
implementation of section 1101 of the Bipartisan Budget Act of 2015 
(BBA), which was enacted into law on November 2, 2015. Section 1101 of 
the BBA repeals the current rules governing partnership audits and 
replaces them with a new centralized partnership audit regime that, in 
general, assesses and collects tax at the partnership level. These 
proposed regulations provide rules for partnerships subject to the new 
regime, including procedures for electing out of the centralized 
partnership audit regime, filing administrative adjustment requests, 
and the determination of amounts owed by the partnership or its 
partners attributable to adjustments that arise out of an examination 
of a partnership. The proposed regulations also address the scope of 
the centralized partnership audit regime and provide definitions and 
special rules that govern its application, including the designation of 
a partnership representative. The proposed regulations affect 
partnerships for taxable years beginning after December 31, 2017 and 
any partnerships that elect application of the centralized partnership 
audit regime pursuant to Sec.  301.9100-22T for taxable years beginning 
after November 2, 2015 and before January 1, 2018. This document also 
provides notice of a public hearing on these proposed regulations. This 
document also withdraws the notice of proposed rulemaking published in 
the Federal Register on February 13, 2009 (74 FR 7205), regarding the 
conversion of partnership items related to listed transactions.

DATES: Written or electronic comments must be received by August 14, 
2017. Outlines of topics to be discussed at the public hearing 
scheduled for September 18, 2017, at 10 a.m. must be received by August 
14, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136118-15), Room 
5207, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:PR 
(REG-136118-15), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW., Washington, DC 20224. Alternatively, taxpayers 
may submit comments electronically via the Federal eRulemaking Portal 
at www.regulations.gov (IRS REG-136118-15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jennifer Black of the Office of Associate Chief Counsel (Procedure and 
Administration), (202) 317-6834; concerning the submission of comments 
and requests for a public hearing, Regina Johnson, (202) 317-6901 (not 
toll-free numbers).

Background

    This document contains proposed regulations to amend the Procedure 
and Administration Regulations (26 CFR part 301) under Subpart--Tax 
Treatment of Partnership Items to implement the centralized partnership 
audit regime enacted by section 1101 of the BBA, Public Law 114-74.

1. In General

    The BBA was enacted on November 2, 2015, and was amended by the 
Protecting Americans from Tax Hikes Act of 2015, Public Law 114-113, 
div. Q (PATH Act) on December 18, 2015. Section 1101(a) of the BBA 
removes subchapter C of chapter 63 of the Internal Revenue Code (Code) 
effective for partnership taxable years beginning after December 31, 
2017. Subchapter C of chapter 63 contains the unified partnership audit 
and litigation rules that were enacted as part of the Tax Equity and 
Fiscal Responsibility Act of 1982, Public Law 97-248 (TEFRA). These 
partnership audit and litigation rules are commonly referred to as the 
TEFRA partnership procedures or simply TEFRA.
    Section 1101(b) of the BBA also removes subchapter D of chapter 63 
of the Code (subchapter D) and part IV of subchapter K of chapter 1 of 
the Code (part IV of subchapter K), rules applicable to electing large 
partnerships, effective for partnership taxable years beginning after 
December 31, 2017. Subchapter D contains the audit rules for electing 
large partnerships, and part IV of subchapter K prescribes the income 
tax treatment for such partnerships.
    Section 1101(c) of the BBA replaces the rules to be removed by 
section 1101(a) and (b) with a centralized partnership audit regime. 
Section 1101(c) adds a new subchapter C to chapter 63, consisting of 
sections 6221 through 6241 of the Code. The BBA also makes related and 
conforming amendments to other provisions of the Code.
    Pursuant to section 1101(g)(1) of the BBA, the amendments made by 
section 1101, which repeal the TEFRA partnership procedures and the 
rules applicable to electing large partnerships and which create the 
centralized partnership audit regime, generally apply to returns filed 
for partnership taxable years beginning after December 31, 2017. 
Section 1101(g)(2) provides that, in the case of an administrative 
adjustment request under section 6227 as amended by the BBA, the 
amendments made by section 1101 apply to requests with respect to 
returns filed for partnership taxable years beginning after December 
31, 2017. Similarly, section 1101(g)(3) provides that, in the case of 
an election to use the alternative to payment of the imputed 
underpayment by the partnership under section 6226 as amended by the 
BBA, the amendments made by section 1101 apply to elections with 
respect to returns filed for partnership taxable years beginning after 
December 31, 2017.
    Section 1101(g)(4) provides that a partnership may elect (at such 
time and in such form and manner as the Secretary may prescribe) for 
the amendments made under section 1101 (other than the election out of 
the centralized partnership audit regime under section 6221(b) as added 
by the BBA) to apply to any return of a partnership filed for 
partnership taxable years beginning after November 2, 2015 (the date of 
the enactment of the BBA) and before January 1, 2018.
    On December 18, 2015, President Obama signed into law the PATH Act. 
Section 411 of the PATH Act corrects and clarifies certain amendments 
made by the BBA. The amendments under the PATH Act are effective as if 
included in section 1101 of the BBA, and therefore, subject to the 
effective dates in section 1101(g) of the BBA.
    On August 5, 2016, the Treasury Department and the IRS published 
temporary regulations (TD 9780, 81 FR 51795) and a notice of proposed 
rulemaking (REG-105005-16, 81 FR 51835) in the Federal Register. The 
temporary regulations set forth in Sec.  301.9100-22T provide the time, 
form, and manner for a partnership to make an election pursuant to 
section

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1101(g)(4) of the BBA to have the centralized partnership audit regime 
apply to any of its partnership returns filed for a partnership taxable 
year beginning after November 2, 2015 and before January 1, 2018. 
Section 301.9100-22T(a) provides the general rule that a partnership 
may elect at the time and in such form and manner as described in Sec.  
301.9100-22T for amendments made by section 1101 of the BBA, except 
section 6221(b) added by the BBA, to apply to any return of the 
partnership filed for an eligible taxable year (as defined in Sec.  
301.9100-22T(d)).
    On December 6, 2016, Congress introduced the Tax Technical 
Corrections Act of 2016 (H.R. 6439, S. 3506) (Tax Technical Corrections 
Act) which contains what are described as technical corrections to the 
centralized partnership audit regime and other corrections to the 
Bipartisan Budget Act of 2015. The Tax Technical Corrections Act 
addresses a number of the provisions of the centralized partnership 
audit regime enacted as part of BBA. The Tax Technical Corrections Act, 
however, was not enacted by Congress.

2. Specific Provisions

A. Scope of the Centralized Partnership Audit Regime
    Section 6221(a), as added by the BBA, provides the scope of items 
that are subject to adjustment under the centralized partnership audit 
regime. That section provides that any adjustment to items of income, 
gain, loss, deduction, or credit of a partnership for a partnership 
taxable year (and any partner's distributive share thereof) shall be 
determined, and any tax attributable thereto shall be assessed and 
collected, at the partnership level. The applicability of any penalty, 
addition to tax, or additional amount which relates to an adjustment to 
any such item or share shall also be determined at the partnership 
level.
    Prior to the enactment of TEFRA, any adjustment to an item 
attributable to a partner's interest in a partnership required the IRS 
to open an examination for each partner and follow deficiency 
procedures to adjust items from a partnership and determine the 
resulting tax. Separate proceedings for each partner often resulted in 
inconsistent treatment of various partners with respect to the same 
items from a partnership. In some cases, inconsistent results occurred 
in the partner-level examinations themselves. In other cases, not all 
partners allocated the same items from the partnership were subject to 
an IRS examination because, for instance, the period of limitations on 
assessment had expired for some, but not all, partners. In addition, 
each partner could challenge the IRS adjustment in separate partner-
level proceedings in different litigation forums and appellate venues, 
resulting in different outcomes with respect to the same partnership 
item. Over time, the size and complexity of partnerships increased, 
multiplying the disparate treatment of partners with respect to the 
same items from a partnership and increasing the burden on the IRS in 
examining and assessing tax related to partnership issues at the 
partner level.
    In 1982, in response to these difficulties, Congress enacted the 
TEFRA partnership procedures to establish unified rules to allow the 
IRS to make adjustments to ``partnership items'' at the partnership 
level in one proceeding. Partnership items are those items that are 
more appropriately determined at the partnership level than at the 
partner level, as provided by regulation. Section 6231(a)(3) (prior to 
amendment by the BBA). The regulations under section 6231 (prior to 
amendment by the BBA) define partnership items by listing the items 
that are more appropriately adjusted at the partnership level within 
the framework of TEFRA. Sec.  301.6231(a)(3)-1. Items on a partner 
return that are not partnership items are not subject to adjustment at 
the partnership level by the IRS under TEFRA, but rather are adjusted 
with respect to each partner at the partner level in a proceeding 
outside of the TEFRA regime (generally, under deficiency procedures).
    Once a TEFRA proceeding is final, the IRS makes corresponding 
computational adjustments to each partner's return to reflect the 
proper treatment of partnership items. Section 6230(a)(1) (prior to 
amendment by the BBA). A computational adjustment may include 
adjustments to ``affected items'' of the partner. Sec.  301.6231(a)(6)-
1. An ``affected item'' is any item on a partner's return that is 
affected by a partnership item. Section 6231(a)(5) (prior to amendment 
by the BBA). When making a computational adjustment, if partner-level 
factual determinations are necessary to properly determine the tax, the 
IRS is required to follow the deficiency procedures at the partner 
level. Section 6230(a)(2)(A)(i) (prior to amendment by the BBA). Any 
item on the partner's return that is neither a partnership item nor an 
affected item is not subject to TEFRA and must be adjusted in a 
separate deficiency proceeding. See, e.g., Bedrosian v. Commissioner, 
144 T.C. 152, 159 (2015); see also section 6230(a)(2)(B) (prior to 
amendment by the BBA), Desmet v. Commissioner, 581 F.3d 297, 302 (6th 
Cir. 2009).
    The TEFRA partnership procedures automatically exempt certain 
partnerships with ten or fewer direct partners. Section 6231(a)(1)(B) 
(prior to amendment by the BBA). For those small partnerships, the IRS 
must follow deficiency procedures for each partner, which requires the 
IRS to adjust items from the partnership on each partner's return and 
to assess the resulting tax subject to the deficiency procedures in a 
separate proceeding at the partner level.
    Since the enactment of TEFRA, the number and complexity of 
partnerships have continued to increase. The number of large 
partnerships, in particular, has increased dramatically. In 1997, 
Congress recognized some of the difficulties facing the IRS under TEFRA 
when auditing complex, large partnership structures and in response 
enacted a streamlined, elective audit regime for certain large 
partnerships (ELP regime). Sections 6240 through 6255 (prior to 
amendment by the BBA). The ELP regime allowed certain partnerships with 
100 or more partners to elect the application of simplified reporting 
rules and a centralized audit regime with features similar to the 
regime enacted under the BBA. The ELP regime was a legislative response 
to the recognition that:

    [a]udit procedures for large partnerships are inefficient and 
more complex than those for other large entities. The IRS must 
assess any deficiency arising from a partnership audit against a 
large number of partners, many of whom cannot easily be located and 
some of whom are no longer partners. In addition, audit procedures 
are cumbersome and can be complicated further by the intervention of 
partners acting individually.

Joint Comm. on Taxation, JCS-23-97, General Explanation of Tax 
Legislation Enacted in 1997, 363 (1997).

    Since 1997, the number and complexity of partnerships has continued 
to increase, reflecting a shift in how business entities are 
structured--toward partnerships and away from C corporations. The ELP 
regime attempted to address some of the difficulties the IRS faced 
auditing large partnerships under TEFRA; however, the ELP regime is 
elective and only a handful of partnerships elected application of the 
ELP regime.
    In 2013, Congress requested that the Government Accountability 
Office (GAO) investigate partnerships and the IRS's audit rate of 
partnerships. The GAO report concluded that from 2002 to 2011 ``the 
number of large partnerships

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with 100 or more direct and indirect partners as well as $100 million 
or more in assets more than tripled to 10,099--an increase of 257 
percent.'' U.S. Gov't Accountability Office, GAO-14-732, Large 
Partnerships: With Growing Number of Partnerships, IRS Needs to Improve 
Audit Efficiency, 13 (2014) (GAO-14-732). And yet, as the number of 
large partnerships increased, the number of partnership audits did not 
keep pace. Compared to the audit rate for large corporations, which was 
27.1 percent in 2012, the audit rate for large partnerships was much 
lower at 0.8 percent. (Large partnership is defined for purposes of the 
GAO report as a partnership with 100 or more direct and indirect 
partners and $100 million or more in assets.) GAO-14-732, cover page, 
summary.
    When the IRS completes an examination of a large partnership under 
TEFRA, the IRS must pass the audit adjustments to partnership items on 
to the ultimate partners, a complex and time-consuming process. This 
requires the IRS to link potentially thousands of partner returns, 
including through tiers of partners that are themselves partnerships, 
to determine the proper share of the adjustments for each ultimate 
partner flowing from adjustments to partnership items. This process is 
``paper and labor intensive. When hundreds of partners' returns have to 
be adjusted, the costs involved limit the number of audits IRS can 
conduct.'' GAO-14-732, cover page, summary. In the meantime, while the 
IRS is determining these linkages, the period of limitations for the 
IRS to assess tax with respect to each partner continues to run.
    Specifically, the GAO reported that without ``legislative action, 
the IRS's ability [to effectively audit]'' partnerships would not 
improve. GAO-14-732, cover page, summary. At the time of the 2014 GAO 
report, Congress and the Administration had put forth legislative 
proposals that ``would allow IRS to collect tax at the partnership 
level instead of having to pass it through to the taxable partners.'' 
GAO-14-732 at 31.
    In 2015, Congress enacted the BBA to replace the TEFRA partnership 
procedures and the ELP regime with the centralized partnership audit 
regime, which contained many aspects of the legislative proposals 
referenced in the GAO report. The centralized partnership audit regime, 
when fully effective for partnership taxable years beginning after 
December 31, 2017, will be the exclusive method by which the IRS may 
audit a partnership in one unified proceeding. For those partnerships 
that will be subject to the centralized partnership audit regime that 
were previously exempt from TEFRA (for example, a partnership with no 
more than 10 partners, none of which is a pass-through entity), the 
centralized partnership audit regime replaces the separate partner-
level deficiency proceedings as the sole method for auditing the 
partnership unless an eligible partnership elects out of the 
centralized regime.
    The centralized partnership audit regime enacted in the BBA 
addresses many of the shortcomings of TEFRA identified by the GAO and 
practitioners. For instance, ``unlike prior law, distinctions between 
partnership items and affected items are no longer made'' in the 
centralized partnership audit regime. Joint Comm. on Taxation, JCS-1-
16, General Explanations of Tax Legislation Enacted in 2015, 57 (2016) 
(JCS-1-16). Instead, section 6221(a) provides that the centralized 
partnership audit regime applies to any adjustment to items of income, 
gain, loss, deduction, or credit of a partnership for a partnership 
taxable year and any partner's distributive share thereof.
    Under TEFRA, the statute broadly defines a partnership item as any 
item more appropriately determined at the partnership level. Section 
6231(a)(3) (prior to amendment by the BBA). In keeping with the 
statute, the regulations under TEFRA broadly define the term 
partnership item to include all items of income, gain, deduction, loss, 
or credit, as well as other related items such as expenditures, tax 
preferences, exempt income, partnership liabilities, guaranteed 
payments, certain basis adjustments, character and the percentage of 
partnership interests, and items arising from the determination at the 
partnership level of partnership assets, investments, transactions and 
operations, such as investment tax credits and at risk rules. See 
generally Sec.  301.6231(a)(3)-1.
    Nothing in the text or legislative history of the BBA, or the 
events leading to enactment of the new regime, indicates that 
Congress's use of the phrase ``income, gain, deduction, loss, or 
credit'' in section 6221(a) was intended to adopt a more limited set of 
items to be adjusted at the partnership level than the items included 
in the broad definition of partnership items under the TEFRA 
regulations. It would be illogical to conclude that Congress intended 
to limit the scope of what the IRS could adjust at the partnership 
level under an expanded centralized partnership audit regime. Such a 
narrow interpretation could mean that rather than increase the ability 
of the IRS to audit large partnerships in one unified proceeding, BBA 
would significantly increase the number of issues affecting 
partnerships that the IRS would be required to audit at the partner 
level, meaning that in large partnerships with thousands of partners, 
the IRS would have to audit issues related to the same partnership 
multiple times, for each partner, rather than just once at the 
partnership level. Given the GAO's criticism in GAO-14-732 of the low 
partnership audit rate, it does not follow that Congress enacted a new 
partnership audit regime that weakens the IRS's ability to conduct 
audits at the partnership level and forces the IRS to open additional 
partner-level proceedings to re-audit the same partnership.
    The centralized partnership audit regime purposefully avoids the 
terms partnership items, affected items, computational adjustments, and 
nonpartnership items that caused so much litigation under TEFRA and 
does so by adopting the single phrase ``income, gain, deduction, loss, 
or credit'' as the scope of the regime. Removing the distinctions 
between the different types of items and adjustments was an effort to 
streamline the examination and judicial process to allow centralized 
collection of the correct amount of tax had the partnership and the 
partners reported items from the partnership correctly. The centralized 
partnership audit regime limits the burden on the IRS in both the 
examination of partnerships and the judicial process--changes that were 
designed to increase the ability of the IRS to audit large 
partnerships. IRS received comments in response to Notice 2016-23, 
2016-13 I.R.B. 490, that agreed that the use of the term ``income, 
gain, deduction, loss, or credit'' in the centralized partnership audit 
regime was an attempt to reduce the challenges the IRS faced under 
TEFRA and does not limit the scope of items subject to audit, 
assessment, and collection at the partnership level.
    Under the centralized partnership audit regime, the IRS is no 
longer required to determine each partner's share of the adjustments 
made to partnership items followed by a separate computational 
adjustment for each partner to assess the correct tax due as a result 
of the partnership audit. Instead, under the default rules of section 
6225, the partnership is liable for an imputed underpayment based on 
the adjustments made at the partnership level. The imputed underpayment 
calculation may, for some partnerships, overstate the amount of tax due 
had the

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partnership and partners reported the partnership adjustments properly. 
To correct potential overstatements, the centralized partnership audit 
regime includes modification procedures and provides additional 
discretionary authority for the IRS to further modify imputed 
underpayments to carry out the function of the modification provision. 
The Joint Committee on Taxation observed that the intent of the 
modification provision is to ``determine the amount of tax due as 
closely as possible to the tax due if the partnership and partners had 
correctly reported and paid while at the same time to implement the 
most efficient and prompt assessment and collection of tax attributable 
to the income of the partnership and partners.'' JCS-1-16 at 65-66.
    To reach the correct amount of tax, the IRS makes one set of 
adjustments at the partnership level and allows the partnership, 
through modification, to adjust the imputed underpayment amount down to 
the correct amount of tax. To determine the amount of an imputed 
underpayment that reflects ``tax due as closely as possible to the tax 
due if the partnership and partners had correctly reported and paid,'' 
the breadth of what the IRS must be able to adjust at the partnership 
level must be at least as broad as the different type of adjustments 
made under TEFRA.
    Furthermore, under the modification provisions, the partnership 
(and its partners if they may amend their returns) takes on the burden 
of further refining the adjustments to reflect the correct amount of 
tax. Where all partners amend their returns taking all of the 
adjustments into account, the IRS, the partnership and its partners 
have effectively mirrored the result of a TEFRA audit, including the 
final partner-level computational adjustments. This can only be 
possible if the scope of what the IRS may adjust at the partnership 
level is sufficiently broad.
    As such, the proposed regulations take an expansive view of the 
scope of the centralized partnership audit regime to cover all items 
and information related to or derived from the partnership. 
Accordingly, under proposed Sec.  301.6221(a)-1 all items required to 
be shown or reflected on the partnership's return and information in 
the partnership's books and records related to a determination of such 
items, as well as factors that affect the determination of items of 
income, gain, loss, deduction, or credit, are subject to determination 
and adjustment at the partnership level under the centralized 
partnership audit regime.
B. Election Out of the Centralized Partnership Audit Regime
    In general, the centralized partnership audit regime applies to all 
partnerships with partnership taxable years beginning after December 
31, 2017 for any partnership (domestic or foreign) required to file a 
return under section 6031. Section 6241(1). Section 6221(b), as added 
by the BBA, allows eligible partnerships to elect out of the 
centralized partnership audit regime. The fact that all partnerships 
are covered by the centralized partnership audit regime unless they 
elect out distinguishes the centralized partnership audit regime from 
the TEFRA partnership procedures. Under TEFRA, only partnerships with 
more than 10 partners and partnerships with at least one partner that 
is not a U.S. individual, a C corporation, or an estate of a deceased 
partner are automatically covered by the regime. Section 6231(a)(1)(B) 
(prior to amendment by the BBA). However, partnerships not 
automatically subject to TEFRA can make an affirmative election into 
TEFRA. Section 6231(a)(1)(B)(ii) (prior to amendment by the BBA).
    Partnerships that elect out of the centralized partnership audit 
regime are subject to the pre-TEFRA audit procedures under which the 
IRS must separately assess tax with respect to each partner under the 
deficiency procedures under subchapter B of chapter 63. As described in 
section 2.A. of the Background section of this preamble, enactment of 
TEFRA was a reaction to the complexity and burden of the pre-TEFRA 
deficiency procedures in the case of partnerships; however, since TEFRA 
was enacted, the IRS and taxpayers have identified numerous issues with 
that regime. The centralized partnership audit regime is intended to 
simplify TEFRA's burdensome processes and to increase the IRS's ability 
to examine partnerships, particularly large and tiered partnerships, 
and to make the process of assessing tax resulting from those audits 
more efficient. The limited opt-out nature of the centralized 
partnership audit regime, which requires the partnership to take 
affirmative action to elect out of the regime, increases the likelihood 
that a partnership will be subject to the more streamlined adjustment, 
assessment, and collection procedures of the centralized partnership 
audit regime, thereby increasing the number of partnerships the IRS is 
able to examine under the centralized partnership audit regime. 
Limiting the number of partnerships that can elect out of the 
centralized partnership audit regime to those entities specifically 
permitted under the statute is necessary to carry out this goal.
    There are two conditions that must be met for a partnership to be 
eligible to elect out of the centralized partnership audit regime. 
First, a partnership must have 100 or fewer partners. Under the 
statute, a partnership has 100 or fewer partners when it is required to 
furnish 100 or fewer statements under section 6031(b), currently 
Schedule K-1, Partner's Share of Income, Deductions, Credits, etc. 
(Schedules K-1), for the taxable year. Section 6221(b)(1)(B). For 
partnerships that have an S corporation as a partner (S corporation 
partner), special rules under section 6221(b)(2)(A) apply for purposes 
of determining the number of Schedules K-1 furnished by the 
partnership. Under that rule, the number of statements required to be 
furnished by the S corporation partner to its own shareholders under 
section 6037(b) for the taxable year, currently Schedule K-1, 
Shareholder's Share of Income, Deductions, Credits, etc., are taken 
into account to determine the number of statements furnished by the 
partnership for purposes of section 6221(b)(1)(B). Section 
6221(b)(2)(A)(ii).
    Second, a partnership must only have eligible partners. Under the 
statute, eligible partners are individuals, C corporations, foreign 
entities that would be treated as C corporations if they were domestic, 
S corporations, and estates of deceased partners. Section 
6221(b)(1)(C). Under section 6221(b)(1)(D)(i), a partnership may elect 
out of the centralized partnership audit regime only on a timely filed 
return for a taxable year (including extensions).
    A partnership must include, in the manner prescribed by the 
Secretary, a disclosure of the name and taxpayer identification number 
(TIN) of each partner of the partnership. Section 6221(b)(1)(D)(ii). In 
the case of an election out by a partnership with an S corporation 
partner, the election also must include, in the manner prescribed by 
the Secretary, a disclosure of the name and TIN of each person to whom 
an S corporation partner is required to furnish a statement for the 
taxable year of the S corporation ending with or within the partnership 
taxable year that is subject to the election. Section 6221(b)(2)(A)(i). 
A partnership must notify each partner of the election in the manner 
prescribed by the Secretary. Section 6221(b)(1)(E).
    Section 6221(b)(2)(B) permits the Secretary to prescribe 
alternative identification procedures for foreign partners. The 
Secretary may by

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regulation or other guidance prescribe rules similar to the rules 
applicable to S corporations with respect to any partners not described 
in section 6221(b)(1)(C). Section 6221(b)(2)(C).
C. Consistent Treatment
i. Consistent Treatment Under TEFRA
    TEFRA includes a requirement that a partner treat items from the 
partnership consistent with the partnership's treatment of such items 
on the partnership's return. Section 6222 (prior to amendment by the 
BBA). TEFRA permits the partner to notify the IRS of inconsistent 
treatment of an item by the partner on the partner's return and avoid 
having a computational adjustment made to the inconsistently treated 
item without the IRS first completing a proceeding at the partnership 
level. The IRS could either accept the partner's inconsistent treatment 
of the item, open up an audit of the partnership to address the item at 
the partnership level, or open up audit of the partner to address the 
inconsistent item. If the IRS examined the partnership or the partner, 
all items for that taxable year would be subject to the examination.
    Section 6222, as amended by the BBA, includes a similar requirement 
of consistency and rules for notification of the inconsistency, but the 
consequences of failing to treat items consistently are different. 
Under TEFRA, the consequence of filing inconsistently is that the IRS 
is not required to conduct a partnership-level proceeding before making 
computational adjustments at the partner level and assessing any 
deficiency attributable to the adjustment of an item to make it 
consistent with the partnership return. Section 6222 now states that 
any underpayment of tax by a partner resulting from a failure to treat 
an item consistently shall be assessed and collected as if the 
underpayment were on account of a mathematical or clerical error 
appearing on the partner's return, permitting the IRS to immediately 
assess and collect such tax.
ii. Statutory Provision
    Section 6222(a) requires a partner to treat on the partner's return 
each item of income, gain, loss, deduction or credit attributable to a 
partnership subject to subchapter C of chapter 63 in a manner that is 
consistent with the treatment of such item on the partnership return. 
If the partner fails to comply with the requirements of section 
6222(a), any underpayment of tax resulting from that failure may be 
assessed and collected as if such underpayment were on account of a 
mathematical or clerical error appearing on the partner's return. 
Section 6222(b). The procedures under section 6213(b)(2), which permit 
a taxpayer to request an abatement of a mathematical or clerical error 
assessment, do not apply in these situations. Section 6222(b).
    Section 6222(c) provides an exception for situations in which a 
partner notifies the IRS of the inconsistent treatment on the partner's 
return. Under section 6222(c)(1), if the partnership has filed a return 
and the partner's treatment of an item on the partner's return is (or 
may be) inconsistent with the treatment of that item on the partnership 
return, the provisions of section 6222(a) (requiring consistent 
treatment) and (b) (allowing math error treatment to adjust 
inconsistent items) will not apply to that item if the partner files 
with the Secretary a statement identifying the inconsistency. Section 
6222(c)(1)(A)(i). The exception also applies if the partnership has not 
filed a return, and the partner files a statement identifying the 
inconsistency. Section 6222(c)(1)(A)(ii).
    In cases where a partner receives incorrect information in a 
statement furnished by a partnership, section 6222(c)(2) provides that 
the partner is treated as having notified the IRS of an inconsistency 
if the partner satisfactorily demonstrates to the Secretary that the 
treatment of the item on the partner's return is consistent with the 
treatment of the item on the statement furnished to that partner by the 
partnership, and the partner elects to have this provision apply. Under 
section 6222(d), any final decision with respect to an inconsistent 
position identified under section 6222(c) in a proceeding to which the 
partnership is not a party is not binding on the partnership.
D. Partnership Representative and Partners Bound by Actions of the 
Partnership
    Section 6223 provides that each partnership shall designate in the 
manner prescribed by the Secretary a partner or other person with a 
substantial presence in the United States as the partnership 
representative who shall have the sole authority to act on behalf of 
the partnership. Section 6223(a). In any case in which such designation 
is not in effect, the statute provides that the Secretary may select 
any person as the partnership representative. Section 6223(a). A 
partnership and all partners of such partnership are bound by actions 
taken under subchapter C of chapter 63 by the partnership and by any 
final decision in a proceeding brought under subchapter C of chapter 63 
with respect to the partnership. Section 6223(b).
    Section 6223 and the concept of the partnership representative 
replace the tax matters partner (TMP) framework that exists under the 
TEFRA partnership procedures. Under TEFRA, a partnership is required to 
designate a TMP who acts as a liaison between the partnership and the 
IRS. That TMP must be a general partner and may be an individual or an 
entity.
    The requirements placed on the designation of the TMP under TEFRA 
make it difficult in many cases to identify a qualified TMP. First, 
only general partners of the partnership may be the TMP. Because the 
TMP has to be a partner, the partnership cannot designate a non-
partner, such as a non-partner manager, even if that person is in the 
best position to understand and have available the partnership's books 
and records. In some cases, the TMP has to be a particular partner, 
such as the partner with the highest profits interest, who may not be 
knowledgeable about the partnership's taxes. See, for example, Sec.  
301.6231(a)(7)-1(m)(2).
    Even if a qualified TMP is identified, the IRS may be unable to 
contact the TMP because the TMP is out of the country or simply 
unreachable. Furthermore, in the case of a TMP that is an entity rather 
than an individual, the IRS must identify and track down an individual 
who can act for the entity. As a result, under TEFRA, partnerships and 
the IRS may spend a significant amount of time determining whether a 
person designated is even eligible to serve as the TMP before the IRS 
can proceed with a partnership examination.
    Additionally, while the TMP has the authority to bind the 
partnership, it cannot bind other partners in the partnership. A 
partner who is not the TMP also has rights during an examination, 
including certain notification rights and the right to participate in 
the proceeding. The rights of the partners to intervene in the 
examination and to contradict the actions taken by the TMP cause 
confusion during examinations and increase the administrative burden on 
the IRS.
    In contrast, the centralized partnership audit regime introduces 
the concept of the partnership representative, which is intended to 
address the shortcomings of the TMP as the representative of the 
partnership under TEFRA. First, unlike the TMP who must be a partner, a 
partnership representative can be any person, including a non-partner. 
This allows the partnership to select the person best

[[Page 27339]]

situated to represent the partnership. The only limitation is that the 
partnership representative must have a substantial presence in the 
United States. This requirement is intended to ensure that the person 
selected to represent the partnership will be available to the IRS in 
the United States when the IRS seeks to communicate or meet with the 
representative. Like TEFRA, the centralized partnership audit regime 
does not prescribe whether a partnership representative may be an 
entity or an individual.
    Second, unlike the TMP who could act for the partnership but whose 
actions did not bind other partners and could be contradicted by those 
partners, section 6223(b) provides that the partnership representative 
has the sole authority to bind the partnership, and all partners and 
the partnership are bound by the actions of the partnership 
representative and any final decision in a proceeding brought under 
subchapter C of chapter 63. The centralized partnership audit regime 
does not include a statutory right to notice of, or to participate in, 
the partnership-level proceeding for any person other than the 
partnership and the partnership representative.
E. Imputed Underpayment and Modification of Imputed Underpayment
    Section 6225 as amended by the BBA addresses partnership 
adjustments made by the IRS under the centralized partnership audit 
regime and the determination of any resulting imputed underpayment. 
Section 6225(a)(1) provides that in the case of any adjustment by the 
Secretary in the amount of any item of income, gain, loss, deduction, 
or credit of the partnership, or any partner's distributive share 
thereof, the partnership shall pay any imputed underpayment with 
respect to such adjustment in the adjustment year as provided in 
section 6232. Any adjustment that does not result in an imputed 
underpayment must be taken into account by the partnership in the 
adjustment year. Section 6225(a)(2). Except for an adjustment to an 
item of credit, which is taken into account as a separately stated 
item, an adjustment not resulting in an imputed underpayment must be 
taken into account as a reduction in non-separately stated income or as 
an increase in non-separately stated loss (whichever is appropriate) in 
accordance with section 702(a)(8). Section 6225(a)(2)(A)-(B).
    An imputed underpayment with respect to a partnership adjustment 
for the partnership's reviewed year is determined in accordance with 
section 6225(b). Under that section, adjustments to similar items of 
income, gain, loss, or deduction are netted with each other, treating 
any net increase or decrease in loss as a decrease or increase, 
respectively, in income. Section 6225(b)(1)(A)-(B). The net amount is 
then multiplied by the highest rate of tax in effect for the reviewed 
year under section 1 (individual rates) or section 11 (corporate 
rates). Section 6225(b)(1)(A). The product is then increased or 
decreased, as the case may be, by any adjustments to items of credit. 
Section 6225(c).
    Section 6225(b)(2) provides that in the case of an adjustment that 
reallocates the distributive share of an item from one partner to 
another, such adjustment shall be taken into account when determining 
the imputed underpayment by disregarding any decrease in any item of 
income or gain and any increase in an item of deduction, loss, or 
credit.
    Under section 6225(c), a partnership may modify an imputed 
underpayment under procedures established by the Secretary. Anything 
required to be submitted to the Secretary under the procedures for 
modification of the imputed underpayment must be submitted within 270 
days following the date the notice of proposed partnership adjustment 
(NOPPA) is mailed under section 6231 by the IRS, unless that period is 
extended with the consent of the Secretary. Section 6225(c)(7). Any 
modification of the imputed underpayment amount shall be made only upon 
approval of the requested modification by the Secretary. Section 
6225(c)(8).
    Under section 6225(c)(2), modification procedures shall provide 
that if one or more partners files amended returns (notwithstanding 
section 6511) for the taxable year of the partners that includes the 
end of the reviewed year of the partnership, such returns take into 
account all adjustments made by the Secretary that are properly 
allocable to such partners (and for any other taxable year with respect 
to which a tax attribute is affected by reason of the adjustments made 
by the Secretary), and payment of any tax due is included with the 
amended returns, the imputed underpayment shall be determined without 
regard to the portion of the adjustments taken into account in the 
amended returns. In the case of any adjustment that reallocates the 
distributive share of any item from one partner to another, a 
modification described in section 6225(c)(2) shall apply only if 
amended returns are filed by all partners affected by such adjustment.
    Under section 6225(c)(3), modification procedures shall provide for 
determining the imputed underpayment without regard to the portion 
thereof that the partnership demonstrates is allocable to a partner 
that would not owe tax by reason of its status as a tax-exempt entity 
(as defined in section 168(h)(2)).
    Under section 6225(c)(4), modification procedures shall provide for 
taking into account a rate of tax lower than the rate of tax described 
in section 6225(b)(1)(A) (that is, the highest rate under section 1 or 
section 11) with respect to any portion of an imputed underpayment that 
the partnership demonstrates is allocable to a partner that is a C 
corporation or, in the case of a capital gain or qualified dividend, is 
an individual. In no event shall the lower rate determined under 
section 6225(c)(4) be lower than the highest rate in effect for the 
reviewed year with respect to the type of income and taxpayer (that is, 
a C corporation or an individual). For the purposes of the lower rate 
for capital gains and qualified dividends, an S corporation shall be 
treated as an individual. Section 6225(c)(4)(A). The portion of an 
imputed underpayment to which the lower rate applies with respect to a 
partner shall be determined by reference to the partner's distributive 
share of the items to which the imputed underpayment relates. Section 
6225(c)(4)(B)(i). If an imputed underpayment is attributable to the 
adjustment of more than one item, and any partner's distributive share 
of such items is not the same with respect to all such items, the 
portion of the imputed underpayment to which the lower rate applies 
with respect to a partner shall be determined by reference to the 
amount which would have been the partner's distributive share of net 
gain or loss if the partnership had sold all of its assets at their 
fair market value as of the close of the reviewed year of the 
partnership. Section 6225(c)(4)(B)(ii).
    Section 6225(c)(5) provides that, in the case of a publicly traded 
partnership (as defined in section 469(k)(2)), the modification 
procedures shall provide for determining the imputed underpayment 
without regard to the portion thereof that the partnership demonstrates 
is attributable to a net decrease in a specified passive activity loss 
that is allocable to a specified partner and for the partnership to 
take such net decrease into account as an adjustment in the adjustment 
year with respect to the specified partners to which such net decrease 
relates. Section 6225(c)(5)(A). For purposes of section 6225(c)(5), the 
term ``specified passive

[[Page 27340]]

activity loss'' means, with respect to any specified partner of such 
publicly traded partnership, the lesser of the passive activity loss of 
such partner which is separately determined with respect to such 
partnership under section 469(k) with respect to such partner's taxable 
year in which or with which the reviewed year of such partnership ends, 
or such passive activity loss so determined with respect to such 
partner's taxable year in which or with which the adjustment year of 
such partnership ends. Section 6225(c)(5)(B). For purposes of section 
6225(c)(5), the term ``specified partner'' means any person if such 
person with respect to each taxable year of such person which is during 
the period beginning with the taxable year of such person in which or 
with which the reviewed year of such publicly traded partnership ends 
and ending with the taxable year of such person in which or with which 
the adjustment year of such publicly traded partnership ends is (1) a 
partner of such publicly traded partnership; (2) is described in 
section 469(a)(2); and (3) has a specified passive activity loss with 
respect to such publicly traded partnership. Section 6225(c)(5)(C).
    Section 6225(c)(6) provides that the Secretary may by regulations 
or guidance provide for additional procedures to modify imputed 
underpayment amounts on the basis of such other factors as the 
Secretary determines are necessary or appropriate to carry out the 
purposes of section 6225(c).
F. Election for the Alternative to Payment of the Imputed Underpayment
    Section 6226 provides an alternative to the general rule under 
section 6225(a)(1) that the partnership must pay the imputed 
underpayment. Under section 6226, the partnership may elect to have its 
reviewed year partners take into account the adjustments made by the 
IRS and pay any tax due as a result of those adjustments. In this case, 
the reviewed year partners must pay any tax resulting from taking into 
account the adjustments and the partnership is not required to pay the 
imputed underpayment.
    In order to elect application of section 6226, a partnership must 
take two steps with respect to an imputed underpayment. First, the 
partnership must make an election in the manner provided by the 
Secretary no later than 45 days after the date the FPA is mailed by the 
IRS under section 6231. Section 6226(a)(1). Second, the partnership 
must furnish, at such time and in such manner as provided by the 
Secretary, a statement of each partner's share of any adjustment as 
determined in the FPA to its reviewed year partners. Section 
6226(a)(2). If the partnership takes these two steps in the time and 
manner prescribed by the statute and by the Secretary, section 6225 
does not apply with respect to the imputed underpayment, and each 
partner must take its share of the adjustments into account as provided 
in section 6226(b). Section 6226(a) (flush language). An election under 
section 6226 is revocable only with the consent of the Secretary. Id.
    Section 6226(b) describes how the adjustments subject to the 
section 6226 election are taken into account by the reviewed year 
partners. Under section 6226(b)(1), each partner's tax imposed by 
chapter 1 of subtitle A of the Code (chapter 1 tax) is increased by the 
aggregate of the adjustment amounts as determined under section 
6226(b)(2). This increase in chapter 1 tax is reported on the return 
for the partner's taxable year that includes the date the statement 
described under section 6226(a) is furnished to the partner by the 
partnership (reporting year).
    The adjustment amounts determined under section 6226(b)(2) fall 
into two categories. In the case of the taxable year of the partner 
that includes the end of the partnership's reviewed year (first 
affected year), the adjustment amount is the amount by which the 
partner's chapter 1 tax would increase for the partner's first affected 
year if the partner's share of the adjustments were taken into account 
in that year. Section 6226(b)(2)(A). In the case of any taxable year 
after the first affected year, and before the reporting year (that is, 
the intervening years), the adjustment amount is the amount by which 
the partner's chapter 1 tax would increase by reason of the adjustment 
to tax attributes determined under section 6226(b)(3) in each of the 
intervening years. Section 6226(b)(2)(B). The adjustment amounts 
determined under section 6226(b)(2)(A) and (B) are added together to 
determine the aggregate of the adjustment amounts for purposes of 
determining the increase to the partner's chapter 1 tax in accordance 
with section 6226(b)(1).
    Section 6226(b)(3) provides two rules regarding adjustments to tax 
attributes that would have been affected if the partner's share of 
adjustments were taken into account in the first affected year. First, 
in the case of an intervening year, any tax attribute must be 
appropriately adjusted for purposes of determining the adjustment 
amount for that intervening year in accordance with section 
6226(b)(2)(B). Section 6226(b)(3)(A). Second, in the case of any 
subsequent taxable year (that is, a year, including the reporting year, 
that is subsequent to the intervening years referenced in 
6226(b)(3)(A)), any tax attribute must be appropriately adjusted. 
Section 6226(b)(3)(B).
    Section 6226(c) provides rules for the treatment of penalties and 
interest determined under section 6221 at the partnership level when an 
election is made under section 6226. Notwithstanding the provisions of 
section 6226(a) and (b) (regarding the requirements for making an 
election and how partners take into account adjustments), any 
penalties, additions to tax, or additional amounts are determined under 
section 6221 at the partnership level, and the reviewed year partners 
of the partnership are liable for any such penalty, addition to tax, or 
additional amount. Section 6226(c)(1).
    In contrast, section 6226(c)(2) provides that interest is 
determined at the partner level. Section 6226(c)(2)(A). Interest is 
calculated from the due date of the partner's return for the taxable 
year to which the increase in tax is attributable taking into account 
any increases attributable to a change in tax attributes for an 
intervening year as determined under section 6226(b)(2). Section 
6226(c)(2)(B). The interest is computed at the underpayment rate under 
section 6621(a)(2), substituting five percentage points for three 
percentage points for purposes of section 6621(a)(2)(B) (the sum of the 
federal short-term rate plus five percentage points instead of three 
percentage points).
G. Administrative Adjustment Requests
    Section 6227 provides a mechanism for a partnership to file an 
administrative adjustment request (AAR) to correct errors on a 
partnership return for a prior year. A partnership may file a request 
for administrative adjustment in the amount of one or more items of 
income, gain, loss, deduction, or credit of the partnership for any 
partnership taxable year. Section 6227(a). Any adjustment requested in 
an AAR is taken into account for the partnership taxable year in which 
the AAR is made. Section 6227(b). Under section 6227, only a 
partnership may file an AAR. Therefore, a partner who is not also the 
partnership representative acting on behalf of the partnership may not 
file an AAR.
    Under section 6227(c), a partnership has three years from the later 
of the filing of the partnership return or the due date of the 
partnership return (excluding extensions) to file an AAR for that 
taxable year. However, a

[[Page 27341]]

partnership may not file an AAR for a partnership taxable year after 
the IRS has mailed a notice of an administrative proceeding under 
section 6231 with respect to that taxable year.
    Under section 6227(b), if an adjustment results in an imputed 
underpayment, the adjustment may be determined and taken into account 
in one of two ways. The partnership may determine and take the 
adjustment into account for the partnership taxable year in which the 
AAR is filed under rules similar to the rules under section 6225, 
relating to payment of the imputed underpayment by the partnership, 
except that the provisions under section 6225 pertaining to 
modification of the imputed underpayment based on amended returns by 
partners, the time for submitting information to the Secretary for 
purposes of modification, and approval by the Secretary of any 
modification do not apply. Section 6227(b)(1). Alternatively, the 
partnership and the partners may determine and take the adjustment into 
account under rules similar to the rules under section 6226 relating to 
the alternative to the partnership payment of the imputed underpayment, 
except that the additional 2 percentage points of interest imposed 
under section 6226 does not apply. Section 6227(b)(2).
    In the case of an adjustment that would not result in an imputed 
underpayment, section 6227(b) requires that the partnership and the 
reviewed year partners must determine and take the adjustment into 
account under rules similar to the rules under section 6226 with 
appropriate adjustments. This provision ensures that the partners for 
the year to which the adjustments relate benefit from any refund that 
may result from such adjustments.
H. Definitions and Special Rules
i. Definitions
    Section 6241(1) defines the term ``partnership'' for purposes of 
subchapter C of chapter 63 as any partnership required to file a return 
under section 6031(a). Section 6241(2) defines the term ``partnership 
adjustment'' as any adjustment in the amount of any item of income, 
gain, loss, deduction, or credit of a partnership, or any partner's 
distributive share thereof. Section 6241(3) defines the term ``return 
due date'' as the due date prescribed for filing the partnership return 
for such taxable year (determined without regard to extensions).
    Section 6225(d)(1) defines the term ``reviewed year'' as the 
partnership taxable year to which the item being adjusted relates. 
Section 6225(d)(2) defines the term ``adjustment year'' to mean, in the 
case of an adjustment pursuant to the decision of a court in a 
proceeding brought under section 6234, the taxable year in which such 
decision becomes final; in the case of an administrative adjustment 
request under section 6227, the taxable year in which such 
administrative adjustment request is made; and, in any other case, the 
taxable year in which a notice of the final partnership adjustment 
(FPA) is mailed under section 6231.
ii. Bankruptcy
    Section 6241(6)(A) provides that, in a case under Title 11 of the 
United States Code (Title 11 case), the running of any period of 
limitations provided in subchapter C of chapter 63 for making a 
partnership adjustment (or provided in section 6501 or 6502 for the 
assessment or collection of any imputed underpayment determined under 
subchapter C of chapter 63) is suspended for the period during which 
the Secretary is prohibited by reason of the Title 11 case from making 
the partnership adjustment or assessing or collecting any amounts due 
under subchapter C of chapter 63. Section 6241(6)(A)(i) provides that 
in the case of the period of limitations for making adjustments or 
making an assessment, the suspension period includes an additional 60 
days. Section 6241(6)(A)(ii) provides that in the case of the period of 
limitations on collection, the suspension period includes an additional 
six months.
    Section 6241(6)(A) provides that a rule similar to the rule of 
section 6213(f)(2) applies for purposes of section 6232(b), the 
limitation on assessments under subchapter C of chapter 63. Section 
6213(f) clarifies that the limitation on assessment under section 
6213(a) with respect to deficiencies does not prohibit the Secretary 
from filing of a proof of claim in a bankruptcy case. Thus, the 
limitation on assessment under section 6232(b) similarly does not 
prohibit the filing of a proof of claim in bankruptcy.
    Under section 6241(6)(B), the running of the 90-day period to file 
a petition for readjustment under section 6234 is suspended during the 
period during which the partnership is prohibited by reason of a 
bankruptcy case from filing the petition for readjustment and for an 
additional 60 days.
iii. Other Rules
    Section 6241(4) provides that any payments required to be made 
under subchapter C of chapter 63 are nondeductible under subtitle A.
    Section 6241(5) provides the general rule that, for purposes of 
section 6234 (regarding judicial review of partnership adjustments), a 
principal place of business located outside the United States is 
treated as located in the District of Columbia.
    Section 6241(7) provides that, where a partnership ceases to exist 
before a partnership adjustment under subchapter C of chapter 63 takes 
effect, the partnership adjustment shall be taken into account by the 
former partners of the partnership pursuant to regulations prescribed 
by the Secretary.
    Section 6241(8) provides that, to the extent provided by 
regulations, the provisions of subchapter C of chapter 63 shall extend 
to the taxable year of an entity for which a partnership return is 
filed by the entity (even if it is determined that the entity is not a 
partnership or that there is no entity for such taxable year), to the 
items of such entity, and to any person holding an interest in such 
entity.
I. Withdrawal of Proposed Regulations Under Section 6231(c)
    On February 13, 2009, a notice of proposed rulemaking (REG-138326-
07) regarding the conversion of partnership items related to listed 
transactions was published in the Federal Register (74 FR 7205). The 
proposed regulations were issued under section 6231(c) (prior to 
amendment by the BBA), which permitted the IRS to issue regulations 
that address special enforcement areas, that is, areas where the 
application of the TEFRA partnership procedures would interfere with 
the effective and efficient enforcement of the internal revenue laws. 
Written or electronic comments responding to the notice of proposed 
rulemaking were received, but no public hearing was requested or held. 
After consideration of all the comments, the Treasury Department and 
the IRS have decided to withdraw the proposed regulations.

Explanation of Provisions

1. Scope of the Centralized Partnership Audit Regime

    Proposed Sec.  301.6221(a)-1(a) provides that all adjustments and 
items relating to a partnership are determined at the partnership level 
under the centralized partnership audit regime. Accordingly, the 
proposed regulations provide that the centralized partnership audit 
regime covers any adjustment to items of income, gain, loss, deduction, 
or credit of a partnership and any partner's distributive share of 
those adjusted items. Further, the proposed regulations provide that 
any chapter 1 tax resulting

[[Page 27342]]

from an adjustment to items under the centralized partnership audit 
regime is assessed and collected at the partnership level. Under the 
proposed regulations, the applicability of any penalty, addition to 
tax, or additional amount which relates to an adjustment to any such 
item or share is also determined at the partnership level.
    Proposed Sec.  301.6221(a)-1(b)(1) defines the phrase ``income, 
gain, loss, deduction, or credit'' for purposes of the centralized 
partnership audit regime broadly so that the phrase includes: The 
character, timing, source, and amount of items; the character, timing, 
and source of the partnership's activities; contributions to and 
distributions from the partnership; the partnership's basis in its 
assets and the value of those assets; the amount and character of 
partnership liabilities; the separate category (for purposes of the 
foreign tax credit limitation), timing, and amount of the partnership's 
creditable foreign tax expenditures; elections made by the partnership; 
items related to transactions between a partnership and any partner 
(including disguised sales and guaranteed payments); any items related 
to terminations of a partnership; and partners' capital accounts. 
Proposed Sec.  301.6221(a)-1(b)(2) defines the phrase ``a partner's 
distributive share'' to include any partner's share of any item 
determined at the partnership level; the nature and amount of the 
partner's interest in the partnership; whether any special allocations 
apply to any partner; the character and timing of any item or activity 
required to be taken into account by the partner which is related to 
any item adjusted at the partnership level under subchapter C of 
chapter 63; and any amount required to be taken into account by the 
partner if the partnership makes an election under section 6226.
    Proposed Sec.  301.6221(a)-1(b)(3) defines the term ``tax'' for 
purposes of Sec.  301.6221(a)-1 to mean tax imposed by chapter 1 of 
subtitle A of the Code. Accordingly, for purposes of assessment and 
collection at the partnership level, taxes imposed by other chapters of 
the Code are not included in the term ``tax.'' Those taxes that are not 
covered by the centralized partnership audit regime include taxes 
imposed by chapter 2 (Tax on Self-Employment Income), chapter 2A 
(Unearned Income Medicare Contribution), chapter 3 (Withholding of Tax 
on Nonresident Aliens and Foreign Corporations), chapter 4 (Taxes to 
Enforce Reporting on Certain Foreign Accounts), and chapter 6 
(Consolidated Returns). In addition, taxes imposed by other subtitles 
of the Code, such as subtitle C (Employment Taxes), are not included 
within the scope of the centralized partnership audit regime. 
Accordingly, the IRS may separately examine the partnership or its 
partners outside the centralized partnership audit regime for purposes 
of determining and assessing these types of taxes.
    In some circumstances, adjustments made under the centralized 
partnership audit regime may have an effect on the determination of 
taxes imposed by provisions of the Code outside of chapter 1. For 
example, if it is determined in a proceeding under the centralized 
partnership audit regime that a partnership has additional unreported 
ordinary income, that determination could form the basis for a separate 
determination that one or more of the partners in that partnership owe 
additional self-employment tax under chapter 2 of the Code. 
Additionally, as clarified in proposed Sec.  301.6221(a)-1(d), 
determinations regarding items covered by the centralized partnership 
audit regime may be relied upon by the IRS when making determinations 
of taxes not covered by chapter 1 to the extent they are relevant in 
making such determinations. For instance, if the IRS determines as part 
of the centralized partnership audit regime that an individual who is 
treated as a partner in the partnership has received additional 
unreported ordinary income from the partnership, the IRS is not 
precluded from separately examining the partnership or that individual 
for purposes of determining whether that individual is an employee and 
not a partner of the partnership for purposes of imposing subtitle C 
employment taxes with regard to that income or examining the individual 
for purposes of determining whether the individual owes additional 
self-employment tax on the income. Any such determinations made in a 
separate examination outside the centralized partnership audit regime 
will be solely for purposes of the taxes not covered by chapter 1, will 
not constitute determinations for purposes of chapter 1, and will not 
constitute an administrative proceeding with respect to the partnership 
for purposes of subchapter C of chapter 63. The IRS may use all 
procedures available, such as obtaining the books and records of the 
partnership, to make determinations of items covered by the centralized 
partnership audit regime solely for purposes of taxes not covered by 
chapter 1. Any determinations for taxes other than chapter 1 taxes are 
not covered by the centralized partnership audit regime under 
subchapter C of chapter 63.
    Proposed Sec.  301.6221(a)-1(a) provides that the applicability of 
any penalty, addition to tax, or additional amount that relates to an 
adjustment under subchapter C of chapter 63 is determined at the 
partnership level. Proposed Sec.  301.6221(a)-1(c) provides that any 
defenses to any penalty, addition to tax, or additional amount under 
subchapter C of chapter 63 may only be raised or considered in a 
partnership proceeding initiated under subchapter C of chapter 63. The 
partnership representative (as defined in section 6223 and the 
regulations thereunder) is the sole representative of the partnership. 
Accordingly, only the partnership representative may raise defenses to 
penalties, additions to tax, or additional amounts, including the 
partnership's defenses and defenses that relate to any partner. For 
example, if the partnership believes it has a viable reasonable cause 
defense, the partnership representative must raise this defense as part 
of the partnership proceeding. Any defense, whether it relies on facts 
and circumstances relating to the partnership or one or more partners 
or any other person, that is not raised by the partnership before a 
final determination under subchapter C of chapter 63 is waived and will 
not be considered if raised by any other person, including a partner 
that receives a section 6226 statement as a result of the partnership 
making an election under section 6226.

2. Election Out of the Centralized Partnership Audit Regime

A. Eligibility To Make the Election
    Proposed Sec.  301.6221(b)-1(b) provides that only an eligible 
partnership may elect out of the centralized partnership audit regime. 
Under that section, a partnership is an eligible partnership if it has 
100 or fewer partners during the year and, if at all times during the 
taxable year, all partners are eligible partners, as defined in 
proposed Sec.  301.6221(b)-1(b)(3).
i. 100 or Fewer Partners
    Under proposed Sec.  301.6221(b)-1(b)(2), a partnership has 100 or 
fewer partners during the year if it is required to furnish 100 or 
fewer statements under section 6031(b) during the taxable year for 
which the partnership makes the election. When determining whether a 
partnership is required to furnish 100 or fewer statements under 
section 6031(b) during the taxable year, only statements required to be 
furnished by the partnership under section 6031(b) for

[[Page 27343]]

the taxable year are taken into account, regardless of the number of 
statements actually furnished by the partnership. Accordingly, if 
contrary to the instructions to the Schedule K-1 the partnership 
furnishes more statements than are required under section 6031(b), any 
statements that are not required to be issued under section 6031(b) are 
not taken into account. For instance, if contrary to the instructions 
to the Schedule K-1 a partnership furnishes two Schedules K-1 to a 
partner (one for the partner's general interest in the partnership and 
one for the partner's limited interest in the partnership), the 
partnership is treated as furnishing only one Schedule K-1 for purposes 
of proposed Sec.  301.6221(b)-1(b)(2) because the partnership is only 
required to furnish one statement to that partner under section 
6031(b).
    The proposed regulations include a special rule for partnerships 
that have S corporation partners. As described in proposed Sec.  
301.6221(b)-1(b)(2)(ii), any statements required to be furnished by the 
S corporation partner under section 6037(b) for the taxable year of the 
S corporation ending with or within the partnership's taxable year are 
taken into account for purposes of determining whether the partnership 
is required to furnish 100 or fewer statements for the taxable year. 
For instance, if an S corporation with 50 shareholders is a partner in 
a partnership, in addition to the statement the partnership is required 
to furnish to the S corporation, the 50 statements that the S 
corporation is required to furnish to its shareholders under section 
6037(b) are taken into account for purposes of determining whether the 
partnership is required to issue 100 or fewer statements. As 
illustrated in Example 5 of proposed Sec.  301.6221(b)-1(b)(2)(iii), 
the special rule under proposed Sec.  301.6221(b)-1(b)(2)(ii) does not 
apply to partners that are not S corporations.
    Pursuant to section 6221(b), the determination of whether the 
partnership has 100 or fewer partners is made by counting the number of 
statements required to be furnished under section 6031(b). Under TEFRA, 
section 6231(a)(1)(B) (prior to amendment by the BBA) specifically 
states that a husband and wife were treated as a single partner for 
purposes of determining whether the partnership had 10 or fewer 
partners (the TEFRA small partnership exception). Section 6221(b) 
contains no similar language. Accordingly, the principles of section 
6031(b), which do not treat a husband and wife as a single partner, 
apply for purposes of determining whether the partnership has 100 or 
fewer partners. Examples 1 and 2 in proposed Sec.  301.6221(b)-
1(b)(2)(iii) illustrate this point.
ii. Eligible Partners
    Proposed Sec.  301.6221(b)-1(b)(3)(i) defines the term ``eligible 
partner'' as any person who is an individual, C corporation, eligible 
foreign entity, S corporation, or an estate of a deceased partner. 
Under this proposed rule, a C corporation is an entity defined in 
section 1361(a)(2), including a regulated investment company (RIC) 
under section 851 and a real estate investment trust (REIT) under 
section 856. The Treasury Department and the IRS intend to continue to 
treat an organization that is determined to be, or claims to be, exempt 
from tax under section 501(a) and is classified as a corporation under 
section 7701(a)(3) as a C corporation for purposes of proposed Sec.  
301.6221(b)-1(b)(3), consistent with Revenue Ruling 2003-69, 2003-1 
C.B. 1118 (treating tax-exempt corporations as C corporations for 
purposes of the TEFRA small partnership exception). This treatment does 
not extend to an organization that is determined to be, or claims to 
be, exempt from tax under section 501(a) that is not classified as a 
corporation under section 7701(a)(3) as a C corporation, such as 
trusts.
    An ``eligible foreign entity'' is defined in proposed Sec.  
301.6221(b)-1(b)(3)(iii) as any foreign entity that is classified as a 
per se corporation under Sec.  301.7701-2(b)(1), (3)-(8), is classified 
by default as an association taxable as a corporation under Sec.  
301.7701-3(b)(2)(i)(B), or is classified as an association taxable as a 
corporation in accordance with an election under the provisions of 
Sec.  301.7701-3(c).
    Proposed Sec.  301.6221(b)-1(b)(3)(ii) clarifies that the term 
``eligible partner'' does not include partnerships, trusts, foreign 
entities that are not eligible foreign entities, disregarded entities, 
nominees, other similar persons that hold an interest on behalf of 
another person, and estates that are not estates of a deceased partner.
    A number of comments received in response to Notice 2016-23 
suggested that the Treasury Department and the IRS should exercise the 
regulatory authority provided in section 6221(b)(2)(C) to expand the 
types of entities that are eligible partners for purposes of the 
election out. Specifically, commenters requested that entities such as 
disregarded entities, trusts, partnerships, and partners who use 
nominees should be considered eligible partners for purposes of the 
election out rules. The commenters also suggest that there may be 
certain partnership structures that could be efficiently examined at 
the ultimate taxpayer level even if a partner is not one of the 
eligible partners listed in section 6221(b). The Treasury Department 
and the IRS considered these comments, but have declined in these 
proposed regulations to exercise the authority under section 
6221(b)(2)(C) to expand the types of entities that are eligible 
partners for purposes of the election out rules or to create separate 
election out provisions for specific partnership structures. When a 
partnership elects out of the centralized partnership audit regime, the 
IRS must examine and assess tax with respect to each ultimate partner 
under the deficiency procedures under subchapter B of chapter 63. 
Enactment of TEFRA was a reaction to the complexity and burden of these 
deficiency procedures with respect to partnerships. The increasing 
number and complexity of partnerships since TEFRA was enacted revealed 
that the TEFRA procedures were inadequate for the IRS to effectively 
audit partnerships. The centralized partnership audit regime is 
intended to enhance the IRS's ability to examine partnerships, 
particularly large and highly tiered partnerships. If the proposed 
regulations broaden the scope of the election out provisions to include 
additional types of partners or partnership structures, the IRS will 
face additional administrative burden in examining those structures and 
partners under the deficiency rules. Comments on any potential 
expansion of the election out rules are particularly helpful if they 
address the additional burdens any such expansion would impose on the 
IRS and not just the decreased burden on taxpayers resulting from the 
suggested change.
B. Making the Election Out
    Proposed Sec.  301.6221(b)-1(c) provides the time, form, and manner 
for the partnership to make an election out of the centralized 
partnership audit regime, and unless all of these requirements are 
satisfied an election will not be valid. The requirements under 
proposed Sec.  301.6221(b)-1(c) are described below.
    First, under proposed Sec.  301.6221(b)-1(c)(1), a partnership may 
make the election only on a timely filed partnership return (including 
extensions) (that is, Form 1065, U.S. Return of Partnership Income) for 
the partnership taxable year to which the election relates. Therefore, 
a partnership may not make the election on a return that is filed after 
the due date (including extensions) for the taxable year. An election 
out made by a partnership may

[[Page 27344]]

only be revoked with the consent of the IRS. Proposed Sec.  
301.6221(b)-1(c)(1).
    In response to Notice 2016-23, some commenters requested that the 
election out rules should not penalize a partnership that does not 
timely file a return. Section 6221(b) specifically prescribes that the 
election must be made on a timely filed return. Accordingly, the 
proposed regulations conform with the statute and require the election 
under section 6221(b) to be made on a timely filed return.
    Second, proposed Sec.  301.6221(b)-1(c)(2) provides that a 
partnership must disclose to the IRS the names, correct TINs, and 
federal tax classifications of all partners of the partnership and, if 
there is an S corporation partner, the names, correct TINs, and federal 
tax classifications of all persons to whom an S corporation partner is 
required to furnish statements during the S corporation partner's 
taxable year ending with or within the partnership's taxable year at 
issue, and any other information regarding those partners (and 
shareholders) as required by the IRS in forms and instructions. The 
Treasury Department and the IRS recognize that section 6221(b)(2)(B) 
grants authority to the Secretary to provide for alternative 
identification of any foreign partners. However, in most cases, 
partners (including foreign partners) in partnerships that file a Form 
1065, U.S. Return of Partnership Income, are required to have taxpayer 
identification numbers, and, as a result, alternative identification 
procedures for foreign partners may be unnecessary. The Treasury 
Department and the IRS request comments describing situations in which 
a foreign partner in a partnership subject to the centralized 
partnership audit regime may not otherwise be required to have a 
taxpayer identification number except for purposes of making an 
election out under section 6221(b), as well as recommendations for 
alternative identification procedures that could be used in such cases.
    Finally, proposed Sec.  301.6221(b)-1(c)(3) provides that a 
partnership that elects out of the centralized partnership audit regime 
must notify each of its partners that the partnership made the 
election. This notification must be made within 30 days of making the 
election. The proposed regulations do not mandate the form of the 
notice that the partnership must provide to its partners. Accordingly, 
the notice may be in writing, electronic, or other form chosen by the 
partnership.
    Proposed Sec.  301.6221(b)-1(d) clarifies that any election out of 
the centralized partnership audit regime by an eligible partnership 
that is a partnership-partner (as defined in proposed Sec.  301.6241-
1(a)(7)) has no effect on the application of the centralized 
partnership audit regime to that partnership-partner in its capacity as 
a partner in another partnership. The Treasury Department and the IRS 
intend this provision to make clear that the effect of adjustments on a 
partnership-partner that is a partner in a partnership that is subject 
to the centralized partnership audit regime are determined under the 
centralized partnership audit regime even if that partnership-partner 
has made a valid election under section 6221(b). The examples in 
proposed Sec.  301.6221(b)-1(d)(2) illustrate these principles.
    Proposed Sec.  301.6221(b)-1(e) provides that, if a partnership 
makes an election under this section, the IRS may rely on that election 
for all purposes unless and until the IRS determines that the election 
is invalid. The Treasury Department and the IRS intend proposed Sec.  
301.6221-1(e) to provide certainty to partnerships and the IRS because 
whether an election out is valid will determine whether the IRS must 
conduct a proceeding with respect to the partnership under the 
centralized partnership audit regime or whether the IRS will follow 
deficiency procedures with respect to the direct or indirect partners 
of the partnership to examine items that, absent a valid election, 
would be subject to the centralized partnership audit regime. Proposed 
Sec.  301.6221-1(e) provides that an election that is not fully 
compliant with all the applicable rules, including an election by a 
partnership not eligible to make the election, may still be relied upon 
by the partnership unless challenged by the IRS, and the IRS may also 
rely upon an election in determining whether a partnership is subject 
to the centralized partnership audit regime. As a result, it will be 
clear to partnerships, direct and indirect partners, and the IRS which 
examination and adjustment regime should apply to the items otherwise 
subject to the centralized partnership audit regime.
C. Effect of Election Out
    As discussed in the Background, the centralized partnership audit 
regime is designed to make it easier for the IRS to examine 
partnerships and collect any resulting underpayments through one 
centralized proceeding. For partnerships that elect out, the IRS will 
be required to open deficiency proceedings at the partner level to 
adjust items associated with the partnership, resolve issues, and 
assess and collect any tax that may result from the adjustments. Each 
partner-level deficiency proceeding is subject to its own statute of 
limitations and venue, which often results in separate partner-by-
partner determinations with respect to the same item. Nevertheless, the 
IRS intends to increase the number of partnership audits for both 
partnerships that are subject to the centralized partnership audit 
regime and partnerships that have elected out of the partnership audit 
regime.
    In addition, to ensure that the election out rules are not used 
solely to frustrate IRS compliance efforts, the IRS intends to 
carefully review a partnership's decision to elect out of the 
centralized partnership audit regime. This review will include 
analyzing whether the partnership has correctly identified all of its 
partners for federal income tax purposes notwithstanding who the 
partnership reports as its partners. For instance, the IRS will be 
reviewing the partnership's partners to confirm that the partners are 
not nominees or agents for the beneficial owner.
    In addition, the IRS intends to carefully scrutinize whether two or 
more partnerships that have elected out should be recast under existing 
judicial doctrines and general federal tax principles as having formed 
one or more constructive or de facto partnerships for federal income 
tax purposes. The types of arrangements that the IRS will carefully 
review include those where the profits or losses of partners are 
determined in whole or in part by the profits or losses of partners in 
another partnership, and those that purport to be something other than 
a partnership, such as the co-ownership of property. If it is 
determined that two or more partnerships that have elected out of the 
centralized partnership audit regime have formed a constructive or de 
facto partnership for a particular partnership taxable year and are 
recast as such by the IRS, that constructive or de facto partnership 
will be subject to the centralized partnership audit regime because 
that constructive or de facto partnership will not have filed a 
partnership return and, therefore, will not have made a timely election 
out as required under section 6221(b)(1)(D)(i) and these proposed 
regulations. The constructive or de facto partnership may also have 
more than 100 partners or an ineligible partner, making it ineligible 
to elect out.

[[Page 27345]]

3. Partner's Return Must Be Consistent With Partnership Return

A. Requirement of Consistency
    Proposed Sec.  301.6222-1(a)(1) provides that a partner's treatment 
of each item of income, gain, loss, deduction, or credit attributable 
to a partnership must be consistent with the treatment of those items 
on the partnership return, including treatment with respect to the 
amount, timing, and characterization of those items. Additionally, 
proposed Sec.  301.6222-1(a)(1) clarifies that the determination of 
whether a partner treats an item consistently with the partnership 
return is determined with reference to the treatment of that item on 
the partnership return filed with the IRS, and not with reference to 
any schedule or other information provided or furnished by the 
partnership to the partner, for example, a schedule K-1 furnished to 
the partner by the partnership, unless the election under proposed 
Sec.  301.6222-1(d), regarding incorrect statements or information, 
applies.
    Proposed Sec.  301.6222-1(a)(2) provides that a partnership-partner 
is subject to section 6222 and the regulations thereunder regardless of 
whether the partnership-partner has made an election out of the 
centralized partnership audit regime under section 6221(b). Proposed 
Sec.  301.6222-1(a)(3) provides that a partner's return is considered 
automatically inconsistent if the partnership does not file a return, 
unless the partner notifies the IRS of this inconsistency in accordance 
with proposed Sec.  301.6222-1(c).
    For purposes of these proposed regulations, the term ``treatment of 
items on a partnership return'' is defined under proposed Sec.  
301.6222-1(a)(4) to take into account treatment of all items reported 
by the partnership, regardless of the form that the reporting of the 
partnership return position with respect to that item takes (that is, 
regardless of whether the return position with respect to an item is 
reflected on an original return or reflected on a statement issued as a 
result of a partnership-initiated adjustment or an IRS-initiated 
adjustment). Accordingly, the term treatment of items on a partnership 
return includes not only the treatment of an item on the partnership's 
return filed with the IRS under section 6031(a), but also includes any 
amendment or supplement to such return, such as an administrative 
adjustment request filed under section 6227 and the regulations 
thereunder, as well as the treatment of an item on any statement, 
schedule or list, and any amendment or supplement thereto, filed by the 
partnership with the IRS, including statements filed pursuant to 
section 6226. Proposed Sec.  301.6222-1(a)(5) provides examples 
illustrating the rules requiring consistent reporting by partners.
B. Mathematical or Clerical Error Adjustments
    Section 6222(b) provides that when a partner fails to treat items 
attributable to a partnership consistently with the treatment of those 
items on the partnership return, the IRS may assess and collect any 
underpayment of tax that results from that inconsistency as if it were 
on account of a mathematical or clerical error appearing on the 
partner's return; however the ability to request an abatement of the 
assessment under section 6213(b)(2) does not apply. Section 6213(b) 
provides the general rules for assessments of amounts of tax arising 
out of mathematical or clerical errors. In general, section 6213(b)(1), 
permits the IRS to immediately assess and collect tax that arises on 
account of a mathematical or clerical error appearing on a taxpayer's 
return, notwithstanding the general restrictions on assessment and 
collection of deficiencies under section 6213(a). Section 6213(b)(2) 
gives the taxpayer 60 days to request an abatement of that assessment.
    Section 6222(b) specifically states that the IRS may assess an 
underpayment of tax as if it were on account of a mathematical or 
clerical error on the partner's return. Section 6222(b), however, does 
not define the term underpayment for these purposes, and the term 
underpayment is not defined elsewhere under subchapter C of chapter 63. 
The term underpayment is defined in section 6664(a); however, that 
definition is expressly limited to part I of subchapter A of chapter 68 
of the Code. Section 6213(b)(1), which discusses assessments arising 
out of mathematical or clerical errors, refers to the amount of tax due 
in excess of that shown on the return on account of the error. Because 
section 6222(b) refers explicitly to mathematical or clerical error and 
other provisions under 6213(b), proposed Sec.  301.6222-1(a) provides 
that the underpayment of tax described under 6222(b) is the amount of 
tax due that results from adjusting the item on the partner's return to 
make the treatment of the item consistent with the treatment of such 
item on the partnership return.
    Accordingly, proposed Sec.  301.6222-1(b) provides that the IRS may 
assess and collect any underpayment of tax that results from adjusting 
a partner's inconsistently reported item to conform that item with the 
treatment on the partnership return as if the resulting underpayment of 
tax were on account of a mathematical or clerical error appearing on 
the partner's return. A partner may not request an abatement of that 
assessment. See proposed Sec.  301.6222-1(b)(2).
    In instances where the partner is itself a partnership, section 
6232(d)(1)(B) provides for the use of rules similar to the rules of 
section 6213(b). Accordingly, proposed Sec.  301.6222-1(b) states that 
if the partner is itself a partnership, any adjustment on account of 
such partnership's failure to treat an item consistently will be 
treated as an adjustment on account of a mathematical or clerical 
error. Also, in accordance with section 6232(d)(2), proposed Sec.  
301.6222-1(b) states that the procedures under section 6213(b)(2) for 
requesting abatements do not apply.
C. Notice of Inconsistency
    Proposed Sec.  301.6222-1(c) states that the provisions of proposed 
Sec.  301.6222-1(a) (consistent reporting requirement) and proposed 
Sec.  301.6222-1(b) (math error treatment) do not apply to items that 
the partner properly identifies as being treated inconsistently with 
the partnership return. In order to properly identify an item, the 
proposed regulations provide that the partner must attach a statement 
identifying the inconsistency to the partner's return on which the item 
is treated inconsistently. Proposed Sec.  301.6222-1(c)(1).
    Proposed Sec.  301.6222-1(c)(2) coordinates the rules regarding 
notice of inconsistent treatment under proposed Sec.  301.6222-1(c)(1) 
with situations where a partner is bound to the treatment of an item 
under section 6223 as result of actions taken by the partnership under 
subchapter C of chapter 63 or by any final decision in a proceeding 
brought under subchapter C of chapter 63 with respect to the 
partnership. For instance, as noted in the proposed regulations under 
section 6226, the election under section 6226 and the filing and 
furnishing of statements under that section are actions of the 
partnership under section 6223. See proposed Sec.  301.6226-1(d). 
Because the partner is bound by the treatment of an item reflected in a 
statement filed by the partnership under section 6226, the partner is 
precluded from treating that item inconsistently under section 6222. 
The fact that the partner files a notice of inconsistent treatment does 
not change the fact that the partner is bound by the treatment of the 
items in the section 6226 statement. Any other result would undermine 
the purpose of section 6223, which provides certainty and finality with 
respect to actions

[[Page 27346]]

taken by the partnership during the centralized partnership audit 
regime. Accordingly proposed Sec.  301.6222-1(c)(2) provides that if a 
partner's treatment of the item is not consistent with the treatment to 
which the partner is bound under section 6223 with respect to such 
item, such as the partnership treatment of items in an administrative 
adjustment request or in a section 6226 statement, the provisions of 
proposed Sec.  301.6222-1(a) (consistent reporting requirement) and 
proposed Sec.  301.6222-1(b) (math error treatment) apply to that item, 
and any underpayment of tax resulting from the failure to treat the 
item consistently with the treatment to which the partner is bound may 
be assessed and collected in the same manner as if such underpayment 
were on account of a mathematical or clerical error.
    Situations may arise in which a partner treats several items 
inconsistently from how the partnership treated those same items, but 
the partner notifies the IRS only of some, but not all, of the 
inconsistencies. Proposed Sec.  301.6222-1(c)(3) clarifies that the 
exception to the consistent reporting requirement and math error 
treatment applies only to the inconsistent positions that are 
specifically identified to the IRS in a proper notification.
    Under section 6223(b), a final decision in an administrative or 
judicial proceeding with respect to a partnership under the centralized 
partnership audit regime is binding on the partnership and all partners 
of the partnership. In contrast, under section 6222(d), a final 
determination in an administrative or judicial proceeding with respect 
to a partner's identified inconsistent position is not binding on the 
partnership if the partnership is not a party to the proceeding. 
Accordingly, section 6222(d) provides that the IRS may conduct a 
proceeding with respect to the partner, that is, a proceeding that does 
not involve the partnership, where the partner notified the IRS of an 
inconsistent position under 6222(c). Section 6222(d) does not, however, 
preclude the IRS from conducting a proceeding with respect to the 
partnership.
    In some cases, the IRS may determine that conducting a partnership 
proceeding under the centralized partnership audit regime under 
subchapter C of chapter 63 is appropriate, for instance when the IRS 
disagrees with both the partner's and the partnership's treatment of 
the item or when multiple partners treat an item inconsistently from 
the treatment by the partnership. In other cases, the IRS may determine 
that a partner proceeding, which generally would be under deficiency 
procedures in subchapter B of chapter 63, is appropriate, for instance 
when the IRS determines that the partner's inconsistent treatment is 
incorrect. Accordingly, proposed Sec.  301.6222-1(c)(4)(i) clarifies 
that in the case of an identified inconsistency, the IRS may conduct 
both a proceeding with respect to the partner (a proceeding in which 
the partnership would not be involved) and a proceeding with respect to 
the partnership. Proposed Sec.  301.6222-1(c)(4)(ii) provides that any 
final decision with respect to an inconsistent position identified in a 
notice to the IRS under section 6222(c) in a proceeding to which the 
partnership is not a party is not binding on the partnership.
    Proposed Sec.  301.6222-1(c)(4)(ii) also provides that if the IRS 
conducts a separate proceeding with respect to a partner, the IRS is 
not required to conform items on the partner's return to make those 
items consistent with the treatment of the items on the partnership 
return. Rather, if the IRS disagrees with the partner's treatment of an 
inconsistent item, the IRS may adjust the item to conform to the proper 
treatment of such item under federal tax law. Proposed Sec.  301.6222-
1(c)(5) provides examples illustrating the provisions under proposed 
Sec.  301.6222-1(c).
    Proposed Sec.  301.6222-1(d) provides that a partner has provided 
notice to the IRS of an inconsistency if the partner treats an item 
consistently with incorrect information that the partnership furnished 
to the partner and makes an election to allow such treatment. The 
proposed regulations provide that the partner makes the election after 
being notified by the IRS of an adjustment due to treatment of an item 
on the partner's return inconsistent with the treatment of that item on 
the partnership's return. As part of the election, the proposed 
regulations require the partner to demonstrate that the treatment of 
the item on the partner's return is consistent with the treatment of 
that item on the incorrect schedule or information furnished to the 
partner by the partnership. Proposed Sec.  301.6222-1(d)(2) provides 
that this election must be made within 60 days from the date of the 
notice informing the partner of the inconsistent treatment. The 
election must be clearly identified as an election under section 
6222(c)(2)(B), signed by the partner making the election, and must be 
accompanied by copies of the schedule or other information furnished to 
the partner by the partnership as well as the notice mailed by the IRS 
informing the partner of the conforming adjustment. If it is not clear 
that the partner's treatment of the item on the partner's return is 
consistent with the information provided by the partnership, the 
election must include an explanation of how the partner's treatment is 
consistent. Proposed Sec.  301.6222-1(d)(3) provides examples 
illustrating the provisions under proposed Sec.  301.6222-1(d).
    One comment in response to Notice 2016-23 suggested that when a 
partner notifies the IRS of an inconsistency, the notification of 
inconsistent treatment should be included with the partner's return for 
the tax year in which the partner took the inconsistent position, 
rather than create a separate notification process. The Treasury 
Department and the IRS agree with this comment. Accordingly, the 
proposed regulations require a partner to attach a notification of 
inconsistent treatment to the partner's return on which the item is 
treated inconsistently. A separate notification process is necessary, 
however, when a partner receives an incorrect statement, schedule, or 
other information from the partnership because the partner generally 
will not know about the inconsistency.

4. Partnership Representative

    Proposed Sec.  301.6223-1 provides rules requiring a partnership to 
designate a partnership representative (proposed Sec.  301.6223-1(a)), 
rules describing the eligibility requirements for a partnership 
representative (proposed Sec.  301.6223-1(b)), rules describing 
designation of the partnership representative (proposed Sec.  301.6223-
1(c)-(f)), and rules describing the termination of a designation of a 
partnership representative (proposed Sec.  301.6223-1(d)-(f)).
A. Eligibility To Serve as the Partnership Representative
    Proposed Sec.  301.6223-1(b)(1) provides that a partnership may 
designate any person as defined in section 7701(a)(1), including an 
entity, that meets the requirements of proposed Sec.  301.6223-1(b)(2), 
(b)(3), and (b)(4), to be the partnership representative. The 
partnership representative must have a substantial presence in the 
United States and must have the capacity to act. If an entity is 
designated as the partnership representative, the partnership must 
identify and appoint an individual to act on the entity's behalf. The 
appointed individual must also have a substantial presence in the 
United States and the capacity to act. Accordingly, provided the person 
is otherwise eligible, the partnership may

[[Page 27347]]

appoint a partner or a non-partner, including the partnership's 
management company, as the partnership representative.
    Proposed Sec.  301.6223-1(b)(2) provides that the partnership 
representative must have a substantial presence in the United States. 
Proposed Sec.  301.6223-1(b)(2)(i) provides that a person has a 
substantial presence in the United States for the purposes of section 
6223 if three criteria are met. First, the person must be able to meet 
in person with the IRS in the United States at a reasonable time and 
place as is necessary and appropriate as determined by the IRS. Second, 
the partnership representative must have a street address in the United 
States and a telephone number with a United States area code where the 
partnership representative can be reached by United States mail and 
telephone during normal business hours in the United States. Third, the 
partnership representative must have a U.S. TIN.
    The proposed regulations do not use the substantial presence test 
as described in section 7701(b)(3) (substantial presence test) because 
the purpose of the substantial presence test is to determine whether an 
alien individual should be treated as a resident alien for U.S. tax 
purposes. In contrast, the purpose of requiring that the partnership 
representative have a substantial presence in the United States is to 
ensure ease of communication so the audit process can proceed smoothly. 
As a result, proposed Sec.  301.6223-1(b)(2) does not adopt the 
substantial presence test in section 7701(b)(3).
    Communication between the IRS and the partnership representative is 
fundamental to an efficient administrative proceeding, both for the IRS 
and the partnership. As a result, if the partnership designates an 
entity as the partnership representative (an entity partnership 
representative), proposed Sec.  301.6223-1(b)(3) requires the 
partnership to appoint an individual (designated individual) as the 
sole individual to act on behalf of the entity partnership 
representative. Like the partnership representative itself, the 
designated individual must meet the substantial presence requirements 
of proposed Sec.  301.6223-1(b)(2). If the partnership does not appoint 
a designated individual, the IRS may determine the partnership 
representative designation is not in effect. See proposed Sec.  
301.6223-1(f).
    In addition, a person must have the capacity to act as the 
partnership representative or the designated individual. Proposed Sec.  
301.6223-1(b)(4) describes specific events that cause a person to lose 
the capacity to act and includes a catch-all provision for unforeseen 
circumstances in which the IRS reasonably determines that the 
partnership representative or designated individual may no longer have 
the capacity to act.
    The proposed regulations provide that a person designated by the 
partnership as the partnership representative is deemed to satisfy the 
substantial presence requirements and have capacity to act unless and 
until the IRS determines the person is ineligible. See proposed Sec.  
301.6223-1(b)(1). If a partnership representative never met, or no 
longer meets, the requirements of proposed Sec.  301.6223-1(b), the 
designation of the partnership representative is valid and remains in 
effect until the partnership, the partnership representative, or the 
IRS takes an affirmative action to terminate that designation. This can 
happen in one of three ways. The partnership representative may resign 
pursuant to proposed Sec.  301.6223-1(d), the partnership may revoke 
the designation pursuant to proposed Sec.  301.6223-1(e), or the IRS 
may determine a designation is not in effect under proposed Sec.  
301.6223-1(f). Until one of those events occurs, the designation is 
valid and remains in effect. For the validity of actions taken by the 
partnership representative during the period when the designation was 
in effect, see proposed Sec.  301.6223-2(b).
B. Designating the Partnership Representative
    Proposed Sec.  301.6223-1(c) describes the manner in which a 
partnership designates the partnership representative. A partnership 
must designate the partnership representative on the partnership's 
return filed for the partnership taxable year. A partnership must 
designate a partnership representative separately for each taxable 
year. A designation for one taxable year is not effective for any other 
taxable year. A designation for a partnership taxable year remains in 
effect until the designation is terminated under proposed Sec.  
301.6223-1(d) (resignation), proposed Sec.  301.6223-1(e) (revocation), 
or proposed Sec.  301.6223-1(f) (determination that the designation is 
not in effect).
    Under the TEFRA partnership procedures, a TMP may be designated, 
including through a resignation or revocation, at any time after the 
filing of the initial partnership return by submitting a new 
designation to the IRS. The IRS processes each of these subsequent 
designations regardless of whether the partnership is examined, 
creating unnecessary work for the IRS because very often the TMP is not 
required to take any action on behalf of the partnership or the 
partners.
    The partnership representative rules are intended to be an 
improvement over the TMP rules. As a result, the partnership 
representative rules have been crafted to avoid the resource drain 
created by processing unnecessary resignations, revocations, and 
subsequent designations of TMPs. Accordingly, the proposed regulations 
provide that a partnership representative designation may not be 
changed (either by resignation or revocation) until the IRS issues a 
notice of administrative proceeding to the partnership, except when the 
partnership files a valid administrative adjustment request (AAR) in 
accordance with section 6227 and proposed Sec.  301.6227-1.
    The proposed regulations provide that the partnership or the 
partnership representative may change the initial designation of the 
partnership representative simultaneously with filing an AAR, but the 
form used for filing an AAR may not be used solely for the purpose of 
changing the partnership representative. The Treasury Department and 
the IRS understand that there may be other circumstances that warrant 
allowing a partnership or partnership representative to change the 
partnership representative designation and request comments regarding 
such other circumstances.
    Specifically, proposed Sec.  301.6223-1(d) allows a partnership 
representative to resign by notifying the partnership and the IRS in 
writing. The partnership representative may not resign prior to the 
issuance of a notice of administrative proceeding (except in 
conjunction with the filing of an AAR), but the partnership 
representative may resign at any time after the issuance of the notice 
of an administrative proceeding. The partnership representative may 
resign regardless of whether that person was designated by the 
partnership or the IRS. The resigning partnership representative may, 
but is not required to, designate a successor partnership 
representative. If the resigning partnership representative does not 
designate a successor, the IRS will determine that the designation is 
not in effect under proposed Sec.  301.6223-1(f) and provide the 
partnership with an opportunity to designate a new partnership 
representative. If the partnership fails to designate a new partnership 
representative, the IRS will designate a new partnership representative

[[Page 27348]]

pursuant to proposed Sec.  301.6223-1(f)(5). A resignation is effective 
30 days after the date the notice of resignation is sent to the IRS. 
See proposed Sec.  301.6223-1(d)(1). Similar rules apply to designated 
individuals, allowing the designated individual to resign and appoint a 
successor. See proposed Sec.  301.6223-1(d)(3).
    Proposed Sec.  301.6223-1(e) describes the rules which allow the 
partnership to revoke the partnership representative designation and 
designate a successor. This revocation provision is an exception to the 
general rule that the partnership representative has the sole authority 
to act on behalf of the partnership. In general, a change in the 
partnership representative or designated individual should only occur 
when the partnership representative resigns and appoints a successor 
under proposed Sec.  301.6223-1(d). However, there may be circumstances 
where the partnership would like to change the designation, and the 
partnership representative or designated individual will not resign. 
Proposed Sec.  301.6223-1(e) provides flexibility to the partnership in 
these circumstances, allowing the partnership, through its partners, to 
revoke a prior designation.
    In the case of a revocation, the partnership must notify the IRS in 
writing and must also notify the partnership representative whose 
designation is being revoked of the revocation. Like resignations under 
proposed Sec.  301.6223-1(d), the partnership may not revoke the 
partnership representative designation prior to the issuance of a 
notice of an administrative proceeding except in conjunction with the 
filing of a valid AAR. A revocation is effective 30 days after the date 
the notice of revocation is sent to the IRS. See proposed Sec.  
301.6223-1(e)(1). Upon the receipt of a valid revocation, the IRS will 
notify the partnership and any partnership representative whose 
designation is being revoked of the acceptance of the revocation.
    Proposed Sec.  301.6223-1(e)(3) provides the rules for who may sign 
a revocation. In general, the partnership representative is the sole 
representative of the partnership. The revocation provision provides a 
limited exception to this rule and allows, solely for purposes of 
revocation, other partners to act on behalf of the partnership. Under 
the proposed regulations, a general partner as shown on the partnership 
return at the close of the taxable year for which the partnership 
representative was designated must sign the revocation. If no general 
partner has the capacity to act on behalf of the partnership (as 
described in proposed Sec.  301.6223-1(b)(4)(i)-(v)), proposed Sec.  
301.6223-1(e)(3)(i) provides that any reviewed year partner in the 
partnership may sign the revocation. Proposed Sec.  301.6223-
1(e)(3)(ii) provides definitions with respect to limited liability 
companies (LLCs) and rules for which members of an LLC may sign a 
revocation. For purposes of which partners may sign a revocation, 
member-managers are treated as general partners, and other members are 
treated as a partner other than a general partner. If there is no 
member-manager, the proposed regulations provide that each member is 
treated as a member-manager for purposes of this section.
    Additionally, proposed Sec.  301.6223-1(e) provides that any 
revocation must include a statement signed under penalties of perjury 
that the partner signing the revocation is authorized by the 
partnership to revoke the designation and has provided a copy of the 
revocation to the partnership and partnership representative.
    The combination of requiring the partner making the revocation to 
attest under penalties of perjury that the partner is authorized to act 
for the partnership and requiring the partner to notify the partnership 
and partnership representative helps ensure that any partnership 
representative revocation is consistent with the wishes of the 
partnership. The notification that the revocation has been accepted 
that the partnership and the partnership representative receive from 
the IRS provides further notice to the partnership and allows for the 
partnership to take action against unauthorized revocations and 
designations.
    There may be circumstances in which more than one general partner 
in the partnership makes a revocation within a short period of time. In 
that circumstance, the IRS may not be able to readily determine the 
identity of the proper partnership representative. To allow the IRS to 
identify the correct partnership representative, proposed Sec.  
301.6223-1(e)(5) provides if the IRS receives multiple revocations or 
subsequent designations within a 90-day period, the IRS may determine 
that a designation is not in effect due to multiple revocations and 
follow the procedures under proposed Sec.  301.6223-1(f) to designate a 
new partnership representative. These rules do not require that the IRS 
designate a person designated in any of the revocations received. If 
the IRS designates a partnership representative under proposed Sec.  
301.6223-1(f), proposed Sec.  301.6223-1(e)(4) provides that the 
partnership must receive the IRS's permission to later revoke the 
designation.
C. Determination That a Designation Is Not in Effect
    Proposed Sec.  301.6223-1(f) provides the rules regarding how the 
IRS makes a determination that a designation of a partnership 
representative is not in effect, as well as how the IRS will designate 
a partnership representative if a designation is not in effect.
    Proposed Sec.  301.6223-1(f) provides that when the IRS determines 
a designation is not in effect, the IRS will notify the partnership and 
the last partnership representative, if there was one, of the IRS's 
determination. The designation is terminated as of the day the IRS 
notifies the partnership that no designation is in effect. Proposed 
Sec.  301.6223-1(f)(4) provides that except in cases where the 
partnership designation is not in effect because there were multiple 
revocations, the partnership will have 30 days to designate a successor 
partnership representative before the IRS will designate a new 
partnership representative. If the IRS has already received multiple 
revocations from different partners and determined it is unable to 
ascertain which partnership representative the partnership wants to 
designate, proposed Sec.  301.6223-1(f)(4) provides that the IRS will 
notify the partnership that the designation is not in effect and 
designate a new partnership representative pursuant to proposed Sec.  
301.6223-1(f)(5) without providing the partnership with an opportunity 
to designate a partnership representative. This rule avoids creating 
further confusion between the partnership and the IRS, which would 
delay the designation and the administrative proceeding.
D. Designation of the Partnership Representative by the IRS
    Proposed Sec.  301.6223-1(f)(1) provides that if there is no 
designation of a partnership representative in effect, the IRS may 
select any person to serve as partnership representative. There is no 
distinction between the authority of a partnership representative 
designated by the partnership and one selected by the IRS. For that 
reason, the proposed regulations refer to the IRS's selection of a 
partnership representative as a designation.
    Under proposed Sec.  301.6223-1(f)(5), the IRS will notify the 
partnership of its designation by providing the partnership with the 
name, address, and telephone number of the new partnership 
representative. Under

[[Page 27349]]

proposed Sec.  301.6223-1(f)(5) the designation by the IRS of a new 
partnership representative is effective on the day the IRS mails the 
notification to the partnership of the designation. Proposed Sec.  
301.6223-1(f)(5) also requires the IRS to mail a copy of the 
notification to the new partnership representative.
    Proposed Sec.  301.6223-1(f)(5)(ii) provides that the IRS may 
designate any person as the partnership representative. In designating 
a person as the partnership representative, the IRS will consider 
whether the person is a partner in the partnership, either in the 
reviewed year or at the time the designation is made. In addition, the 
IRS may consider the other remaining factors listed in proposed Sec.  
301.6223-1(f)(5)(ii).
    Once the IRS has designated a partnership representative, the 
partnership may not revoke that designation without the consent of the 
IRS. See proposed Sec.  301.6223-1(f)(3)(iii). The examples under 
proposed Sec.  301.6223-1(f)(6) illustrate the operation of the rules 
described above.
E. Authority of the Partnership Representative
    Proposed Sec.  301.6223-2 describes the binding nature of actions 
taken by the partnership representative on behalf of the partnership 
under subchapter C of chapter 63 and of the partnership with respect to 
its partners. Under proposed Sec.  301.6223-2, the partnership and all 
partners are bound by the actions of the partnership and the 
partnership representative and by any final decision in a proceeding 
brought under subchapter C of chapter 63. The partnership 
representative binds the partnership and its partners by the 
partnership representative's actions, including: Agreeing to 
settlements, agreeing to a notice of final partnership adjustment, 
making an election under section 6226, and agreeing to an extension of 
the period for adjustments under section 6235. In addition, all persons 
whose tax liability is determined, in whole or in part, by taking into 
account, directly or indirectly (such as indirect partners), 
adjustments to any item within the scope of the centralized partnership 
audit regime under section 6221(a), by the IRS in a notice of final 
partnership adjustment in a proceeding brought under subchapter C of 
chapter 63, or in a final decision of a court under subchapter C of 
chapter 63 are similarly bound. This binding authority extends to all 
partners, including those partners who have elected out of the 
centralized partnership audit regime under section 6221(b).
    Proposed Sec.  301.6223-2(c)(1) provides that the partnership 
representative has the sole authority to act on behalf of the 
partnership in any examination or other proceeding under subchapter C 
of chapter 63. Similarly, proposed Sec.  301.6223-2(c)(2)(ii) provides 
that a designated individual has the sole authority to act on behalf of 
the partnership representative and the partnership. Except for a 
partner that is also the partnership representative or a designated 
individual, proposed Sec.  301.6223-2(c)(1) provides that partners may 
not participate in or contest the results of an examination or other 
proceeding involving a partnership without permission of the IRS. 
Proposed Sec.  301.6223-2(c)(1) also provides that no other person, 
regardless of whether that person's tax liability is affected by the 
actions of the partnership, may participate in the partnership 
proceeding under subchapter C of chapter 63.
    Proposed Sec.  301.6223-2(c)(1) states that the broad authority of 
the partnership representative may not be limited by state law, 
partnership agreement, or any other document or agreement. Any action 
taken by the partnership representative with respect to the centralized 
partnership audit regime under the Code and federal tax regulations is 
valid and binding on the partnership for purposes of tax law regardless 
of any other provision of state law, partnership agreement, or any 
other document or agreement.
    Proposed Sec.  301.6223-2(c)(2)(i) provides that the partnership 
representative, by virtue of being designated, has the authority to 
bind the partnership for purposes of the centralized partnership audit 
regime. Similarly, under proposed Sec.  301.6223-2(c)(2)(ii), the 
designated individual's authority to bind the partnership 
representative and the partnership is derived by virtue of the 
appointment of that designated individual.
    The examples under proposed Sec.  301.6223-2(d) illustrate the 
operation of the rules described above.
F. Notice 2016-23 Comments Regarding the Partnership Representative
    A number of comments made specific suggestions about whom the IRS 
should designate as the partnership representative when no partnership 
representative designation is in effect. The suggestions ranged from 
designating the partner with the largest profits interest or the 
greatest percentage ownership interest to designating any partner that 
can sign the partnership return. Commenters suggested that partners 
with small investments, nominal profits interests, or other minor roles 
in the partnership would not be suitable to adequately represent the 
partnership during an administrative proceeding. The proposed 
regulations, however, establish rules to provide more flexibility for 
the IRS to designate a partnership representative to avoid some of the 
shortcomings of TEFRA, including the complexity and difficulty of 
locating a qualified TMP.
    Accordingly, the proposed regulations allow the IRS to designate 
any person after first considering partners from the reviewed year or 
at the time the designation is made, but it also provides several 
factors that the IRS may consider in determining whom to select. This 
rule balances the needs of the government and the partnership.
    Other suggestions included requiring that the IRS select a 
partnership representative that has authority to bind the partnership 
under state law. The proposed regulations do not limit whom the IRS may 
designate based on state law. The sole authority to bind the 
partnership for all purposes is derived from the Code and applies for 
purposes of the internal revenue laws. Therefore, proposed regulations 
are drafted so that federal, rather than state law, controls with 
respect to the rules regarding the partnership representative for 
purposes of the centralized partnership audit regime.
    Some commenters requested that there be no restrictions on whom the 
partnership can designate as the partnership representative other than 
the requirement of substantial presence in the United States. These 
suggestions included allowing entities, even entities with no 
employees, to be appointed as the partnership representative. The 
proposed regulations adopt these suggestions by allowing the 
partnership to designate any person, including an entity, to be the 
partnership representative provided, in the case of an entity 
designated as partnership representative, the partnership also identify 
a designated individual to act on behalf of the entity partnership 
representative. The proposed regulations require that both an entity 
partnership representative and the designated individual have 
substantial presence in the United States. Provided an entity with no 
employees otherwise meets the requirements of proposed Sec.  301.6223-
1, the proposed regulations would allow that entity to be the 
partnership representative.
    Some commenters suggested that the proposed rules require the 
partnership representative to provide notice to all

[[Page 27350]]

partners of significant developments in an administrative proceeding 
and to allow partners other than the partnership representative to 
participate in the administrative proceeding. The proposed regulations 
do not adopt these suggestions. The centralized partnership audit 
statutory regime does not include any notice requirements, which 
relieves both the IRS and the TMP of the cumbersome TEFRA notice 
requirements. Whether and how the partnership representative 
communicates with the partners in the partnership is best left to the 
partnership to determine. Likewise, it is more efficient for the IRS to 
interact solely with the partnership representative during an 
administrative proceeding.

5. Imputed Underpayment and Modification of Imputed Underpayment

A. General Rules Regarding the Imputed Underpayment
    Proposed Sec.  301.6225-1(a) provides the general rule that if a 
partnership adjustment results in an imputed underpayment, the 
partnership must pay the imputed underpayment in the adjustment year. 
As described in proposed Sec.  301.6225-1(a)(3), the partnership 
adjustments and any imputed underpayment resulting from such 
adjustments are set forth in a NOPPA mailed to the partnership and 
partnership representative. The partnership may request modification 
with respect to an imputed underpayment set forth in the NOPPA under 
the procedures described in proposed Sec.  301.6225-2.
    The IRS and taxpayers both have an interest in resolving the issues 
raised by the IRS under the centralized partnership audit regime in the 
most efficient manner. An administrative proceeding under the 
centralized partnership audit regime is conducted under the same 
principles applicable to examinations generally. For instance, after 
providing the partnership and partnership representative with a notice 
of administrative proceeding, consistent with IRS general examination 
procedures, the IRS will endeavor to work with the partnership 
representative to set a schedule for information document requests 
(IDRs) and partnership responses to the IDRs. In general, the IRS 
informs the partnership representative about potential items and 
transactions that raise issues and provides information about 
adjustments that will be included in the NOPPA.
    As part of this process, the IRS may agree to review certain 
information prior to the issuance of the NOPPA in an effort to resolve 
issues in an expedited fashion and eliminate the need to make certain 
adjustments. In addition, the modification process may move faster if 
relevant information is provided to the IRS employees conducting the 
administrative proceeding prior to issuance of the NOPPA. However, once 
the NOPPA is issued, the modification procedures under proposed Sec.  
301.6225-2 are the partnership's only formal route to request changes 
to an imputed underpayment set forth in the NOPPA.
    Proposed Sec.  301.6225-1(a)(2) provides that unless the IRS 
determines otherwise, all applicable preferences, restrictions, 
limitations, and conventions will be taken into account as if the 
adjusted item was originally taken into account by the partnership or 
the partners in the manner most beneficial to the partnership or 
partners. Therefore, the IRS calculates an imputed underpayment by 
taking into account the applicable internal revenue laws, including 
provisions that may limit or restrict the ability of a partner to 
reduce income or take advantage of tax benefits flowing from the 
partnership. For instance, if the adjustment is a reduction of 
qualified research expenses, the IRS may determine the amount of the 
adjustment as if all partners claimed a credit with respect to their 
allocable portion of such expenses under section 41, rather than a 
deduction under section 174. To the extent supported by the facts, the 
partnership may take steps through the modification procedures set 
forth in proposed Sec.  301.6225-2 to provide the IRS with information 
about specific partners and how those partners took items from the 
partnership into account.
    The modification process, discussed later in this preamble, is the 
method for the partnership to request that the IRS modify an imputed 
underpayment to more closely reflect the tax consequences that would 
have resulted if the partners had taken the adjusted items into account 
correctly on their original returns for the year that includes the 
reviewed year of the partnership.
B. Calculation of the Imputed Underpayment
    Proposed Sec.  301.6225-1(c) provides rules for the calculation of 
an imputed underpayment. Proposed Sec.  301.6225-1(c)(1) provides that 
the imputed underpayment is calculated by multiplying the total netted 
partnership adjustment by the highest rate of federal income tax in 
effect for the reviewed year (as defined in proposed Sec.  301.6241-
1(a)(8)) under section 1 or 11. The product of that amount is then 
increased or decreased by any adjustment made to the partnership's 
credits. If the result of this summation is a net positive adjustment, 
the resulting amount is the imputed underpayment, and, if it results in 
a net non-positive amount, the result is an adjustment that does not 
result in an imputed underpayment. See proposed Sec.  301.6225-1(c)(2).
    Proposed Sec.  301.6225-1(c)(3) defines the total netted 
partnership adjustment for purposes of calculating the imputed 
underpayment in proposed Sec.  301.6225-1(c)(1) as the sum of all net 
positive adjustments in the residual grouping as determined in 
accordance with paragraph (d)(2)(v) of this section, plus the sum of 
all net positive adjustments in the reallocation grouping as determined 
in accordance with paragraph (d)(2)(ii) of this section.
i. Grouping and Netting of Adjustments
    Under proposed Sec.  301.6225-1(d), adjustments are grouped 
together, which provides a framework for the netting of adjustments 
appropriately. Within each grouping, adjusted items may be further 
divided into subgroupings depending on their character or to account 
for preferences, sources, categories, limitations, or other 
restrictions under Title 26 (for example, adjustments to short-term 
capital gain will generally be in a different subgrouping from 
adjustments to long-term capital gain). See proposed Sec.  301.6225-
1(d)(1). The groupings and subgroupings provide the IRS with the 
ability to net adjustments according to applicable limitations and 
restrictions, but the Treasury Department and the IRS seek comments on 
any specific items that may require special rules or special 
subgroupings.
    Proposed Sec.  301.6225-1(d)(2)(i) provides that there are three 
types of groupings, and that the adjustments are divided in order into 
those groupings. First, adjustments that reallocate items among the 
partners (reallocation grouping) are grouped together. Second, 
adjustments to the partnership's credits (credit grouping) are grouped 
together. Third, all remaining adjustments (residual grouping) are 
grouped together according to the character, preferences, restrictions, 
and other limitations of the item adjusted. Within each grouping, there 
might be more than one subgrouping based on a partnership's particular 
adjustments. For instance, within the residual grouping, there might be 
an ordinary subgrouping as well as a capital subgrouping. Adjustments 
that generally affect, or that are affected by, the application of

[[Page 27351]]

any rules related to preferences, limitations, restrictions, or 
conventions, will generally be taken into account within their own 
respective grouping or subgrouping.
    Proposed Sec.  301.6225-1(d)(2)(ii) describes the reallocation 
grouping. Any adjustment that reallocates an item from one or more 
partners to one or more other partners is treated as two adjustments. 
The first adjustment is a decrease in the amount of the items allocated 
by the partnership on its return to one or more partners. The second 
adjustment is an increase in the amount of the items allocated by the 
IRS to the other partner(s). Each adjustment is grouped in its own 
reallocation subgrouping to prevent the two adjustments from netting to 
zero. After application of the netting rules under proposed Sec.  
301.6225-1(d)(3), any net non-positive adjustment is disregarded in the 
calculation of the imputed underpayment under proposed Sec.  301.6225-
1(d)(3)(ii)(A). An adjustment that results in a net non-positive 
adjustment is an adjustment that does not result in an imputed 
underpayment because the reallocation of an item among partners is one 
of the circumstances described in proposed Sec.  301.6225-1(c)(2).
    The credit grouping described in proposed Sec.  301.6225-
1(d)(2)(iii) includes all adjustments to items that the partnership 
claimed or could have claimed as a credit on the partnership's return. 
The Treasury Department and the IRS seek comments on whether additional 
rules should be proposed regarding how the credits are grouped 
together, or whether such credits should be applied in a particular 
order, similar to the order required for general business credits as 
reported on Form 3800, General Business Credit.
    A paragraph is reserved in proposed Sec.  301.6225-1(d)(2)(iv) for 
special rules relating to the treatment of certain creditable 
expenditures. This paragraph is reserved to provide rules applicable 
with respect to adjustments to items that are, or could be, reported by 
the partnership as expenditures that may be treated as a credit when 
taken into account by a partner. The Treasury Department and the IRS 
also seek comments on the appropriate treatment of items reported by 
the partnership as expenditures that may be treated as a credit when 
taken into account by a partner.
    The third grouping is the residual grouping, which is described in 
proposed Sec.  301.6225-1(d)(2)(v). The residual grouping includes all 
other adjustments, which are grouped according to character (for 
instance, ordinary or capital) and other limitations under the Code. 
The adjustments of a particular partnership may warrant further 
subgroupings for other items (for instance, long-term capital versus 
short-term capital). An adjustment that recharacterizes the character 
of an item is treated as two separate adjustments, one adjustment 
decreasing the amount of the item as reported by the partnership and a 
second adjustment increasing the amount of the item as recharacterized 
by the IRS. Each adjustment is grouped separately with similar items.
    Proposed Sec.  301.6225-1(d)(3) describes the rules for netting 
items after separating the items into their groupings and subgroupings. 
First, proposed Sec.  301.6225-2(d)(3)(i) provides that the IRS will 
net items within the same grouping or subgrouping. For instance, all 
ordinary adjustments (assuming no other restrictions under the Code) 
are netted against each other, regardless of whether such adjustments 
were part of related transactions or whether they were increases or 
decreases to income, but none of the ordinary adjustments are netted 
against the adjustments in the capital subgrouping. Adjustments in the 
capital subgrouping are netted against each other within that 
subgrouping. Adjustments from one taxable year may not be netted 
against adjustments from another taxable year, even if they would 
otherwise be part of the same subgrouping. See proposed Sec.  
301.62251-1(c)(4).
    Once adjustments within each subgrouping have been netted, each 
grouping or subgrouping will have either a net positive adjustment (as 
defined in proposed Sec.  301.6225-1(d)(3)(ii)(B)) or a net non-
positive adjustment (as defined in proposed Sec.  301.6225-
1(d)(3)(ii)(C)). Any netted amount that is a net non-positive 
adjustment in the reallocation grouping or the residual grouping is an 
adjustment that does not result in an imputed underpayment under 
proposed Sec.  301.6225-1(c)(2), and the rules described in proposed 
Sec.  301.6225-3 apply regarding the treatment of the partnership 
adjustments that were netted giving rise to that net non-positive 
adjustment. Any such net non-positive adjustment is disregarded for the 
remaining purpose of calculating the imputed underpayment. See proposed 
Sec.  301.6225-1(c)(2) (which lists this netting step as another 
circumstance in which net non-positive adjustments are adjustments that 
do not result in an imputed underpayment) and Sec.  301.6225-
1(d)(3)(ii)(A).
    The exception to this rule under proposed Sec.  301.6225-
1(d)(3)(ii)(A) (regarding disregarding net non-positive adjustments) is 
with respect to the credit grouping because adjustments to credits are 
applied to the total netted partnership adjustment after the rate is 
applied as described in proposed Sec.  301.6225-1(c)(1). If the net 
credits reduce the amount calculated under proposed Sec.  301.6225-
1(c)(1) to zero or less than zero, the partnership adjustments 
resulting in the total netted partnership adjustment and the 
adjustments to credits taken into account in calculating the zero or 
less than zero amount are all partnership adjustments that do not 
result in an imputed underpayment under proposed Sec.  301.6225-
1(c)(2).
    Proposed Sec.  301.6225-1(d)(3)(iii) describes how adjustments are 
treated within each particular grouping or subgrouping (other than the 
credit grouping) for purposes of netting. Increased gain is treated as 
increased income, decreased gain is treated as decreased income, 
increased loss is treated as decreased income, and decreased loss is 
treated as increased income. The credit grouping is excluded from this 
treatment because any adjustment to a credit does not result in an 
increase or decrease of income but rather in an adjustment to the 
amount of tax owed after the tax rate is applied under proposed Sec.  
301.6225-1(c)(1).
ii. Multiple Imputed Underpayments
    Proposed Sec.  301.6225-1(e) provides rules for multiple imputed 
underpayments. Each administrative proceeding that ends with the 
determination by the IRS of an imputed underpayment will result in a 
general imputed underpayment. The IRS may determine, in its discretion, 
a specific imputed underpayment on the basis of certain adjustments 
allocated to one partner or a group of partners based on the items or 
adjustments having the same or similar characteristics, based on the 
group of partners sharing similar characteristics, or based on the 
partners having participated in the same or similar transactions. There 
may be multiple specific imputed underpayments depending on the 
adjustments. For instance, some transactions may not involve all 
partners, and there may be a reason to place certain adjustments or 
even entire groupings into a specific imputed underpayment (described 
in proposed Sec.  301.6225-1(e)(2)(iii)), while other adjustments 
remain in a general imputed underpayment (described in proposed Sec.  
301.6225-1(e)(2)(ii)).
    For example, if a partnership intends to elect the alternative to 
payment of an imputed underpayment under section

[[Page 27352]]

6226 and the regulations thereunder, and, based on the appropriate 
allocable shares, a particular adjustment should be allocated to one 
partner or group of partners, the IRS could separate that adjustment 
into a separate imputed underpayment, called a specific imputed 
underpayment. The partnership could then elect to apply the rules under 
section 6226 to the specific imputed underpayment for which a single 
partner or group of partners would be responsible and the partnership 
could pay the general imputed underpayment at the partnership level.
    The option to create multiple imputed underpayments provides 
flexibility for the partnership, the partners, and the IRS to address 
fact-specific issues that may arise as part of the administrative 
proceeding at the partnership level. If the partnership would like to 
change the number or composition of the imputed underpayments that are 
listed on the NOPPA, the partnership may request modification under 
proposed Sec.  301.6225-2(d)(6).
    The examples in proposed Sec.  301.6225-1(f) demonstrate the rules 
of this section.
C. Modification of an Imputed Underpayment
    Proposed Sec.  301.6225-2(a) provides general rules for 
modification of an imputed underpayment. A partnership that has 
received a NOPPA may request modification of a proposed imputed 
underpayment. The effect of modification on the proposed imputed 
underpayment is described in proposed Sec.  301.6225-2(b). Only the 
partnership representative may request modification of an imputed 
underpayment.
    With respect to adjustments that do not result in an imputed 
underpayment, modification is only permissible if the partnership also 
has an imputed underpayment that is eligible to be modified under 
proposed Sec.  301.6225-2. Section 6225(c) refers to modification of 
the imputed underpayment and does not address modification with respect 
to adjustments that do not result in an imputed underpayment. Section 
6225(c)(2)(B), however, requires a partner whose allocable share of a 
reallocation adjustment does not result in an imputed underpayment to 
file an amended return and take into account the partner's share in 
order for the partnership to receive modification of the imputed 
underpayment. As a result, section 6225 clearly contemplates the 
possibility of requesting modification with respect to an adjustment 
that does not result in an imputed underpayment. Accordingly, proposed 
Sec.  301.6225-2(a) allows for such modifications provided the 
partnership has an imputed underpayment that is set forth in the NOPPA. 
If the NOPPA does not set forth an imputed underpayment, the 
partnership may not request a modification with respect to adjustments 
that do not result in an imputed underpayment under proposed Sec.  
301.6225-2.
i. Effect of Modification
    Proposed Sec.  301.6225-2(b) provides the rules describing the 
effect of modification on the calculation of the imputed underpayment. 
Some modifications may result in excluding certain adjustments, or 
portions thereof, from the calculation of the imputed underpayment, 
such as modification under proposed Sec.  301.6225-2(d)(2), (d)(3), 
(d)(5), (d)(7), (d)(8), and, if applicable, (d)(9). When the IRS 
approves one of those types of modification, the portion of the 
partnership adjustment attributable to that partner (or indirect 
partner) is removed from the calculation of the netted grouping amounts 
under proposed Sec.  301.6225-1, resulting in a reduction of the total 
netted partnership adjustments underlying the calculation of the 
imputed underpayment. This reduction in the total netted partnership 
adjustments does not, however, affect the amount of the partnership 
adjustment itself, only whether the adjustment is included in the 
calculation of the imputed underpayment. For instance, assume the IRS 
makes an adjustment by increasing the valuation of an asset from $100 
to $1100 (a $1000 adjustment). One partner files an amended return to 
take into account that partner's 50 percent share of the adjustment. 
The result is that only $500 worth of adjustments are included in the 
imputed underpayment calculation. The value of the asset remains $1100 
as determined by the IRS, and the adjustment remains $1000, 
notwithstanding the amended return that is filed by the partner.
    Proposed Sec.  301.6225-2(b)(3) provides that modification with 
respect to a partnership with partners for which rate modification 
under section 6225(c)(4) and proposed Sec.  301.6225-2(d)(4) is 
approved affects the taxable rate applied to the total netted 
partnership adjustment and does not affect the extent to which 
partnership adjustments factor into the calculation of the imputed 
underpayment. This rule may also apply in appropriate circumstances to 
modifications under proposed Sec.  301.6225-2(d)(8) and proposed Sec.  
301.6225-2(d)(9). Proposed Sec.  301.6225-2(b)(3) provides the method 
for calculating the partnership's ``rate-modified netted partnership 
adjustment'' and imputed underpayment when rate modification under 
proposed Sec.  301.6225-2(d)(4) is approved.
    A specific rule applies to rate modification with respect to 
special allocations that requires each partner's distributive share to 
be determined based on the amount of net gain or loss to the partner 
that would result if the partnership had sold all of its assets at 
their fair market value as of the close of the reviewed year of the 
partnership. See proposed Sec.  301.6225-2(b)(3)(iv). If a partnership 
requests more than one type of modification, proposed Sec.  301.6225-
2(b)(1) provides an ordering rule that states that rate modification is 
applied after the other types of modification specified in proposed 
Sec.  301.6225-2(d).
    Proposed Sec.  301.6225-2(b)(4) provides that the IRS may prescribe 
other guidance regarding the effect of other modifications referenced 
in proposed Sec.  301.6225-2(d)(9), and the Treasury Department and the 
IRS seek comments on other appropriate modifications and their effect 
on the calculation of an imputed underpayment. In particular, the 
Treasury Department and the IRS request comments on modifications that 
may be considered appropriate where a partner is a foreign person and 
thus may be subject to gross basis taxation under section 871(a) or 
881(a), or where a partner, indirect partner, or the partnership is 
entitled to a modified rate under the Code or as a resident of a 
country that has in effect an income tax treaty with the United States.
ii. Time, Form, and Manner for Requesting Modification
    Proposed Sec.  301.6225-2(c) provides time, form, and manner rules 
for when a partnership may request modification. Modification must be 
requested in the form and manner prescribed by the IRS within the 270-
day period described in proposed Sec.  301.6225-2(c)(3)(i). The 
Treasury Department and the IRS request comments on the coordination of 
these rules with the mutual agreement procedures available under income 
tax treaties that a partnership, partner, or indirect partner may 
invoke in order to determine eligibility for treaty benefits that may 
affect the calculation of the imputed underpayment.
    Proposed Sec.  301.6225-2(c)(1) provides that a determination with 
respect to a modification request does not preclude the IRS under 
section 7605(b) from initiating an administrative proceeding with 
respect to a partner, even if the IRS approves modification based on 
the

[[Page 27353]]

partner's actions or status. The IRS may rely on the facts provided to 
the IRS by the partnership representative to determine whether a 
modification request is proper and is not required to conduct an 
examination of the partners that form the basis of any modification 
request. Any determination by the IRS with respect to a modification 
request is a determination as part of the administrative proceeding 
with respect to the partnership. The IRS may approve modification based 
on an adjustment in an amended return filed for modification purposes 
and also examine the amended return in a separate proceeding with 
respect to that partner.
    Similarly, if the IRS approves a modification based on the tax-
exempt status of a partner, the IRS is not precluded from examining 
whether the partner was in fact tax-exempt for the same year in a 
separate proceeding. A review of or request for any information or 
documents provided as part of modification does not constitute an 
examination, inspection, or administrative proceeding with respect to 
any person other than the partnership. Accordingly, even in the case of 
an election under section 6226, and where certain modifications may 
affect what adjustments a partner take into account under proposed 
Sec.  301.6226-3, nothing in these proposed regulations prohibits the 
IRS from examining that partner's return and re-determining items that 
were affected by a previously approved modification.
    A partnership requesting modification must substantiate the facts 
supporting a request for modification to the satisfaction of the IRS. 
The particular documents and other information that may be required are 
based on the type of modification requested. The IRS may, in forms, 
instructions, or other guidance, require particular documents or other 
information to substantiate a particular type of modification or impose 
other information-reporting or recordkeeping requirements on 
partnerships requesting modification.
    For all requests, the partnership representative must furnish to 
the IRS upon request, a detailed description of the structure, 
allocations, ownership, and ownership changes of the partnership, its 
partners, and, if relevant, any indirect partners for each taxable year 
relevant to the request, as well as all partnership agreements 
(including side agreements) for each relevant taxable year with respect 
to each modification request. In the case of a modification requested 
by the partnership with respect to an indirect partner, the IRS may 
require certain information related to the pass-through partner(s) 
through which the indirect partner holds its interest in the 
partnership subject to the administrative proceeding. For instance, in 
the case of amended return modification by an indirect partner, the IRS 
may require the partnership to provide any information necessary to 
determine whether the indirect partner has taken the correct amount of 
the adjustments into account. Such information may include information 
similar to amended returns for any partnership-partner through which 
the adjustments are flowed before being taken into account by the 
indirect partner. The IRS will deny modification if a partnership fails 
timely to provide information the IRS determines is necessary to 
support and substantiate a request for modification.
    Proposed Sec.  301.6225-2(c)(3)(ii) provides that the partnership 
may request an extension of the 270-day period described in proposed 
Sec.  301.6225-2(c)(3)(i), and proposed Sec.  301.6225-2(c)(3)(iii) 
provides that the 270-day period described in proposed Sec.  301.6225-
2(c)(3)(i) closes early when the partnership representative and the IRS 
agree, in writing, to waive the 270-day delay between the mailing of 
the NOPPA and when the IRS may first issue an FPA described in section 
6231(a) (flush language). The waiver of the 270-day period would 
prevent the partnership from providing modification-related information 
after the date the waiver was executed, and it would also allow the IRS 
to issue an FPA earlier than normal. This may be desirable for a 
partnership if the partnership does not intend to seek modification, 
but the partnership does want to litigate the adjustments or make an 
election under section 6226. This could also occur in conjunction with 
the partnership's waiver of the requirement that the IRS issue an FPA 
before making a partnership adjustment, for example, if the partnership 
agrees to the adjustments. Proposed Sec.  301.6225-2(c)(4) describes 
the method by which the IRS will approve modification requests.
D. Types of Modification
    Proposed Sec.  301.6225-2(d) provides seven enumerated types of 
modifications the IRS will consider if requested by the partnership. 
Additionally, the IRS may consider alternative forms of modification 
under proposed Sec.  301.6225-2(d)(9). Unless otherwise stated in 
proposed Sec.  301.6225-2(d), a partnership may request any or all of 
the types of modification described in that paragraph. See proposed 
Sec.  301.6225-2(d)(1).
i. Amended Returns
    A partnership may request modification of an imputed underpayment 
if a reviewed year partner (or indirect partner) of a partnership files 
one or more amended returns that take into account a partnership 
adjustment or a portion of a partnership adjustment. See proposed Sec.  
301.6225-2(d)(2)(i). The reviewed year partner (or indirect partner) 
filing the amended return(s) must take into account the appropriate 
adjustments (or portion thereof) and also address the effects of such 
adjustments on any tax attributes (as defined in proposed Sec.  
301.6241-1(a)(10)) that must be adjusted because the partnership 
adjustments were taken into account. For the partnership to receive 
modification as a result of a partner's amended returns, the partner 
must file amended returns for all years with respect to which any tax 
attribute is affected by reason of the partnership adjustment(s) taken 
into account and include any payment due. The Treasury Department and 
the IRS seek comments on how best to streamline this process for ease 
of administering the amended return modification process.
    The partners' amended returns must be filed with the IRS in 
accordance with the applicable forms and instructions prescribed by the 
IRS, and the partnership representative must provide affidavits from 
each partner for which modification is sought that the partner did in 
fact file amended returns and make appropriate payments. See proposed 
Sec.  301.6225-2(d)(2)(iii). Any payment due as a result of adjustments 
taken into account on an amended return is due at the time the 
partner's amended return is filed. See proposed Sec.  301.6225-
2(d)(2)(ii).
    Any partner that files an amended return for modification purposes 
and is required to make a payment of any kind with that amended return 
must do so prior to the expiration of the period of limitations under 
section 6501 for the modification year(s). See proposed Sec.  301.6225-
3(d)(2)(v). Section 6225(c)(2) provides that partners may file amended 
returns ``notwithstanding section 6511,'' and consequently, a partner 
may file an amended return that seeks a refund (such as in the case of 
a reallocation of a distributive share as described in proposed Sec.  
301.6225-2(d)(2)(vi)) at any time. A request for refund filed as part 
of an amended return filed for modification purposes outside the period 
set forth in 6511 may only request a refund for adjustments related to 
the partnership proceeding and relevant correlative adjustments. A

[[Page 27354]]

partner may not request a refund through the amended return 
modification procedures outside the period set forth in section 6511 
for adjustments that are not a direct result of the partnership 
adjustments determined in the partnership-level proceeding. See 
proposed Sec.  301.6225-2(d)(2)(v)(B).
    If, however, the IRS must make an assessment to collect a payment 
due with respect to an amended return filed during modification, the 
partner's period of limitations under section 6501 must not have 
expired at the time the amended return is filed. Nothing in the 
proposed regulations prevents partners from signing an extension of the 
period of limitations for partnership adjustments at the time the IRS 
initiates the partnership administrative proceeding or at any other 
time prior to the expiration of the period of limitations under section 
6501. The IRS recognizes that securing such extensions may not be 
possible in all cases, but doing so may be an option for certain 
partners and partnerships. Alternatively, there may be other 
modification alternatives for a partner whose assessment period under 
section 6501 with respect to the modification years (as defined in 
proposed Sec.  301.6225-2(d)(2)(iv)) has expired. A partner may, for 
example, be able to enter into a closing agreement that allows for 
treatment similar to an amended return and to make a payment on behalf 
of the partnership's liability in recognition of what the partner would 
have filed and paid if the partner's assessment period had not already 
expired.
    In general, there is no requirement that all reviewed year partners 
of a partnership file amended returns for the partnership to request 
amended return modification. However, in the case of a reallocation 
adjustment, in general, in order for the IRS to approve the 
modification, all partners affected by the reallocation adjustment must 
file amended returns related to the reallocation adjustment. See 
proposed Sec.  301.6225-2(d)(2)(vi). In certain cases, a partnership 
may be able to demonstrate that a partner subject to a reallocation 
adjustment has taken into account that partner's relevant adjustment 
via some other type of modification that may not require an amended 
return. For instance, if one partner is a tax-exempt entity for which 
the partnership may request modification based on that partner's tax-
exempt status (as described in proposed Sec.  301.6225-2(d)(3)), and 
that partner is subject to a reallocation adjustment, it may be 
unnecessary for the tax-exempt partner to file an amended return in 
order for the partnership to request modification in accordance with 
the requirements of proposed Sec.  301.6225-2(d)(2)(vi). Such 
determinations will depend on the facts and circumstances related to 
the particular modification and are within the discretion of the IRS.
    The Treasury Department and the IRS propose a specific rule that 
addresses pass-through partners in proposed Sec.  301.6225-
2(d)(2)(vii). A pass-through partner (as defined in proposed Sec.  
301.6241-1(a)(5)) may, for modification purposes only, file an amended 
return and take into account its allocable share of the adjustments. A 
pass-through partner that does so must pay an amount calculated in the 
same manner as the safe harbor amount under proposed Sec.  301.6226-
2(g) on the pass-through partner's share of the partnership adjustment 
except that, for purposes of calculating the payment amount, instead of 
using the tax rate under section 6225(b)(1)(A), the tax rate is the 
rate determined by substituting the total net income of the pass-
through partner for the taxable year (as adjusted) for taxable income 
in section 1(c) of the Code (determined without regard to section 
1(h)).
    An amended return filed by a pass-through partner without a payment 
(when required based on the adjustments) will not result in 
modification for the partnership. See proposed Sec.  301.6225-
2(d)(2)(vii). An amended return filed by a pass-through partner is not 
an administrative adjustment request as defined in section 6227 and the 
regulations thereunder, but rather is a stand-alone document that is 
filed solely for modification purposes.
    Regardless of the number of pass-through partners or tiers involved 
in a partnership structure, all amended returns filed by a pass-through 
partner and its owners must be filed with the IRS and any tax, 
penalties, additions to tax, and interest due with respect to such 
amended returns must be paid within the 270-day modification period 
described in proposed Sec.  301.6225-2(c)(3)(i). Modification is 
allowed to the extent amended returns are filed and any necessary 
payments are made within the 270-day time period.
    Because amended return modification requires a partner to fully 
take into account all adjustments allocable to that partner, a 
partnership may not request additional modification with respect to a 
partner who files and takes into account adjustments on an amended 
return. See proposed Sec.  301.6225-2(d)(2)(i). This restriction exists 
because a partner that files an amended return has fully accounted for 
the adjustment and allowing, for example, a further rate reduction 
would produce a double benefit at the partnership level.
    If a partner files an amended return for modification purposes 
which leads to a reduction in the imputed underpayment based on the 
IRS's approval of that modification request, the partner waives its 
ability to file further amended returns for the modification years with 
respect to items related to the partnership adjustments and the imputed 
underpayment unless the partner receives permission from the IRS to do 
so. See proposed Sec.  301.6225-2(d)(2)(vii)(B). The intent of this 
provision is to prevent a partner from filing an amended return for 
modification purposes, paying some additional amount due and then, 
after the partnership receives modification, filing another amended 
return claiming a refund for the same amount on which the partnership 
relied as part of its modification request.
    In addition, partners filing amended returns under section 6225 do 
so as part of the proceeding under subchapter C of chapter 63, which 
means that they are bound by the partnership representative's actions 
pursuant to section 6223. If the partnership representative agrees to 
an imputed underpayment that was modified due to a partner filing an 
amended return, the partner is bound to that modification through 
section 6223 and may not change the partner's position related to the 
partnership adjustments that were taken into account in a way that is 
inconsistent with the partnership representative's actions. 
Nonetheless, the IRS understands that situations may arise in which a 
partner needs to file a further amended return for an unrelated reason, 
and the partner may request permission from the IRS to do so if 
necessary. The Treasury Department and the IRS seek comments on the 
most efficient ways that taxpayers may request permission from the IRS 
to file a subsequent amended return.
    In addition, a partner can only file an amended return with respect 
to items stemming from a partnership under the procedures set forth in 
subchapter C of chapter 63, that is, the amended return modification 
procedures. See proposed Sec.  301.6225-2(d)(2)(vii)(A).
ii. Tax-Exempt Partners
    A partnership may request modification based on the status of its 
tax-exempt partners. If the IRS approves that modification, the imputed 
underpayment is calculated without regard to the portion of the 
partnership adjustment that is allocable to the tax-

[[Page 27355]]

exempt partner and with respect to which the partner would not be 
subject to tax for the reviewed year by reason of its status as a tax-
exempt entity. The modification request is based on the tax-exempt 
status of the partner during the reviewed year. See proposed Sec.  
301.6225-2(d)(3)(i).
    For the purposes of modification, section 6225(c)(3) provides that 
a tax-exempt entity is defined pursuant to section 168(h)(2). Proposed 
Sec.  301.6225-2(d)(3)(ii) further provides that status as a tax-exempt 
entity for purposes of modification is determined in accordance with 
the definitions provided under section 168(h)(2)(A), (C), and (D) 
without reference to section 168(h)(2)(B) and (E). Section 168(h)(2)(B) 
and (E) do not define categories of entities that are treated as tax-
exempt entities, but rather impose limits on the extent to which 
certain property leased to tax-exempt entities is entitled to special 
treatment as ``tax-exempt use property'' with respect to depreciation 
deductions available to a lessor. As such, those provisions are 
inapplicable to the determination of tax-exempt status for purposes of 
the modification process.
    Some tax-exempt entities may receive income for which they are 
subject to tax. For example, section 511 imposes a tax on unrelated 
business taxable income received by certain tax-exempt entities. 
Additionally, section 871, section 881, and section 882 impose tax on 
certain income received by foreign persons. A partnership may request 
modification based on an adjustment allocable to a tax-exempt partner 
only to the extent that the partnership demonstrates to the 
satisfaction of the IRS that the tax-exempt partner would not have been 
subject to tax with respect to the adjustment allocable to the partner 
for the reviewed year. See proposed Sec.  301.6225-2(d)(3)(iii).
    A partnership's decision either to request or not to request 
modification in the course of an audit under these proposed regulations 
may raise issues concerning whether and to what extent any benefit that 
might result from its request or failure to request modification could 
be considered to have been provided to any person in lieu of to a tax-
exempt partner (whether a current or former partner, and at any 
``tier'' of the partnership). For example, such a transfer of benefit 
may raise issues for one or more partners with respect to: (1) The 
status of a tax-exempt partner because of private inurement or private 
benefit under section 501(c); (2) excise taxes under chapter 42 of 
subtitle D of the Code or under sections 4975, 4976, or 4980; or (3) 
requirements under title I of the Employee Retirement Income Security 
Act of 1974, Public Law 93-406 (88 Stat. 829 (1974)) as amended 
(ERISA), such as the fiduciary responsibility rules under part 4 
thereof. Some of these issues may be addressed by including appropriate 
provisions in the partnership agreement. However, the Treasury 
Department and the IRS request comments from the public on whether 
guidance is needed to address these potential issues and, if so, on 
possible ways to resolve such issues. Any such comments related to 
title I of ERISA will be shared with the Department of Labor.
iii. Rate Modification
    Section 6225(c)(4) provides the opportunity for a partnership to 
request to modify an imputed underpayment by changing the tax rate 
applied to the portion of the total netted partnership adjustment 
allocable to a C corporation or an individual with respect to capital 
gains and qualified dividends. If the partnership has partners that are 
C corporations or individuals, the partnership may request that a lower 
rate apply to those portions, but that lower rate will be the highest 
rate in effect with respect to the type of income and partner for whom 
modification is requested. See proposed Sec.  301.6225-2(d)(4).
iv. Certain Passive Losses of Publicly Traded Partnerships (PTPs)
    Section 6225(c)(5) provides an opportunity for publicly traded 
partnerships (as defined in section 469(k)(2)) to request to modify an 
imputed underpayment in the case of a net decrease in a specified 
passive activity loss for specified partners. Proposed Sec.  301.6225-
2(d)(5)(ii) defines specified passive activity losses, and proposed 
Sec.  301.6225-2(d)(5)(iii) defines specified partners. This 
modification is available both to partnerships that are publicly traded 
partnerships and with respect to partners (and indirect partners) that 
are publicly traded partnerships. The partnership requesting 
modification must report to all specified partners that the partnership 
has adjusted the amount of their suspended passive loss carryovers at 
the end of the adjustment year by the amount of any passive losses 
applied in connection with such modifications. The reduction in 
suspended passive loss carryovers is binding on the specified partners 
pursuant to section 6223 and the regulations thereunder. The Treasury 
Department and the IRS seek comments on how the requirement to notify 
partners can most efficiently be accomplished.
v. Other Forms of Modification Under Section 6225(c)(6)
    Section 6225(c)(6) provides that the IRS may prescribe additional 
types of modification through regulations. In these proposed 
regulations, the IRS is proposing three specific additional methods of 
modification and one general provision for additional types of 
modification to be considered at a later time.
    Proposed Sec.  301.6225-2(d)(6) allows a partnership to request 
modification of the number and composition of imputed underpayments. 
This provision specifically allows modifications of the process 
described in proposed Sec.  301.6225-1(e), in which a specific imputed 
underpayment may be appropriate. The IRS is not obligated to implement 
this modification if it determines it is appropriate to reflect the 
partnership adjustments in imputed underpayments in a manner different 
than requested by the partnership. For instance, the IRS may determine 
it is appropriate to deny the calculation of a specific imputed 
underpayment by the partnership if, as a result of the specific imputed 
underpayment calculation, there is an increase in number of the 
partnership adjustments that net to a net non-positive amount, causing 
them to be disregarded and treated as adjustments that do not result in 
an imputed underpayment, which would shift the net losses away from the 
partnership and the reviewed year and to the adjustment year.
    A special modification has been allowed in proposed Sec.  301.6225-
2(d)(7) for partners that are qualified investment entities described 
in section 860. These entities may distribute deficiency dividends 
after the NOPPA has been issued, and, if the entities do so in 
compliance with section 860 and the regulations thereunder, the IRS 
will treat the amount allowed as a deficiency dividend deduction under 
section 860(a) as having been taken into account by a partner in a 
manner similar to an amended return modification. One concern regarding 
this form of modification is that a NOPPA proposes an imputed 
underpayment, but it is not a final amount, in that the partnership may 
still challenge the amount in the IRS Office of Appeals or in court, 
but, once a deficiency dividend is distributed and claim therefore is 
filed, the qualified investment entities have no opportunity to change 
their position if the partnership obtains a favorable result at a later 
date. Given this lack of finality, the Treasury Department and the IRS 
seek comments on whether this provision adequately allows qualified

[[Page 27356]]

investment entities to use the modification process.
    Finally, the IRS may take into account any closing agreements 
entered into by partners pursuant to section 7121 and will allow 
appropriate modification based on the contents of that closing 
agreement. See proposed Sec.  301.6225-2(d)(8). This type of 
modification may provide some flexibility for taxpayers for which other 
forms of modification may prove burdensome or difficult. In certain 
cases, however, closing agreements may not be appropriate for partners 
seeking to modify an imputed underpayment because the finality of a 
closing agreement may limit a partnership's ability to challenge the 
underlying adjustments in the IRS Office of Appeals or in court.
    In addition to the enumerated types of modification described in 
proposed Sec.  301.6225-2(d)(2) through (8), the IRS may, in its 
discretion, consider alternative types of modification not specifically 
discussed in proposed Sec.  301.6225-2(d); the documentation necessary 
to substantiate such modifications may be set forth in forms, 
instructions, or other guidance prescribed by the Department of 
Treasury or the IRS. See proposed Sec.  301.6225-2(d)(9). The IRS may 
issue further guidance to establish procedures related to additional 
alternative forms of modification. As with all forms of modification, 
the partnership must demonstrate that an alternative modification is 
accurate and appropriate.
    The examples in proposed Sec.  301.6225-2(e) demonstrate the rules 
of Sec.  301.6225-2.
E. Treatment of Adjustments That Do Not Result in an Imputed 
Underpayment
    Proposed Sec.  301.6225-1(c)(2) sets forth the three circumstances 
in which partnership adjustments do not result in an imputed 
underpayment. Under that paragraph, a partnership adjustment does not 
result in an imputed underpayment: (1) If the adjustment relates to a 
distributive share reallocation that is disregarded under proposed 
Sec.  301.6225-1(d)(2)(ii), (2) if after grouping and netting the 
adjustments, the result is a net non-positive adjustment under proposed 
Sec.  301.6225-1(d)(3)(ii), or (3) if the calculation under proposed 
Sec.  301.6225-1(c)(1) of this section results in an amount that is 
zero or less than zero.
    Proposed Sec.  301.6225-3 sets forth the rules for the treatment of 
adjustments that do not result in an imputed underpayment. In general, 
such an adjustment is taken into account by the partnership in the 
adjustment year as a reduction in non-separately stated income or as an 
increase in non-separately stated loss depending on whether the 
adjustment is to an item of income or loss. One of the exceptions to 
this rule is for separately stated items under section 702. Proposed 
Sec.  301.6225-3(b)(2) provides that if an adjustment is to an item 
that is required to be separately stated under section 702, the 
adjustment shall be taken into account by the partnership on its 
adjustment year return as an adjustment to such separately stated item. 
Proposed Sec.  301.6225-3(b)(3) provides that an adjustment to a credit 
is also taken into account as a separately stated item. However, if a 
section 6226 election is made with respect to an imputed underpayment, 
these rules do not apply to adjustments that are disregarded in 
computing the imputed underpayment with respect to which the section 
6226 election was made. Such adjustments are taken into account by the 
reviewed year partners under section 6226.
i. Allocation of Adjustments That Do Not Result in an Imputed 
Underpayment
    Generally, the proposed regulations are silent with respect to the 
allocation of adjustments that do not result in an imputed 
underpayment, leaving their allocation to the partnership agreement. 
Section 301.6225-3(b)(3) proposes rules, however, governing those 
allocations, or lack thereof, in limited circumstances.
    An adjustment that does not result in an imputed underpayment 
pursuant to Sec.  301.6225-1(c)(2)(i) is allocated to those adjustment 
year partners who are the reviewed year partners with respect to whom 
the amount was reallocated. This rule is intended to prevent the 
allocation of such an item back to the partner from whom it was 
reallocated in connection with the audit. If the reviewed year partners 
with respect to whom the amount was reallocated are not adjustment year 
partners, then such adjustment is allocated to the adjustment year 
partners who are the successors to those reviewed year partners or, if 
no successors are identifiable or do not exist, among adjustment year 
partners according to the adjustment year partners' distributive 
shares.
    If as part of the modification process under Sec.  301.6225-2, a 
partner takes into account an adjustment that would otherwise not 
result in an imputed underpayment, the adjustment is not allocated to 
any partner for the adjustment year because the reviewed year partner 
has already taken its share of the adjustment into account. See 
proposed Sec.  301.6225-3(b)(5). Allocating such an adjustment in the 
adjustment year would result in double counting.
    In addition, if proposed Sec.  301.6226-3 applies with respect to 
an adjustment that does not result in an imputed underpayment, proposed 
Sec.  301.6225-3 does not apply to that adjustment, and the adjustments 
are taken into account under the rules governing section 6226. See 
proposed Sec.  301.6225-3(b)(6). Finally, the rules of subchapter K 
apply with respect to adjustments taken into account under Sec.  
301.6225-3. See proposed Sec.  301.6225-3(c).
F. Notice 2016-23 Comments Related to Section 6225
    As discussed above, section 6225 generally requires that 
adjustments be taken into account for purposes of computing the imputed 
underpayment, except that adjustments that do not result in an imputed 
underpayment are taken into account in the adjustment year. Section 
6241(4) prescribes the treatment of the imputed underpayment as a 
nondeductible payment by the partnership, but is otherwise silent 
regarding the effect of the adjustments themselves on the partnership, 
the reviewed year partners, or the adjustment year partners. In 
response to Notice 2016-23, 2016-12 I.R.B. 490, commenters requested 
that the effect of partnership adjustments on basis be addressed in the 
regulations. One commenter recommended that regulations provide that a 
partnership that pays an imputed underpayment attributable to an 
adjustment to an item of income, gain, loss, or deduction, allocate 
that item in the adjustment year to the adjustment year partners 
treating such items as items of income, gain, loss, or deduction as 
non-taxable or deductible under sections 705(a)(1)(B) or (2)(B). The 
commenter explained that adjustments to basis and capital accounts are 
necessary to ensure that inside and outside basis remain congruent and 
to ensure that income, gain, loss, and deduction are not taxed twice. 
The Treasury Department and the IRS intend to adopt the approach the 
commenter recommended and to provide additional rules providing for 
adjustments to the inside basis and book value of any partnership 
property if the partnership adjustment is a change to an item of gain, 
loss, amortization or depreciation (i.e., the change is basis 
derivative). Adjustment items taken into account on an amended return 
in connection with a modification to an imputed underpayment should not 
be allocated in the adjustment year. The proposed regulations reserve a 
place for these rules.

[[Page 27357]]

    The commenter that recommended that a partnership allocate 
adjustment items in the adjustment year to the adjustment year partners 
as items described in sections 705(a)(1)(B) or (2)(B) also recommended 
that the allocations should be made in accordance with the partnership 
agreement and subject to the existing ``substantial economic effect'' 
requirements under section 704. The Treasury Department and the IRS 
request comments on whether, instead, it would be appropriate to 
allocate partnership adjustments that result in an imputed underpayment 
(meaning they are not taken into account by the partnership in the 
adjustment year under section 6225(a)(2)) only to adjustment year 
partners that are allocated part of the section 705(a)(2)(B) expense 
related to the partnership's payment of the imputed underpayment. The 
Treasury Department and the IRS also request comments on whether 
partnership adjustments arising from a reviewed year allocation that is 
reallocated from one partner to another partner require special rules 
restricting their allocations in the adjustment year to the partners 
from and to whom the item was reallocated and how to address successor 
partners or situations where the reviewed year partner has received a 
liquidating distribution and is no longer a partner.
    Another commenter suggested that the IRS should have to provide 
evidence of a net underpayment of tax prior to making an adjustment 
because in some cases the tax may simply have been paid by the wrong 
partner (for example, with a reallocation adjustment). This suggestion 
is contrary to the compliance function of the IRS, and therefore, the 
IRS has declined to propose such a rule. The suggestion is also 
contrary to the statutory framework of the centralized partnership 
audit regime generally, and the rules for determining the imputed 
underpayment specifically. Section 6225(b)(2) specifically provides 
rules for how the IRS should make reallocation adjustments, which 
appear to be contrary to the commenter's suggestion.
    Another commenter asked for safeguards similar to the mitigation 
provisions to prevent an overpayment of tax. The proposed regulations 
do not specifically address the mitigation provisions already in place 
under the Code, but there is nothing in the proposed regulations 
related to the centralized partnership audit regime that would prevent 
a partner or the partnership from pursuing mitigation, if appropriate. 
Therefore, no change in the mitigation procedures is necessary.
    Commenters requested that the IRS address credit recapture 
situations and how those items are affected by the centralized 
partnership audit regime. The proposed regulations do not specifically 
address those issues. However, proposed Sec.  301.6225-1(a)(2) provides 
that the calculation of the imputed underpayment will take into account 
all applicable preferences, restrictions, limitations, and conventions 
under the Code. Therefore, the proposed regulations provide flexibility 
to permit the IRS, during the examination, to account for credit 
recapture. The Treasury Department and IRS request additional comments 
on how credits should be managed within the framework of the proposed 
regulations.
    One commenter discussed several ways to account for adjustments to 
creditable foreign tax expenditures (CFTEs) under the BBA. One 
recommended approach was to account for a decrease to CFTEs as a 
decrease to credits, while treating an increase to CFTEs as an 
adjustment that is disregarded for purposes of the imputed underpayment 
(to account for limitations and other considerations). Under this 
recommendation, an increase in CFTEs that is disregarded for purpose of 
calculating the imputed underpayment would be reported as a separately 
stated item in the adjustment year. The commenter noted that taxpayers 
would have the option to achieve an accurate result through the 
modification process. This recommendation is generally consistent with 
the broader approach taken in the proposed regulations; however, the 
Treasury Department and the IRS are reserving on the treatment of CFTEs 
and other adjustments affecting the amount of foreign tax credit that 
might be allowable to partners. The comments received did not provide a 
detailed recommendation with respect the treatment of other adjustments 
relating to the foreign tax credit calculation, and the Treasury 
Department and IRS request comments on how adjustments affecting 
foreign tax credit calculations should be taken into account within the 
framework of the centralized partnership audit regime, including 
possible ways to account for adjustments to items sourced or calculated 
at the partner level, such as interest expense and deemed paid credits.
    Commenters asked that the tax attributes of adjustment year 
partners be taken into account when determining modification. This 
suggestion was not adopted for a number of reasons. First, section 
6225(d) and proposed Sec.  301.6241-1(a)(1) provide that the adjustment 
year is not determined until the adjustments are final. The partnership 
must seek modification prior to when the adjustment year is determined, 
potentially more than a calendar year before and even longer if the 
partnership seeks judicial review of the FPA. Because the adjustment 
year has not yet been determined at the time modification must be 
requested, there would be no way for the IRS or the partnership to know 
who the adjustment year partners should be.
    Further, the text of section 6225 indicates that reviewed year 
partners are the appropriate partners with respect to which 
modification may be requested. For instance, the amended return 
modification provision under section 6225(c)(2)(A)(i) explicitly 
requires a partner to file an amended return for the partner's taxable 
year which includes the end of the reviewed year of the partnership. 
When filing that amended return, the partner must take the adjustments 
``properly allocable to such partners'' in the reviewed year into 
account. Section 6225(c)(2)(A)(ii). It would be nonsensical for an 
adjustment year partner that was not also a reviewed year partner to 
file an amended return for the reviewed year taking any amount into 
account. Similarly, section 6225(b)(1)(A) provides that the imputed 
underpayment is calculated based on the highest tax rate in effect for 
the reviewed year, and rate modification under section 6225(c)(4)(A) 
relates specifically to a reduction in the rates in effect for the 
reviewed year by allowing for application of the rate of tax lower than 
the rate described in subsection (b)(1)(A), that is, the reviewed year 
rates. Finally, with respect to rate modifications under the rule for 
special allocations in section 6225(c)(4)(B)(ii), by statute, the rate 
modification is based specifically on a partner's distributive share of 
net gains and losses if the partnership had sold all of its assets at 
the close of the reviewed year. Such a rule cannot be applied to an 
adjustment year partner that was not also a reviewed year partner. In 
light of the statutory references to the reviewed year, it would be 
incongruous to key certain modifications off of the reviewed year 
partners and others off of adjustment year partners.
    In addition, the partnership can control who its current year 
partners are and could admit partners to the partnership for the sole 
purpose of improving the results of a modification, even attempting to 
inappropriately eliminate the imputed underpayment. As a result, 
modification generally must

[[Page 27358]]

take into changes to tax that result from the reviewed year partner 
taking the partnership adjustments into account. Finally, modification 
applies to reviewed year partners because their attributes are the most 
relevant to determining the proper amount of taxes and other 
liabilities owed by the partnership and its partners with respect to 
partnership adjustments related to the reviewed year. Adjustment year 
partners' tax attributes are generally relevant to what is reported on 
the adjustment year return, not to the reviewed year exam.
    Commenters requested clarification as to how modification would 
apply if only some of the partners filed amended returns. Section 
6225(c)(2)(B) requires that all affected partners file amended returns 
only in the case of an adjustment involving the reallocation of 
distributive shares among partners. Proposed Sec.  301.6225-2(b) 
provides the rules for how modification adjustments are taken into 
account in calculating the modified imputed underpayment, and proposed 
Sec.  301.6225-2(d)(2) provides specific rules related to amended 
return modification. Other than in the case of a reallocation 
adjustment, these rules allow some partners to file amended returns 
without requiring that all partners file amended returns. A partnership 
will be granted amended return modification to the degree that the 
partners (or indirect partners) in a partnership participate in the 
amended return modification process.
    Even in the case of a reallocation adjustment, if the partners can 
demonstrate the affected partners' adjustments were fully taken into 
account through some other form of modification, the IRS may determine 
that that requirement was met without all partners' filing amended 
returns because the partners have met the spirit of the statute's 
requirements (that is, taking into account adjustments at the partner 
level). With the exception of the reallocation adjustment rule, if some 
partners choose to participate in amended return modification, the 
partnership will receive modification for those partners' amended 
returns. The partnership will not receive modification for partners 
that choose not to file amended returns unless those partners satisfy 
another modification provision as demonstrated by the partnership.
    Commenters requested clarification regarding whether a partner may 
file an amended return if the statute of limitations on assessment was 
closed for the year the partnership return was filed or to allow 
partners to file limited amended returns related to closed years. 
Proposed Sec.  301.6225-2(d)(2)(v) prevents partners from filing 
amended returns for modification purposes that require payment of tax 
after the period of limitations on assessment under section 6501 is 
closed. Although section 6225(c)(2) provides that amended returns may 
be filed ``notwithstanding section 6511,'' the statute provides no such 
exception for the statute of limitations under section 6501. As a 
result, there are limits on which partners will be permitted to file an 
amended return under the modification procedures. Partners that are 
precluded from filing amended returns due to an expired section 6501 
period may be eligible for other forms of modification, such as closing 
agreement modification under proposed Sec.  301.6225-2(d)(8), or 
partners and the partnership may choose to make other arrangements 
where the partner pays the imputed underpayment on behalf of the 
partnership outside of the modification procedures.
    Commenters requested that partners be able to modify at various 
tiers within a partnership's ownership structure (that is, modification 
of indirect partners). This suggestion has been adopted. For example, 
see the amended return modification under proposed Sec.  301.6225-
2(d)(2)(vii), which provides a special rule for pass-through partners. 
Under these rules, if the modification provisions are satisfied with 
respect to indirect partners, partnerships may seek modification with 
respect to the partners as well as the indirect partners.
    Another commenter asked for an additional 270 days after the 
issuance of the notice of final partnership adjustment, during which 
the partners could file amended returns. Section 6225(c) provides that 
the information required for modification purposes must be provided to 
the IRS within 270 days of the issuance of the NOPPA unless the IRS 
consents to an extension. The proposed regulations closely follow these 
rules. Accordingly, a request for an extension of the 270-day period 
will be considered by the IRS on a case by case basis. See proposed 
Sec.  301.6225-2(c)(3).
    Commenters requested that partners be allowed to certify that they 
have filed amended returns so that the partners do not have to provide 
their amended return information directly to the partnership or the 
partnership representative. This suggestion was incorporated in 
proposed Sec.  301.6225-2(d)(2)(iii). Under this section, partners must 
file their returns in accordance with forms and instructions for filing 
amended returns for modification purposes, and the partnership 
representative must provide certifications from those partners to the 
IRS employee conducting the administrative proceeding.
    Commenters requested that the IRS allow the partners to pay any 
taxes due related to their amended returns either at the time the 
amended returns are filed or through any available IRS administrative 
collection process. The Treasury Department and the IRS declined to 
propose this rule at this time. The IRS seeks comments as to how the 
IRS might allow more flexibility for taxpayers with respect to payment, 
while at the same time ensuring that partners in partnerships that 
request amended return modification are committed to taking into 
account the adjustments relevant to their amended returns.
    Commenters requested that an alternative modification be available 
to partners that involved a summary or schedule of adjustments that 
reflect what would happen if an amended return were filed, rather than 
requiring the partners to file amended returns. The IRS will take into 
account closing agreements entered into as partners to the degree they 
affect the imputed underpayment, and partners could use this 
modification option to accomplish the goal of avoiding amended returns. 
The Treasury Department and the IRS request comments on additional 
possible options for modification that would simplify the amended 
return process as well as the process for other types of modification.
    Commenters requested that the IRS permit modifications for taxes 
already paid, for example, on a partner's reviewed year return filed 
inconsistently with the partnership's reviewed year return. This 
suggestion was not adopted, but the IRS will allow modification with 
respect to closing agreements entered into by partners and other 
modification options. See proposed Sec.  301.6225-2(d). Other 
commenters requested that the IRS allow qualified investment entities 
to use the deficiency dividend procedures under section 860 in 
modification. The proposed regulations adopt this suggestion. See 
proposed Sec.  301.6225-2(d)(7).

6. Election for the Alternative to Payment of the Imputed Underpayment

    Proposed Sec.  301.6226-1(a) provides that a partnership may elect 
under section 6226 to ``push out'' adjustments to its reviewed year 
partners rather than paying the imputed underpayment determined under 
section 6225. If a partnership makes a valid election in accordance 
with proposed Sec.  301.6226-1,

[[Page 27359]]

the partnership is no longer liable for the imputed underpayment. A 
partnership may make an election under this section with respect to one 
or more imputed underpayments identified in an FPA. For example, where 
the FPA includes a general imputed underpayment and one or more 
specific imputed underpayments, the partnership may make an election 
under this section with respect to any or all of the imputed 
underpayments.
    Proposed Sec.  301.6226-1(b)(1) provides that if a partnership 
makes a valid election in accordance with proposed Sec.  301.6226-1, 
the reviewed year partners of the partnership are liable for tax, 
penalties, additions to tax, and additional amounts, as well interest 
on such amounts, after taking into account their share of the 
partnership adjustments determined in the FPA. Any modifications 
approved by the IRS under proposed Sec.  301.6225-2 are also reported 
to the reviewed year partners. In addition, under proposed Sec.  
301.6226-1(b)(2), adjustments that do not result in an imputed 
underpayment described in Sec.  301.6225-1(c)(2)(i) and (ii) are not 
taken into account by the partnership in the adjustment year and 
instead are included in the reviewed year partners' share of the 
partnership adjustments reported to the reviewed year partners of the 
partnership.
    Under proposed Sec.  301.6226-1(c), an election under section 6226 
is not valid unless the partnership complies with all the provisions 
for making the election under proposed Sec.  301.6226-1 and the 
provisions under proposed Sec.  301.6226-2 requiring the partnership to 
furnish statements to the reviewed year partners and file those 
statements electronically with the IRS. An election under proposed 
Sec.  301.6226-1 may only be revoked with the consent of the IRS.
    Proposed Sec.  301.6226-1(c)(2) provides that if the IRS determines 
that an election under section 6226 is invalid, the IRS will notify the 
partnership and the partnership representative (within 30 days of the 
determination) that the election is invalid and provide the reason why 
the election is invalid. Proposed Sec.  301.6226-1(c)(2) provides that 
a final determination that the election is invalid means that the 
partnership is liable for any imputed underpayment to which the 
election related, as well as any penalties and interest with respect to 
the imputed underpayment determined under section 6233. An election 
under proposed Sec.  301.6226-1 is valid until the IRS determines the 
election is invalid.
A. Making the Election Under Section 6226
    Under proposed Sec.  301.6226-1(c)(3), a partnership may only make 
an election under section 6226 within 45 days of the date the FPA was 
mailed by the IRS. The time for filing the election may not be 
extended. The election must be signed by the partnership representative 
and filed with the IRS in accordance with forms, instructions, and 
other guidance. Proposed Sec.  301.6226-1(c)(4)(i). Proposed Sec.  
301.6226-1(c)(4)(ii) provides that the election must include the name, 
address, and correct taxpayer identification number (TIN) of the 
partnership, the taxable year to which the election relates, the 
imputed underpayment(s) to which the election applies (if there is more 
than one imputed underpayment in the FPA), each reviewed year partner's 
name, address, and correct TIN, and any other information required 
under forms, instructions, and other guidance. A copy of the FPA to 
which the election relates must also be attached to the election.
    As stated in proposed Sec.  301.6226-1(d), an election under 
section 6226, which includes filing and furnishing the statements 
described in proposed Sec.  301.6226-2, is an action taken by the 
partnership under section 6223 and the regulations thereunder. 
Accordingly, all reviewed year partners are bound by the election and 
each reviewed year partner must take the adjustments on the statement 
into account in accordance with section 6226(b) and report and pay 
additional chapter 1 tax (if any) pursuant to proposed Sec.  301.6226-
3. Therefore, a reviewed year partner may not treat items reflected on 
a statement described in proposed Sec.  301.6226-2 inconsistently with 
how those items are treated on the statement that the partnership files 
with the IRS. See proposed Sec.  301.6222-1(c)(2) (regarding items the 
treatment of which a partner is bound to under section 6223).
    The Treasury Department and the IRS request comments from the 
public on whether guidance is needed on how to address potential issues 
arising with respect to tax-exempt entities as a result of an election 
under section 6226 and, if so, on possible ways to resolve such issues. 
For instance, if a tax exempt entity's share of the amounts under 
section 6226 is investment income, issues may arise regarding how a 
section 6226 election might affect the entity's public support 
calculation (if the entity is a publicly-supported organization) or the 
applicable net investment income tax (if the entity is a private 
foundation).
B. Filing Statements With the IRS and Furnishing Statements to Reviewed 
Year Partners
    Proposed Sec.  301.6226-2(a) provides that a partnership making an 
election under section 6226 must furnish statements to the reviewed 
year partners with respect to the partner's share of the adjustments 
and file those statements with the IRS in the time, form, and manner 
prescribed by proposed Sec.  301.6226-2(b) and (c). Proposed Sec.  
301.6226-2(a) further provides that the statements furnished to the 
reviewed year partners under section 6226 are in addition to, and must 
be filed and furnished separate from, any other statements required to 
be filed with the IRS and furnished to the partners for the taxable 
year, including any Schedules K-1, Partner's Share of Income, 
Deductions, Credits, etc. Therefore, the partnership may not include 
the partnership adjustments that are to be taken into account by the 
reviewed year partners under section 6226 in any Schedule K-1 required 
to be furnished to the partner under section 6031(b). Similarly, the 
partnership must furnish separate statements for each reviewed year at 
issue and cannot combine multiple reviewed years (if any) into a single 
statement.
    Under proposed Sec.  301.6226-2(b), the statements must be 
furnished to the reviewed year partners no later than 60 days after the 
date the partnership adjustments become finally determined. The 
partnership adjustments become finally determined upon the later of the 
expiration of the time to file a petition under section 6234 or, if a 
petition is filed under section 6234, the date when the court's 
decision becomes final. Accordingly, if an FPA is mailed on June 30, 
2020, and no petition is filed by the partnership, the partnership 
adjustments reflected in the FPA become finally determined on September 
28, 2020 (at the conclusion of the 90-day petition period under section 
6234). An example under proposed Sec.  301.6226-2(b)(3) illustrates 
these rules.
    Under proposed Sec.  301.6226-2(b)(2), a partnership must furnish 
the statement to each reviewed year partner in accordance with the 
forms, instructions, or other guidance prescribed by the IRS. If the 
statements are mailed, it must mail the statements to each reviewed 
year partner using the current or last address for that partner that is 
known to the partnership. If a statement is returned to the partnership 
as undeliverable, a partnership must exercise reasonable due diligence 
to identify a correct address for the

[[Page 27360]]

reviewed year partner to which the statement relates. Examples under 
proposed Sec.  301.6226-2(b)(3) illustrate this rule. Under proposed 
Sec.  301.6226-2(c), the partnership must electronically file the 
statements with the IRS, along with a transmittal that includes a 
summary of the statements and any other information required in the 
forms and instructions, by the date the partnership is required to 
furnish the statements to the reviewed year partners.
    Under proposed Sec.  301.6226-2(d), if a partnership discovers an 
error on a statement filed with the IRS, the partnership must correct 
the error within 60 days of the due date for furnishing the statements 
to partners and filing the statements with the IRS, as described in 
proposed Sec.  301.6226-2(b) and (c). Under proposed Sec.  301.6226-
2(d)(2)(ii), if a partnership discovers an error after this 60-day 
period, the partnership may only correct the statements with the 
permission of the IRS in accordance with the forms, instructions, or 
other guidance prescribed by the IRS. If the IRS discovers an error in 
the statements, the IRS may require the partnership to correct the 
errors. If a partnership fails to correct an error as required by the 
IRS, the IRS may treat this as a failure to properly furnish statements 
to partners and file the statements with the IRS, and thus, allow the 
IRS to determine that the election under proposed Sec.  301.6226-1 is 
invalid with the result that the partnership is liable for the imputed 
underpayment to which the election related. A partnership corrects an 
error in a statement by electronically filing the corrected statement 
with the IRS and furnishing the corrected statement to the affected 
reviewed year partner in accordance with the forms, instructions, and 
other guidance prescribed by the IRS. The adjustments contained on a 
corrected statement are taken into account by the reviewed year partner 
in accordance with proposed Sec.  301.6226-3 for the reporting year (as 
defined in proposed Sec.  301.6226-3(a)). Proposed Sec.  301.6226-
2(d)(4). Because reviewed year partners cannot file inconsistently with 
any statements furnished by the partnership under proposed Sec.  
301.6226-2 (see proposed Sec.  301.6226-1(d)), this provision provides 
a partner a period during which the partner may notify the partnership 
of any errors in a statement and have the partnership furnish a 
corrected statement to the partner and file the corrected statement 
with the IRS.
i. Contents of the Statements
    The statements described in proposed Sec.  301.6226-2 must include 
the name and correct TIN of the reviewed year partner; the current or 
last address of the reviewed year partner that is known to the 
partnership; the reviewed year partner's share of items originally 
reported to the partner (taking into account any adjustments made under 
section 6227); the reviewed year partner's share of the partnership 
adjustments and any penalties, additions to tax, or additional amounts; 
modifications attributable to the reviewed year partner; the reviewed 
year partner's share of any amounts attributable to adjustments to the 
partnership's tax attributes in any intervening year (as defined in 
proposed Sec.  301.6226-3) resulting from the partnership adjustments 
allocable to the partner; the reviewed year partner's safe harbor 
amount and interest safe harbor amount (if applicable), as determined 
in accordance with proposed Sec.  301.6226-2(g); the date the statement 
is furnished to the partner; the partnership taxable year to which the 
adjustments relate; and any other information required by the forms, 
instructions, or other guidance prescribed by the IRS. Proposed Sec.  
301.6226-2(e).
ii. Partner's Share of Adjustments and Other Amounts
    Under proposed Sec.  301.6226-2(f), a reviewed year partner's share 
of the adjustments that must be taken into account by the reviewed year 
partner must be reported to the reviewed year partner in the same 
manner as originally reported on the return filed by the partnership 
for the reviewed year. If the adjusted item was not reflected in the 
partnership's reviewed year return, the adjustment must be reported in 
accordance with the rules that apply with respect to partnership 
allocations, including under the partnership agreement. However, if the 
adjustments, as finally determined, are allocated to a specific partner 
or in a specific manner, the partner's share of the adjustment must 
follow how the adjustment is allocated in that final determination. 
Proposed Sec.  301.6226-2(f)(1). In all cases, adjustments taken into 
account on any amended returns or closing agreements that are approved 
during the modification process under proposed Sec.  301.6225-2(d)(2) 
and that are disregarded in determining the imputed underpayment are 
ignored for purposes of determining the reviewed year partners' share 
of the adjustments. However, these modifications are listed separately 
on the statements provided to the reviewed year partners. Although 
modifications are ignored for purposes of reporting the adjustments to 
the reviewed year partners, any reviewed year partner that took an 
adjustment into account and paid tax through an amended return or 
closing agreement as part of modification with respect to that 
adjustment will not be taxed a second time with respect to that 
adjustment. This is true for two reasons. First, the partnership will 
inform the partner of any such adjustment in the statement furnished to 
that partner, per proposed Sec.  301.6226-2(e). Therefore, the partner 
will know upon receipt of a statement that certain adjustments were 
taken into account by the partner and that those adjustments were 
disregarded in determining the imputed underpayment. Second, when 
computing the partner's tax that stems from such an adjustment (as 
described in proposed Sec.  301.6226-3), the partner will account for 
the adjustment as part of that process, and the computation of the tax 
will reflect that the partner had already paid tax with respect to that 
adjustment during the modification phase of the audit. An example in 
proposed Sec.  301.6226-3(g) illustrates this concept.
    Any penalties, additions to tax, or additional amounts are reported 
to the reviewed year partners in the same proportion as each partner's 
share of the adjustments to which the penalties relate, unless the 
penalty, addition to tax, or additional amount is specifically 
allocated to a specific partner(s) or in a specific manner by a final 
court decision or in the FPA, if no petition is filed. Proposed Sec.  
301.6226-2(f)(2). Accordingly, if a penalty is determined with respect 
to a specific item or items, that penalty is reported to the reviewed 
year partners in the same manner as the adjustments to that specific 
item or items, unless otherwise provided in the FPA or a final court 
decision, for instance in a situation where there are partner-specific 
defenses to a penalty determined at the partnership level. If a 
penalty, addition to tax, or additional amount does not relate to a 
specific adjustment, each reviewed year partner's share of the penalty, 
addition to tax, or additional amount is determined in accordance with 
how such items would have been allocated under rules that apply with 
respect to partnership allocations, including under the partnership 
agreement, unless it is allocated to a specific partner in a specific 
manner in a final determination of the adjustments, in which case it is 
allocated in accordance with the final determination.

[[Page 27361]]

C. Computation of the Tax Resulting From Taking Adjustments Into 
Account
    Under proposed Sec.  301.6226-3, a reviewed year partner that is 
furnished a statement under proposed Sec.  301.6226-2 is required to 
pay any additional chapter 1 tax (additional reporting year tax) for 
the partner's taxable year which includes the date the statement was 
furnished to the partner in accordance with proposed Sec.  301.6226-2 
(the reporting year) that results from taking into account the 
adjustments reflected in the statement. The additional reporting year 
tax is either the aggregate of the adjustment amounts, as determined in 
proposed Sec.  301.6226-3(b), or, if an election is made under proposed 
Sec.  301.6226-3(c), a safe harbor amount.
    In addition to being liable for the additional reporting year tax, 
the reviewed year partner of a partnership that makes an election under 
section 6226 must also pay, for the reporting year, the partner's share 
of any penalties, additions to tax, or additional amounts reflected in 
the statement, and any interest on such amounts. Interest is determined 
in accordance with proposed Sec.  301.6226-3(d).
i. Calculating the Aggregate of the Adjustment Amounts
    Under proposed Sec.  301.6226-3(b), the aggregate of the adjustment 
amounts is the aggregate of the correction amounts determined under 
proposed Sec.  301.6226-3(b). There are two correction amounts for 
these purposes--one for the partner's taxable year which includes the 
reviewed year of the partnership (first affected year) and a second 
correction amount for the partner's taxable years after the first 
affected year and before the reporting year (intervening years). These 
correction amounts cannot be less than zero, and any amount below zero 
after applying the rules in proposed Sec.  301.6226-3(b) does not 
reduce any correction amount, any tax in the reporting year, or any 
other amount.
    Under proposed Sec.  301.6226-3(b)(2), the correction amount for 
the first affected year is the amount by which the reviewed year 
partner's chapter 1 tax would increase for the first affected year by 
taking into account the adjustments reflected in the statement provided 
to the reviewed year partner under proposed Sec.  301.6226-2. The 
correction amount for the first affected year is calculated by first 
determining the amount of chapter 1 tax that would have been imposed 
for the first affected year if the items as adjusted in the statement 
had been correctly reported in the first affected year. From that 
amount is subtracted the sum of the amount of chapter 1 tax shown by 
the partner on the return for the first affected year (which includes 
amounts shown on an amended return for such year, including an amended 
return filed under section 6225(c)(2) by the reviewed year partner) 
plus any amounts not shown but previously assessed (or collected 
without assessment) less any rebates made (as defined in Sec.  1.6664-
2(e)). In other words, the correction amount is equal to A minus (B 
plus C minus D). A is the amount of chapter 1 tax that would have been 
imposed had the items as adjusted been properly reported on the return 
for the first affected year. B is the amount shown as chapter 1 tax on 
the return for the first affected year (including amended returns filed 
under section 6225(c)(2) by a reviewed year partner). C represents any 
amounts not so shown previously assessed (or collected without 
assessment). D is the amount of rebates made. For purposes of applying 
this definition, an amount previously assessed includes an amount that 
was previously assessed as a result of the partner taking into account 
adjustments under section 6226(b) pursuant to an election made by a 
partnership other than the partnership making the current election.
    Under proposed Sec.  301.6226-3(b)(3), the aggregate correction 
amount for all intervening years is the sum of the correction amounts 
for each intervening year. Determining the correction amount for each 
intervening year is a year-by-year determination. The correction amount 
for each intervening year is the amount by which the reviewed year 
partner's chapter 1 tax would increase by taking into account any 
adjustments to any tax attributes. The correction amount for each 
intervening year is calculated by determining the amount of chapter 1 
tax that would have been imposed for the intervening year if any tax 
attribute for the intervening year had been adjusted after taking into 
account the partner's share of the adjustments for the first affected 
year (and if any tax attribute for the intervening year had been 
adjusted after taking into account any adjustments to tax attributes in 
any prior intervening year(s)). From that amount is subtracted the sum 
of the amount of chapter 1 tax shown by the partner on the return for 
the intervening year (which includes amounts shown on an amended return 
for such year, including an amended return filed under section 
6225(c)(2) by the reviewed year partner) plus any amounts not shown but 
previously assessed (or collected without assessment) less any rebates 
made (as defined in Sec.  1.6664-2(e)).
    For instance, if a partner had a net operating loss on his original 
return for the first affected year that was carried forward into the 
intervening years, the net operating loss (a tax attribute as defined 
in proposed Sec.  301.6241-1(a)(10)) in the first intervening year 
after the first affected year is reduced by any portion of the net 
operating loss utilized to offset the adjustments in the first affected 
year. This reduction may not only affect the first intervening year 
after the first affected year, but if not fully absorbed in that 
intervening year, it may have a cascading effect through the 
intervening years as the intervening years are adjusted to reflect the 
adjustment to the net operating loss carryforward.
    A number of comments received in response to Notice 2016-23 
suggested that the Treasury Department and the IRS should permit 
calculation of the additional reporting year tax to account for any 
decreases in chapter 1 tax that may have resulted in the first affected 
year or any intervening year after taking into account the partner's 
share of the partnership adjustments. However, section 6226(b) 
specifically describes the correction amounts as amounts by which a 
partner's chapter 1 tax would increase for each respective year. 
Section 6226(b)(2)(A) and (B). Accordingly, the proposed regulations 
reflect the statute and do not permit any decreases in chapter 1 tax 
that would result for the first affected year or for any intervening 
year to factor into the calculation of the additional reporting year 
tax.
ii. Election To Pay the Safe Harbor Amount
    Under proposed Sec.  301.6226-3(c), a partner that is furnished a 
statement described in proposed Sec.  301.6226-2 may elect under this 
section to pay the safe harbor amount (or the interest safe harbor 
amount, in the case of certain individuals) shown on the statement in 
lieu of the additional reporting year tax. The election is made on the 
partner's return for the reporting year. If a partner is furnished 
multiple statements described in proposed Sec.  301.6226-2, the partner 
may elect to pay the safe harbor amount from some or all of the 
statements. For instance, if the IRS examined two partnership taxable 
years in the same administrative proceeding, and an election under 
section 6226 was made with respect to all imputed underpayments for 
both years, the partnership would be required to furnish separate 
statements to its reviewed year partners and to calculate

[[Page 27362]]

separate safe harbor amounts for each year. A reviewed year partner 
could elect to pay the safe harbor amount for one taxable year, but not 
the other taxable year. If a partner elects to pay the safe harbor 
amount, the partner must report the safe harbor amount on the partner's 
timely-filed return (excluding extensions) for the partner's reporting 
year. If the partner fails to do so, the partner may not utilize the 
safe harbor amount, but instead must compute the additional reporting 
year tax under proposed Sec.  301.6226-3(b) as if no election under 
proposed Sec.  301.6226-3(c) had been made.
    Proposed Sec.  301.6226-2(g) provides rules for the partnership to 
compute the safe harbor amount and the interest safe harbor amount, 
which cannot be less than zero, for inclusion in the section 6226 
statement furnished to each reviewed year partner and filed with the 
IRS. For purposes of calculating the safe harbor amount, all of the 
allocation rules of proposed Sec.  301.6226-2(f) apply. Under proposed 
Sec.  301.6226-2(g), the safe harbor amount for each reviewed year is 
calculated in the same manner as the imputed underpayment under 
proposed Sec.  301.6225-1 except that the adjustments allocated to the 
partner on the statement (including any amounts attributable to 
adjustments to partnership tax attributes) are used instead of the 
adjustments that are taken into account for purposes of determining the 
imputed underpayment under proposed Sec.  301.6225-1. With one 
exception, any approved modifications of the imputed underpayment, 
including a rate modification under section 6225(c)(4), has no effect 
on the determination of the safe harbor amount for any partner.
    The one exception is where a reviewed year partner filed an amended 
return, or entered into a closing agreement, during the modification 
phase under section 6225(c)(2), and as a result, the imputed 
underpayment, to which an election under this section relates, was 
determined without regard to the adjustments taken into account on the 
amended return or in the closing agreement. In that case, such 
adjustments are not taken into account in determining that partner's 
safe harbor amount.
    In addition to the safe harbor amount, a partnership must calculate 
an interest safe harbor amount for partners who are individuals and who 
have a calendar year taxable year. The interest safe harbor amount is 
calculated at the rate set forth in proposed Sec.  301.6226-3(d)(4) 
from the due date (without extension) of the individual reviewed year 
partner's return for the first affected year until the due date 
(without extension) of the individual reviewed year partner's return 
for the reporting year.
    A separate safe harbor amount (and interest safe harbor amount, if 
applicable) is calculated for each separate statement furnished to the 
partner under proposed Sec.  301.6226-2. For example, if there are 
multiple reviewed years, the partner would receive a separate statement 
for each reviewed year, and there would be a separate safe harbor 
calculation and amount for each statement.
    The purpose of the safe harbor amount (and the interest safe harbor 
amount) is to provide a simplified method for the reviewed year partner 
to take into account the reviewed year partner's share of the 
adjustments with respect to the partnership's reviewed year. 
Determining what the reviewed year partner's increase in chapter 1 tax 
would be in the partner's first affected year if the adjustments were 
taken into account in that year, the increase in chapter 1 tax that 
would have occurred as a result of any adjustment to the tax attributes 
for each intervening year, and interest due for the first affected year 
and each intervening year could be very complex. In addition, because 
the statute only permits adjustments to increase, but not decrease, 
chapter 1 tax for any taxable year, adjustments taken into account 
under section 6226(b) do not fully reflect the tax consequences of 
treating the items correctly in the reviewed year. While the safe 
harbor amount also does not reflect the tax consequences of treating 
the items correctly in the reviewed year any better than the method 
prescribed by the statute, it is a reasonable alternative to 
approximate the tax that would have been due. In some cases, many years 
may have lapsed between the first affected year and the last 
intervening year, further complicating the calculation. Accordingly, 
while determination of the aggregate of the correction amounts provides 
a close but imperfect approximation of the partner's tax that would 
have been due if the partnership return was correct in the reviewed 
year, some partners may decide that the complexity and cost of doing 
the calculations necessary to determine the aggregate of the correction 
amounts is not worth the effort given that the aggregate of the 
correction amounts may not be exactly what the tax due would have been 
if the partnership return was correct in the reviewed year.
    Under the proposed regulations, the safe harbor amount is computed 
so that partners filing amended returns under section 6225(c)(2) or 
entering into closing agreements are not paying tax twice on the same 
adjustment. In addition, the safe harbor amount is determined by 
multiplying the net adjustments against the highest tax rate under 
section 6225(b)(1)(A). Use of a fixed rate rather than requiring the 
reviewed year partner to determine the rate in the first affected year 
and the intervening years allows the partnership to compute the safe 
harbor amount for the reviewed year partner, further reducing burden on 
the reviewed year partner.
    The election under section 6226 is a partnership election and the 
partners are bound by the election. See section 6223(b); proposed Sec.  
301.6226-1(d). Although reviewed year partners can avoid the 
computation under section 6226(b) by filing an amended return (or 
entering into a closing agreement) and paying the tax and interest due 
in accordance with section 6225(c)(2) during the modification phase of 
the audit, not all partners are willing or able to amend their returns 
for the relevant year. Therefore, the Treasury Department and the IRS 
believe that it is important to allow partners an option to pay a 
simplified safe harbor amount in lieu of computing the correction 
amounts described under proposed Sec.  301.6226-3(b) and a simplified 
interest safe harbor amount for certain individuals in lieu of 
computing the interest on the safe harbor amount under proposed Sec.  
301.6226-3(d)(2).
    Any reviewed year partner may elect to pay the safe harbor amount, 
including reviewed year partners that are partnership-partners or S 
corporation partners.
iii. Interest
    Reviewed year partners are also liable for interest on any 
correction amount for the first affected year and any intervening years 
under proposed Sec.  301.6226-3(d)(1). If the partner elects to pay the 
safe harbor amount, a reviewed year partner that is an individual may 
also elect to pay the interest safe harbor amount. For all other 
partners and individuals that do not elect the safe harbor amount, 
interest applies under proposed Sec.  301.6226-3(d)(2). Interest on the 
correction amounts and the safe harbor amount is determined at the 
partner level. Under proposed Sec.  301.6226-3(d)(4), the rate of 
interest is calculated using the underpayment rate under section 
6621(a)(2), except that when determining that rate, five percentage 
points are used instead of three percentage points, with the result 
that the underpayment rate for purposes of

[[Page 27363]]

section 6226 is the federal short-term rate plus five percentage 
points.
    Under proposed Sec.  301.6226-3(d)(1), a reviewed year partner is 
liable for interest on any correction amount from the first affected 
year and any intervening years from the due date of the return (without 
extension) for the applicable tax year (that is, the year to which the 
additional tax is attributable) until the correction amount is paid. 
For purposes of calculating interest, the safe harbor amount and any 
penalties, additions to tax, or additional amounts are attributable to 
adjustments taken into account for the first affected year. Therefore, 
proposed Sec.  301.6226-3(d)(2) and (3) provide that the reviewed year 
partner is liable for interest on the safe harbor amount and any 
penalties, additions to tax, or additional amounts from the due date of 
the return for the corresponding first affected year (without 
extension) until the reviewed year partner pays such amounts.
D. Qualified Investment Entities (QIEs): Regulated Investment Companies 
(RICs) and Real Estate Investment Trusts (REITs)
    The proposed regulations under section 6226 coordinate the rules 
under the centralized partnership audit regime with the deficiency 
dividend procedures under section 860 for partners that are RICs and 
REITs. In general, section 860 allows RICs and REITs to be relieved 
from the payment of a deficiency in (or to receive a credit or refund 
of) certain taxes including, among certain others, taxes imposed by 
sections 852(b)(1) and (3), 857(b)(1) or (3), and, if the entity fails 
the distribution requirements of section 852(a)(1)(A) or 857(a)(1), as 
applicable, the corporate income tax imposed by section 11(a) or 
1201(a). The procedure provided by section 860 is to allow an 
additional deduction for ``deficiency dividends'' within the meaning of 
section 860(f) that meets the requirements of section 860 in computing 
the deduction for dividends paid for the taxable year for which a 
``determination'' within the meaning of section 860(e) is made. Under 
proposed Sec.  301.6226-2(h), if a statement described in proposed 
Sec.  301.6226-2 is furnished to a reviewed year partner that is a RIC 
or REIT, the RIC or REIT may take into account the adjustments 
reflected in the statement that also are ``adjustments'' within the 
meaning of section 860(d) by using the deficiency dividend procedures 
set forth in section 860, subject to the limitations described in 
proposed Sec.  301.6226-3(b)(4). Accordingly, a REIT or a RIC may 
utilize the deficiency dividend procedures under section 860 if the 
REIT or RIC receives a statement from a partnership under proposed 
Sec.  301.6226-2 that includes adjustments within the meaning of 
section 860(d).
    Section 301.6226-3(b)(4) of the proposed regulations coordinates 
rules for the deficiency dividend procedures set forth in section 860 
with the rules for determining the additional reporting year tax under 
Sec.  301.6226-3(b) with respect to any adjustments shown on a 
statement furnished to a RIC or REIT under proposed Sec.  301.6226-2. 
Under these rules, if the statement described in proposed Sec.  
301.6226-2 results in any adjustment (within the meaning of section 
860(d)) to a RIC or REIT for the first affected year or any intervening 
year, the RIC or REIT may make a determination under section 860(e)(4) 
and Rev. Proc. 2009-28, 2009-1 C.B. 1011, and avail itself of the 
deficiency dividend procedures set forth in section 860 and the 
regulations thereunder. If the RIC or REIT utilizes the deficiency 
dividend procedures with respect to adjustments in a statement 
described in proposed Sec.  301.6226-2, the RIC or REIT may claim a 
deduction for deficiency dividends against the adjustments furnished to 
the RIC or REIT (to the extent they qualify as adjustments under 
section 860(d)) in calculating any correction amounts for the first 
affected year and any intervening year to the extent that the RIC or 
REIT makes deficiency dividend distributions under section 860(f) and 
complies with all requirements of section 860 and the regulations 
thereunder.
    Also, if a RIC or REIT claims a deficiency dividends deduction, 
interest under proposed Sec.  301.6226-3(d) is only calculated on any 
correction amount determined after deducting any deficiency dividend 
deduction from the adjustments taken into account by the RIC or REIT. 
Nothing in proposed Sec.  301.6226-3(b)(4) affects a RIC's or REIT's 
liability for any interest on the deficiency dividend distribution 
under section 860(c)(1). Therefore, a RIC or a REIT will be liable for 
interest under section 860(c)(1) as to any deficiency dividend 
distribution as well as interest on any correction amount as determined 
under proposed Sec.  301.6226-3(d). Because the deficiency dividend 
distribution is deductible in calculating the correction amounts, in no 
event will a RIC or REIT pay both interest under section 860(c)(1) and 
section 6226 as to the same amount.
    Finally, as clarified in proposed Sec.  301.6226-3(b)(4), a 
deficiency dividend deduction used in calculating any correction amount 
has no effect on a RIC or REIT's liability for any penalties reflected 
in the statement furnished to the RIC or REIT under proposed Sec.  
301.6226-2.
E. Foreign Partners and Certain U.S. Partners
    The proposed regulations reserve on rules that would apply when 
statements described in proposed Sec.  301.6226-2 are provided to 
foreign partners, including foreign entities, or certain domestic 
partners. In general, certain amounts received by a partnership that 
are allocable to a foreign partner may be subject to withholding under 
chapter 3 of subtitle A of the Code (chapter 3), and certain amounts 
allocable to a foreign or domestic partner may be subject to 
withholding under chapter 4 of subtitle A of the Code (chapter 4). To 
the extent that amounts are withheld by the partnership or other 
withholding agent under chapter 3 or 4, and remitted to the IRS, such 
amounts are creditable by the foreign partner or domestic partner to 
offset the chapter 1 tax that the partner otherwise would owe in the 
absence of the withholding. The purpose of chapter 3 withholding is to 
ensure compliance by foreign persons with respect to income subject to 
tax under chapter 1, by requiring the partnership (or other withholding 
agent) to withhold and remit the tax that would normally be paid by the 
foreign person on payments or income allocated to the foreign person. 
The purpose of chapter 4 withholding is to ensure that information 
reporting about U.S. persons that use certain offshore financial 
accounts or passive foreign entities is available to the IRS to enhance 
tax compliance. The withholding imposed under chapter 4 may be imposed 
on certain foreign financial institutions, account holders of a 
financial account, or passive non-financial foreign entities with 
substantial U.S. owners, to incentivize the information required under 
chapter 4 to be reported and available to the IRS.
    It is the view of the Treasury Department and the IRS that, 
consistent with the purposes of chapters 3 and 4, if adjustments in a 
statement described in proposed Sec.  301.6226-2 represent additional 
income allocable to a foreign or domestic partner that was not 
accounted for in the reviewed year, and the partnership elects under 
section 6226 to have the partners take into account the adjustments, 
such income should be subject to the rules in chapters 3 and 4 in the 
adjustment year to the same extent that such amounts would have been if 
they had been properly accounted for by the partnership in the reviewed 
year. Accordingly, the Treasury Department

[[Page 27364]]

and the IRS intend to issue regulations that coordinate the application 
of the rules under chapters 3 and 4 to income allocable to a foreign 
partner or domestic partner where a partnership elects the application 
of section 6226. Comments are requested on how to efficiently 
coordinate the election under section 6226 with the withholding rules 
under chapters 3 and 4, while taking into account the objectives and 
purposes of BBA to improve the IRS's ability to effectively audit 
partnerships. In particular, the Treasury Department and the IRS 
request comments on: (1) How the partnership should satisfy its 
reporting obligations under chapters 3 and 4 in the reporting year with 
respect to income allocable to a foreign partner or domestic partner; 
(2) whether the partnership should be required to obtain new 
documentation from partners to support a lower withholding rate or 
whether the partnership should be able to rely on documentation 
obtained with respect to the reviewed year; and (3) how the rules under 
chapters 3 and 4 should apply when a statement described in proposed 
Sec.  301.6226-2 includes additional income allocable to a foreign 
partner that is an intermediary or flow-through entity.
    Additionally, the Treasury Department and the IRS also intend to 
issue regulations to address situations where a direct partner in the 
partnership is a foreign entity, such as a trust or corporation, that 
may not be liable for U.S. federal income tax with respect to one or 
more adjustments, but an owner of the direct partner is, or could be 
liable for tax with respect to such amount. For example, if a direct 
partner in the audited partnership is a controlled foreign corporation, 
the foreign corporation as a direct partner may not have a U.S. tax 
liability with respect to a given adjustment; however, the adjustment 
may impact the tax liability of its U.S. shareholder(s). The tax 
effects on the U.S. shareholder(s) may arise in the adjustment year, an 
intervening year, or some subsequent year, depending on the specific 
facts and circumstances. Comments are requested on how the reporting 
obligations concerning foreign entities should be modified to ensure 
that statements issued under section 6226 are timely reflected on the 
returns of the U.S. owners of such entities.
F. Section 6226 Election and Section 6234 Petition for Readjustment
    Section 6226(a) provides that the election under that section must 
be made within 45 days of the date the FPA is mailed. Section 6234(a) 
provides that the partnership may petition for readjustment within 90 
days of the date the FPA is mailed. The proposed regulations coordinate 
these rules so that an election can be made during the time frame 
provided under section 6226 without cutting off the partnership's right 
to challenge the adjustments in court within the time frame provided 
for in section 6234.
    As clarified under proposed Sec.  301.6226-1(e), an election under 
proposed Sec.  301.6226-1 does not affect the partnership's ability to 
file a petition under section 6234 to challenge adjustments determined 
in an FPA. The proposed regulations do this by providing that while the 
election under section 6226 must be filed within 45 days of the date 
the FPA is mailed, the filing and furnishing of the statements, is not 
required until 60 days after the adjustments are finally determined. 
Proposed Sec.  301.6226-2(b). Under proposed Sec.  301.6226-2(b), the 
partnership adjustments become finally determined upon the later of the 
expiration of the time to file a petition under section 6234 or, if a 
petition is filed under section 6234, the date when the court's 
decision becomes final. Accordingly, a partnership can make an election 
under section 6226, petition for readjustment, and then file and 
furnish statements once the adjustments are finally determined. If, 
after going to court, a partnership that filed the election within the 
45-day period determines that it no longer wishes to have section 6226 
apply, the partnership can request IRS consent to revoke the election.
G. Pass-Through Partners
    A number of comments received in response to Notice 2016-23 
suggested that a pass-through partner who receives a statement 
described in proposed Sec.  301.6226-2 should be able to flow through 
the adjustments to its owners instead of paying tax on the adjustments 
at the first tier. Under this approach, the adjustments would flow 
through the tiers until a partner that is not a pass-through partner 
receives the adjustment. The proposed regulations reserve on this 
issue.
    Under section 6226(a)(2), if a partnership elects the alternative 
to the payment of the imputed underpayment, the partnership is required 
to furnish statements to ``each partner of the partnership for the 
reviewed year.'' Under section 6226(b), a reviewed year partner's tax 
imposed by chapter 1 for the reporting year is increased by the 
aggregate of the correction amounts for the first affected year and any 
intervening years. Section 7701(a)(2) defines ``partner'' as a member 
in a partnership (that is, a direct partner). Accordingly, if a 
partnership makes an election under section 6226, section 6226(b) 
requires the partnership's direct partners from the reviewed year to 
take into account the adjustments. Neither section 7701(a)(2) nor 
section 6226 makes any distinction in this respect between those direct 
partners that are themselves pass-through entities, and direct partners 
that are not pass-through entities, such as individuals and C 
corporations.
    Section 6226 is prescriptive regarding the election to push out the 
partnership adjustments resulting from a centralized partnership audit 
proceeding rather than paying the imputed underpayment. First, the 
partnership subject to the proceeding must make the election no later 
than 45 days after the FPA is mailed to the partnership, and the 
partnership must furnish and file statements reflecting the reviewed 
year partners' shares of the adjustments. Section 6226(a)(1) and (2). 
Second, section 6226(b) provides that each direct partner's chapter 1 
tax for the taxable year including the date the statement is furnished 
(reporting year) is increased by an amount that represents the tax that 
should have been paid by the partner if in the reviewed year the items 
adjusted were correctly reported on the partnership's return and taken 
into account by the direct partner.
    In the case of a partnership that is itself a partner, the General 
Explanation of Tax Legislation Enacted for 2015 (Bluebook) explained 
that the partnership-partner ``pays the tax attributable to adjustments 
with respect to the [first affected year] and the intervening years, 
calculated as if it were an individual . . . for the taxable year . . . 
.'' JCS-1-16 at 70. To account for the fact that partnerships are not 
liable for chapter 1 tax, the Bluebook provides that, ``a partnership 
that receives a statement from the audited partnership is treated 
similarly to an individual who receives a statement from the audited 
partnership.'' Id. (omitting footnote providing ``[s]ection 703, which 
states that `the taxable income of a partnership shall be computed in 
the same manner as in the case of an individual . . . .' ''). In 
consideration of the fact that direct partnership-partners must pay the 
tax, the Bluebook further states that the audited partnership, the 
partnership receiving the statement under section 6226, and that 
partnership's partners ``may have entered into indemnification 
agreements under the partnership agreement with respect to the risk of 
tax liability of reviewed year partners being borne economically by 
partners in the

[[Page 27365]]

year that includes the date of the statement. Because the payment of 
tax by a partnership under the centralized system is nondeductible, 
payments under an indemnification or similar agreement with respect to 
the tax are nondeductible.'' Id.
    In December 2016, both the House of Representatives and the Senate 
introduced bipartisan technical corrections that would resolve this 
issue by providing that a partner that is a partnership or S 
corporation may elect to either pay an imputed underpayment under rules 
similar to section 6225 or flow the adjustments through the tiers. See 
Tax Technical Corrections Act of 2016 (H.R. 6439, 114th Cong. (2016)); 
Tax Technical Corrections Act of 2016 (S. 3506, 114th Cong. (2016)).
    The Technical Corrections Act's approach to allow a partnership or 
S corporation to flow adjustments through the tiers presents 
significant administrative concerns. First and foremost, allowing such 
entities to flow through the tiers will result in complexities, 
challenges, and inefficiencies similar to what occurred under TEFRA. 
Under TEFRA, following the conclusion of an administrative or judicial 
proceeding, the IRS was expected to work through the various tiers and 
calculate, assess, and collect the tax at the ultimate partner level. 
Allowing partners under BBA to flow adjustments through the tiers 
presents similar, if not greater, burdens since multiple returns are 
implicated, from the reviewed year through the adjustment year and all 
intervening years, in verifying, assessing and collecting the tax, 
interest and penalties. The IRS would have to undertake this labor 
intensive process of tracking, validating, and reconciling adjustments 
and payments through countless tiers. Indeed, as the GAO noted in its 
most recent report on large partnerships and TEFRA, almost two-thirds 
of large partnerships in 2011 had more than 1,000 direct and indirect 
partners, and hundreds of large partnerships had more than 100,000 
direct and indirect partners.
    Another significant concern is that BBA presents a bifurcated 
process where the tax is determined and later assessed and collected 
through a self-reporting process by the partners. The process of 
flowing adjustments to the reviewed year partners occurs after the 
audit/litigation is concluded. The assessment process under BBA, 
whereby the partners are required to calculate the tax, interest, and 
penalties and report them on their next filed return, presents a 
challenge because of the passage of time. Even compliant taxpayers, who 
receive statements in the middle of the tax year may not understand 
their significance, and may not know exactly how to utilize this 
information. This would necessitate additional compliance resources by 
the IRS to check the adjustment year reporting to verify that the 
adjustments were indeed correctly reported by every tier and by all 
direct and indirect partners.
    The costs involved in administering these processes will limit the 
overall number of audits that can be undertaken, which in turn will 
limit the IRS's ability to meaningfully address tax noncompliance for 
this segment of taxpayers, as well as limit the overall revenue 
collection from these entities, including, for example, as partners 
die, dissolve, become insolvent, or are not able to be located due to 
the passage of time.
    In light of these administrative concerns and the need for public 
comment on more immediately relevant aspects of these regulations, the 
proposed regulations reserve this issue. See proposed Sec.  301.6226-
2(e). However, the Treasury Department and the IRS are considering an 
approach under section 6226 for tiered partnerships for pushing the 
adjustments beyond the first tier partners that will be the subject of 
other proposed regulations to be published in the near future. The 
Treasury Department and the IRS seek comments on how the IRS might 
administer the requirements of section 6226 in tiered structures, 
including comments on the information tracking and other information 
sharing from the partnership under examination with respect to its 
direct and indirect partners to the IRS that are necessary for the IRS 
to monitor whether adjustments are properly flowed through the tiers 
and to determine that the proper taxpayers take into account the 
correct amount of adjustments and report the correct amount of any 
resulting tax, interest, and penalties. The Treasury Department and the 
IRS are also specifically interested in comments on reducing 
noncompliance and collection risk in tiered structures, while at the 
same time limiting the administrative costs of the IRS.
    In addition, the Treasury Department and the IRS are interested in 
comments as to how to treat under section 6226 a direct partner in the 
partnership that is an estate or trust, or a foreign entity, such as a 
trust or corporation that may not be liable for U.S. federal income tax 
with respect to one or more adjustments, but an owner of the direct 
partner is, or could be, liable for tax with respect to such amount. 
For instance, if a direct partner in the audited partnership is a 
controlled foreign corporation, the foreign corporation as a direct 
partner may not have a U.S. tax liability with respect to a given 
adjustment; however, the adjustment may impact the tax liability of its 
U.S. shareholder(s). The tax effects on the U.S. shareholder(s) may 
arise in the first affected year, an intervening year, or some 
subsequent year, depending on the specific facts and circumstances. The 
Treasury Department and the IRS request comments on how the safe harbor 
amount should be computed with respect to such foreign partners.
H. Adjustments to Partners' Outside Bases and Capital Accounts and a 
Partnership's Basis and Book Value in Property
    As discussed previously in this preamble, section 6226(b)(3) 
requires that any tax attribute which would have been affected if the 
partnership adjustments were taken into account for the reviewed year, 
be appropriately adjusted for purposes of computing the amount by which 
the tax imposed under chapter 1 would increase for any intervening 
year. As with section 6225, however, section 6226 does not explicitly 
provide that tax attributes affected by reason of a partnership 
adjustment should be adjusted for all purposes, and not just for 
purposes of taking the adjustments into account to calculate the 
additional reporting year tax, and that the adjustments to tax those 
attributes should continue to have effect after the adjustment year.
    As in the case of a partnership that did not elect the application 
of section 6226 with respect to an imputed underpayment, the Treasury 
Department and the IRS have determined that it is appropriate to adjust 
the adjustment year partners' outside bases and capital accounts and a 
partnership's basis and book value in property when one of those tax 
attributes is affected by reason of a partnership adjustment. However, 
given that the tax imposed under section 6226 includes the amount by 
which the tax imposed under chapter 1 would increase for any 
intervening year, a different approach is appropriate.
    The purpose of the partnership adjustments is to create a new, 
accurate starting point for later taxable years; therefore, it is 
necessary to adjust the adjustment year partners' outside bases and 
capital accounts despite the fact that it is the reviewed year partners 
who pay additional tax under section 6226. Providing mechanical rules 
to govern the adjustments to adjustment year

[[Page 27366]]

partners' outside bases and capital accounts and a partnership's basis 
and book value in property raise a myriad of technical issues on which 
the Treasury Department and the IRS request comments. As a result, the 
proposed regulations reserve a place for rules regarding adjustments to 
a partner's outside basis or capital account and a partnership's basis 
or book value in property when a partnership elects the application of 
section 6226 with respect to an imputed underpayment.
    The Treasury Department and the IRS have determined that, in the 
adjustment year, adjustment year partners' outside bases and capital 
accounts and a partnership's basis and book value in property should be 
adjusted to what they would have been if the adjustments were made in 
the reviewed year to reviewed year partners and property and then 
modified to take into account all intervening events considered in 
computing the amount by which the tax imposed under chapter 1 would 
increase for any intervening year--for example, amortization or 
depreciation of property. In some cases, the reviewed year partner may 
not be an adjustment year partner, or the partnership might, in an 
intervening year, have disposed of property to which an adjustment 
relates. Accordingly, rules will also need to provide how adjustments 
to adjustment year partners' outside bases and capital accounts and a 
partnership's basis and book value in property are made when there have 
been: (1) Sales of property, (2) distributions of property to partners, 
(3) contributions of property to corporations or lower-tier 
partnerships, (4) other nonrecognition transfers of property, (5) sales 
of partnership interests, (6) transfers of partnership interests in 
nonrecognition transactions, and (7) contributions to the partnership. 
In addition, the Treasury Department and the IRS are considering 
whether partnerships should be required to recompute basis adjustments 
under sections 734 and 743 that resulted from distributions or 
transfers in intervening years to take into account adjustments to 
partners' outside bases and a partnership's basis in property. The 
Treasury Department and the IRS are also considering whether and how an 
adjustment should be made to the basis of property distributed in an 
intervening year when an adjustment to the partnership's basis in that 
property or an adjustment to the recipient partner's outside basis 
would otherwise have been appropriate.
    It seems appropriate that any outside basis and capital account 
adjustments that need to be made are made with respect to the 
adjustment year partners who are the reviewed year partners who 
received a statement of the partner's share of any adjustment to 
income, gain, loss, deduction or credit. The Treasury Department and 
the IRS believe that if a reviewed year partner transfers its 
partnership interest in an intervening year, it is appropriate for the 
transferee adjustment year partner's capital account and outside basis 
to be adjusted in the adjustment year. Whether the interest was 
transferred in a recognition transaction or a nonrecognition 
transaction, however, is relevant to the amount of the adjustment to 
the transferee's outside basis, but not capital account, because the 
transferee in either case succeeds to the capital account of the 
transferor, however, in a recognition transaction, the transferee would 
have taken a cost basis in the interest upon a transfer in which gain 
was recognized. The Treasury Department and the IRS request comments 
regarding whether and how to adjust the outside bases and capital 
accounts of adjustment year partners if the reviewed year partner whose 
basis and capital account should have been adjusted is no longer a 
partner as a result of a liquidating distribution and thus no other 
partner has succeeded to the liquidating partner's capital account.
    Finally, comments are requested on how, or if, these regulations 
should address partnerships that do not maintain capital accounts.

7. Administrative Adjustment Requests

A. Procedures for Filing an Administrative Adjustment Request
    Proposed Sec.  301.6227-1(a) describes the general rules for filing 
an administrative adjustment request (AAR). In accordance with section 
6227(a), proposed Sec.  301.6227-1(a) provides that a partnership may 
file an AAR with respect to one or more items of income, gain, loss, 
deduction, or credit of the partnership and any partner's distributive 
share thereof for any partnership taxable year as determined under 
section 6221 and the regulations thereunder. Proposed Sec.  301.6227-
1(a) requires a partnership to determine whether the adjustments 
requested in the AAR result in an imputed underpayment in accordance 
with proposed Sec.  301.6227-2(a) for the reviewed year, that is, the 
taxable year to which the adjustments relate (see proposed Sec.  
301.6241-1(a)(8)). If the requested adjustments result in an imputed 
underpayment, proposed Sec.  301.6227-1(a) provides that the 
partnership takes the adjustments into account under proposed Sec.  
301.6227-2(b), which requires the partnership to pay the imputed 
underpayment unless the partnership makes an election under proposed 
Sec.  301.6227-2(c). If the partnership makes an election under 
proposed Sec.  301.6227-2(c), the reviewed year partners take the 
adjustments into account in accordance with proposed Sec.  301.6227-3, 
which provides rules similar to section 6226. Under proposed Sec.  
301.6227-1(a), if the adjustments do not result in an imputed 
underpayment, the reviewed year partners must take the adjustments into 
account under the rules of proposed Sec.  301.6227-3.
    Proposed Sec.  301.6227-1(a) clarifies that only a partnership may 
file an AAR and that a partner may not file an AAR unless the partner 
is doing so in his or her capacity as partnership representative for 
the partnership. Additionally, in certain cases, a partner that is 
itself a partnership subject to subchapter C of chapter 63 (that is, 
the partnership has not elected out of the centralized partnership 
regime under section 6221(b)) may file an AAR in response to the filing 
of an AAR by the partnership of which it is a partner. See proposed 
Sec.  301.6227-3(c) for the rules regarding certain partnership-
partners filing AARs. In addition, proposed Sec.  301.6227-1(a) 
clarifies that a partnership may not file an AAR solely to provide the 
partnership an opportunity to change a designation of the partnership 
representative.
    Proposed Sec.  301.6227-1(b) provides that an AAR may only be filed 
by a partnership with respect to any partnership taxable year for which 
a partnership return has been filed. In general, a partnership may not 
file an AAR with respect to a partnership taxable year more than three 
years after the later of the date the partnership return for such 
partnership taxable year was filed or the last day for filing such 
partnership return determined without regard to extensions. In 
addition, the proposed regulations provide that an AAR may not be filed 
with respect to a partnership taxable year after a notice of 
administrative proceeding with respect to such taxable year has been 
mailed by the IRS under section 6231.
    The proposed regulations reserve on rules to coordinate the rules 
under section 6227 with the requirements in section 905(c) when the AAR 
includes an adjustment to the amount of creditable foreign tax incurred 
by the partnership. Comments are requested on how a partnership can 
fulfill the requirements of section 905(c), including those rules 
relating to the assessment and collection of interest on certain 
refunds of creditable foreign taxes, while taking into account the 
objectives and purposes of the

[[Page 27367]]

centralized partnership audit regime to improve the IRS's ability to 
effectively audit partnerships.
    Proposed Sec.  301.6227-1(c)(1) provides that an AAR must be filed 
in accordance with the forms, instructions, and other guidance 
prescribed by the IRS and must include any required statements, forms, 
and schedules. An AAR must be signed under penalties of perjury by the 
partnership representative. This requirement is consistent with section 
6223 which states that the partnership representative has the sole 
authority to act on behalf of the partnership under subchapter C of 
chapter 63. See proposed Sec.  301.6223-2.
    Under proposed Sec.  301.6227-1(c)(2), a valid AAR must include the 
adjustments requested; any required statements described in proposed 
Sec.  301.6227-1(e), including any transmittal with respect to such 
statements as prescribed in forms, instructions, and other guidance; 
and any other information prescribed by the IRS in forms, instructions, 
or other guidance. Proposed Sec.  301.6227-1(d) provides that where 
reviewed year partners are required to take into account adjustments 
requested in an AAR, the partnership must furnish a copy of the 
statement filed with the IRS to the reviewed year partner to whom the 
statement relates. If the partnership mails the statement, it must be 
mailed to the current or last address of the reviewed year partner that 
is known to the partnership. The copy of the statement must be 
furnished to the reviewed year partner on the date the partnership 
files the AAR with the IRS.
    Proposed Sec.  301.6227-1(c) describes the statements that must be 
issued to reviewed year partners in the case of an election under 
proposed Sec.  301.6227-2(c) or an AAR not resulting in an imputed 
underpayment under proposed Sec.  301.6227-2(d). Each statement must 
include the name and correct TIN of the reviewed year partner; the 
current or last address of the partner that is known to the 
partnership; the reviewed year partner's share of items originally 
reported to the partner (taking into account any adjustments made 
pursuant to a prior AAR filed under section 6227); the reviewed year 
partner's share of the adjustments requested in the AAR (as described 
in proposed Sec.  301.6227-1(c)(2)); the date the statement is 
furnished to the partner; the partnership taxable year to which the 
adjustments relate (the reviewed year); and any other information 
required by the forms, instructions, or other guidance prescribed by 
the IRS. Proposed Sec.  301.6227-1(e).
    Proposed Sec.  301.6227-1(e)(2) describes the reviewed year 
partners' share of the adjustments requested in an AAR for purposes of 
the statements described in proposed Sec.  301.6227-1(e)(1). Under 
proposed Sec.  301.6227-1(e)(2), except when a specific partner's share 
of an item is reflected on an AAR in a specific manner in accordance 
with the provisions of the partnership agreement and in accordance with 
the principles of section 704(b), each reviewed year partner's share of 
an adjustment must be determined and reported to the reviewed year 
partner in the same manner as the item to which the adjustment relates 
was originally determined and reported on the partnership return for 
the reviewed year. If the item to which the adjustment relates was not 
reflected on the partnership's reviewed year return, the reviewed year 
partners' respective shares of the adjustment must be determined and 
reported to the reviewed year partners in accordance with the manner in 
which the allocation of the items to which the adjustment relates would 
have been made under the partnership agreement and subject to the 
principles of section 704(b) in the reviewed year. If the adjustments, 
as requested in the AAR, allocate items to a specific partner or in a 
specific manner, the statement must reflect the adjustment as allocated 
in accordance with the AAR.
    Proposed Sec.  301.6227-1(f) provides that the filing of an AAR 
under proposed Sec.  301.6227-1(b) and the filing and furnishing of 
statements as described in proposed Sec.  301.6227-1(c) and proposed 
Sec.  301.6227-1(d) are actions taken by the partnership under section 
6223 and the regulations thereunder. Section 6223 states that a 
partnership and all partners of such partnership shall be bound by 
actions taken by the partnership under subchapter C of chapter 63. 
Accordingly, proposed Sec.  301.6227-1(f) provides that, unless 
otherwise determined by the IRS, a partner's share of the adjustments 
requested in an AAR as reflected on a statement described in proposed 
Sec.  301.6227-1(e) are binding on the partner. Under proposed Sec.  
301.6227-1(f), a partner must treat the adjustments on the partner's 
return consistently with how the adjustments are treated on the 
statement that the partnership files with the IRS. See proposed Sec.  
301.6222-1(c)(2) (regarding items the treatment of which a partner is 
bound to under section 6223).
    Proposed Sec.  301.6227-1(g) provides that the IRS may, within the 
period provided under section 6235, conduct a proceeding with respect 
to the partnership for the taxable year to which the AAR relates and 
adjust items subject to subchapter C of chapter 63, including the items 
adjusted in the AAR. In the case of an AAR, the Service may make 
adjustments with respect to the partnership taxable year to which the 
AAR pertains within three years from the date the AAR is filed. 
Proposed Sec.  301.6227-1(g) provides that the IRS may re-determine 
adjustments requested in an AAR, including modifications applied by the 
partnership to the imputed underpayment. If the partnership adjustments 
determined by the IRS increase any imputed underpayment, the additional 
amount is assessed in the same manner and subject to the same 
restrictions as any other imputed underpayment. See section 6232.
B. Adjustments Requested in an AAR Taken Into Account by the 
Partnership
    Proposed Sec.  301.6227-2 describes how adjustments requested in an 
AAR are determined and taken into account by a partnership. Proposed 
Sec.  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 proposed Sec.  301.6225-1.
    Under proposed Sec.  301.6227-2(a)(2), in the case of an AAR, a 
partnership may reduce the imputed underpayment as a result of certain 
modifications permitted under proposed Sec.  301.6225-2. Those 
modifications are modifications that relate to tax-exempt partners, 
rate modification, modification related to certain passive losses of 
publicly traded partnerships, modification applicable to qualified 
investment entities described in section 860, and other modifications 
to the extent permitted under future IRS guidance. The modifications 
described in proposed Sec.  301.6227-2 are the only modifications a 
partnership can use in an AAR context. Other types of modification, 
such as modifications under proposed Sec.  301.6225-2 with respect to 
amended returns and closing agreements are not available in the case of 
an AAR.
    In addition, proposed Sec.  301.6227-2(a)(2)(i) provides that a 
partnership does not need to seek IRS approval prior to modifying an 
imputed underpayment that results from adjustments requested in an AAR. 
However, proposed Sec.  301.6227-2(a)(2)(ii) provides that 
modifications to the imputed underpayment resulting from adjustments 
requested in an AAR can be taken into account by the partnership only 
if the AAR that is filed includes notification to the IRS of the 
modification, a description of the effect

[[Page 27368]]

of the modification on the imputed underpayment, an explanation of the 
basis for such modification, and all necessary documentation to support 
the partnership's entitlement to such modification. These rules differ 
from the modification procedures under section 6225, where the imputed 
underpayment is not modified prior to approval by the IRS.
C. Adjustments Resulting in an Imputed Underpayment
i. Partnership Pays the Imputed Underpayment
    Proposed Sec.  301.6227-2(b)(1) provides that when the adjustments 
requested in an AAR result in an imputed underpayment, the partnership 
must pay the imputed underpayment (as reduced by modifications meeting 
the requirements of proposed Sec.  301.6227-2(a)(2)(ii)) at the time 
the partnership files the AAR, unless the partnership makes the 
election under proposed Sec.  301.6227-2(c) to have its reviewed year 
partners take such adjustments into account. The partnership's payment 
of the imputed underpayment is treated as a nondeductible expenditure 
under section 705(a)(2)(B) in accordance with proposed Sec.  301.6241-
4.
    Proposed Sec.  301.6227-2(b)(2) provides the rules for determining 
penalties and interest with respect to an imputed underpayment 
resulting from adjustments requested in the AAR. As provided in 
proposed Sec.  301.6227-2(b)(2), the IRS may impose any penalty, 
addition to tax, and additional amount with respect to such an imputed 
underpayment in accordance with section 6233(a)(3). In the case of any 
failure to pay an imputed underpayment at the time an AAR is filed, the 
IRS may impose any penalty, addition to tax, and additional amount in 
accordance with section 6233(b)(3). Interest on an imputed underpayment 
is determined under chapter 67 for the period beginning on the date 
after the due date of the partnership return for the reviewed year 
(determined without regard to extension) and ending on the earlier of 
the date payment of the imputed underpayment is made with the AAR, or 
the due date of the partnership return for the adjustment year. See 
section 6233(a)(2). In the case of any failure to pay an imputed 
underpayment before the due date of the partnership return for the 
adjustment year, any interest is determined in accordance with section 
6233(b)(2).
    The Treasury Department and the IRS intend in future guidance to 
cross reference proposed Sec.  301.6225-4 for rules regarding 
adjustments to partners' outside bases and capital accounts and a 
partnership's basis and book value in property when the adjustments 
requested in an AAR result in an imputed underpayment and the 
partnership does not elect under proposed Sec.  301.6227-2(c) to have 
its reviewed year partners take such adjustments into account.
ii. Election To Have the Reviewed Year Partners Take the Adjustments 
Into Account
    Proposed Sec.  301.6227-2(c) provides that a partnership may elect 
to have its reviewed year partners take into account adjustments 
requested in an AAR that result in an imputed underpayment in lieu of 
the partnership paying that imputed underpayment. If the partnership 
makes a valid election under proposed Sec.  301.6227-2(c), the 
partnership is no longer required to pay the imputed underpayment 
resulting from the adjustments requested in the AAR. Rather, each 
reviewed year partner must take into account its share of such 
adjustments in accordance with proposed Sec.  301.6227-3. For these 
purposes, any modification requested under proposed Sec.  301.6227-
2(a)(2) is disregarded, and all adjustments requested in the AAR are 
taken into account by each reviewed year partner in accordance with 
proposed Sec.  301.6227-3.
D. Adjustments Requested in an AAR Not Resulting in an Imputed 
Underpayment
    When the adjustments requested in an AAR do not result in an 
imputed underpayment, the reviewed year partners must take into account 
their shares of such adjustments in accordance with proposed Sec.  
301.6227-3. Proposed Sec.  301.6227-2(d) provides that in that 
situation the partnership must furnish statements to the reviewed year 
partners and file a copy of those statements with the IRS in accordance 
with proposed Sec.  301.6227-1.
E. Rules for Reviewed Year Partners To Take Adjustments Into Account
    Reviewed year partners take adjustments requested in an AAR filed 
by the partnership into account in two circumstances: (1) The 
adjustments requested in the AAR result in an imputed underpayment and 
the partnership elects under proposed Sec.  301.6227-2(c) to have its 
reviewed year partners take the adjustments into account, or (2) the 
adjustments requested in the AAR do not result in an imputed 
underpayment as described in Sec.  301.6227-2(d). Proposed Sec.  
301.6227-3 describes how reviewed year partners take into account 
adjustments requested in an AAR.
i. Rules Under Section 6226 Apply With Certain Changes
    Generally, under proposed Sec.  301.6227-3, a reviewed year partner 
who receives a statement described in proposed Sec.  301.6227-1(e) must 
treat that statement as if it were provided under section 6226(a)(2). 
Under proposed Sec.  301.6227-3(b), the reviewed year partner must pay 
any amount of tax, penalties, additions to tax, additional amounts, and 
interest that results from taking into account such adjustments in 
accordance with proposed Sec.  301.6226-3, except that, the rules under 
proposed Sec.  301.6226-3(c) (allowing the reviewed year partner to 
elect to pay a safe harbor amount), proposed Sec.  301.6226-3(d)(2) 
(regarding interest on the safe harbor amount), and proposed Sec.  
301.6226-3(d)(4) (regarding the increased rate of interest) do not 
apply. Comments are requested regarding whether the election to pay a 
safe harbor amount under proposed Sec.  301.6226-3(c) should be 
available in the case of a partner that must take into account 
adjustments requested in an AAR under proposed Sec.  301.6227-3.
    Furthermore, proposed Sec.  301.6227-3(b)(1) provides that the 
restriction in proposed Sec.  301.6226-3(b)(1) that the correction 
amount for the first affected year and any intervening year cannot be 
less than zero does not apply in the case of taking into account 
adjustments requested by the partnership in an AAR. The reason for this 
is two-fold. First, unlike an adjustment request under section 6227, 
which is a voluntary request for adjustment initiated by the 
partnership, the rules under sections 6225 and 6226 are designed to 
address adjustments that are determined by the IRS after it initiated a 
proceeding with respect to of the partnership. In cases where the 
partnership is requesting adjustments that will reduce a partner's tax 
liability, such adjustment request mirrors the voluntary compliance of 
a partnership self-reporting amounts on its original return, which may 
include losses resulting in refunds for partners. For this reason, 
partners taking adjustments into account should similarly be able to 
claim refunds when applicable. In cases where adjustments in an AAR 
would increase tax due, such voluntary compliance by partnerships 
should be encouraged and only allowing unfavorable effects from such 
adjustments would discourage partnership voluntary compliance.
    Second, section 6226(b)(2) specifically provides that only 
increases in tax are taken into account by the

[[Page 27369]]

reviewed year partners. In contrast, section 6227 does not similarly 
limit adjustments taken into account by the reviewed year partners; 
although section 6227 explicitly provides that adjustments requested in 
an AAR that do not result in an imputed underpayment may only be taken 
into account by the reviewed year partners under rules similar to the 
rules of 6226 with appropriate adjustments to those rules. The lack of 
a specific restriction in section 6227 on taking into account decreases 
to tax in the first affected year and intervening years, combined with 
section 6227's requirement that adjustments that do not result in an 
imputed underpayment must be taken into account by the reviewed year 
partners (the partners who originally overpaid tax due) indicates that 
in the AAR context both favorable and unfavorable adjustments should be 
given effect when taken into account by the reviewed year partners. 
Therefore, it is appropriate in the AAR context to remove the 
restriction in proposed Sec.  301.6226-3(b)(1) that the correction 
amount for the first affected year and any intervening year as 
described in that section cannot be less than zero.
    Proposed Sec.  301.6227-3(b)(2) allows the reviewed year partner to 
claim a refund where the partnership incorrectly allocated items from 
the partnership in the reviewed year and provides that when a partner 
(other than a pass-through partner) takes into account adjustments 
requested in an AAR, and those adjustments result in a decrease in tax, 
the partner may use that decrease to reduce the partner's chapter 1 tax 
for the taxable year which includes the date the statement was 
furnished to the partner (reporting year), and may make a claim for 
refund of any overpayment that results. The reduction is treated in a 
manner similar to a refundable credit under section 6401(b). Nothing 
under the proposed rules, however, will entitle a pass-through partner 
to a refund to which the pass-through partner would not otherwise be 
entitled under the Code. Proposed Sec.  301.6227-3(b)(3) provide 
examples to illustrate the operation of these rules.
    The Treasury Department and the IRS intend in future guidance to 
cross reference proposed Sec.  301.6226-4 for rules regarding 
adjustments to partners' outside bases and capital accounts and a 
partnership's basis and book value in property when reviewed year 
partners take adjustments requested in an AAR filed by the partnership 
into account.
ii. Pass-Through Partners
    Proposed Sec.  301.6227-3(c) is reserved to provide rules for pass-
through partners (as defined in proposed Sec.  301.6241-1(a)(5)) to 
take into account adjustments requested in an AAR. Section 6227 
provides that adjustments requested in an AAR that result in an imputed 
underpayment may be taken into account by the partnership and partners 
under rules similar to the rules of section 6226. In the case of an 
adjustment that does not result in an imputed underpayment, rules 
similar to the rules of section 6226 shall apply with appropriate 
adjustments. Rules under section 6226 pertaining to pass-through 
partners have been reserved under proposed Sec.  301.6226-3(e). 
Accordingly, the proposed regulations under section 6227 also reserve 
on rules with respect to pass-through partners until the rules under 
section 6226 regarding such partners are established.

8. Definitions and Special Rules

A. Terms Defining Partnership Years and Types of Partners
    Proposed Sec.  301.6241-1(a) contains definitions for purposes of 
subchapter C of chapter 63 and these proposed regulations. Proposed 
Sec.  301.6241-1(a)(8) defines the term ``reviewed year'' to mean the 
partnership taxable year to which the adjustments relate. Proposed 
Sec.  301.6241-1(a)(9) defines the term ``reviewed year partner'' to 
mean any person who held an interest in a partnership at any time 
during the reviewed year. Proposed Sec.  301.6241-1(a)(1) defines the 
term ``adjustment year'' to mean the partnership taxable year in which 
a decision of a court becomes final (if a petition is filed under 
section 6234), an AAR is made, or, in any other case, when an FPA is 
mailed (or if the partnership waives its right to an FPA, the year the 
waiver is executed by the IRS). Proposed Sec.  301.6241-1(a)(2) defines 
an ``adjustment year partner'' to mean any person who held an interest 
in a partnership at any time during the adjustment year of the 
partnership.
    Proposed Sec.  301.6241-1(a)(5) defines the term ``pass-through 
partner'' to mean a pass-through entity that holds an interest in a 
partnership. A pass-through entity is a partnership (including a 
foreign entity that is classified as a partnership under Sec.  
301.7701-3(b)(2)(i)(A) or (c)), an S corporation, a trust, (other than 
a trust described in the next sentence), and a decedent's estate. The 
term ``pass-through partner'' does not include disregarded entities 
described in Sec.  301.7701-2(c)(2)(i) or a trust that is wholly owned 
by only one person, whether the grantor or another person, and the 
trust reports the owner's information to payors under Sec.  1.671-
4(b)(2)(i)(A). In addition, the term ``pass-through partner'' does not 
include entities such as a registered investment company under section 
851 or a real estate investment trust under section 856.
    Proposed Sec.  301.6241-1(a)(7) defines the term ``partnership-
partner'' to mean a partnership that holds an interest in a 
partnership. A partnership-partner is a type of pass-through partner as 
defined in proposed Sec.  301.6241-1(a)(5).
    Proposed Sec.  301.6241-1(a)(4) defines an ``indirect partner'' as 
any person who has an interest in the partnership through their 
interest in one or more pass-through partners. For example, a 
shareholder in an S corporation that is a partner in a partnership is 
an indirect partner of that partnership.
B. Partnership Adjustment, Imputed Underpayment, and Tax Attribute
    Under proposed Sec.  301.6241-1(a)(6), the term ``partnership 
adjustment'' means any adjustment to the amount of any item of income, 
gain, loss, deduction, or credit as defined in proposed Sec.  
301.6221(a)-1(b)(1), or any partner's distributive share thereof, as 
described under proposed Sec.  301.6221(a)-1(b)(2).
    Proposed Sec.  301.6241-1(a)(3) defines the term ``imputed 
underpayment'' as any amount determined in accordance with proposed 
Sec.  301.6225-1.
    For purposes of subchapter C of chapter 63, proposed Sec.  
301.6241-1(a)(10) defines the term ``tax attribute''. Under this 
definition, a tax attribute is anything that can affect, with respect 
to a partnership or partner, the amount or timing of an item of income, 
gain, loss, deduction or credit as defined in proposed Sec.  
301.6221(a)-1(b)(1) or that can affect the amount of tax due in any 
taxable year. Examples of tax attributes include, but are not limited 
to, basis and holding period, as well as the character of items of 
income, gain, loss, deduction, or credit and carryovers and carrybacks 
of such items.
C. Bankruptcy
    Under proposed Sec.  301.6241-2(a)(1), if a partnership is a debtor 
in a Title 11 bankruptcy case, the running of any period of limitations 
under section 6235 for making a partnership adjustment, and under 
sections 6501 and 6502 for assessment or collection of any imputed 
underpayment, is suspended during the period the bankruptcy case 
prohibits the IRS from making the adjustment, assessment, or 
collection. The suspension runs until the prohibition ends, plus 60 
days in the case of an

[[Page 27370]]

adjustment or assessment, or six months in the case of collection.
    While proposed Sec.  301.6241-2(a)(1) follows the language in 
section 6241(6) to suspend the adjustment, assessment, and collection 
periods when those actions are prohibited by a bankruptcy case, the 
Bankruptcy Code does not prohibit two of those actions--adjustment or 
assessment. No provision of the automatic stay in section 362(a) of 
Title 11 prevents tax audits or the issuance of an FPA, the mechanism 
for adjustment, and the making of a tax assessment is expressly allowed 
under section 362(b)(9) of Title 11 notwithstanding the general stay 
against tax assessments in section 362(a)(6) of Title 11.
    Proposed Sec.  301.6241-2(a)(2) clarifies that the filing of a 
proof of claim or request for payment and the taking of other actions 
in the partnership's bankruptcy case do not violate the restrictions in 
section 6232(b) prohibiting assessment or collection during the 90-day 
period to petition for judicial review under section 6234 and, if a 
petition is filed, before the court's decision becomes final.
    Under proposed Sec.  301.6241-2(a)(3), the period to petition for 
judicial review is suspended while the bankruptcy case prevents the 
partnership from filing a petition under section 6234, and for 60 days 
thereafter.
    Proposed Sec.  301.6241-2(a)(4) clarifies that bankruptcy law does 
not prohibit audits, mailing of notices under section 6231, demands for 
unfiled returns, assessments or notice or demand for payment of 
assessments.
D. Partnerships That Cease To Exist
    Proposed Sec.  301.6241-3 follows section 6241(7) and provides that 
if the IRS determines that any partnership (including a partnership-
partner) ceases to exist before a partnership adjustment under 
subchapter C of chapter 63 takes effect, the partnership adjustment is 
taken into account by the former partners of the partnership.
    Under proposed Sec.  301.6241-3(c), a partnership adjustment takes 
effect when all amounts due under subchapter C of chapter 63 resulting 
from the partnership adjustment are fully paid by the partnership. 
Therefore, if a partnership does not pay the amounts owed, the 
partnership adjustment resulting in the imputed underpayment or other 
amount due has not taken effect. As a result, former partners of a 
partnership may be required to take into account partnership 
adjustments if a partnership does not pay an imputed underpayment (and 
any applicable interest, penalties, additions to tax, or additional 
amounts) under section 6225 or section 6227. Additionally, former 
partners of a partnership-partner may be required to take into account 
partnership adjustments if a partnership-partner does not pay any 
amount due (including any applicable interest, penalties, additions to 
tax, or additional amounts) under section 6226 or section 6227 as a 
result of receiving a statement from a partnership in which it is a 
partner under proposed Sec.  301.6226-2 or proposed Sec.  301.6227-2.
    As provided in proposed Sec.  301.6241-3(a)(3), the provisions of 
proposed Sec.  301.6241-3 do not apply to partnerships that have a 
valid election in effect under section 6221(b) and the regulations 
thereunder. Accordingly, the former partners of a partnership that has 
elected out of the centralized partnership audit regime are not 
required to take partnership adjustments into account under proposed 
Sec.  301.6241-3.
    Under proposed Sec.  301.6241-3(b)(1), the IRS may, in its 
discretion, determine that a partnership ceases to exist. Only the IRS 
may determine that a partnership has ceased to exist. No other person, 
including the partnership, the partnership representative, nor any 
partner, current or former, has the ability to make this determination 
for purposes of invoking the provisions of section 6241(7) and the 
proposed regulations. The IRS is not required to make a determination 
that a partnership ceases to exist even if the definition in proposed 
Sec.  301.6241-3(b)(2) applies with respect to such partnership. If the 
IRS determines that any partnership has ceased to exist for purposes of 
these rules, the IRS will notify the partnership and the former 
partners, in writing, at their last known address, within 30 days of 
the determination. If the IRS determines that a partnership (or 
partnership-partner) has ceased to exist, the partnership is no longer 
liable for any remaining amounts owed resulting from a partnership 
adjustment that is required to be taken into account by a former 
partner. Proposed Sec.  301.6241-3(a)(2).
    Proposed Sec.  301.6241-3(b)(2) defines the term ``cease to exist'' 
for purposes of section 6241(7). Under proposed Sec.  301.6241-3(b)(2), 
a partnership ceases to exist if the partnership terminates within the 
meaning of section 708(b)(1)(A) or does not have the ability to pay, in 
full, any amount that the partnership owes under subchapter C of 
chapter 63. See JCS-1-16 at 80 (noting that a partnership ceases to 
exist if it terminates under section 708(b)(1)(A), as well as when the 
partnership ``has no significant income, revenue, assets, or activities 
at the time the partnership adjustment takes effect''). A partnership 
does not have the ability to pay if the IRS determines that the account 
with respect to the partnership is not collectible based on the 
information that the IRS has at the time of the determination. In 
making that determination, the IRS will rely on existing guidance 
regarding when a taxpayer account is not collectible and is not 
required to develop additional facts that are not known to the IRS at 
the time the decision is made.
    Proposed Sec.  301.6241(b)(2)(i) provides that the IRS will not 
determine that a partnership has ceased to exist solely because: (i) A 
partnership has technically terminated under section 708(b)(1)(B); (ii) 
the partnership had made a valid election under section 6226 and the 
regulations thereunder with respect to any imputed underpayment; or 
(iii) the partnership has not paid any amount the partnership is liable 
for under subchapter C of chapter 63. If a partnership terminates under 
section 708(b)(1)(A), the partnership ceases to exist on the last day 
of the partnership's final taxable year. If a partnership does not have 
the ability to pay, the partnership ceases to exist on the date that 
the IRS makes a determination under proposed Sec.  301.6241-3(b)(2)(i) 
that the partnership ceases to exist. Proposed Sec.  301.6241-
3(b)(2)(ii).
    Proposed Sec.  301.6241-3 only applies if the IRS has determined 
that a partnership has ceased to exist before a partnership adjustment 
determined in a partnership-level proceeding under the centralized 
partnership audit regime takes effect. As described in proposed Sec.  
301.6241-3(c), for purposes of this section, a partnership adjustment 
takes effect when all amounts due under subchapter C of chapter 63 
resulting from the partnership adjustment are fully paid by the 
partnership. However, in no event may the IRS determine that a 
partnership ceases to exist with respect to a partnership adjustment 
after the expiration of the period of limitations on collection 
applicable to the amount due resulting from such adjustment. Proposed 
Sec.  301.6241-3(b)(2)(iii). In the event that a partnership pays some, 
but not all, of any amount due resulting from a partnership adjustment 
before a partnership ceases to exist, the former partners of the 
partnership that has ceased to exist are not required to take into 
account the portion of the partnership adjustments with respect to 
which any amounts have been paid by the partnership. Proposed Sec.  
301.6241-3(c)(2). In cases of partial payment, the

[[Page 27371]]

notification that the IRS has determined that the partnership has 
ceased to exist will include information regarding the portion of the 
partnership adjustments that are attributable to any remaining balance 
owed by the partnership that must be taken into account by the former 
partners.
    If the IRS determines that a partnership ceases to exist, the 
partnership adjustments are taken into account by the former partners 
of the partnership. Under proposed Sec.  301.6241-3(d)(1)(i), the term 
``former partners'' means the adjustment year partners of a partnership 
that has ceased to exist. If any adjustment year partner is a 
partnership-partner that the IRS has determined has ceased to exist, 
the partners of the partnership-partner for the partnership-partner's 
taxable year that includes the end of the adjustment year of the 
partnership that has ceased to exist are the former partners for 
purposes of this section. Proposed Sec.  301.6241-3(d)(1)(ii). If there 
are no adjustment year partners of a partnership, including where there 
are no partners of a partnership-partner, (for instance, because the 
partnership ceased to exist before the adjustment year), the term 
``former partners'' means the partners of the partnership (or 
partnership-partner) during the last taxable year for which a 
partnership return was filed under section 6031(b). Proposed Sec.  
301.6241-3(d)(2).
    Under proposed Sec.  301.6241-3(e), the former partners of a 
partnership that has ceased to exist take the partnership adjustment 
into account as if the partnership had made an election under section 
6226 and the regulations thereunder. A former partner must take into 
account the former partner's share of a partnership adjustment 
reflected in the statement provided to the former partner in accordance 
with proposed Sec.  301.6226-3.
    If a partnership is notified by the IRS that it has ceased to 
exist, the partnership must furnish statements to its former partners 
reflecting the former partner's share of the partnership adjustments 
required to be taken into account, and file the statements with the 
IRS, no later than 30 days after the date of the notice from the IRS in 
which the IRS determines that the partnership ceases to exist. Proposed 
Sec.  301.6241-3(e)(2)(ii). The statements must conform to the 
requirements under proposed Sec.  301.6226-2 except that the 
adjustments are taken into account by the former partners rather than 
the reviewed year partners. Proposed Sec.  301.6241-3(e)(2)(i). If the 
statements are not timely furnished to the former partners, the IRS may 
furnish statements to the former partners to inform those partners of 
their share of the adjustments. Proposed Sec.  301.6241-3(e)(3). If the 
IRS furnishes the statements to the former partners, the IRS will 
notify the former partner in writing of such partner's share of the 
partnership adjustment based on the information reasonably available to 
the IRS at the time such notification is provided. A notification 
issued by the IRS is treated the same as a statement required to be 
furnished and filed under proposed Sec.  301.6241-3(e)(2).
    Proposed Sec.  301.6241-3(f) provides examples that illustrate the 
provisions of this section.
E. Nondeductible Payments
    Proposed Sec.  301.6241-4 provides generally that the payment of 
any amount under subchapter C of chapter 63 is nondeductible, and must 
be treated as an expenditure described in section 705(a)(2)(B) (that 
is, not deductible and not properly chargeable to a capital account). 
Accordingly, a payment by a partnership of any amount required to be 
paid under subchapter C of chapter 63, including any imputed 
underpayment, any amount under proposed Sec.  301.6226-3 (regarding 
reviewed year partners taking into account partnership adjustments), 
and any interest, penalties, additions to tax, or additional amounts 
with respect to such amounts is treated as an expenditure described in 
section 705(a)(2)(B).
F. Extension to Entities Filing Partnership Returns
    Proposed Sec.  301.6241-5 extends the provisions of the centralized 
partnership audit regime to a taxable year for which any entity files a 
partnership return (Form 1065, U.S. Return of Partnership Income), even 
if it is determined that the entity filing the return is not a 
partnership (proposed Sec.  301.6241-5(a)) or even that no entity 
existed (proposed Sec.  301.6241-5(b)). Under proposed Sec.  301.6241-
5(a), if an entity files a partnership return for a taxable year, the 
provisions of subchapter C of chapter 63 (and the regulations 
thereunder) apply to that entity, its items (and any partner's 
distributive share of those items), and any person holding an interest 
in that entity at any time during the taxable year for which the 
partnership return was filed.
    Proposed Sec.  301.6241-5(c) provides exceptions to the general 
rules in proposed Sec.  301.6241-5(a). Under proposed Sec.  301.6241-
5(c)(1), the provisions of subchapter C of chapter 63 do not apply to 
taxable years for which a valid election under section 6221(b) to elect 
out of the centralized partnership audit regime is in effect. Under 
proposed Sec.  301.6241-5(c)(2), the provisions of subchapter C of 
chapter 63 do not apply to taxable years for which a partnership return 
is filed solely to make an election described in section 761(a) 
(election out of subchapter K of chapter 1 for certain unincorporated 
organizations).

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. However, pursuant to Executive Order 13789, the Treasury 
Department is currently reviewing the scope and implementation of the 
existing exemption for certain tax regulations from the review process 
set forth in Executive Order 12866. Because the proposed regulations 
would not impose a collection of information on small entities, the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, Notices and other guidance 
cited in this preamble are published in the Internal Revenue Bulletin 
(or Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS Web site at www.irs.gov.

Comments

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments that 
are submitted timely to the IRS as prescribed in this preamble under 
the ADDRESSES heading. The Treasury Department and the IRS request 
comments on all aspects of the proposed regulations. All comments 
submitted will be made available at www.regulations.gov or upon 
request.
    A public hearing has been scheduled for September 18, 2017, 
beginning at 10:00 a.m. in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue NW., Washington, DC. Due to building 
security procedures, visitors must enter at the

[[Page 27372]]

Constitution Avenue entrance. All visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 30 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic by August 14, 2017. A period of 10 
minutes will be allocated to each person for making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these proposed regulations are Jennifer M. 
Black, Joy E. Gerdy-Zogby, and Steven L. Karon of the Office of the 
Associate Chief Counsel (Procedure and Administration). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, the notice of 
proposed rulemaking (REG-138326-07) that was published in the Federal 
Register on Friday, February 13, 2009 (74 FR 7205) is withdrawn.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 301 is proposed to be amended as follows:

PART 301--PROCEDURE AND ADMINISTRATION

0
Paragraph 1. The authority citation for part 301 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *

0
Par. 2. Section 301.6221(a)-1 is added to read as follows:


Sec.  301.6221 (a)-1  Scope of the partnership procedures under 
subchapter C of chapter 63 of the Internal Revenue Code.

    (a) In general. Any adjustment to items of income, gain, loss, 
deduction, or credit (as defined in paragraph (b)(1) of this section) 
of a partnership for a partnership taxable year and any partner's 
distributive share (as defined in paragraph (b)(2) of this section) 
thereof is determined, any tax attributable thereto is assessed and 
collected, and the applicability of any penalty, addition to tax, or 
additional amount that relates to an adjustment to any such item or 
share is determined at the partnership level under subchapter C of 
chapter 63 of the Internal Revenue Code (subchapter C of chapter 63). 
See Sec.  301.6222-1 for rules relating to assessment and collection in 
a proceeding involving inconsistent reporting pursuant to section 6222. 
See Sec.  301.6225-2 for rules with respect to an amended return in the 
case of modification under section 6225(c)(2). See Sec.  301.6226-3 for 
rules in cases where an election under section 6226 is made.
    (b) Definitions. Solely for purposes of paragraph (a) of this 
section the following terms have the meaning described in this 
paragraph (b).
    (1) Items of income, gain, loss, deduction, or credit-(i) In 
general. The phrase items of income, gain, loss, deduction, or credit 
means all items and information required to be shown, or reflected, on 
a return of the partnership under section 6031, the regulations 
thereunder, and the forms and instructions prescribed by the Internal 
Revenue Service (IRS) for the partnership's taxable year, and any 
information in the partnership's books and records for the taxable 
year. This phrase includes--
    (A) the character, timing, source, and amount of the partnership's 
income, gain, loss, deductions, and credits, including whether an item 
is deductible, tax-exempt, or a tax-preference item;
    (B) the character, timing, and source of the partnership's 
activities, including whether the partnership's activities are passive 
or active;
    (C) contributions to, and distributions from, the partnership, 
including the value, amount, and character of those contributions and 
distributions (for example, for purposes of sections 704(c), 721(b), 
721(c), 737, and 751(b));
    (D) the partnership's basis in its assets, the character and type 
of the assets, and the value (or revaluation such as under Sec.  1.704-
1(b)(2)(iv)(f) or (s) of this chapter) of the assets; including any 
effect the character or value of the partnership's assets has on the 
sale or exchange of an interest in the partnership (for example, for 
purposes of section 751(a));
    (E) the amount and character of partnership liabilities, including 
whether a liability is recourse or nonrecourse and any changes to those 
liabilities from the preceding tax year;
    (F) the separate category, timing, and amount of the partnership's 
creditable foreign tax expenditures described in Sec.  1.704-
1(b)(4)(viii)(b) of this chapter;
    (G) any elections made by the partnership and the consequences or 
effects of those elections, including a section 754 election, any 
election referenced in section 703(b), a section 761 election, and an 
election under sections 6221(b) or 6226(a);
    (H) items related to transactions between a partnership and any 
person including disguised sales, guaranteed payments, section 704(c) 
allocations, and transactions to which section 707 applies;
    (I) any item resulting from a partnership terminating under section 
708(b)(1)(A), including as a result of a transaction under Rev. Rul. 
99-6 (1999-1 C.B. 432) (see Sec.  601.601(d)(2) of this chapter);
    (J) items and any effects from a technical termination under 
section 708(b)(1)(B); and
    (K) partner capital accounts, including the release of a partner 
from a deficit restoration obligation.
    (ii) Factors that affect the determination of items of income, 
gain, loss, deduction, or credit. Any factors that must be taken into 
account to determine or allocate the tax treatment of items adjusted 
under subchapter C of chapter 63 (in accordance with paragraph (b)(1) 
of this section) are determined at the partnership level. Such factors 
include--
    (A) the legal and factual determinations that underlie the 
determination of items of income, gain, loss, deduction, or credit;
    (B) the partnership's accounting practices and methods;
    (C) whether any person is a partner in the partnership;
    (D) whether a partnership exists for tax purposes, including 
whether multiple partnerships should be treated as a single 
partnership;
    (E) whether any items or transactions of the partnership, the 
adjustments to which are determined under subchapter C of chapter 63, 
lack economic substance or should otherwise be disregarded, collapsed, 
recharacterized, or attributed to other persons (for example, under the 
step transaction doctrine), including whether the

[[Page 27373]]

partnership is a sham or should otherwise be disregarded for tax 
purposes (including under Sec.  1.701-2 of this chapter and any 
applicable judicial doctrines);
    (F) the period of limitations on making adjustments under 
subchapter C of chapter 63;
    (G) the period of limitations on the assessment of amounts 
attributable to adjustments determined under subchapter C of chapter 
63, except for the period of limitations under section 6501 with regard 
to assessments of tax attributable to adjustments taken into account by 
partners as a result of an election under section 6226;
    (H) partners' outside bases, but only to the extent the partners' 
outside bases relate to an adjustment determined under subchapter C of 
chapter 63; and
    (I) any determinations necessary to calculate the imputed 
underpayment (as defined in Sec.  301.6241-1(a)(3)) under section 6225, 
including whether items adjusted under subchapter C of chapter 63 are 
limited (or subject to limitations) under the Internal Revenue Code (or 
a treaty), and the facts and circumstances specific to any partner(s) 
that might affect the calculation of an imputed underpayment or 
modification requested by the partnership with respect to an imputed 
underpayment.
    (2) Partner's distributive share. The phrase partner's distributive 
share includes--
    (i) the partner's share of items adjusted under subchapter C of 
chapter 63, including the type of partnership interest(s) the partner 
holds and the percentage interest of a partner in the partnership;
    (ii) the allocation of any item determined under subchapter C of 
chapter 63;
    (iii) any special allocations applicable to any partner;
    (iv) the character, source, and timing of any item or activity 
required to be taken into account by the partner which is related to 
any item adjusted under subchapter C of chapter 63; and
    (v) any amount required to be taken into account by any person 
under section 6226.
    (3) Tax. For purposes of section 6221(a), the term tax means tax 
imposed by chapter 1 of subtitle A of the Internal Revenue Code.
    (c) Penalty defenses--(1) In general. Any defense to any penalty, 
addition to tax, or additional amount must be raised by the partnership 
in a partnership-level proceeding under subchapter C of chapter 63, 
regardless of whether the defense relates to facts and circumstances 
relating to a person other than the partnership. After the adjustments 
determined in a partnership proceeding under subchapter C of chapter 63 
become final, no defense to any penalty determined may be raised or 
taken into account in determining the applicable penalties, additions 
to tax, or additional amounts under subchapter C of chapter 63 with 
respect to any person.
    (2) Examples. The following examples illustrate the rules of this 
paragraph (c).

    Example 1. The IRS initiates an administrative proceeding with 
respect to Partnership's taxable year under subchapter C of chapter 
63. During the proceeding, the IRS mails to Partnership a notice of 
proposed partnership adjustment under section 6231 that imposes a 
section 6662 accuracy-related penalty with respect to an imputed 
underpayment on the grounds that the imputed underpayment is 
attributable to negligence or disregard of rules or regulations. 
Partnership believes that the actions of A, a partner in the 
partnership for the taxable year subject to the administrative 
proceeding, demonstrate that A had reasonable cause and acted in 
good faith with respect to how A reported on A's Federal income tax 
return the items that were adjusted and gave rise to the imputed 
underpayment subject to the penalty. Partnership provides this 
information to the IRS during the administrative proceeding in 
response to the notice of proposed partnership adjustment. The IRS 
will take this penalty defense into account when determining whether 
the portion of the penalty that relates to the adjustments 
attributable to A applies at the partnership level.
    Example 2. Same facts as in Example 1 of this paragraph (c)(2), 
except Partnership does not provide A's information to the IRS 
during the administrative proceeding. The IRS mails Partnership a 
notice of final partnership adjustment (FPA) under section 6231. 
Partnership does not challenge the FPA in court. Partnership makes a 
timely election under section 6226 (regarding the alternative to 
payment of the imputed underpayment) and furnishes each reviewed 
year partner (as defined in Sec.  301.6241-1(a)(9)) a statement 
including the reviewed year partner's share of the section 6662 
accuracy-related penalty determined in the FPA. In taking the 
section 6662 accuracy-related penalty into account, A raises with 
the IRS a reasonable cause defense based on A's actions, asserting 
that A had reasonable cause and acted in good faith. Because all 
defenses against a penalty imposed under subchapter C of chapter 63 
may only be raised by Partnership, A may not raise a defense to his 
share of the section 6662 penalty determined under section 6226. 
Therefore, the IRS will not take the penalty defense into account.

    (d) Coordination with other chapters of the Internal Revenue Code. 
Nothing in subchapter C of chapter 63 and the regulations thereunder 
precludes the IRS from making any adjustment to an item described in 
paragraph (b) of this section for purposes of determining taxes imposed 
by other provisions of the Internal Revenue Code (that is, taxes not 
imposed by chapter 1 of subtitle A).
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 3. Section 301.6221(b)-1 is added to read as follows:


Sec.  301.6221(b)-1  Election out for certain partnerships with 100 or 
fewer partners.

    (a) In general. The provisions of subchapter C of chapter 63 of the 
Internal Revenue Code (subchapter C of chapter 63) do not apply for any 
partnership taxable year for which an eligible partnership under 
paragraph (b) of this section makes a valid election in accordance with 
paragraph (c) of this section. For rules regarding deficiency 
procedures, see subchapter B of chapter 63 of the Internal Revenue Code 
and Sec. Sec.  301.6211-1 through 301.6215-1.
    (b) Eligible partnership--(1) In general. Only an eligible 
partnership may make an election under this section. A partnership is 
an eligible partnership for purposes of this section if--
    (i) the partnership has 100 or fewer partners as determined in 
accordance with paragraph (b)(2) of this section, and
    (ii) each statement the partnership is required to furnish under 
section 6031(b) for the partnership taxable year is furnished to a 
partner that was an eligible partner (as defined in paragraph (b)(3) of 
this section) for the partnership's entire taxable year.
    (2) 100 or fewer partners--(i) In general. Except as provided in 
paragraph (b)(2)(ii) of this section, a partnership has 100 or fewer 
partners if the partnership is required to furnish 100 or fewer 
statements under section 6031(b) for the taxable year.
    (ii) Special rule for S corporations. For purposes of this 
paragraph (b)(2), a partnership with a partner that is an S corporation 
(as defined in section 1361(a)(1)) must take into account each 
statement required to be furnished by the S corporation to its 
shareholders under section 6037(b) for the taxable year of the S 
corporation ending with or within the partnership's taxable year.
    (iii) Examples. The following examples illustrate the provisions of 
this paragraph (b)(2). For purposes of these examples, each partnership 
is

[[Page 27374]]

required to file a return under section 6031(a):

    Example 1. During its 2020 partnership taxable year, Partnership 
has four partners each owning an interest in Partnership. Two of the 
partners are Spouse 1 and Spouse 2 who are married to each other 
during all of 2020. Spouse 1 and Spouse 2 each own a separate 
interest in Partnership. The two other partners are unmarried 
individuals. Under section 6031(b), Partnership is required to 
furnish a separate statement (that is, Schedule K-1 (Form 1065), 
Partner's Share of Income, Deductions, Credits, etc.) to each 
individual partner, including separate statements to Spouse 1 and 
Spouse 2. Therefore, for purposes of paragraph (b)(2) of this 
section, Partnership has four partners during its 2020 taxable year.
    Example 2. The facts are the same as in Example 1 of this 
paragraph (b)(2)(iii), except Spouse 2 does not separately own an 
interest in Partnership during 2020 and Spouse 1 and Spouse 2 live 
in a community property state. Spouse 1 and Spouse 2 have lived in 
the community property state for the entire taxable year and at all 
times since they were married. Spouse 1 acquired Spouse 1's interest 
in Partnership while married to Spouse 2. Because Spouse 2's 
community property interest in Spouse 1's partnership interest is 
not taken into account for purposes of determining the number of 
statements Partnership is required to furnish under section 6031(b), 
Partnership is required to furnish a statement to Spouse 1, but not 
to Spouse 2. Therefore, for purposes of paragraph (b)(2) of this 
section, Partnership has three partners during its 2020 taxable 
year.
    Example 3. At the beginning of 2020, Partnership, which has a 
taxable year ending December 31, 2020, has three partners--
individuals A, B, and C. Each individual owns an interest in 
Partnership. On June 30, 2020, Individual A dies, and A's interest 
in Partnership becomes an asset of A's estate. A's estate owns the 
interest for the remainder of 2020. On September 1, 2020, B sells 
his interest in Partnership to Individual D, who holds the interest 
for the remainder of the year. Under section 6031(b), Partnership is 
required to furnish five statements for its 2020 taxable year--one 
each to Individual A, the estate of Individual A, Individual B, 
Individual D, and Individual C. Therefore, for purposes of paragraph 
(b)(2) of this section, Partnership has five partners during its 
2020 taxable year.
    Example 4. During its 2020 taxable year, Partnership has 51 
partners--50 partners who are individuals and S, an S corporation. S 
and Partnership are both calendar year taxpayers. S has 50 
shareholders during the 2020 taxable year. Under section 6031(b), 
Partnership is required to furnish 51 statements for the 2020 
taxable year--one to S and one to each of Partnership's 50 partners 
who are individuals. Under section 6037(b), S is required to furnish 
a statement (that is, Schedule K-1 (Form 1120-S), Shareholder's 
Share of Income, Deductions, Credits, etc.) to each of its 50 
shareholders. Under paragraph (b)(2)(ii) of this section, the number 
of statements required to be furnished by S under section 6037(b), 
which is 50, is taken into account to determine whether partnership 
has 100 or fewer partners. Accordingly, for purposes of paragraph 
(b)(2) of this section, Partnership has a total of 101 partners (51 
statements furnished by Partnership to its partners plus 50 
statements furnished by S to its shareholders) and is therefore not 
an eligible partnership under paragraph (b)(1) of this section. 
Because Partnership is not an eligible partnership, it cannot make 
the election under paragraph (a) of this section.
    Example 5. During its 2020 taxable year, Partnership has two 
partners, A, an individual, and E, an estate of a deceased partner. 
E has 10 beneficiaries. Under section 6031(b), Partnership is 
required to furnish two statements, one to A and one to E. Any 
statements that E may be required to furnish to its beneficiaries 
are not taken into account for purposes of paragraph (b)(2) of this 
section. Therefore, Partnership has two partners under paragraph 
(b)(2) of this section.

    (3) Eligible Partners--(i) In general. For purposes of paragraph 
(b)(1)(ii) of this section, the term eligible partner means a partner 
that is an individual, a C corporation (as defined by section 
1361(a)(2)), an eligible foreign entity described in paragraph 
(b)(3)(iii) of this section, an S corporation, or an estate of a 
deceased partner. An S corporation is an eligible partner regardless of 
whether one or more shareholders of the S corporation are not an 
eligible partner.
    (ii) Partners that are not eligible partners. A partner is not an 
eligible partner under paragraph (b)(3)(i) of this section if the 
partner is--
    (A) a partnership,
    (B) a trust,
    (C) a foreign entity that is not an eligible foreign entity 
described in paragraph (b)(3)(iii) of this section,
    (D) a disregarded entity described in Sec.  301.7701-2(c)(2)(i),
    (E) a nominee or other similar person that holds an interest on 
behalf of another person, or
    (F) an estate of an individual other than a deceased partner.
    (iii) Eligible foreign entity. For purposes of this paragraph 
(b)(3), a foreign entity is an eligible partner if the foreign entity 
would be treated as a C corporation if it were a domestic entity. For 
purposes of the preceding sentence, a foreign entity would be treated 
as a C corporation if it were a domestic entity if the entity is 
classified as a per se corporation under Sec.  301.7701-2(b)(1), (3), 
(4), (5), (6), (7), or (8), is classified by default as an association 
taxable as a corporation under Sec.  301.7701-3(b)(2)(i)(B), or is 
classified as an association taxable as a corporation in accordance 
with an election under the provisions of Sec.  301.7701-3(c).
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (b)(3). For purposes of these examples, each partnership is 
required to file a return under section 6031(a):

    Example 1. During the 2020 taxable year, Partnership has four 
equal partners. Two partners are individuals. One partner is a C 
corporation. The fourth partner, D, is a partnership. Because D is a 
partnership, D is not an eligible partner under paragraph (b)(3)(i) 
of this section. Accordingly, Partnership is not an eligible 
partnership under paragraph (b)(1) of this section and, therefore, 
cannot make the election under paragraph (a) of this section for its 
2020 taxable year.
    Example 2. During its 2020 taxable year, Partnership has four 
equal partners. Two partners are individuals. One partner is a C 
corporation. The fourth partner, S, is an S corporation. S has ten 
shareholders. One of S's shareholders is a disregarded entity and 
one is a qualified small business trust. S is an eligible partner 
under paragraph (b)(3)(i) of this section even though S's 
shareholders would not be considered eligible partners if those 
shareholders held direct interests in Partnership. See Sec.  
301.6221(b)-1(b)(3)(i). Accordingly, Partnership meets the 
requirements under paragraph (b)(3) of this section for its 2020 
taxable year.
    Example 3. During its 2020 taxable year, Partnership has two 
equal partners, A, an individual, and C, a disregarded entity, 
wholly owned by B, an individual. C is not an eligible partner under 
paragraph (b)(3)(i) of this section. Accordingly, Partnership is not 
an eligible partnership under paragraph (b)(1)(ii) of this section 
and, therefore, is ineligible to make the election under paragraph 
(a) of this section for its 2020 taxable year.

    (c) Election--(1) In general. An election under this section must 
be made on the eligible partnership's timely filed return, including 
extensions, for the taxable year to which the election applies and 
include all information required by the Internal Revenue Service (IRS) 
in forms, instructions, or other guidance. An election is not valid 
unless the partnership discloses to the IRS all of the information 
required under paragraph (c)(2) of this section about all partners and, 
in the case of a partner that is an S corporation, the shareholders of 
such S corporation. An election once made may not be revoked without 
the consent of the IRS.
    (2) Disclosure of partner information to the IRS. A partnership 
making an election under this section must disclose to the IRS 
information about each person that was a partner at any time during the 
taxable year of the partnership to which the election applies, 
including each partner's name, correct U.S. taxpayer identification 
number (TIN), and Federal tax classification, an affirmative statement 
that the partner is an eligible partner under paragraph (b)(3) of this 
section,

[[Page 27375]]

and any other information required by the IRS in forms, instructions, 
or other guidance. If a partner is an S corporation, the partnership 
must also disclose to the IRS the name, correct TIN, and Federal tax 
classification of each shareholder of the S corporation as well as any 
other information required by the IRS in forms, instructions, or other 
guidance.
    (3) Partner notification. A partnership that makes an election 
under this section must notify each of its partners of the election 
within 30 days of making the election.
    (d) Election made by a partnership that is a partner--(1) In 
general. The fact that a partnership has made an election under this 
section does not affect whether the provisions of subchapter C of 
chapter 63 apply to any other partnership, including a partnership in 
which the partnership making the election is a partner. Accordingly, 
the provisions of subchapter C of chapter 63 that apply to partners in 
a partnership that has not made an election under this section apply, 
to the extent provided in the regulations under subchapter C of chapter 
63, to partners that are themselves partnerships that have made an 
election under this section in their capacity as partners in the other 
partnership.
    (2) Examples. The following examples illustrate the rules of 
paragraph (d)(1) of this section. For purposes of these examples, each 
partnership is required to file a return under section 6031(a):

    Example 1. During its 2020 taxable year, Partnership, a calendar 
year taxpayer, has two partners. One partner, A, is also a calendar 
year partnership. A files a valid election out of the centralized 
partnership audit regime with its timely filed partnership return 
for its 2020 taxable year. Notwithstanding A's valid election out of 
the centralized partnership audit regime, A is subject to the same 
rules as any partner in a partnership subject to the rules under 
subchapter C of chapter 63, including the consistency requirements 
of section 6222 and the regulations thereunder.
    Example 2. The IRS mails to Partnership, a calendar year 
taxpayer, a notice of final partnership adjustment under section 
6231 with respect to Partnership's 2020 taxable year. Partnership 
timely elects the alternative to payment of imputed underpayment 
under section 6226 and the regulations thereunder. One of 
Partnership's partners is A, a calendar year partnership. A made a 
valid election out of the centralized partnership audit regime with 
its timely filed partnership return for its 2020 taxable year. 
Partnership must provide A with a statement under section 6226 
containing A's share of the adjustments for Partnership's 2020 
taxable year. A is subject to the same rules as any partner in a 
partnership subject to the rules under subchapter C of chapter 63.

    (e) Effect of an election--(1) In general. An election made under 
this section is an action taken under subchapter C of chapter 63 by the 
partnership for purposes of section 6223. Accordingly, the partnership 
and all partners are bound by an election of the partnership under this 
section unless the IRS determines that the election is invalid. See 
Sec.  301.6223-2 for the binding nature of actions taken by a 
partnership under subchapter C of chapter 63.
    (2) IRS determination that election is invalid. If the IRS 
determines that an election under this section for a partnership 
taxable year is invalid, the IRS will notify the partnership in writing 
and the provisions of subchapter C of chapter 63 will apply to that 
partnership taxable year.
    (f) Applicability date. These regulations are applicable to 
partnership taxable years beginning after December 31, 2017.
0
Par. 4. Section 301.6222-1 is added to read as follows:


Sec.  301.6222-1  Partner's return must be consistent with partnership 
return.

    (a) Consistent treatment of items--(1) In general. The treatment on 
a partner's return of each item of income, gain, loss, deduction, or 
credit (as defined in Sec.  301.6221(a)-1(b)(1)) attributable to a 
partnership must be consistent with the treatment of those items on the 
partnership return in all respects, including the amount, timing, and 
characterization of those items. A partner has not satisfied the 
requirement of this paragraph (a) if the treatment of the item on the 
partner's return is consistent with how the item was treated on a 
schedule or other information furnished to the partner by the 
partnership but inconsistent with the treatment of the item on the 
partnership return actually filed. For rules relating to the election 
to be treated as having reported the inconsistency where the partner 
treats an item consistently with an incorrect schedule or other 
information furnished by the partnership, see paragraph (d) of this 
section.
    (2) Partner that is a partnership. The rules of this section apply 
to a partnership-partner (as defined in Sec.  301.6241-1(a)(7)) 
regardless of whether the partnership-partner has made an election 
under section 6221(b) to elect out of the provisions of subchapter C of 
chapter 63 of the Internal Revenue Code (subchapter C of chapter 63). 
Accordingly, unless the requirements of paragraph (c) of this section 
are satisfied, a partnership-partner must treat items attributable to a 
partnership in which it is a partner consistent with the treatment of 
such items on the partnership return filed by the partnership in which 
it is a partner.
    (3) Partnership does not file a return. A partner's treatment of 
items attributable to a partnership that does not file a return is per 
se inconsistent, unless the partner files a notice of inconsistent 
treatment under paragraph (c) of this section.
    (4) Treatment of items on a partnership return. For purposes of 
this section, the treatment of an item on a partnership return 
includes--
    (i) the treatment of an item on the partnership's return of 
partnership income filed with the IRS under section 6031, and any 
amendment or supplement thereto, including an administrative adjustment 
request (AAR) filed pursuant to section 6227 and the regulations 
thereunder; and
    (ii) the treatment of an item on any statement, schedule or list, 
and any amendment or supplement thereto, filed by the partnership with 
the Internal Revenue Service (IRS), including any statements filed 
pursuant to section 6226 and the regulations thereunder.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (a). For purposes of these examples, each partnership is 
subject to the provisions of subchapter C of chapter 63, and each 
partnership and its partners are calendar year taxpayers, unless 
otherwise stated.

    Example 1. B is a partner in Partnership during 2018 and 2019. 
Both B and Partnership are calendar year taxpayers. In December 
2018, Partnership receives an advance payment for services to be 
performed in 2019 and reports this amount as income on its 
partnership return for 2018. B includes its distributive share of 
income from the advance payment on B's income tax return for 2019 
and not on B's income tax return for 2018. B did not file a notice 
of inconsistent treatment with respect to the advanced payment. B's 
treatment of the income attributable to Partnership is inconsistent 
with the treatment of that item by Partnership on its partnership 
return.
    Example 2. C is a partner in Partnership during 2018. 
Partnership incurred start-up costs before it was actively engaged 
in its business. Partnership capitalized these costs on its 2018 
partnership return. C deducted his distributive share of the start-
up costs on C's 2018 income tax return. C's treatment of the start-
up costs is inconsistent with the treatment of that item by 
Partnership on its partnership return.
    Example 3. D is a partner in Partnership during 2018. 
Partnership reports a loss of $100,000 on its partnership return for 
2018. On the 2018 Schedule K-1 attached to the partnership return, 
Partnership reports $5,000 as D's distributive share of that loss. 
On the 2018 Schedule K-1 furnished to D, however, Partnership 
reports $15,000 as D's distributive share of the loss. D reports the

[[Page 27376]]

$15,000 loss on D's 2018 income tax return. D has not satisfied the 
requirements of paragraph (a) of this section because D reported D's 
distributive share of the loss in a manner that is inconsistent with 
how D's distributive share of the loss was reported on the 2018 
partnership return actually filed. See, however, paragraph (d) of 
this section for the election to be treated as having reported the 
inconsistency where the partner treats an item consistently with an 
incorrect schedule.
    Example 4. D was a partner in Partnership during 2018. 
Partnership reports a loss of $100,000 on its partnership return for 
2018. In 2020, Partnership files an AAR under section 6227 reporting 
that the amount of the loss on its 2018 partnership return is 
$90,000, rather than $100,000 as originally reported. Pursuant to 
section 6227 and the regulations thereunder, Partnership elects to 
have its partners take the adjustment into account, and furnishes D 
a statement showing D's share of the reduced loss for 2018. D fails 
to take his share of the reduced loss for 2018 into account in 
accordance with section 6227 and the regulations thereunder. D has 
not satisfied the requirements of paragraph (a) of this section 
because D has not taken into account his share of the loss in a 
manner consistent with how Partnership treated such items on the 
partnership return actually filed.
    Example 5. E was a partner in Partnership during 2018. In 2021, 
Partnership receives a notice of final partnership adjustment in an 
administrative proceeding under subchapter C of chapter 63 with 
respect to Partnership's 2018 taxable year. Partnership properly 
elects the application of section 6226 and furnishes to E a 
statement of E's share of adjustments with respect to Partnership's 
2018 taxable year. E fails to take his share of the adjustments into 
account in accordance with section 6226 and the regulations 
thereunder. E has not satisfied the requirements of paragraph (a) of 
this section because E has not taken into account his share of 
adjustments with respect to Partnership's 2018 taxable year in a 
manner consistent with how Partnership treated such items on the 
partnership return actually filed.
    Example 6. In 2018, E is a partner in Partnership. E is a 
partnership-partner with a 2018 taxable year that ends on the same 
day as Partnership's 2018 taxable year. E has filed a valid election 
under section 6221(b) in effect with respect to E's 2018 partnership 
taxable year. Notwithstanding E's election under section 6221(b) for 
its 2018 taxable year, E is subject to section 6222 for taxable year 
2018. E must treat, on its 2018 partnership return, any items 
attributable to E's interest in Partnership in a manner that is 
consistent with the treatment of those items on the 2018 partnership 
return actually filed by Partnership.

    (b) Effect of inconsistent treatment--(1) Determination of 
underpayment of tax resulting from inconsistent treatment. If a partner 
fails to satisfy the requirements of paragraph (a) of this section, 
unless the partner provides notice in accordance with paragraph (c) of 
this section, the IRS may adjust the inconsistently reported item on 
the partner's return to make it consistent with the treatment of such 
item on the partnership return and determine the underpayment of tax 
that results from that adjustment. For purposes of this section, the 
underpayment of tax is the amount by which the correct tax, as 
determined by making the partner's return consistent with the 
partnership return, exceeds the tax shown on the partner's return.
    (2) Assessment and collection of tax. The IRS may assess and 
collect any underpayment of tax resulting from an adjustment described 
in paragraph (b)(1) of this section in the same manner as if the 
underpayment of tax was on account of a mathematical or clerical error 
appearing on the partner's return, except that the procedures under 
section 6213(b)(2) for requesting abatement of an assessment do not 
apply.
    (3) Effect when partner is a partnership. If the partner is itself 
a partnership (a partnership-partner), any adjustment on account of 
such partnership-partner's failure to satisfy the requirements of 
paragraph (a) of this section will be treated as an adjustment on 
account of a mathematical or clerical error under section 6213(b), 
except that the procedures under section 6213(b)(2) for requesting 
abatement of an assessment do not apply. See section 6232(d)(1)(B).
    (4) Examples. The following examples illustrate the rules of this 
paragraph (b).

    Example 1. D, an individual, is a partner in Partnership. D and 
Partnership are both calendar year taxpayers and Partnership does 
not have an election under section 6221(b) in effect for its 2018 
taxable year. On its partnership return for taxable year 2018, 
Partnership reports $100,000 in ordinary income. On the Schedule K-1 
attached to the partnership return, as well as on the Schedule K-1 
furnished to D, Partnership reports $15,000 as D's distributive 
share of the $100,000 in ordinary income. D reports only $5,000 of 
the $15,000 of ordinary income on his 2018 income tax return. The 
IRS may determine the amount of tax that results from adjusting the 
ordinary income attributable to D's interest in Partnership reported 
on D's 2018 income tax return from $5,000 to $15,000 and assess that 
resulting underpayment in tax as if it was on account of a 
mathematical or clerical error appearing on D's return. D may not 
request an abatement of that assessment under section 6213(b).
    Example 2. F was a partner in Partnership during 2018. In 2021, 
Partnership receives a notice of final partnership adjustment in an 
administrative proceeding under subchapter C of chapter 63 with 
respect to Partnership's 2018 taxable year. Partnership properly 
elects the application of section 6226 and files with the IRS a 
statement of F's share of adjustments with respect to Partnership's 
2018 taxable year. F fails to report one adjustment, F's share of a 
decrease in the amount of losses for 2018, on F's return as required 
by section 6226 and the regulations thereunder. The IRS may 
determine the amount of tax that results from adjusting the decrease 
in the amount of losses on F's return to be consistent with the 
amount included on the section 6226 statement filed with the IRS and 
may assess the resulting underpayment in tax as if it was on account 
of a mathematical or clerical error appearing on F's return. F may 
not request an abatement of that assessment under section 6213(b).

    (c) Notification to the IRS when items attributable to a 
partnership are treated inconsistently--(1) In general. Paragraphs (a) 
and (b) of this section (regarding the consistent treatment of items 
and the effect of inconsistent treatment) do not apply to items 
identified as inconsistent (or that may be inconsistent) in a statement 
that the partner provides to the IRS according to the forms, 
instructions, and other guidance prescribed by the IRS. Instead, the 
procedures in paragraph (c)(3) of this section apply. A statement does 
not identify an inconsistency for purposes of this paragraph (c) unless 
it is attached to the partner's return on which the item is treated 
inconsistently.
    (2) Coordination with section 6223. Paragraph (c)(1) of this 
section is not applicable to an item the treatment of which is binding 
on the partner because of actions taken by the partnership under 
subchapter C of chapter 63 or because of a final decision in a 
proceeding with respect to the partnership under subchapter C of 
chapter 63. Accordingly, the provisions of paragraph (c)(1) of this 
section do not apply with respect to the partner's treatment of an item 
reflected on an AAR under section 6227 or a statement under section 
6226 filed by the partnership with the IRS to which the partner is 
bound under section 6223. Therefore, if the partner's treatment of the 
item reflected on an AAR or statement described in section 6226 is not 
consistent with the treatment of the partnership to which the partner 
is bound under section 6223, the provisions of section 6222(c) and 
paragraph (c)(1) of this section do not apply with respect to that 
item, and any resulting underpayment may be assessed and collected in 
accordance with paragraph (b)(2) of this section.
    (3) Partner protected only to extent of notification. A partner who 
reports the inconsistent treatment of an item is not subject to 
paragraphs (a) and (b) of this section only with respect to those items 
identified in the statement described in paragraph (c)(1) of this 
section. Thus, if a partner notifying the IRS with respect

[[Page 27377]]

to one item does not report the inconsistent treatment of another item, 
the IRS may determine the amount of tax that results from adjusting the 
unidentified, inconsistently reported item on the partner's return to 
make it consistent with the treatment of the item on the partnership 
return, and assess the resulting underpayment of tax in accordance with 
paragraph (b)(2) of this section.
    (4) Adjustment after notification--(i) In general. If a partner 
notifies the IRS of the inconsistent treatment of an item in accordance 
with paragraph (c)(1) of this section, and the IRS disagrees with the 
inconsistent treatment, the IRS may adjust the identified, 
inconsistently reported item in a proceeding with respect to the 
partner. Nothing in this paragraph (c)(4)(i) precludes the IRS from 
also conducting a proceeding with respect to the partnership.
    (ii) Adjustments in partner proceeding. In a proceeding with 
respect to a partner described in paragraph (c)(4)(i) of this section, 
the IRS may adjust any identified, inconsistently reported item to make 
the item consistent with the treatment of that item on the partnership 
return or determine that the correct treatment of such item differs 
from the treatment on the partnership return and instead adjust the 
item to reflect the correct treatment, notwithstanding the treatment of 
that item on the partnership return. The IRS may also adjust any item 
on the partner's return, including items that are not attributable to 
the partnership. Any final decision with respect to an inconsistent 
position in a proceeding to which the partnership is not a party is not 
binding on the partnership.
    (5) Examples. The following examples illustrate the rules of this 
paragraph (c). For purposes of these examples, each partnership is 
subject to the provisions of subchapter C of chapter 63, and each 
partnership and partner is a calendar year taxpayer, unless otherwise 
stated.

    Example 1. B is a partner in Partnership during 2018. B treats a 
deduction and a capital gain attributable to Partnership on B's 2018 
income tax return in a manner that is inconsistent with the 
treatment of those items by Partnership on its 2018 partnership 
return. B reports the inconsistent treatment of the deduction in 
accordance with paragraph (c)(1) of this section, but not the 
inconsistent treatment of the gain. Because B did not notify the IRS 
of the inconsistent treatment of the gain in accordance with 
paragraph (c)(1) of this section, the IRS may determine the amount 
of tax that results from adjusting the gain reported on B's 2018 
income tax return in order to make the treatment of that gain 
consistent with how the gain was treated on Partnership's 
partnership return. Pursuant to paragraph (c)(3) of this section, 
the IRS may assess and collect the underpayment of tax resulting 
from the adjustment to the gain as if it was on account of a 
mathematical or clerical error appearing on B's return.
    Example 2. On its 2018 partnership return, Partnership treats 
partner E's distributive share of ordinary loss attributable to 
Partnership as $8,000. E, however, claims an ordinary loss of $9,000 
as attributable to Partnership on its 2018 income tax return and 
notifies the IRS of the inconsistent treatment in accordance with 
paragraph (c)(1) of this section. As a result of the notice of 
inconsistent treatment, the IRS conducts a separate proceeding under 
subchapter B of chapter 63 of the Internal Revenue Code with respect 
to E's 2018 income tax return, a proceeding to which Partnership is 
not a party. During the proceeding, the IRS determines that the 
proper amount of E's distributive share of the ordinary loss from 
Partnership is $3,000. During the same proceeding, the IRS also 
determines that E overstated a charitable contribution deduction in 
the amount of $2,500 on its 2018 income tax return. The 
determination of the adjustment of E's share of ordinary loss is not 
binding on Partnership. The charitable contribution deduction is not 
attributable to Partnership or to another partnership subject to the 
provisions of subchapter C of chapter 63. The IRS may determine the 
amount of tax that results from adjusting the $9,000 ordinary loss 
deduction to $3,000 and from adjusting the charitable contribution 
deduction. Pursuant to paragraph (c)(4)(ii) of this section, the IRS 
is not limited to only adjusting the ordinary loss of $9,000, as 
originally reported on E's partner return, to $8,000, as originally 
reported by Partnership on its partnership return, nor is the IRS 
prohibited from adjusting the charitable contribution deduction in 
the proceeding with respect to E.

    (d) Partner receiving incorrect information--(1) In general. A 
partner is treated as having complied with section 6222(c)(1)(B) and 
paragraph (c)(1) of this section with respect to an item attributable 
to a partnership if the partner--
    (i) Demonstrates that the treatment of the item on the partner's 
return is consistent with the treatment of that item on the statement, 
schedule, or other form prescribed by the IRS and furnished to the 
partner by the partnership, and
    (ii) The partner makes an election in accordance with paragraph 
(d)(2) of this section.
    (2) Time and manner of making election--(i) In general. An election 
under paragraph (d) of this section must be filed in writing with the 
IRS office set forth in the notice that notified the partner of the 
inconsistency no later than 60 days after the date of such notice.
    (ii) Contents of election. The election described in paragraph 
(d)(2)(i) of this section must be--
    (A) Clearly identified as an election under section 6222(c)(2)(B);
    (B) Signed by the partner making the election;
    (C) Accompanied by a copy of the statement, schedule, or other form 
furnished to the partner by the partnership and a copy of the IRS 
notice that notified the partner of the inconsistency; and
    (D) Include any other information required in forms, instructions, 
or other guidance prescribed by the IRS.
    (iii) Treatment of item is unclear. Generally, the requirement 
described in paragraph (d)(2)(ii)(C) of this section will be satisfied 
by attaching a copy of the statement, schedule, or other form furnished 
to the partner by the partnership to the election (in addition to a 
copy of the IRS notice that notified the partner of the inconsistency). 
However, if it is not clear from the statement, schedule, or other form 
furnished by the partnership that the partner's treatment of such item 
on the partner's return is consistent, the election must also include 
an explanation of how the treatment of such item on the statement, 
schedule, or other form furnished by the partnership is consistent with 
the treatment of the item on the partner's return, including with 
respect to the characterization, timing, and amount of such item.
    (3) Example. The following example illustrates the rules of this 
paragraph (d). For purposes of this example, the partnership is subject 
to subchapter C of chapter 63 and the partnership and its partners are 
calendar year taxpayers.

    Example. E is a partner in Partnership for 2018. On its 2018 
partnership return, Partnership reports that E's distributive share 
of ordinary income attributable to Partnership is $1,000. 
Partnership furnishes to E a Schedule K-1 for 2018 showing $500 as 
E's distributive share of ordinary income. E reports $500 of 
ordinary income attributable to Partnership on its 2018 income tax 
return consistent with the Schedule K-1 furnished to E. The IRS 
notifies E that E's treatment of the ordinary income attributable to 
Partnership on its 2018 income tax return is inconsistent with how 
Partnership treated the ordinary income allocated to E on its 2018 
partnership return. Within 60 days of receiving the notice from the 
IRS of the inconsistency, E files an election with the IRS in 
accordance with paragraph (d)(2) of this section. Because E made a 
valid election under section 6222(c)(2)(B) and paragraph (d)(1) of 
this section, E is treated as having notified the IRS of the 
inconsistency with respect to the ordinary income attributable to 
Partnership under paragraph (c)(1) of this section.

    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to

[[Page 27378]]

partnership taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 5. Section 301.6223-1 is added to read as follows:


Sec.  301.6223-1  Partnership representative.

    (a) Each partnership must have a partnership representative. A 
partnership subject to subchapter C of chapter 63 of the Internal 
Revenue Code (subchapter C of chapter 63) for a partnership taxable 
year must designate a partnership representative for the partnership 
taxable year in accordance with this section. There may be only one 
designated partnership representative for a partnership taxable year at 
any time. The designation of a partnership representative for a 
partnership taxable year under this section remains in effect until the 
date on which the designation of the partnership representative is 
terminated by valid resignation (as described in paragraph (d) of this 
section), valid revocation (as described in paragraph (e) of this 
section), or a determination by the Internal Revenue Service (IRS) that 
the designation is not in effect (as described in paragraph (f) of this 
section). A designation of a partnership representative for a 
partnership taxable year under paragraphs (d), (e), or (f) of this 
section supersedes all prior designations of a partnership 
representative for that year. A partnership representative must update 
the partnership representative's contact information when such 
information changes as required by forms, instructions, or other 
guidance prescribed by the IRS. See Sec.  301.6223-2(a) and (b) with 
regard to the binding effect of actions taken by the partnership 
representative. See Sec.  301.6223-2(c) with regard to the sole 
authority of the partnership representative to act on behalf of the 
partnership. See paragraph (f) of this section for rules regarding 
designation of a partnership representative by the IRS.
    (b) Eligibility to serve as a partnership representative--(1) In 
general. Any person (as defined in section 7701(a)(1)) that meets the 
requirements of paragraphs (b)(2) and (3) of this section, as 
applicable, is eligible to serve as a partnership representative. A 
partnership representative who no longer has the capacity to act (as 
described in paragraph (b)(4) of this section) is ineligible to serve 
as a partnership representative. A person designated under this section 
as partnership representative is deemed to be eligible to serve as the 
partnership representative unless and until the IRS determines that the 
person is ineligible.
    (2) Substantial presence in the United States. A person must have 
substantial presence in the United States to be the partnership 
representative. A person has substantial presence in the United States 
for the purposes of this section if--
    (i) The person is available to meet in person with the IRS in the 
United States at a reasonable time and place, as is necessary and 
appropriate, as determined by the IRS;
    (ii) The person has a street address that is in the United States 
and a telephone number with a United States area code where the person 
can be reached during normal business hours; and
    (iii) The person has a United States taxpayer identification 
number.
    (3) Eligibility of an entity to be a partnership representative--
(i) In general. A person who is not an individual may be a partnership 
representative only if an individual who meets the requirements of 
paragraphs (b)(2) and (4) of this section is appointed by the 
partnership as the sole individual through whom the partnership 
representative will act for all purposes under subchapter C of chapter 
63. A partnership representative meeting the requirements of this 
paragraph (b)(3) is an entity partnership representative and the 
individual through whom such entity partnership representative acts is 
the designated individual. Designated individual status automatically 
terminates on the date that designation of the entity partnership 
representative for which the designated individual was appointed is no 
longer in effect.
    (ii) Appointment of a designated individual. A designated 
individual is appointed at the time of the designation of the entity 
partnership representative in the manner prescribed by the IRS in 
forms, instructions, and other guidance. Accordingly, if the entity 
partnership representative is designated on the partnership return for 
the taxable year in accordance with paragraph (c)(2) of this section, 
the designated individual must be appointed at that time. Similarly, if 
the entity partnership representative is designated under paragraph (d) 
of this section (regarding resignation and successor designation of a 
partnership representative) or paragraph (e) of this section (regarding 
revocation and subsequent designation after revocation of a partnership 
representative), the designated individual must be appointed at that 
time. If the partnership fails to appoint a designated individual, the 
IRS may determine that the entity partnership representative 
designation is not in effect under paragraph (f) of this section.
    (4) Capacity to act. For the purposes of this section, a person 
does not have the capacity to act, and is therefore ineligible to serve 
as a partnership representative or designated individual, as 
applicable, under this paragraph (b), in the event of--
    (i) Death;
    (ii) A court order adjudicating that the person does not have the 
capacity to manage his or her person or estate;
    (iii) A court order enjoining the person from acting on behalf of 
the partnership or the entity partnership representative;
    (iv) Incarceration;
    (v) Liquidation or dissolution under state law in the case of an 
entity partnership representative; or
    (vi) Any similar situation where the IRS reasonably determines the 
person may no longer have the capacity to act.
    (c) Designation of partnership representative by the partnership--
(1) In general. The partnership must designate a partnership 
representative separately for each taxable year. The designation of a 
partnership representative for one taxable year is effective only for 
the taxable year for which it is made.
    (2) Designation. Except in the case of designation of a partnership 
representative after an event described in paragraph (d) of this 
section (regarding resignation), paragraph (e) of this section 
(regarding revocation by the partnership), or paragraph (f) of this 
section (regarding designation made by the IRS), or as prescribed in 
forms, instructions, and other guidance, designation of a partnership 
representative must be made on the partnership return for the 
partnership taxable year to which the designation applies and must 
include all of the information required by forms, instructions, and 
other guidance, including information about the designated individual 
if the provisions of paragraph (b)(3) of this section apply. The 
designation of the partnership representative (and the appointment of 
the designated individual, if applicable) is effective on the date that 
the partnership return is filed.
    (3) Example. The following example illustrates the rules of this 
paragraph (c).

    Example. Partnership properly designates A as its partnership 
representative for taxable year 2018 on its 2018 partnership return. 
Partnership designates B as its partnership representative for 
taxable year 2021 on its 2021 partnership return. In 2022, the IRS

[[Page 27379]]

mails Partnership a notice of administrative proceeding under 
section 6231 with respect to Partnership's 2018 taxable year. A is 
the partnership representative for the 2018 partnership taxable 
year, notwithstanding the designation of B as partnership 
representative for the 2021 partnership taxable year.

    (d) Resignation of the partnership representative--(1) In general. 
A partnership representative may resign by notifying the partnership 
and the IRS in writing of the resignation. The notification to the IRS, 
submitted in accordance with applicable forms and instructions 
prescribed by the IRS, may include a designation of a successor 
partnership representative for the partnership taxable year for which 
designation of the resigning partnership representative was in effect. 
A resignation and designation of the successor partnership 
representative, if applicable, is effective 30 days from the date on 
which the IRS receives the written notification. If the resigning 
partnership representative designates a successor, the IRS will notify 
the partnership, the resigning partnership representative, and the 
newly designated partnership representative when the IRS receives the 
written notification. If the resigning partnership representative does 
not designate a successor, the IRS will determine there is no 
designation in effect in accordance with paragraph (f) of this section, 
and the partnership will have the opportunity to designate a successor 
partnership representative, or the IRS will designate a successor, as 
described in paragraph (f)(1) of this section. Failure to satisfy the 
requirements of this paragraph (d) is treated as if no resignation has 
occurred and the partnership representative designation remains in 
effect until the designation is terminated either by valid resignation 
(as described in this paragraph (d)), a valid revocation of the 
designation by the partnership (as described in paragraph (e) of this 
section), or a determination by the IRS that the designation is not in 
effect (as described in paragraph (f) of this section).
    (2) Time for resignation. A partnership representative may resign 
simultaneously with the filing of a valid administrative adjustment 
request (AAR) in accordance with section 6227 and the regulations 
thereunder for a partnership taxable year, after receipt of a notice of 
administrative proceeding for the partnership taxable year, or at such 
other time as prescribed by the IRS in other guidance. If a partnership 
representative resigns in connection with the filing of an AAR, the 
partnership representative must designate a successor partnership 
representative. A partnership may not use the form prescribed by the 
IRS for filing an AAR solely for the purposes of allowing the 
partnership representative to resign.
    (3) Special rule for resignation of designated individual. A 
designated individual may resign by notifying the partnership, 
partnership representative, and the IRS in writing of the resignation 
subject to the time of resignation restrictions described in paragraph 
(b)(2) of this section as if the designated individual were a 
partnership representative. The notification to the IRS, submitted in 
accordance with applicable forms and instructions prescribed by the 
IRS, may, but is not required to, include an appointment of a successor 
designated individual for the partnership taxable year for which the 
designated individual was appointed. The resignation (and appointment 
of the successor designated individual, if applicable) is effective 30 
days from the date on which the IRS receives the written notification. 
If the resigning designated individual appoints a successor, the IRS 
will notify the partnership, the partnership representative, the 
resigning designated individual, and any newly appointed designated 
individual when the IRS receives the written notification. If the 
resigning designated individual does not appoint a successor, the IRS 
will determine there is no designation in effect in accordance with 
paragraph (f) of this section, and the partnership will have the 
opportunity to designate a partnership representative, including the 
appointment of a designated individual, or the IRS will designate a 
partnership representative, as described in paragraph (f)(1) of this 
section.
    (e) Revocation of designation--(1) In general. The partnership may 
revoke the designation of the partnership representative for a 
partnership taxable year by notifying the partnership representative 
and the IRS in writing. The notification to the IRS, submitted in 
accordance with applicable forms and instructions prescribed by the 
IRS, must satisfy the requirements of paragraph (e)(3)(iii) of this 
section and must include designation of a successor partnership 
representative for the partnership taxable year for which designation 
of the partnership representative was in effect. The revocation and 
designation of a new partnership representative is effective 30 days 
from the date on which the IRS receives the written notification. The 
IRS will notify the partnership and any partnership representative 
whose designation is being revoked when the IRS receives a revocation 
made in accordance with paragraph (e)(2) of this section. Failure to 
satisfy the requirements of this section is treated as if no revocation 
has occurred and the partnership representative designation remains in 
effect until the designation is terminated either by valid resignation 
(as described in paragraph (d) of this section), valid revocation of 
the designation by the partnership (as described in this paragraph 
(e)), or a determination by the IRS that the designation is not in 
effect (as described in paragraph (f) of this section).
    (2) Time for revocation--(i) Revocation during an administrative 
proceeding. Except as provided in paragraph (e)(2)(ii) of this section 
or in other guidance prescribed by the IRS, a partnership may not 
revoke the designation of the partnership representative before the IRS 
mails a notice of administrative proceeding pursuant to section 6231 
and the regulations thereunder. Upon receipt of a notice of 
administrative proceeding, the partnership may revoke the partnership 
representative designation.
    (ii) Revocation with an AAR. The partnership may revoke a 
designation of a partnership representative for the taxable year when 
the partnership files a valid AAR in accordance with section 6227 and 
the regulations thereunder for a partnership taxable year. The 
revocation of the partnership representative and the designation of the 
new partnership representative is effective 30 days from the date the 
partnership files a valid AAR. A partnership may not use the form 
prescribed by the IRS for filing an AAR solely for the purpose of 
revoking the designation of a partnership representative.
    (3) Partners who may sign revocation--(i) General partner and 
certain partners in limited circumstances. A revocation must be signed 
by a person who was a general partner at the close of the taxable year 
for which the partnership representative designation is in effect as 
shown on the partnership return for that taxable year. A partner in the 
partnership during the taxable year who was not a general partner 
eligible to sign the revocation may sign the revocation only if, at the 
time the revocation is signed, each general partner eligible to sign 
the revocation is no longer a partner or no longer has the capacity to 
act (as described under paragraphs (b)(4)(i) through (v) of this 
section as if the general partner was a partnership representative or 
designated individual). See paragraph (e)(3)(ii) of this section

[[Page 27380]]

for the rules applicable to limited liability companies.
    (ii) Limited liability companies--(A) In general. Solely for the 
purposes of applying this paragraph (e)(3) to a limited liability 
company (LLC) (as defined in paragraph (e)(3)(ii)(B)(1) of this 
section), a member-manager of an LLC is treated as a general partner, 
and a member of an LLC who is not a member-manager is treated as a 
partner other than a general partner.
    (B) Definitions. For purposes of this paragraph (e)(3)(ii), the 
following terms have the following meaning:
    (1) LLC. An LLC means an organization formed under a state or 
foreign law that allows the limitation of the liability of all members 
for the organization's debts and other obligations within the meaning 
of Sec.  301.7701-3(b)(2)(ii) and that is classified as a partnership 
for Federal tax purposes.
    (2) Member. A member means any person who owns an interest in an 
LLC.
    (3) Member-manager. A member-manager means a member of an LLC who, 
alone or together with others, is vested with the continuing exclusive 
authority to make the management decisions necessary to conduct the 
business for which the organization was formed. Generally, an LLC 
statute may permit the LLC to choose management by one or more managers 
(whether or not members) or by all of the members. If there are no 
elected or designated member-managers of the LLC, each member will be 
treated as a member-manager for purposes of this paragraph 
(e)(3)(ii)(B)(3).
    (iii) Form of the revocation. The notification of revocation 
described in paragraph (e)(1) of this section must include the items 
described in this paragraph (e)(3)(iii). A notification of revocation 
described in paragraph (e)(1) of this section that does not include 
each of the following items is not a valid revocation:
    (A) A certification under penalties of perjury that the person 
signing the form--
    (1) Is a partner described in paragraph (e)(3)(i) of this section 
(or in the case of an LLC, a person described in paragraph (e)(3)(ii) 
of this section) authorized by the partnership to revoke the 
designation of the partnership representative; and
    (2) Has provided a copy of the revocation to the partnership and to 
the partnership representative whose designation is being revoked;
    (B) A statement that the person signing the form is revoking the 
designation of the partnership representative; and
    (C) A subsequent designation of a partnership representative in 
accordance with forms and instructions prescribed by the IRS.
    (4) Partnership representative designated by the IRS. If a 
partnership representative is designated by the IRS pursuant to 
paragraph (f)(5) of this section, the partnership may only revoke that 
designation with the permission of the IRS.
    (5) Multiple revocations. If within a 90-day period the IRS 
receives more than one revocation of a designation of a partnership 
representative for the same partnership taxable year signed by 
different persons, the IRS may determine that a designation is not in 
effect under paragraph (f) of this section.
    (6) Examples. The following example illustrates the rules of this 
paragraph (e).

    Example 1. Partnership properly designates B as partnership 
representative for its 2018 taxable year on its 2018 partnership 
return. In 2020, Partnership mails written notification to the IRS 
to revoke designation of B as its partnership representative for 
Partnership's 2018 taxable year. The revocation is not made in 
connection with an AAR for Partnership's 2018 taxable year, and the 
IRS has not mailed Partnership a notice of administrative proceeding 
under section 6231 with respect to Partnership's 2018 taxable year. 
Because the revocation was not made during a time permitted under 
paragraph (e)(2) of this section, the revocation is not effective 
and B remains the partnership representative for Partnership's 2018 
taxable year.
    Example 2. During an administrative proceeding with respect to 
Partnership's 2018 taxable year, Partnership provides IRS with 
written notification to revoke its designation of B as its 
partnership representative for the 2018 taxable year. The written 
notification does not include a designation of a new partnership 
representative for Partnership's 2018 taxable year. Because the 
revocation does not include a designation of a new partnership 
representative as required under paragraph (e)(1) of this section, 
the revocation is not effective and B remains the partnership 
representative for Partnership's 2018 taxable year.

    (f) Designation of the partnership representative by the IRS--(1) 
In general. If the IRS determines that a designation of a partnership 
representative is not in effect for a partnership taxable year in 
accordance with paragraph (f)(2) of this section, the IRS will notify 
the partnership and the most recent partnership representative for that 
partnership taxable year that a partnership designation is not in 
effect and provide the partnership with the opportunity to designate a 
successor partnership representative that is eligible under paragraph 
(b) of this section. The determination that a designation is not in 
effect is effective on the date the IRS mails the notification. Except 
as described in paragraph (f)(4) of this section, the partnership may 
designate a successor partnership representative within 30 days of the 
date of notification. If the partnership does not designate a successor 
within 30 days from the date of notification, the IRS will designate a 
partnership representative in accordance with paragraph (f)(5) of this 
section. A partnership representative designation made in accordance 
with paragraphs (c), (d), (e), or (f) of this section remains in effect 
until the IRS determines the designation is not in effect.
    (2) IRS determination that partnership representative designation 
not in effect. The IRS may determine that the partnership 
representative designation is not in effect in the case of multiple 
revocations as described in paragraph (e)(5) of this section or if the 
IRS determines that--
    (i) the partnership failed to make a valid designation under 
paragraph (c) of this section;
    (ii) the partnership representative or the designated individual 
does not have substantial presence (as described in paragraph (b)(2) of 
this section, as applicable) or does not have capacity to act (as 
described in paragraph (b)(4) of this section);
    (iii) the partnership failed to appoint a designated individual (as 
described in paragraph (b)(3) of this section, as applicable); or
    (iv) no successor designation or appointment was made in the case 
of a resignation without a designation or appointment of a successor as 
described in paragraphs (d)(1) and (3) of this section.
    (3) Form of successor partnership representative designation. The 
partnership must designate the successor partnership representative in 
accordance with applicable forms and instructions prescribed by the 
IRS. If the partnership fails to provide all information required under 
the forms and instructions, the partnership will have failed to 
designate a successor partnership representative.
    (4) No opportunity for designation by the partnership in the case 
of multiple revocations. In the event that the IRS determines a 
partnership representative designation is not in effect due to multiple 
revocations as described in paragraph (e)(5) of this section, the 
partnership will not be given an opportunity to designate the successor 
partnership representative prior to the designation by the IRS as 
described in paragraph (f)(5) of this section.

[[Page 27381]]

    (5) Designation by the IRS--(i) In general. The IRS designates a 
partnership representative by notifying the partnership of the name, 
address, and telephone number of the new partnership representative. 
The designation of a partnership representative by the IRS is effective 
on the date on which the IRS mails the notice of the designation to the 
partnership. The IRS will also mail a copy of the notice to the new 
partnership representative.
    (ii) Factors considered when partnership representative designated 
by the IRS. The IRS may designate any person to be the partnership 
representative. In addition to other relevant factors, the IRS will 
consider whether there is a suitable partner of the partnership, either 
from the reviewed year (as defined in Sec.  301.6241-1(a)(8)) or at the 
time the partnership representative designation is made. The IRS may 
consider the following factors when designating a person as the 
partnership representative:
    (A) The views of the partners having a majority interest in the 
partnership regarding the designation;
    (B) The general knowledge of the person in tax matters and the 
administrative operation of the partnership;
    (C) The person's access to the books and records of the 
partnership;
    (D) Whether the person is a United States person (within the 
meaning of section 7701(a)(30)).
    (6) Examples. The following examples illustrate the rules of this 
paragraph (f).

    Example 1. The IRS determines that Partnership has designated a 
partnership representative that does not have substantial presence 
in the United States as defined in paragraph (b)(2) of this section. 
The IRS may determine that the designation is not in effect and 
designate a new partnership representative after following the 
procedures in paragraph (f) of this section.
    Example 2. Partnership designates as its partnership 
representative a corporation but fails to appoint a designated 
individual to act on behalf of the corporation as required under 
paragraph (b)(3) of this section. The IRS may determine that the 
partnership representative designation is not in effect and may 
designate a new partnership representative after following the 
procedures in paragraph (f) of this section.
    Example 3. The partnership representative resigns pursuant to 
paragraph (d) of this section without designating a new partnership 
representative. The IRS mails Partnership a notification informing 
Partnership that no designation is in effect and that the IRS plans 
to designate a new partnership representative. Partnership fails to 
respond within 30 days of the IRS's notification. The IRS will 
designate a partnership representative pursuant to paragraph (f) of 
this section.
    Example 4. Partnership designated on its partnership return a 
partnership representative, PR1. After Partnership received a notice 
of administrative proceeding, general partner, GP1, signs and 
submits to the IRS the form described in paragraph (e)(3) of this 
section requesting the revocation of the current partnership 
representative PR1 and the designation of a successor partnership 
representative, PR2. Sixty days later, general partner, GP2, signs 
and submits a form described in paragraph (e)(3) of this section 
requesting the revocation of the newly appointed PR2 and the 
designation of PR3 as the new partnership representative. The IRS 
may accept GP2's revocation and subsequent designation of PR3 or, 
because GP2's revocation was within 90 days of GP1's revocation, the 
IRS may determine, pursuant to paragraphs (e)(5) and (f)(2) of this 
section that there is no designation in effect due to multiple 
revocations. The IRS may then designate a new partnership 
representative pursuant to paragraph (f) of this section without 
allowing the partnership an opportunity for additional, possibly 
conflicting, designations.

    (g) Reliance on forms required by this section. The IRS may rely on 
any form or other document filed or submitted under this section as 
evidence of the designation, resignation, or revocation on such form 
and as evidence of the date on which such form was filed or submitted 
relating to a designation, resignation, or revocation.
    (h) Effective date--(1) In general. Except as provided in paragraph 
(h)(2) of this section, this section applies to partnership taxable 
years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable years beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 6. Section 301.6223-2 is added to read as follows:


Sec.  301.6223-2  Binding effect of actions of the partnership and 
partnership representative.

    (a) Binding nature of actions by partnership and final decision in 
a partnership proceeding. The actions of the partnership and the 
partnership representative taken under subchapter C of chapter 63 of 
the Internal Revenue Code (subchapter C of chapter 63) and any final 
decision in a proceeding brought under subchapter C of chapter 63 with 
respect to the partnership bind the partnership, all partners of the 
partnership (including partnership-partners as defined in Sec.  
301.6241-1(a)(7) that have a valid election under section 6221(b) in 
effect for any taxable year that overlaps with the taxable year of the 
partnership), and any other person whose tax liability is determined in 
whole or in part by taking into account directly or indirectly 
adjustments determined under subchapter C of chapter 63 (for example, 
indirect partners as defined in Sec.  301.6241-1(a)(4)). For instance, 
a settlement agreement entered into by the partnership representative 
on behalf of the partnership, a notice of final partnership adjustment 
with respect to the partnership that is not contested by the 
partnership or the partnership representative, or the final decision of 
the court with respect to the partnership if the notice of final 
partnership adjustment is contested, binds all persons described in the 
preceding sentence.
    (b) Actions by the partnership representative before termination of 
designation. The termination of the designation of the partnership 
representative under Sec.  301.6223-1 does not affect the validity of 
any action taken by that partnership representative during the period 
prior to termination when the designation was in effect. For example, 
if a partnership representative properly designated under Sec.  
301.6223-1 consented to an extension of the period for adjustments 
under section 6235(b), that extension remains valid even after 
termination of the designation of that partnership representative.
    (c) Partnership representative has the sole authority to act on 
behalf of the partnership--(1) In general. The partnership 
representative has the sole authority to act on behalf of the 
partnership for all purposes under subchapter C of chapter 63. In the 
case of an entity partnership representative, the designated individual 
has the sole authority to act on behalf of the partnership 
representative and the partnership. Except for a partner that is the 
partnership representative or the designated individual, no partner, or 
any other person, may participate in an examination or other proceeding 
involving the partnership under subchapter C of chapter 63 without the 
permission of the IRS. No state law, partnership agreement, or other 
document or agreement may limit the authority of the partnership 
representative or the designated individual as described in section 
6223 and this section.
    (2) Designation provides authority to bind the partnership--(i) 
Partnership representative. A partnership representative, by virtue of 
being designated under section 6223 and Sec.  301.6223-1, has the 
authority to bind the partnership for all purposes under subchapter C 
of chapter 63.

[[Page 27382]]

    (ii) Designated individual. A designated individual described under 
Sec.  301.6223-1(b)(3)(i) by virtue of being appointed as part of the 
designation of the partnership representative under Sec.  301.6223-1, 
has the sole authority to bind the partnership representative and the 
partnership for all purposes under subchapter C of chapter 63.
    (d) Examples. The following examples illustrate the rules of this 
section.

    Example 1.  Partnership designates a partnership representative, 
PR, on its partnership return for 2020. PR is a partner in 
Partnership. The partnership agreement for Partnership includes a 
clause that requires PR to consult with an identified management 
group of partners in Partnership before taking any action with 
respect to an administrative proceeding before the IRS. The IRS 
initiates an administrative proceeding with respect to Partnership's 
2020 taxable year. During the course of the administrative 
proceeding, PR consents to an extension of the period for 
adjustments under section 6235(b) allowing additional time for the 
IRS to mail a final notice of partnership adjustment. PR failed to 
consult with the management group of partners prior to agreeing to 
this extension of time. PR's consent provided to the IRS to extend 
the time period is valid and binding on Partnership because, 
pursuant to section 6223, PR, as the designated partnership 
representative, has authority to bind Partnership and all its 
partners.
    Example 2.  Partnership designates a partnership representative, 
PR, on its partnership return for 2020. PR is not a partner in 
Partnership. During an administrative proceeding with respect to 
Partnership's 2020 taxable year, PR agrees to certain IRS 
adjustments and within 45 days after the issuance of the notice of 
final partnership adjustment (FPA), elects the alternative to 
payment of the imputed underpayment under section 6226 and the 
regulations thereunder. Certain partners in Partnership challenge 
the actions taken by PR during the administrative proceeding and the 
validity of the section 6226 statements furnished to those partners, 
alleging that PR was never authorized to act on behalf of 
Partnership under state law or the partnership agreement. Because PR 
was designated by Partnership as the partnership representative, 
under section 6223 and this section, PR was authorized to act on 
behalf of Partnership for all purposes under subchapter C of chapter 
63, and the IRS may rely on that designation as conclusive evidence 
of PR's authority to act on behalf of Partnership.
    Example 3.  Partnership designates an entity partnership 
representative, EPR, and appoints an individual A, as the designated 
individual, on its partnership return for 2020. EPR is a C 
corporation. A is unaffiliated with EPR and is not an officer, 
director, or employee of EPR. During an administrative proceeding 
with respect to Partnership's 2020 taxable year, A, acting for EPR, 
agrees to an extension of the period for adjustments under section 
6235(b). The IRS mails an FPA within the extended period for 
adjustments as agreed to by EPR, but after the expiration of the 
period had no agreement been entered into. Partnership challenges 
the FPA as untimely, alleging that A was not authorized under state 
law to act on behalf of EPR and thus the extension agreement was 
invalid. Because A was appointed by the partnership as the 
designated individual to act on behalf of EPR, A was authorized to 
act on behalf of EPR for all purposes under subchapter C of chapter 
63, and the IRS may rely on that identification as conclusive 
evidence of A's authority to act on behalf of EPR and Partnership.
    Example 4.  The partnership representative, PR, consents to an 
extension of the period for adjustment under section 6235(b) for 
Partnership for the partnership taxable year. After signing the 
consent, PR resigns as partnership representative in accordance with 
Sec.  301.6223-1. The extension of the period under section 6235(b) 
remains valid even after PR resigns.
    Example 5.  Partnership designates a partnership representative 
who is unable to meet with the IRS in person in the United States as 
required by Sec.  301.6223-1(b). Although the partnership 
representative does not have substantial presence in the United 
States within the meaning of Sec.  301.6223-1(b)(2), until a 
termination occurs under Sec.  301.6223-1(d) or (e) or the IRS 
determines the partnership representative is ineligible under Sec.  
301.6223-1(b) and terminates the designation under Sec.  301.6223-
1(f), the partnership representative designation remains in effect, 
and Partnership and all its partners are bound by the actions of the 
partnership representative.

    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable years beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 7. Section 301.6225-1 is added to read as follows:


Sec.  301.6225-1  Partnership Adjustment by the Internal Revenue 
Service.

    (a) Imputed underpayment paid by partnership in adjustment year--
(1) In general. Any imputed underpayment (as determined in accordance 
with paragraph (c) of this section) with respect to any partnership 
adjustment (as defined in Sec.  301.6241-1(a)(6)) for any partnership 
taxable year must be paid by the partnership in the same manner as if 
it were a tax imposed for the adjustment year (as defined in Sec.  
301.6241-1(a)(1)). The notice of final partnership adjustment under 
section 6231 will include the amount of any imputed underpayment, as 
modified under Sec.  301.6225-2 if applicable, unless the partnership 
waives its right to such notice under section 6232(d)(2). For the 
alternative to payment of the imputed underpayment by the partnership, 
see Sec.  301.6226-1. For assessment, collection, and payment of an 
imputed underpayment, see section 6232 and the regulations thereunder. 
If a partnership pays an imputed underpayment (as determined in 
accordance with paragraph (c) of this section), the partnership's 
expenditure for the imputed underpayment and the adjustments that 
result in the imputed underpayment are taken into account by the 
partnership in accordance with Sec.  301.6241-4. For interest and 
penalties with respect to an imputed underpayment, see section 6233.
    (2) All preferences, limitations, restrictions, and conventions 
apply. For purposes of determining the imputed underpayment, 
adjustments, netting of adjustments, and calculations or determinations 
of any amounts under this section, unless the Internal Revenue Service 
(IRS) in its discretion determines otherwise, all applicable 
preferences, restrictions, limitations, and conventions will be taken 
into account to disallow netting of adjustments, where applicable, or 
to disallow or limit, as applicable, any adjustment that potentially 
results in an increase of loss, deduction or credit, or decrease of 
income or gain, and as if the adjusted item was originally taken into 
account by the partnership or the partners, as applicable, in the 
manner most beneficial to the partnership or partners. For instance, if 
the adjustment is a reduction of qualified research expenses, the 
amount of the imputed underpayment is determined as if all partners 
claimed a credit with respect to their allocable portion of such 
expenses under section 41, rather than a deduction under section 174. 
See Sec.  301.6225-2 for modifications of the imputed underpayment that 
may be requested by the partnership.
    (3) Imputed underpayment set forth in notice of proposed 
partnership adjustment. An imputed underpayment set forth in a notice 
of proposed partnership adjustment (NOPPA) under section 6231 is 
determined under paragraph (c)(1) of this section without regard to any 
modification under Sec.  301.6225-2. Modifications under Sec.  
301.6225-2, if allowed by the IRS, may reduce the imputed underpayment 
determined under paragraph (c)(1) of this section. Only the partnership 
adjustments set forth in a NOPPA are taken into account for purposes 
determining the imputed underpayment under this section and any 
modification under Sec.  301.6225-2.

[[Page 27383]]

    (b) Treatment of an adjustment that does not result in an imputed 
underpayment. Any adjustment that does not result in an imputed 
underpayment (as described in paragraph (c)(2) of this section) is 
taken into account by the partnership in the adjustment year in 
accordance with Sec.  301.6225-3.
    (c) Calculation of an imputed underpayment--(1) In general. In the 
case of any partnership adjustment by the IRS, the imputed underpayment 
required to be paid by the partnership under paragraph (a) of this 
section is calculated by--
    (i) Multiplying the total netted partnership adjustment (as 
determined under paragraph (c)(3) of this section) by the highest rate 
of Federal income tax in effect for the reviewed year (as defined in 
Sec.  301.6241-1(a)(8)) under section 1 or 11, and
    (ii) Increasing or decreasing the product in paragraph (c)(1)(i) of 
this section by the net increase or net decrease in credits resulting 
from partnership adjustments (as determined under paragraph (d) of this 
section).
    (2) Partnership adjustments that do not result in an imputed 
underpayment. A partnership adjustment does not result in an imputed 
underpayment if--
    (i) The adjustment relates to a distributive share reallocation 
that is disregarded under paragraph (d)(2)(ii) of this section;
    (ii) After grouping and netting the adjustments as described in 
paragraph (d) of this section, the result of netting any grouping or 
subgrouping is a net non-positive adjustment (as described in paragraph 
(d)(3) of this section); or
    (iii) The calculation under paragraph (c)(1) of this section 
results in an amount that is zero or less than zero.
    (3) Calculation of the total netted partnership adjustment. For 
purposes of determining whether there is an imputed underpayment under 
paragraph (c)(1) of this section, the total netted partnership 
adjustment is--
    (i) The sum of all net positive adjustments in the residual 
grouping as determined in accordance with paragraph (d)(2)(v) of this 
section, plus
    (ii) The sum of all net positive adjustments in the reallocation 
grouping as determined in accordance with paragraph (d)(2)(ii) of this 
section.
    (4) No netting of adjustments between taxable years. Each imputed 
underpayment is calculated based on adjustments solely with respect to 
a single taxable year. Adjustments from one taxable year may not be 
netted against adjustments from another taxable year.
    (d) Grouping and netting of partnership adjustments--(1) In 
general. For purposes of calculating an imputed underpayment under 
paragraph (c) of this section, partnership adjustments are grouped 
according to paragraph (d)(2) of this section and the partnership 
adjustments comprising each grouping are netted in accordance with 
paragraph (d)(3) of this section. Within each grouping, partnership 
adjustments are further grouped into subgroupings based on preferences, 
limitations, restrictions, and conventions, such as source, character, 
holding period, or restrictions under the Internal Revenue Code (Code) 
applicable to such items.
    (2) Groupings--(i) In general. To calculate an imputed underpayment 
under paragraph (c) of this section, partnership adjustments are 
grouped into categories in the following order--
    (A) First, each partnership adjustment that reallocates the 
distributive share of an item forms its own grouping which is taken 
into account in accordance with paragraph (d)(2)(ii) of this section 
(reallocation grouping);
    (B) Second, adjustments to credits are taken into account in a 
grouping under paragraph (d)(2)(iii) of this section (credit grouping);
    (C) Third, adjustments to creditable expenditures are taken into 
account in a grouping under paragraph (d)(2)(iv) of this section 
(creditable expenditure grouping); and
    (D) Fourth, the remaining adjustments are taken into account in the 
residual grouping under paragraph (d)(2)(v) of this section (residual 
grouping).
    (ii) Reallocation grouping. A partnership adjustment that 
reallocates the distributive share of an item from one or more partners 
to one or more other partners, or a partnership adjustment that 
allocates an item to a particular partner or partners, is taken into 
account in calculating the imputed underpayment under paragraph (c) of 
this section by disregarding net decreases to items of income or gain 
and net increases to items of deduction, loss, or credit. Each 
adjustment to an item or to a distributive share of an item that 
allocates to or reallocates to and from a particular partner or 
partners is a separate subgrouping for purposes of the netting rules in 
paragraph (d)(3) of this section. For instance, if the reallocation 
adjustment reallocates an item of deduction from one partner to another 
partner, the decrease in the deduction with respect to the first 
partner is in a separate subgrouping from the increase in deduction 
with respect to the second partner. If a particular partner or group of 
partners has more than one adjustment allocable to it within the 
reallocation grouping, such adjustments may be combined or further 
divided into additional subgroupings according to the principles of 
paragraphs (d)(1) and (d)(2)(v) of this section and netted according to 
paragraph (d)(3) of this section. After subgroupings are netted under 
paragraph (d)(3) of this section, any net non-positive adjustments (as 
defined in paragraph (d)(3)(ii)(C) of this section) are disregarded. 
Net non-positive adjustments disregarded under this paragraph 
(d)(2)(ii) are adjustments that do not result in an imputed 
underpayment under paragraph (c)(2) of this section. Net positive 
adjustments are included in the calculation of the total netted 
partnership adjustment under paragraph (c)(3) of this section if the 
net positive adjustments would otherwise be a part of the residual 
grouping described in paragraph (d)(2)(v) of this section. Net positive 
adjustments to credits are included in the credit grouping described in 
paragraph (d)(2)(iii) of this section.
    (iii) Credit grouping. The credit grouping includes all adjustments 
to items that are claimed or could be claimed by a partnership as a 
credit on the partnership's return.
    (iv) Creditable expenditure grouping.--[Reserved]
    (v) Residual grouping. Any partnership adjustment not described in 
paragraph (d)(2)(ii), (d)(2)(iii), or (d)(2)(iv) of this section is 
included in the residual grouping described in this paragraph (d)(2)(v) 
and is further divided into subgroupings according to any limitations 
or restrictions imposed on the items to which the adjustment relates 
under the Code. Each subgrouping in the residual grouping is created to 
account for limitations or restrictions such as character or holding 
period.
    (3) Netting adjustments within each grouping or subgrouping--(i) In 
general. The partnership adjustments in a grouping or subgrouping 
described in paragraph (d)(2) of this section are netted together 
within each grouping or subgrouping to determine whether there is a net 
positive adjustment or a net non-positive adjustment (as defined in 
paragraph (d)(3)(ii)(B) and (C) of this section) for that grouping or 
subgrouping. Adjustments in one grouping or subgrouping are not netted 
against adjustments in any other grouping or subgrouping. For instance, 
under paragraph (d)(2) of this section, adjustments to ordinary income 
and loss items are grouped together separately from capital gain and 
loss items. Therefore under this paragraph (d)(3)(i), the items in the 
ordinary grouping are

[[Page 27384]]

not netted against the items in the capital grouping.
    (ii) Only net positive adjustments taken into account in 
calculating the total netted partnership adjustment--(A) In general. 
Only adjustments to items resulting in a net positive adjustment (as 
defined in paragraph (d)(3)(ii)(B) of this section) for a grouping or 
subgrouping are taken into account in calculating the total netted 
partnership adjustment under paragraph (c)(3) of this section. A net 
non-positive adjustment (as defined in paragraph (d)(3)(ii)(C) of this 
section) for a grouping or subgrouping is disregarded for purposes of 
calculating the total netted partnership adjustment under paragraph 
(c)(3) of this section. The adjustments underlying a net non-positive 
adjustment that are disregarded under this paragraph (d)(3)(ii)(A) are 
adjustments that do not result in an imputed underpayment (as described 
in paragraph (c)(2) of this section).
    (B) Net positive adjustment. A net positive adjustment results if 
the net amount of adjustments within a grouping or subgrouping under 
paragraph (d)(2) of this section (except with respect to the credit 
grouping described in paragraph (d)(2)(iii) of this section) is greater 
than zero.
    (C) Net non-positive adjustment. A net non-positive adjustment is 
any net amount within a grouping or subgrouping described in paragraph 
(d)(2) of this section (except for the credit grouping under paragraph 
(d)(2)(iii) of this section) that is not a net positive adjustment (as 
defined in paragraph (d)(3)(ii)(B) of this section).
    (iii) Treatment of adjustments when netting. For purposes of 
netting adjustments within a grouping--
    (A) An increase in gain is treated as an increase in income;
    (B) A decrease in gain is treated as a decrease in income;
    (C) An increase in loss is treated as a decrease in income; and
    (D) A decrease in a loss is treated as an increase in income.
    (e) Multiple imputed underpayments in a single administrative 
proceeding--(1) In general. The IRS, in its discretion, may determine 
that partnership adjustments for the same partnership taxable year 
result in more than one imputed underpayment. The determination of 
whether there is more than one imputed underpayment for any partnership 
taxable year, and if so, which partnership adjustments are taken into 
account to calculate any particular imputed underpayment is based on 
the nature of the partnership adjustments. See Sec.  301.6225-2(d)(6) 
for modification of the number and composition of imputed 
underpayments.
    (2) Types of imputed underpayments--(i) In general. There are two 
types of imputed underpayments, a general imputed underpayment (defined 
in paragraph (e)(2)(ii) of this section) and a specific imputed 
underpayment (defined in paragraph (e)(2)(iii) of this section). Each 
type of imputed underpayment is separately calculated in accordance 
with the rules described in paragraphs (c) and (d) of this section.
    (ii) General imputed underpayment. The general imputed underpayment 
is calculated based on all adjustments (other than adjustments that do 
not result in an imputed underpayment under paragraph (c)(2) of this 
section) that are not taken into account to determine a specific 
imputed underpayment under paragraph (e)(2)(iii) of this section. There 
is only one general imputed underpayment in any administrative 
proceeding. If there is one imputed underpayment in an administrative 
proceeding, it is a general imputed underpayment and may take into 
account adjustments described in paragraph (e)(2)(iii) of this section, 
if any.
    (iii) Specific imputed underpayment. A specific imputed 
underpayment is an imputed underpayment with respect to adjustments to 
an item or items that were allocated to one partner or a group of 
partners that had the same or similar characteristics or that 
participated in the same or similar transaction. The IRS may designate 
more than one specific imputed underpayment with respect to any 
partnership taxable year. For instance, in a single partnership taxable 
year there may be a specific imputed underpayment with respect to 
adjustments related to a transaction affecting some, but not all, 
partners of the partnership (such as adjustments that are specially 
allocated to certain partners) and a second specific imputed 
underpayment with respect to adjustments resulting from a reallocation 
of a distributive share of income from one partner to another partner. 
The IRS may, in its discretion, determine that partnership adjustments 
that could be taken into account to calculate one or more specific 
imputed underpayments under this paragraph (e)(2)(iii) for a 
partnership taxable year are more appropriately taken into account in 
determining the general imputed underpayment for such taxable year. For 
instance, the IRS may determine that it is more appropriate to 
calculate only the general imputed underpayment if when calculating the 
specific imputed underpayment requested by the partnership, there is an 
increase in the number of the partnership adjustments that after 
netting result in net non-positive adjustments and are disregarded in 
calculating the specific imputed underpayment.
    (f) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership is subject to 
the provisions of subchapter C of chapter 63 of the Code, each 
partnership and its partners are calendar year taxpayers, all partners 
are U.S. persons (unless otherwise stated), the highest rate of income 
tax in effect for all taxpayers is 40 percent for all relevant periods, 
and no partnership requests modification under Sec.  301.6225-2.

    Example 1.  Partnership reports on its 2019 partnership return 
$100 of ordinary income and an ordinary deduction of <$70>. The IRS 
initiates an administrative proceeding with respect to Partnership's 
2019 taxable year and determines that ordinary income was $105 
instead of $100 ($5 adjustment) and that the ordinary deduction was 
<$80> instead of <$70> (<$10> adjustment). Neither item is subject 
to special restrictions or limitations. Pursuant to paragraph (d) of 
this section, the adjustments are both in the residual grouping. The 
<$10> adjustment to the ordinary deduction is netted with the $5 
adjustment to ordinary income because they are both ordinary in 
character and neither is subject to restrictions or limitations. 
After netting these adjustments, the total netted partnership 
adjustment is <$5>, which does not result in an imputed underpayment 
and therefore, the underlying adjustments (that is, the <$10> 
adjustment to the ordinary deduction and the $5 adjustment to 
ordinary income) are taken into account by Partnership in the 
adjustment year in accordance with Sec.  301.6225-3.
    Example 2.  Partnership reports on its 2019 partnership return 
ordinary income of $300, long-term capital gain of $125, long-term 
capital loss of <$75>, a depreciation deduction of <$100>, and a tax 
credit that can be claimed by the partnership of $5. In an 
administrative proceeding with respect to the partnership's 2019 
taxable year, the IRS determines ordinary income of $500 ($200 
adjustment), long-term capital gain of $200 ($75 adjustment), long-
term capital loss of <$25> ($50 adjustment), a depreciation 
deduction of <$70> ($30 adjustment), and a tax credit of $3 ($2 
adjustment). Pursuant to paragraph (d) of this section, the tax 
credit is in the credit grouping under paragraph (d)(2)(iii) of this 
section. The remaining adjustments are part of the residual grouping 
under paragraph (d)(2)(v) of this section. The adjustment to 
ordinary income and the depreciation deduction are grouped together 
in an ordinary subgrouping within the residual grouping and netted 
with each other because they are both ordinary in character and 
neither is subject to differing restrictions or limitations. 
Pursuant to paragraph (d)(3)(iii) of this section, for purposes of 
netting, the decrease in the depreciation

[[Page 27385]]

deduction is treated as an increase in income of $30. Thus, $200 
(adjustment to ordinary income) plus $30 (depreciation adjustment 
treated as increase in income) yields $230 of additional income in 
the ordinary subgrouping within the residual grouping. For similar 
reasons, the adjustments to long-term capital gain and long-term 
capital loss are grouped together in a long-term capital subgrouping 
within the residual grouping and netted with each other. For 
purposes of netting, the decrease in capital loss is treated as an 
increase in income of $50. Thus, $75 (long-term capital gain 
adjustment) plus $50 (long-term capital loss adjustment) yields $125 
of additional income in the long-term capital subgrouping within the 
residual grouping. With respect to the ordinary subgrouping, the 
$230 adjustment to ordinary income is a net positive adjustment for 
that subgrouping and is added to the $125 of additional income in 
the long-term capital subgrouping, for a total netted partnership 
adjustment of $355. Under paragraph (c)(1)(i) of this section, the 
total netted partnership adjustment is multiplied by 40 percent 
(highest tax rate in effect), which results in $142. Under paragraph 
(c)(1)(ii) of this section, the $142 is increased by the $2 credit 
adjustment, resulting in an imputed underpayment of $144.
    Example 3.  Partnership reported on its 2019 partnership return 
long-term capital gain of $125 and long-term capital loss of <$75>. 
In an administrative proceeding with respect to Partnership's 2019 
taxable year, the IRS determines the long-term capital gain should 
have been reported as ordinary income of $125, resulting in an 
increase in ordinary income of $125 ($125 adjustment) as well as a 
decrease of long-term capital gain of $125 (<$125> adjustment). 
Under paragraph (d)(2) of this section, these adjustments are part 
of the residual grouping, but are in a separate subgrouping because 
of their different character, that is, the increase in ordinary 
income is part of an ordinary subgrouping and the decrease in long-
term capital gain is part of a long-term capital subgrouping, both 
within the residual grouping. There are no other adjustments for the 
2019 taxable year. The $125 decrease in long-term capital gain is a 
net non-positive adjustment in the long-term capital subgrouping and 
as a result is an adjustment that does not result in an imputed 
underpayment. The $125 increase in ordinary income results in a net 
positive adjustment. Because the ordinary subgrouping is the only 
subgrouping resulting in a net positive adjustment, $125 is the 
total netted partnership adjustment. Under paragraph (c)(1)(i) of 
this section, $125 is multiplied by 40 percent resulting in an 
imputed underpayment of $50.
    Example 4.  Partnership reported a $100 deduction for certain 
expenses on its 2019 partnership return and a $100 deduction with 
respect to the same expenses on its 2020 partnership return. The IRS 
initiates an administrative proceeding with respect to Partnership's 
2019 and 2020 taxable years and determines that Partnership 
improperly accelerated accrual of a portion of the expenses with 
respect to the deduction in 2019 that should have been taken into 
account in 2020. Therefore, for taxable year 2019, the IRS 
determines that Partnership should have reported a deduction of $75 
with respect to the expenses ($25 adjustment) in 2019. However, for 
2020, the IRS determines that Partnership should have reported a 
deduction of $125 with respect to these expenses (<$25> adjustment). 
There are no other adjustments for the 2019 and 2020 partnership 
taxable years. Pursuant to paragraph (c)(4) of this section, the 
adjustments for 2019 and 2020 are not netted with each other. The 
2019 adjustment of $25 is multiplied by 40 percent resulting in an 
imputed underpayment of $10 for Partnership's 2019 taxable year. The 
$25 increase in the deduction for 2020 is an adjustment that does 
not result in an imputed underpayment. Therefore, there is no 
imputed underpayment for 2020.
    Example 5.  On its partnership return for the 2020 taxable year, 
Partnership reported ordinary income of $100 million and a capital 
gain of $50 million. Partnership had four equal partners during the 
2020 tax year, all of whom were individuals. On its partnership 
return for the 2020 tax year, the capital gain was allocated to 
partner E and the ordinary income was allocated to all partners 
based on their interests in Partnership. In an administrative 
proceeding with respect to Partnership's 2020 taxable year, the IRS 
determines that for 2020 the capital gain allocated to E should have 
been $75 million instead of $50 million and that Partnership should 
have recognized an additional $10 million in ordinary income. In the 
NOPPA mailed by the IRS, the IRS may determine pursuant to paragraph 
(e) of this section that there is a general imputed underpayment 
with respect to the increase in ordinary income and a specific 
imputed underpayment with respect to the increase in capital gain 
specially allocated to E.

    (g) Applicability date--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 8. Section 301.6225-2 is added to read as follows:


Sec.  301.6225-2  Modification of Imputed Underpayment.

    (a) Partnership may request modification of an imputed 
underpayment. A partnership that has received a notice of proposed 
partnership adjustment (NOPPA) under section 6231 from the Internal 
Revenue Service (IRS) may request modification of a proposed imputed 
underpayment set forth in the NOPPA in accordance with this section and 
any forms, instructions, and other guidance prescribed by the IRS. The 
effect of modification on a proposed imputed underpayment is described 
in paragraph (b) of this section. Unless otherwise described in 
paragraph (d) of this section, a partnership may request any type of 
modification of an imputed underpayment described in paragraph (d) of 
this section in the time and manner described set forth in paragraph 
(c) of this section. A request for modification with respect to a 
partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) that does 
not result in an imputed underpayment (as described in Sec.  301.6225-
1(c)(2)(i) or (c)(2)(ii)) is only available if the partnership has a 
proposed imputed underpayment set forth in the NOPPA. Only the 
partnership representative may request modification of an imputed 
underpayment. See section 6223 and Sec.  301.6223-2 for rules regarding 
the binding authority of the partnership representative.
    (b) Effect of modification--(1) In general. A modification of an 
imputed underpayment under this section that is approved by the IRS may 
result in an increase or decrease in the amount of an imputed 
underpayment set forth in the NOPPA under section 6231. A modification 
may increase or decrease an imputed underpayment by affecting the 
extent to which adjustments factor into the calculation of the imputed 
underpayment (as described in paragraph (b)(2) of this section), by 
affecting the tax rate that is applied in calculating the imputed 
underpayment (as described in paragraph (b)(3) of this section), and to 
the extent provided in forms, instructions, or other guidance 
prescribed by the IRS (see paragraph (b)(4) of this section). If a 
partnership requests more than one modification, modifications that 
affect the extent to which an adjustment factors into the calculation 
of the imputed underpayment under paragraph (b)(2) of this section are 
taken into account before rate modifications under paragraph (b)(3) of 
this section are taken into account. A modification under this section 
has no effect on the amount of any partnership adjustment determined 
under subchapter C of chapter 63 of the Internal Revenue Code 
(subchapter C of chapter 63).
    (2) Modifications that affect partnership adjustments for purposes 
of calculating the imputed underpayment. Once approved by the IRS, a 
modification under paragraph (d)(2) of this section (amended returns), 
paragraph (d)(3) of this section (tax exempt status), paragraph (d)(5) 
of this section (specified passive activity losses), paragraph (d)(7) 
of this section (qualified investment entities), paragraph (d)(8) of 
this section (closing

[[Page 27386]]

agreements), or, if applicable, paragraph (d)(9) of this section (other 
modifications) affects the extent to which a partnership adjustment 
factors into the calculation of an imputed underpayment. Any 
partnership adjustment or portion of a partnership adjustment that is 
taken into account through one of the types of modification described 
in this paragraph (b)(2) is excluded from the calculation of the total 
netted partnership adjustment (as described in Sec.  301.6225-1(c)(3)) 
if the adjustment or portion of the adjustment is part of the 
reallocation grouping (as described in Sec.  301.6225-1(d)(2)(ii)) or 
the residual grouping (as described in Sec.  301.6225-1(d)(2)(v)). 
Similarly, any partnership adjustment or portion of a partnership 
adjustment that is taken into account through one of the types of 
modification described in this paragraph (b)(2) is excluded from the 
credit grouping (as described in Sec.  301.6225-1(d)(2)(iii)) if the 
adjustment or portion thereof is part of the credit grouping.
    (3) Modifications that affect the tax rate--(i) In general. Once 
approved by the IRS, a modification under paragraph (d)(4) of this 
section (rate modification) reduces the tax rate applied in calculating 
the total netted partnership adjustment (as determined under Sec.  
301.6225-1(c)(3)) with respect to an imputed underpayment. Rate 
modification does not affect the extent to which partnership 
adjustments factor into the calculation of the imputed underpayment. A 
modification under paragraph (d)(9) of this section (other 
modifications) is treated as a rate modification under paragraph (b)(3) 
of this section if such modification affects the rate applied with 
respect to any partnership adjustment or portion of a partnership 
adjustment that makes up the total netted partnership adjustment with 
respect to an imputed underpayment.
    (ii) Determination of the imputed underpayment in the case of rate 
modification. Except as described in paragraph (b)(3)(iv) of this 
section, the imputed underpayment in the case of rate modification 
under paragraph (d)(4) of this section is the sum of partnership 
adjustments not subject to rate reduction under paragraph (d)(4) of 
this section (as described in this paragraph (b)(3)(ii)), plus the 
rate-modified netted partnership adjustment determined under paragraph 
(b)(3)(iii) of this section, reduced or increased by any adjustments to 
credits (taking into account any modifications under this section). To 
determine the partnership adjustments not subject to rate reduction 
under paragraph (d)(4) of this section, multiply the partnership 
adjustments in the total netted partnership adjustment that are not 
subject to rate modification under paragraph (d)(4) of this section 
(including the portion of any partnership adjustment that remains after 
applying paragraph (b)(3)(iii) of this section) by the highest tax rate 
(as described in Sec.  301.6225-1(c)(1)(i)).
    (iii) Calculation of rate-modified netted partnership adjustment in 
the case of a rate modification. The rate-modified netted partnership 
adjustment is determined as follows--
    (A) For each partnership adjustment in the total netted partnership 
adjustment that is subject to an approved rate modification under 
paragraph (d)(4) of this section, determine each reviewed year 
partner's (as defined in Sec.  301.6241-1(a)(9)) or indirect partner's 
(as defined in Sec.  301.6241-1(a)(4)) distributive share of the 
partnership adjustment subject to modification based on how each 
adjustment subject to rate modification would be properly allocated to 
such partner in the reviewed year (as defined in Sec.  301.6241-
1(a)(8)).
    (B) Multiply the portion of each partnership adjustment determined 
under paragraph (b)(3)(iii)(A) of this section by the tax rate 
applicable to such portion under paragraph (d)(4) of this section.
    (C) Add all of the amounts calculated under paragraph 
(b)(3)(iii)(B) of this section with respect to each partnership 
adjustment subject to an approved rate modification under paragraph 
(d)(4).
    (iv) Rate modification with respect to special allocations. If an 
imputed underpayment results from adjustments with respect to more than 
one item and any reviewed year partner (or indirect partner) for whom 
modification is approved under paragraph (d)(4) of this section has a 
distributive share of such items that is not the same with respect to 
all such items, the imputed underpayment as modified under paragraph 
(d)(4) of this section is determined as described in paragraphs 
(b)(3)(ii) and (b)(3)(iii) of this section except that each partner's 
distributive share is determined based on the amount of net gain or 
loss to the partner that would have resulted if the partnership had 
sold all of its assets at their fair market value as of the close of 
the reviewed year appropriately adjusted to reflect any modification 
with respect to any partner (or indirect partner) that is approved 
under paragraphs (d)(2), (d)(3), (d)(5), (d)(6), (d)(7), (d)(8), and 
(d)(9) of this section. Upon request by the IRS, the partnership may be 
required to provide the partners' capital account calculation through 
the end of the reviewed year, a calculation of asset liquidation gain 
or loss, and any other information necessary to determine whether rate 
modification is appropriate, consistent with the rules of paragraph 
(c)(2) of this section.
    (4) Other modifications. The effect of other modifications 
described in paragraph (d)(9) of this section may be described in 
forms, instructions, or other guidance prescribed by the IRS.
    (c) Time, form, and manner for requesting modification--(1) In 
general. In addition to the requirements described in paragraph (d) of 
this section, a request for modification under this section must be 
submitted in accordance with the forms, instructions, and other 
guidance prescribed by the IRS and contain the information described in 
paragraph (c)(2) of this section. The partnership representative must 
submit any request for modification and all relevant information (as 
described in paragraph (c)(2) of this section and as required by 
paragraph (d) of this section) to the IRS within the time described in 
paragraph (c)(3) of this section. A request for modification, including 
a request by the IRS for information related to a request for 
modification, and the determination by the IRS to approve or not 
approve all or a portion of a request for modification, is part of the 
administrative proceeding with respect to the partnership under 
subchapter C of chapter 63 and does not constitute an examination, 
inspection, or other administrative proceeding with respect to any 
other person for purposes of section 7605(b).
    (2) Partnership must substantiate facts supporting a request for 
modification--(i) In general. A partnership requesting modification 
under this section must substantiate the facts supporting such a 
request to the satisfaction of the IRS. The documents and other 
information necessary to substantiate a particular request for 
modification is based on the facts and circumstances of each request, 
as well as the type of modification requested under paragraph (d) of 
this section, and may include tax returns, partnership operating 
documents, certifications in the form and manner required with respect 
to the particular modification, and any other information necessary to 
support the requested modification. The IRS may, in forms, 
instructions, or other guidance, set forth procedures with respect to 
information and documents supporting the modification, including 
procedures to require particular documents or other information to

[[Page 27387]]

substantiate a particular type of modification, the manner for 
submitting documents and other information to the IRS, and 
recordkeeping requirements. The IRS will deny a request for 
modification if a partnership fails timely to provide information the 
IRS determines is necessary to substantiate a request for modification.
    (ii) Information to be furnished for any modification request. In 
the case of any modification request, the partnership representative 
must furnish to the IRS a detailed description of the structure, 
allocations, ownership, and ownership changes, its partners, and, if 
relevant, any indirect partners for each taxable year relevant to the 
request for modification, as well as the partnership agreement as 
defined in Sec.  1.704-1(b)(2)(ii)(h) of this chapter for each taxable 
year relevant to the modification request. In the case of any 
modification request with respect to an indirect partner, the 
partnership representative must provide to the IRS any information that 
the IRS may require relevant to any pass-through partner(s) (as defined 
in Sec.  301.6241-1(a)(5)) through which the indirect partner holds its 
interest in the partnership. For instance, if the partnership requests 
modification with respect to an amended return filed by an indirect 
partner pursuant to paragraph (d)(2) of this section, the partnership 
representative may be required to provide to the IRS information that 
would have been required to have been filed by pass-through partners 
through which the indirect partner holds its interest in the 
partnership as if those pass-through partners had also filed their own 
amended returns.
    (3) Time for submitting modification request and information--(i) 
Modification request. Unless an extension of time is granted by the 
IRS, all information required under this section with respect to a 
request for modification must be submitted to the IRS in the form and 
manner prescribed by the IRS on or before 270 days after the date the 
NOPPA is mailed.
    (ii) Extension of the 270-day period. A partnership may request an 
extension, subject to consent by the IRS, of the 270-day period 
described in paragraph (c)(3)(i) of this section.
    (iii) Expiration of the 270-day period by agreement. The 270-day 
period described in paragraph (c)(3)(ii) of this section expires as of 
the date the partnership representative and the IRS agree, in writing, 
to waive the 270-day period after the mailing of the NOPPA and before 
the IRS may issue a notice of final partnership adjustment. See section 
6231(a) (flush language).
    (4) Approval of modification by the IRS. After the IRS makes a 
determination as to whether a requested modification is accurate and 
appropriate, the IRS will notify the partnership representative in 
writing of the approval or denial, in whole or in part, of any request 
for modification. Notification of approval will be provided to the 
partnership representative only after receipt of all relevant 
information (including any supplemental information required by the 
IRS) and all necessary payments with respect to the particular 
modification requested.
    (d) Types of modification--(1) In general. Except as otherwise 
described in this section, a partnership may request one type of 
modification or more than one type of modification described in 
paragraph (d) of this section.
    (2) Amended returns by partners--(i) In general. A partnership may 
request a modification of an imputed underpayment based on an amended 
return filed by a reviewed year partner (or indirect partner) in 
accordance with paragraph (d)(2) of this section that takes into 
account all of the partnership adjustments properly allocable to such 
partner (or indirect partner). The partnership may not request an 
additional modification of any imputed underpayment for a partnership 
taxable year under this section with respect to any partner (or 
indirect partner) that files an amended return under paragraph (d)(2) 
of this section or with respect to any partnership adjustment allocated 
to such partner.
    (ii) Modification request based on amended return will not be 
approved without full payment. A modification request under paragraph 
(d)(2) of this section will not be approved unless the partner (or 
indirect partner) filing the amended return has paid all tax, 
penalties, additions to tax, and interest due as a result of taking 
into account the adjustments in the first affected year (as defined in 
Sec.  301.6226-(b)(2)) and all modification years (as described in 
paragraph (d)(2)(iv) of this section) before the expiration of the 270-
day period described in paragraph (c)(3) of this section.
    (iii) Form and manner for filing amended returns. A reviewed year 
partner (or indirect partner) must file all amended returns required 
for modification under paragraph (d)(2) of this section with the IRS. 
The IRS will not approve modification under paragraph (d)(2) of this 
section unless prior to the expiration of the 270-day period described 
in paragraph (c)(3) of this section, the partnership representative 
provides to the IRS in the form and manner prescribed by the IRS an 
affidavit from the partner (or indirect partner) signed under penalties 
of perjury by such partner that each amended return required to be 
filed under paragraph (d)(2) of this section has been filed (including 
the date on which such amended returns were filed) and that the full 
amount of tax, penalties, additions to tax, additional amounts, and 
interest was paid (including the date on which such amounts were paid).
    (iv) Modification approved only if amended returns for all taxable 
years are filed. Modification under paragraph (d)(2) of this section 
will not be approved by the IRS unless a partner (or indirect partner) 
files an amended return for the first affected year and any 
modification year. A modification year is any taxable year with respect 
to which any tax attribute (as defined in Sec.  301.6241-1(a)(10)) is 
affected by reason of taking the partner's allocable share of all 
partnership adjustments into account in the first affected year. A 
modification year may be a taxable year before or after the first 
affected year, depending on the effect on tax attributes of taking the 
partner's (or indirect partner's) share of the partnership adjustments 
into account in the first affected year.
    (v) Period of limitations must be open--(A) In general. Except as 
described in paragraph (d)(2)(v)(B) of this section, the IRS will not 
accept modification under paragraph (d)(2) of this section with respect 
to any amended return if the period of limitations on assessment under 
section 6501 with respect to the partner's taxable year for which the 
amended return is being filed has expired. For modification with 
respect to years for which a partner's period of limitations on 
assessment under section 6501 has expired, see Sec.  301.6225-2(d)(8) 
(regarding closing agreements).
    (B) Amended return claiming a refund. An amended return filed under 
paragraph (d)(2) of this section claiming a refund may be filed after 
the expiration of period of limitations under section 6511, provided 
all partnership adjustments allocated to the partner (or indirect 
partner) filing the amended return are taken into account on such 
amended return, the only items reported on the amended return are items 
attributable to such partnership adjustments, and the partner files all 
required amended returns described in paragraph (d)(2)(iv) of this 
section.
    (vi) Amended returns for partnership adjustments that reallocate 
distributive shares. Except as described in this

[[Page 27388]]

paragraph (d)(2)(vi), in the case of a partnership adjustment that 
reallocates the distributive share of any item from one partner to 
another, a modification under paragraph (d)(2) of this section will be 
approved only if all partners affected by such adjustment (affected 
partners) file amended returns in accordance with paragraph (d)(2) of 
this section. The IRS may determine that the requirements of this 
paragraph (d)(2)(vi) are satisfied if one or more affected partners 
take into account their allocable share of the adjustment through other 
modifications approved by the IRS. For instance, if, in the case where 
an adjustment reallocates a loss from one partner to another, one 
affected partner files an amended return taking into account the 
adjustment, and the other affected partner signs a closing agreement 
taking into account the adjustment, the IRS may determine that the 
requirements of this paragraph (d)(2)(vi) have been satisfied.
    (vii) Amended returns in the case of pass-through partners--(A) 
Pass-through partners may file amended returns. A pass-through partner 
(or indirect partner that is a pass-through partner), including a 
partnership-partner (as defined in Sec.  301.6241-1(a)(7)) (or indirect 
partner that is a partnership-partner) that has a valid election under 
section 6221(b) in effect for a partnership taxable year, may elect, 
solely for purposes of modification under paragraph (d)(2) of this 
section, to take into account its share of the partnership adjustments 
and determine and pay an amount calculated in the same manner as the 
safe harbor amount under Sec.  301.6226-2(g) (except as described in 
paragraph (d)(2)(vii)(B) of this section).
    (B) Tax rate. For purposes of calculating the payment amount for a 
pass-through partner under paragraph (d)(2)(vii)(A) of this section, 
instead of using the tax rate under section 6225(b)(1)(A), the tax rate 
is the rate determined by substituting the total net income of the 
pass-through partner for the taxable year (as adjusted) for taxable 
income in section 1(c) (determined without regard to section 1(h)).
    (C) Restrictions on upper-tier amended returns. If modification is 
approved with respect to a pass-through partner (or indirect partner 
that is a pass-through partner) that takes its share of the partnership 
adjustments into account and pays any amount due under paragraph 
(d)(2)(vii)(A) of this section, the partnership may not request 
modification based on amended returns of direct and indirect partners 
of the pass-through partner (or indirect partner that is a pass-through 
partner).
    (vii) Limitations on amended returns--(A) In general. A partner (or 
indirect partner) may not file an amended return with respect to any 
items related to partnership adjustments or an imputed underpayment 
except as described in paragraph (d)(2) of this section.
    (B) Further amended returns restricted. If a partner files an 
amended return under paragraph (d)(2) of this section, such partner may 
not file a subsequent amended return without the permission of the IRS.
    (3) Tax-exempt partners--(i) In general. A partnership may request 
modification of an imputed underpayment with respect to partnership 
adjustments that the partnership demonstrates to the satisfaction of 
the IRS are allocable to a reviewed year partner (or indirect partner) 
that would not owe tax by reason of its status as a tax-exempt entity 
(as defined in paragraph (d)(3)(ii) of this section) in the reviewed 
year (tax-exempt partner).
    (ii) Definition of tax-exempt entity. For the purposes of paragraph 
(d)(3) of this section, the term tax-exempt entity means a person or 
entity defined in section 168(h)(2)(A), (C), or (D).
    (iii) Modification limited to portion of partnership adjustments 
for which tax-exempt partner not subject to tax. Only the portion of 
the partnership adjustments properly allocated to a tax-exempt partner 
with respect to which the partner would not be subject to tax for the 
reviewed year (tax-exempt portion) may form the basis of a modification 
of the imputed underpayment under paragraph (d)(3) of this section. A 
modification under paragraph (d)(3) of this section will not be 
approved by the IRS unless the partnership provides documentation in 
accordance with paragraph (c)(2) of this section to support the tax-
exempt partner's status and the tax-exempt portion of the partnership 
adjustment allocable to the tax-exempt partner.
    (4) Modification based on a rate of tax lower than the highest 
applicable tax rate. A partnership may request modification based on a 
lower rate of tax with respect to adjustments that are attributable to 
a reviewed year partner (or indirect partner) that is a C corporation 
and adjustments with respect to capital gains or qualified dividends 
that are attributable to a reviewed year partner (or indirect partner) 
who is an individual. In no event may the lower rate determined under 
the preceding sentence be less than the highest rate in effect with 
respect to the type of income and taxpayer. For instance, with respect 
to adjustments that are attributable to a C corporation, the highest 
rate in effect for the reviewed year with respect to all C corporations 
would apply to that adjustment, regardless of the rate that would apply 
to the C corporation based on the amount of that C corporation's 
taxable income. For the purposes of this paragraph (d)(4), an S 
corporation is treated as an individual.
    (5) Certain passive losses of publicly traded partnerships--(i) In 
general. In the case of a publicly traded partnership (as defined in 
section 469(k)(2)), the imputed underpayment is determined without 
regard to the portion thereof that the partnership demonstrates is 
attributable to a net decrease in a specified passive activity loss (as 
defined in paragraph (d)(5)(ii) of this section) which is allocable to 
a specified partner (as defined in paragraph (d)(5)(iii) of this 
section). The modification described in this paragraph (d)(5)(i) 
applies equally with respect to a publicly traded partnership that is 
subject to a proceeding under subchapter C of chapter 63 and where a 
portion of the imputed underpayment is attributable to a publicly 
traded partnership that is a partnership-partner (or indirect partner 
that is a partnership-partner).
    (ii) Specified passive activity loss. A specified passive activity 
loss carryover amount for any specified partner of a publicly traded 
partnership is the lesser of the section 469(k) passive activity loss 
of that partner which is separately determined with respect to such 
partnership at the end of the partner's taxable year in which or with 
which the reviewed year of the partnership ends (reviewed year loss) or 
at the end of the partner's taxable year in which or with which the 
adjustment year (as defined in Sec.  301.6241-1(a)(1)) of the 
partnership ends, reduced to the extent any such partner has utilized 
any portion of its reviewed year loss to offset income or gain relating 
to the ownership or disposition of its interest in such publicly traded 
partnership during either the adjustment year or any intervening year 
(as defined in Sec.  301.6226-3(b)(3)).
    (iii) Specified partner. A specified partner is a person that for 
each taxable year beginning with the partner's taxable year in which or 
with which the partnership reviewed year ends through the partner's 
taxable year in which or with which the partnership adjustment year 
ends satisfies the following three requirements--
    (A) The person is a partner of a publicly traded partnership;

[[Page 27389]]

    (B) The person is an individual, estate, trust, closely held C 
corporation, or personal service corporation; and
    (C) The person has a specified passive activity loss with respect 
to the publicly traded partnership.
    (iv) Partner notification requirement to reduce passive losses. If 
the IRS approves a modification request under paragraph (d)(5) of this 
section, the partnership must report, in accordance with forms, 
instructions, or other guidance prescribed by the IRS, to each 
specified partner the amount of that specified partner's reduction of 
its suspended passive loss carryovers at the end of the adjustment year 
to take into account the amount of any passive losses applied in 
connection with such modification request. The reduction in suspended 
passive loss carryovers as reported to a specified partner under this 
paragraph (d)(5)(iv) is a determination of the partnership under 
subchapter C of chapter 63 and is binding on the specified partners 
under section 6223 and the regulations thereunder.
    (6) Modification of the number and composition of imputed 
underpayments. A partnership may request that the IRS include one or 
more partnership adjustments in one or more particular groupings or 
subgroupings (as described in Sec.  301.6225-1(d)(2)) and may request 
that the IRS determine one or more specific imputed underpayments based 
on such groupings. For example, a partnership may request under this 
paragraph (d)(6) that one or more partnership adjustments taken into 
account to calculate an imputed underpayment be taken into account to 
calculate a different imputed underpayment.
    (7) Partnerships with partners that are ``qualified investment 
entities'' described in section 860--(i) In general. A partnership may 
request a modification of an imputed underpayment based on the 
partnership adjustments allocated to a reviewed year partner (or 
indirect partner) where the modification is based on deficiency 
dividends distributed as described in section 860(f), by a partner that 
is a qualified investment entity (QIE) under section 860(b), which 
includes both a regulated investment company (RIC) and a real estate 
investment trust (REIT). Modification is available only to the extent 
that the deficiency dividends take into account adjustments described 
in Sec.  301.6225-1 that are also adjustments within the meaning of 
section 860(d)(1) or (d)(2) (whichever applies).
    (ii) Documentation of deficiency dividend. The partnership must 
provide documentation in accordance with paragraph (c) of this section 
of the ``determination'' described in section 860(e). Under section 
860(e)(2), Sec.  1.860-2(b)(1)(i) of this chapter, and paragraph (d)(8) 
of this section, a closing agreement entered into by the QIE partner 
pursuant to section 7121 and paragraph (d)(8) of this section is a 
determination described in section 860(e), and the date of the 
determination is the date in which the closing agreement is approved by 
the IRS. In addition, under section 860(e)(4), a determination also 
includes a Form 8927, Determination Under Section 860(e)(4) by a 
Qualified Investment Entity, properly completed and filed by the RIC or 
REIT pursuant to section 860(e)(4). To establish the date of the 
determination under section 860(e)(4) and the amount of deficiency 
dividends actually paid, the partnership must provide a copy of Form 
976, Claim for Deficiency Dividends Deductions by a Personal Holding 
Company, Regulated Investment Company, or Real Estate Investment Trust 
(Form 976), properly completed by or on behalf of the QIE pursuant to 
section 860(g), together with a copy of each of the required 
attachments for Form 976.
    (8) Partner closing agreements. A partnership may request 
modification based on a closing agreement entered into by the IRS and 
any partner (or indirect partner) pursuant to section 7121, and, if 
approved by the IRS, the IRS will allow modification with respect to a 
partnership adjustment that is fully taken into account by such partner 
(or indirect partner) under a closing agreement and for which the 
required payment under the closing agreement is made. Generally, the 
IRS will not approve any additional modification under this section 
with respect to a partner (or indirect partner) to which a modification 
under this paragraph (d)(8) has been approved.
    (9) Other modifications. A partnership may request a modification 
not described in paragraph (d) of this section and the IRS will 
determine whether such modification is accurate and appropriate in 
accordance with paragraph (c)(4) of this section. Additional types of 
modifications and the documentation necessary to substantiate such 
modifications may be set forth in forms, instructions, or other 
guidance prescribed by the IRS.
    (e) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership is subject to 
the provisions of subchapter C of chapter 63, each partnership and its 
partners are calendar year taxpayers, all partners are U.S. persons 
(unless otherwise stated), the highest rate of income tax in effect for 
all taxpayers is 40 percent for all relevant periods, and no 
partnership requests modification under this section except as provided 
in the example.

    Example 1. The IRS mails a NOPPA to Partnership for the 2019 
partnership taxable year proposing a single partnership adjustment 
increasing ordinary income by $100, resulting in a $40 imputed 
underpayment ($100 multiplied by the 40 percent tax rate). Partner, 
A, held a 20 percent interest in Partnership during 2019. 
Partnership requests modification under paragraph (d)(2) of this 
section based on A filing an amended return for the 2019 taxable 
year taking into account $20 of the partnership adjustment and 
paying the tax and interest due attributable to A's share of the 
increased income and based on A's effective tax rate for 2019. No 
tax attribute in any other taxable year of A is affected by A taking 
into account A's share of the partnership adjustment for 2019. IRS 
approves the modification and the $20 increase in ordinary income 
allocable to A is therefore not included in the calculation of the 
total netted partnership adjustment (determined in accordance with 
Sec.  301.6225-1). Partnership's total netted partnership adjustment 
is reduced to $80 ($100 adjustment less $20 taken into account by 
A), and the imputed underpayment is reduced to $32 (total netted 
partnership adjustment of $80 after modification multiplied by 40 
percent).
    Example 2. The IRS initiates an administrative proceeding with 
respect to Partnership's 2019 taxable year. Partnership has two 
equal partners during its 2019 taxable year: An individual, A, and a 
partnership-partner, B. For 2019, B has two equal partners: A tax-
exempt entity, C, and an individual, D. The IRS mails a NOPPA to 
Partnership for its 2019 taxable year showing a single partnership 
adjustment increasing Partnership's ordinary income by $100, 
resulting in a $40 imputed underpayment ($100 total netted 
partnership adjustment multiplied by 40 percent). Partnership 
requests modification under paragraph (d)(3) of this section with 
respect to B's partner, C, a tax-exempt entity. Partnership's 
partnership representative provides the IRS with documentation 
demonstrating to the IRS's satisfaction that C holds a 25 percent 
indirect interest in Partnership through its interest in B and that 
C is a tax-exempt entity defined in paragraph (d)(3)(ii) of this 
section that is not subject to tax with respect to its share of the 
partnership adjustment allocated to B which is $25 (50 percent x 50 
percent x $100). IRS approves the modification and the $25 increase 
in ordinary income allocable to C is not included in the calculation 
of the total netted partnership adjustment (determined in accordance 
with Sec.  301.6225-1). Partnership's total netted partnership 
adjustment is reduced to $75 ($100 adjustment less C's share of the 
adjustment, $25), and the imputed underpayment is reduced to $30 
(total netted partnership adjustment of $75, after modification, 
multiplied by 40 percent).

[[Page 27390]]

    Example 3. The facts are the same as in Example 2 of this 
paragraph (e), except 30 percent of the $25 of the adjustment 
allocated to C is unrelated business taxable income (UBTI) as 
defined in section 512 with respect to which C would be subject to 
tax if taken into account by C. As a result, the modification under 
paragraph (d)(3) of this section with respect to C relates only to 
70 percent of the $25 of ordinary income allocated to C that is not 
UBTI. Therefore, only a modification of $17.50 (70 percent 
multiplied by $25) of the total $100 partnership adjustment may be 
approved by the IRS and excluded when calculating the imputed 
underpayment for Partnership's 2019 taxable year. The total netted 
partnership adjustment (determined in accordance with Sec.  
301.6225-1) is reduced to $82.50 ($100 less $17.50), and the imputed 
underpayment is reduced to $33 (total netted partnership adjustment 
of $82.50, after modification, multiplied by 40 percent).
    Example 4. The facts are the same as in Example 2 of this 
paragraph (e), but assume that B filed an amended return taking its 
share of the partnership adjustments into account. B reports 50 
percent of the partnership adjustments ($50) on its amended return, 
and B makes a payment pursuant to paragraph (d)(2)(ii) of this 
section. Partnership's total netted partnership adjustment is 
reduced by $50 (the amount taken into account by B). Partnership's 
total netted partnership adjustment (determined in accordance with 
Sec.  301.6225-1) is $50, and the imputed underpayment, after 
modification, is $20.
    Example 5. The facts are the same as in Example 2 of this 
paragraph (e), except that in addition to the modification with 
respect to tax-exempt entity C which reduced the imputed 
underpayment by excluding from the calculation of the imputed 
underpayment $25 of the $100 partnership adjustment reflected in the 
NOPPA, individual D files an amended return for D's 2019 taxable 
year taking into account D's share of the partnership adjustment (50 
percent of B's 50 percent interest in Partnership, or $25) and 
paying the additional tax and interest due in accordance with 
paragraph (d)(2) of this section. No tax attribute in any other 
taxable year of D is affected by D taking into account D's share of 
the partnership adjustment for 2019. IRS approves the modification 
and the $25 increase in ordinary income allocable to D is not 
included in the calculation of the total netted partnership 
adjustment (determined in accordance with Sec.  301.6225-1). As a 
result, Partnership's total netted partnership adjustment is $50 
($100, less $25 allocable to C, less $25 taken into account by D), 
and the imputed underpayment, after modification, is $20.
    Example 6. The IRS mails a NOPPA to Partnership for the 2019 
taxable year proposing two partnership adjustments based on an IRS 
determination that two assets, asset X and asset Y, owned by 
Partnership were overvalued. The partnership adjustment with respect 
to asset X results in increased ordinary income of $75 and the 
partnership adjustment with respect to asset Y results in an 
increase in depreciation of $25, which under Sec.  301.6225-
1(d)(3)(iii) is treated as a $25 decrease in income. The total 
netted partnership adjustment (determined in accordance with Sec.  
301.6225-1) is $50 ($75-$25), resulting in an imputed underpayment 
of $20 ($50 multiplied by 40 percent). Under the partnership 
agreement in effect for Partnership's 2019 taxable year, the 
adjustments attributable to both of these assets are allocated to 
the partners consistent with their ownership percentages in 
Partnership. Partnership requests a modification under paragraph 
(d)(6) of this section to calculate two imputed underpayments with 
respect to the partnership adjustments for 2019: A general imputed 
underpayment with respect to $50 of the increase in income related 
to the adjustment of the value of asset X and a specific imputed 
underpayment with respect to $25 of the increase in income related 
to the adjustment of the value of asset X and the $25 decrease in 
income related to the adjustment of the value of asset Y. If 
approved by the IRS, the general imputed underpayment, as modified, 
is $20 ($50 multiplied by 40 percent) and the specific imputed 
underpayment would result in zero (increase in income of $25 
attributable to asset X offset by the decrease in income of $25 
attributable to asset Y), causing those two adjustments to be 
disregarded and taken into account by the partnership in the 
adjustment year as adjustments that do not result in an imputed 
underpayment. The IRS may determine that the creation of the 
specific imputed underpayment is not appropriate in this 
circumstance and deny the partnership's modification request because 
the adjustments are not related to allocations to particular 
partners and also because the proposed modification results in an 
increase in net non-positive adjustments. See Sec.  301.6225-
1(e)(2)(iii).

    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 9. Section 301.6225-3 is added to read as follows:


Sec.  301.6225-3  Treatment of partnership adjustments that do not 
result in an imputed underpayment.

    (a) In general. Partnership adjustments (as defined in Sec.  
301.6241-1(a)(6)) that do not result in an imputed underpayment (as 
described in Sec.  301.6225-1(c)(2)) are taken into account by a 
partnership in the adjustment year (as defined in Sec.  301.6241-
1(a)(1)) in accordance with paragraph (b) of this section.
    (b) Treatment of adjustments by the partnership--(1) In general. 
Except as described in paragraphs (b)(2) through (b)(5) of this 
section, a partnership adjustment that does not result in an imputed 
underpayment is taken into account as a reduction in non-separately 
stated income or as an increase in non-separately stated loss for the 
adjustment year depending on whether the adjustment is to an item of 
income or loss.
    (2) Separately stated items. In the case of a partnership 
adjustment to an item that is required to be separately stated under 
section 702, the adjustment is taken into account by the partnership in 
the adjustment year as a reduction in such separately stated item or as 
an increase in such separately stated item depending on whether the 
adjustment is a reduction or an increase to the separately stated item.
    (3) Credits. In the case of a partnership adjustment to a credit 
shown on the partnership return for the reviewed year (as defined in 
Sec.  301.6241-1(a)(8)), the adjustment is taken into account by the 
partnership in the adjustment year as a separately stated item.
    (4) Reallocation adjustments. A partnership adjustment that does 
not result in an imputed underpayment pursuant to Sec.  301.6225-
1(c)(2)(i) is taken into account by the partnership in the adjustment 
year as a separately stated item or a non-separately stated item, as 
required by section 702. The portion of an adjustment allocated under 
this paragraph (b)(4) is allocated to adjustment year partners (as 
defined in Sec.  301.6241-1(a)(2)) who are also reviewed year partners 
(as defined in Sec.  301.6241-1(a)(9)) with respect to whom the amount 
was reallocated. If any reviewed year partner with respect to whom an 
amount was reallocated is not also an adjustment year partner, the 
portion of the adjustment that would otherwise be allocated to such 
reviewed year partner is allocated instead to the adjustment year 
partner or partners who are the successor or successors to the reviewed 
year partner. If the partnership cannot identify an adjustment year 
partner that is a successor to the reviewed year partner described in 
the previous sentence or if a successor does not exist, the portion of 
the adjustment that would otherwise be allocated to that reviewed year 
partner is allocated among the adjustment year partners according to 
the adjustment year partners' distributive shares.
    (5) Adjustments taken into account by partners as part of the 
modification process. If, as part of modification under Sec.  301.6225-
2, a reviewed year partner (or an indirect partner (as defined in Sec.  
301.6241-1(a)(4)) that holds its interest in the partnership through 
its interest in the reviewed year partner)

[[Page 27391]]

takes into account an adjustment that would otherwise not result in an 
imputed underpayment, and the IRS approves the modification, such 
adjustment is not taken into account by the partnership in the 
adjustment year.
    (6) Effect of election under section 6226. If a partnership makes a 
valid election under Sec.  301.6226-1 with respect to an imputed 
underpayment, a partnership adjustment that does not result in an 
imputed underpayment and that is described in Sec.  301.6225-1(c)(2)(i) 
or (c)(2)(ii) is taken into account by the reviewed year partners in 
accordance with Sec.  301.6226-3 and is not taken into account under 
this section.
    (c) Treatment of adjustment year partners. The rules under 
subchapter K of chapter 1 of subtitle A of the Internal Revenue Code 
with respect to the treatment of partners apply in the case of 
adjustments taken into account by the partnership under this section.
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 10. Section 301.6225-4 is added to read as follows:


Sec.  301.6225-4  Adjustments to partners' outside bases and capital 
accounts and a partnership's basis and book value in property--
[Reserved]

0
Par. 11. Section 301.6226-1 is added to read as follows:


Sec.  301.6226-1  Election for an alternative to the payment of the 
imputed underpayment.

    (a) In general. A partnership may elect under this section an 
alternative to the payment by the partnership of an imputed 
underpayment determined under section 6225 and the regulations 
thereunder. In addition, a partnership making a valid election under 
paragraph (b) of section is no longer liable for the imputed 
underpayment (as defined in Sec.  301.6241(a)(3)) to which the election 
applies. If a notice of final partnership adjustment (FPA) mailed under 
section 6231 includes more than one imputed underpayment in accordance 
with Sec.  301.6225-1(e), a partnership may make an election under this 
section with respect to one or more imputed underpayments identified in 
the FPA. See Sec.  301.6226-2(f) regarding the determination of each 
reviewed year partner's share of the partnership adjustments (as 
defined in Sec.  301.6241-1(a)(6)) and related penalties, additions to 
tax, and additional amounts that must be taken into account.
    (b) Effect of election--(1) Reviewed year partners. If a 
partnership makes a valid election under this section with respect to 
any imputed underpayment, the reviewed year partners (as defined in 
Sec.  301.6241-1(a)(9)) must take into account their share of the 
partnership adjustments that relate to that imputed underpayment and 
are liable for any tax, penalties, additions to tax, additional 
amounts, and interest as described in Sec.  301.6226-3. A modification 
approved by the IRS under Sec.  301.6225-2 is taken into account by the 
reviewed year partners in accordance with Sec.  301.6226-2(f)(2).
    (2) Partnership. A partnership making a valid election under this 
section is not liable for the imputed underpayment to which the 
election applies on the date such election is made. In addition, 
adjustments that do not result in an imputed underpayment described in 
Sec.  301.6225-1(c)(2)(i) and (ii) are not taken into account by the 
partnership in the adjustment year (as defined in Sec.  301.6241-
1(a)(1)) and instead are included in the reviewed year partners' share 
of the partnership adjustments reported to the reviewed year partners 
of the partnership.
    (c) Time, form, and manner for making the election--(1) In general. 
An election under this section is valid only if all of the provisions 
of this section and Sec.  301.6226-2 (regarding statements furnished to 
reviewed year partners and filed with the Internal Revenue Service 
(IRS)) are satisfied. An election under this section may only be 
revoked with the consent of the IRS.
    (2) Invalid election. If an election under this section is 
determined by the IRS to be invalid, the IRS will notify the 
partnership and the partnership representative within 30 days of the 
determination that the election is invalid and the reason for the 
determination that the election is invalid. If the IRS makes a final 
determination that an election under this section is invalid, section 
6225 applies with respect to the imputed underpayment as if the 
election was never made and the partnership must pay the imputed 
underpayment under section 6225 and any penalties and interest under 
section 6233. An election under this section is valid until the IRS 
determines that the election is invalid.
    (3) Time for making the election. An election under this section 
must be filed within 45 days of the date the FPA is mailed by the IRS. 
The time for filing such an election may not be extended.
    (4) Form and manner of the election--(i) In general. An election 
under this section must be signed by the partnership representative and 
filed in accordance with forms, instructions, and other guidance and 
include the information specified in paragraph (c)(4)(ii) of this 
section.
    (ii) Contents of the election. An election under this section must 
include--
    (A) The name, address, and correct taxpayer identification number 
(TIN) of the partnership,
    (B) The taxable year to which the election relates,
    (C) A copy of the FPA to which the election relates,
    (D) In the case of an FPA that includes more than one imputed 
underpayment, identification of the imputed underpayment(s) to which 
the election applies,
    (E) Each reviewed year partner's name, address, and correct TIN, 
and
    (F) Any other information prescribed by the IRS in forms, 
instructions, and other guidance.
    (d) Binding nature of statements. The election under this section, 
which includes filing and furnishing statements described in Sec.  
301.6226-2, are actions of the partnership under section 6223 and the 
regulations thereunder and, unless determined otherwise by the IRS, the 
partner's share of the adjustments, the safe harbor amount and interest 
safe harbor amount (as described in Sec.  301.6226-2(g)), and any 
penalties, additions to tax, and additional amounts as set forth in the 
statement are binding on the partner pursuant to section 6223. 
Accordingly, a partner may not treat items reflected on a statement 
described in Sec.  301.6226-2 on the partner's return inconsistently 
with how those items are treated on the statement that is filed with 
the IRS. See Sec.  301.6222-1(c)(2) (regarding items the treatment of 
which a partner is bound to under section 6223).
    (e) Coordination with section 6234 regarding judicial review. 
Nothing in this section affects the rules regarding judicial review of 
a partnership adjustment. Accordingly, a partnership that makes an 
election under this section is not precluded from filing a petition 
under section 6234(a). See Sec.  301.6226-2(b)(3), Example 3.
    (f) Applicability date--(1) In general. Except as provided in 
paragraph (f)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1,

[[Page 27392]]

2018 for which a valid election under Sec.  301.9100-22T is in effect.
0
Par. 12. Section 301.6226-2 is added to read as follows:


Sec.  301.6226-2   Statements furnished to partners and filed with the 
IRS.

    (a) In general. A partnership that makes an election under Sec.  
301.6226-1 must furnish to each reviewed year partner (as defined in 
Sec.  301.6241-1(a)(9)) and file with the Internal Revenue Service 
(IRS) a statement that includes the items required by paragraphs (e) 
and (f) of this section with respect to each reviewed year partner's 
share of partnership adjustments (as defined in Sec.  301.6241-1(a)(6)) 
with respect to the imputed underpayment for which an election under 
Sec.  301.6226-1 is made. The statements furnished to the reviewed year 
partners under this section are in addition to, and must be filed and 
furnished separate from, any other statements required to be filed with 
the IRS and furnished to partners, including any statements under 
section 6031(b). A separate statement under this section must be 
furnished with respect to each reviewed year (as defined in Sec.  
301.6241-1(a)(8)) subject to an election under Sec.  301.6226-1.
    (b) Time and manner for furnishing the statements to partners--(1) 
In general. The statements described in paragraph (a) of this section 
must be furnished to the reviewed year partners no later than 60 days 
after the date all of the partnership adjustments to which the 
statement relates are finally determined. The partnership adjustments 
are finally determined upon the later of:
    (i) The expiration of the time to file a petition under section 
6234, or
    (ii) If a petition under section 6234 is filed, the date when the 
court's decision becomes final.
    (2) Address used for reviewed year partners. The partnership must 
furnish the statement described in paragraph (a) of this section to 
each reviewed year partner in accordance with the forms, instructions, 
and other guidance prescribed by the IRS. If the partnership mails the 
statement, it must mail the statement to the current or last address of 
the reviewed year partner that is known to the partnership. If a 
statement is returned to the partnership as undeliverable, the 
partnership must undertake reasonable diligence to identify a correct 
address for the reviewed year partner to which the statement relates.
    (3) Examples. The following examples illustrate the rules of 
paragraph (b) of this section.

    Example 1. During Partnership's 2020 taxable year, A, an 
individual, was a partner in Partnership and had an address at 123 
Main St. On February 1, 2021, A sold his interest in Partnership and 
informed Partnership that A moved to 456 Broad St. On March 15, 
2021, Partnership mails A's statement under section 6031(b) for the 
2020 taxable year to 456 Broad St. On June 1, 2023, A moves again 
but does not inform Partnership of A's new address. In 2023, the IRS 
initiates an administrative proceeding with respect to Partnership's 
2020 taxable year and mails a notice of final partnership adjustment 
(FPA) to Partnership for that year. Partnership makes a timely 
election under section 6226 in accordance with Sec.  301.6226-1 and 
on May 31, 2024, timely mails a statement described in paragraph (a) 
of this section to A at 456 Broad St. Although the statement was 
mailed to the last address for A that was known to Partnership, it 
is returned to Partnership as undeliverable because unknown to 
Partnership, A had moved. After undertaking reasonable diligence as 
to the correct address of A, Partnership is unable to ascertain the 
correct address. Therefore, pursuant to paragraph (b)(2) of this 
section, Partnership has properly furnished the statement to A.
    Example 2. The facts are the same as in Example 1 of this 
paragraph (b)(3), except that A lives at 789 Forest Ave during all 
of 2024 and reasonable diligence would have revealed that 789 Forest 
Ave is the correct address for A, but Partnership did not undertake 
such diligence. Therefore, Partnership failed to properly furnish 
the statement with respect to A pursuant to paragraph (b)(2) of this 
section.
    Example 3. Partnership is a calendar year taxpayer. The IRS 
initiates an administrative proceeding with respect to Partnership's 
2020 taxable year. On January 1, 2024, the IRS mails an FPA with 
respect to the 2020 taxable year to Partnership. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1. Partnership timely files a petition for readjustment 
under section 6234 with the Tax Court. The IRS prevails, and the Tax 
Court sustains all of the adjustments in the FPA with respect to the 
2020 taxable year. The time to appeal the Tax Court decision 
expires, and the Tax Court decision becomes final on April 10, 2025. 
Under paragraph (b)(1)(ii) of this section, the adjustments in the 
FPA are finally determined on April 10, 2025, and Partnership must 
furnish the statements described in paragraph (a) of this section to 
its reviewed year partners and electronically file the statements 
with the IRS no later than June 9, 2025. See paragraph (c) of this 
section for the rules regarding filing the statements with the IRS.

    (c) Time and manner for filing the statements with the IRS. No 
later than 60 days after the date the partnership adjustments are 
finally determined (as described in paragraph (b)(1) of this section), 
the partnership must electronically file with the IRS the statements 
that the partnership furnishes to each reviewed year partner under this 
section, along with a transmittal that includes a summary of the 
statements filed and such other information required in forms, 
instructions, and other guidance.
    (d) Correction of statements--(1) In general. A partnership 
corrects an error in a statement furnished under paragraph (b) of this 
section or filed under paragraph (c) of this section by filing the 
corrected statement with the IRS in the manner prescribed in paragraph 
(c) of this section and furnishing a copy of the corrected statement to 
the reviewed year partner to whom the statement relates in accordance 
with the forms, instructions, and other guidance prescribed by the IRS.
    (2) Error discovered by partnership--(i) Discovery within 60 days 
of statement due date. If a partnership discovers an error in a 
statement within 60 days of the due date for furnishing the statements 
to partners and filing the statements with the IRS as described in 
paragraphs (b) and (c) of this section, the partnership must correct 
the error in accordance with paragraph (d)(1) of this section and does 
not have to seek consent of the IRS prior to doing so.
    (ii) Error discovered more than 60 days after statement due date. 
If a partnership discovers an error more than 60 days after the due 
date for furnishing the statements to partners and filing the 
statements with the IRS as described in paragraphs (b) and (c) of this 
section, the partnership may only correct the error after receiving 
consent of the IRS in accordance with the forms, instructions, and 
other guidance prescribed by the IRS.
    (3) Error discovered by the IRS. If the IRS discovers an error in 
the statements furnished or filed under paragraphs (b) and (c) of this 
section, the IRS may require the partnership to correct such errors in 
accordance with paragraph (d)(1) of this section. Failure by the 
partnership to correct an error when required by the IRS may be treated 
by the IRS as a failure to properly furnish statements to partners and 
file the statements with the IRS as described in paragraphs (b) and (c) 
of this section.
    (4) Adjustments in the corrected statements taken into account by 
the reviewed year partners. The adjustments included on a corrected 
statement are taken into account by a reviewed year partner in 
accordance with Sec.  301.6226-3 for the reporting year (as defined in 
Sec.  301.6226-3(a)).
    (e) Content of the statements. Each statement described in 
paragraph (a) of this section must include the following information:

[[Page 27393]]

    (1) The name and correct TIN of the reviewed year partner to whom 
the statement is being furnished;
    (2) the current or last address of the reviewed year partner that 
is known to the partnership;
    (3) the reviewed year partner's share of items as originally 
reported for the reviewed year to the partner on statements furnished 
to the partner under section 6031(b) and, if applicable, section 6227;
    (4) the reviewed year partner's share of partnership adjustments 
determined under paragraph (f)(1) of this section;
    (5) modifications with respect to the reviewed year partner 
determined under paragraph (f)(2) of this section;
    (6) the reviewed year partner's share of any amounts attributable 
to adjustments to the partnership's tax attributes (as defined in Sec.  
301.6241-1(a)(10)) for any intervening year (as defined in Sec.  
301.6226-3(b)(3)) resulting from the partnership adjustments in the 
reviewed year;
    (7) the reviewed year partner's share of any penalties, additions 
to tax, or additional amounts determined under paragraph (f)(3) of this 
section;
    (8) the reviewed year partner's safe harbor amount and, if 
applicable, interest safe harbor amount, as described under paragraph 
(g) of this section;
    (9) the date the statement is furnished to the reviewed year 
partner;
    (10) the partnership taxable year to which the adjustments relate; 
and
    (11) any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (f) Determination of each partner's share of adjustments, 
penalties, additions to tax, and additional amounts--(1) Adjustments 
and other amounts--(i) In general. Except as described in paragraph 
(f)(1)(ii), (f)(1)(iii), or (f)(2) of this section, the adjustments set 
forth in the statement described in paragraph (a) of this section and 
any amounts attributable to adjustments to the partnership's tax 
attributes are reported to the reviewed year partner in the same manner 
as each adjusted item was originally allocated to the reviewed year 
partner on the partnership return for the reviewed year or intervening 
year, as applicable.
    (ii) Adjusted item not reported on the partnership's return for the 
reviewed year. Except as described in paragraph (f)(1)(iii) of this 
section, if the adjusted item was not reported on the partnership 
return for the reviewed year or intervening year, as applicable, each 
reviewed year partner's share of the adjustments must be determined in 
accordance with how such items would have been allocated under rules 
that apply with respect to partnership allocations, including under the 
partnership agreement.
    (iii) Adjustments that specifically allocate items. If an 
adjustment involves an allocation of an item to a specific partner or 
in a specific manner, including a reallocation of an item, the reviewed 
year partner's share of the adjustment set forth in the statement is 
determined in accordance with the adjustment as finally determined (as 
described in paragraph (b)(1) of this section).
    (2) Treatment of modifications disregarded. If the reviewed year 
partner filed an amended return pursuant to Sec.  301.6225-3(c)(2) or 
entered into a closing agreement pursuant to Sec.  301.6225-3(c)(6) and 
the imputed underpayment under section 6225 was determined without 
regard to the adjusted items taken into account on the amended return 
or in the closing agreement, such adjustments are disregarded for 
purposes of determining each reviewed year partner's share of the 
adjustments under paragraph (f)(1) of this section. However, these 
modifications are listed separately on the statements described in 
paragraph (a) of this section.
    (3) Penalties, additions to tax, or additional amounts. Penalties, 
additions to tax, and additional amounts must be reported to each 
reviewed year partner in the same proportion as the reviewed year 
partner's share of the adjustment to which the penalty, addition to 
tax, or additional amount relates as determined in paragraph (f)(1) of 
this section. If a penalty, addition to tax, or additional amount does 
not relate to a specific adjustment, each reviewed year partner's share 
of the penalty, addition to tax, or additional amount is determined in 
accordance with how such items would have been allocated under rules 
that apply with respect to partnership allocations, including under the 
partnership agreement, unless it is allocated to a specific partner in 
a specific manner in a final determination of the adjustments, in which 
case it is allocated in accordance with that final determination. See 
paragraph (b)(1) of this section regarding when adjustments are finally 
determined.
    (g) Safe harbor amount--(1) In general. The partnership must 
calculate a safe harbor amount, which cannot be less than zero, for 
each reviewed year partner in accordance with paragraph (g)(2) of this 
section and an interest safe harbor amount for each reviewed year 
partner that is an individual in accordance with paragraph (g)(2). 
Except as provided in paragraph (g)(2)(ii) of this section, the rules 
of paragraph (f) of this section apply for purposes of paragraph (g) of 
this section.
    (2) Calculating the safe harbor amount--(i) In general. The safe 
harbor amount for each reviewed year partner is calculated in the same 
manner as the imputed underpayment under Sec.  301.6225-1 except that 
each reviewed year partner's share of the partnership adjustments on 
the statement described in paragraph (a) of this section (including any 
amounts attributable to adjustments to partnership tax attributes) are 
substituted as the partnership adjustments taken into account for 
purposes of determining the imputed underpayment under Sec.  301.6225-
1.
    (ii) Effect of modification on safe harbor amount--(A) In general. 
Except as described in paragraph (g)(2)(ii)(B) of this section, any 
modification of the imputed underpayment approved by the IRS, including 
modification under Sec.  301.6225-2(d)(4) (regarding rate 
modification), has no effect on the determination of the safe harbor 
amount for any partner.
    (B) Amended return and closing agreement. Notwithstanding paragraph 
(g)(2)(ii)(A) of this section, if the reviewed year partner filed an 
amended return pursuant to Sec.  301.6225-3(d)(2), or entered into a 
closing agreement pursuant to Sec.  301-6225-3(d)(6), and the imputed 
underpayment under section 6225 to which an election under Sec.  
301.6226-1 applies is determined without regard to the adjustments 
taken into account on the amended return or in the closing agreement, 
such adjustments are disregarded in determining that partner's safe 
harbor amount.
    (iii) Calculating the interest safe harbor amount. For partners who 
are individuals and who have calendar year taxable years, the 
partnership must also calculate an interest safe harbor amount. The 
interest safe harbor amount is calculated at the rate set forth in 
Sec.  301.6226-3(d)(4) from the due date (without extension) of the 
individual reviewed year partner's return for the first affected year 
(as defined in paragraph Sec.  301.6226-3(b)(2)) until the due date 
(without extension) of the individual reviewed year partner's return 
for the reporting year.
    (h) Coordination with other provisions under subtitle A of the 
Internal Revenue Code--(1) Statements furnished to qualified investment 
entities described in section 860. If a reviewed year partner is a 
qualified investment entity within the meaning of section 860(b) and 
the partner receives a statement described in paragraph (a) of this

[[Page 27394]]

section, the partner may be able to avail itself of the deficiency 
dividend procedure described in Sec.  301.6226-3(b)(4).
    (2) Liability for tax under section 7704(g)(3). An election under 
this section has no effect on a partnership's liability for any tax 
under section 7704(g)(3) (regarding the exception for electing 1987 
partnerships from the general rule that certain publicly traded 
partnerships are treated as corporations).
    (3) Adjustments subject to chapters 3 and 4 of subtitle A of the 
Internal Revenue Code.--[Reserved]
    (i) Applicability date--(1) In general. Except as provided in 
paragraph (i)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 13. Section 301.6226-3 is added to read as follows:


Sec.  301.6226-3  Adjustments Taken Into Account by Partners.

    (a) Tax imposed by chapter 1 increased by additional reporting year 
tax. The tax imposed by chapter 1 of subtitle A of the Internal Revenue 
Code (chapter 1 tax) for each reviewed year partner (as defined in 
Sec.  301.6241-1(a)(9)) for the taxable year that includes the date a 
statement was furnished in accordance with Sec.  301.6226-2 (the 
reporting year) is increased by the additional reporting year tax. The 
additional reporting year tax is either the aggregate of the adjustment 
amounts (determined in accordance with paragraph (b) of this section) 
or, if an election is made under paragraph (c) of this section, the 
safe harbor amount (determined in accordance with Sec.  301.6226-2(g)). 
In addition to being liable for the additional reporting year tax, a 
reviewed year partner must also pay for the reporting year the 
partner's share of any penalties, additions to tax, and additional 
amounts as reflected in the statement described in Sec.  301.6226-2 and 
any interest (as determined under paragraph (d) of this section).
    (b) Determining the aggregate of the adjustment amounts--(1) In 
general. For purposes of paragraph (a) of this section, the aggregate 
of the adjustment amounts is the aggregate of the correction amounts 
described in paragraphs (b)(2) and (b)(3) of this section. A correction 
amount cannot be less than zero, and any amount below zero after 
applying the rules in this paragraph (b) does not reduce any other 
correction amount or tax due.
    (2) Correction amount for the first affected year. The correction 
amount for the taxable year of the partner that includes the end of the 
reviewed year (the first affected year) is the amount by which the 
reviewed year partner's chapter 1 tax would increase for the first 
affected year if the partner's taxable income for such year was 
recomputed by taking into account the reviewed year partner's share of 
the partnership adjustments (as defined in Sec.  301.6241-1(a)(6)) 
reflected on the statement described in Sec.  301.6226-2 with respect 
to the partner. The correction amount is the amount by which the 
chapter 1 tax that would have been imposed for the first affected year 
if the items as adjusted in the statement described in Sec.  301.6226-2 
had been reported as such on the return for the first affected year 
exceeds the excess of--
    (i) The sum of--
    (A) The amount of chapter 1 tax shown by the partner on the return 
for the first affected year (which includes amounts shown on an amended 
return for such year, including an amended return filed under section 
6225(c)(2) by the reviewed year partner or an indirect partner (as 
defined in Sec.  301.6241-1(a)(4)) that holds its interest in the 
partnership through its interest in the reviewed year partner with 
respect to the first affected year of the indirect partner), plus
    (B) Amounts not so shown previously assessed (or collected without 
assessment) (as defined in Sec.  1.6664-2(d) of this chapter), less
    (ii) The amount of rebates made (as defined in Sec.  1.6664-2(e) of 
this chapter).
    The definition of correction amount also may be expressed as--

Correction amount = A - (B + C - D),

Where A = the amount of chapter 1 tax that would have been imposed 
had the items as adjusted been properly reported on the return for 
the first affected year; B = the amount shown as chapter 1 tax on 
the return for the first affected year (taking into account amended 
returns); C = amounts not so shown previously assessed (or collected 
without assessment); and D = the amount of rebates made.

    (3) Correction amount for the intervening years. The correction 
amount for all taxable years after the first affected year and before 
the reporting year (the intervening years) is the aggregate of the 
correction amounts determined for each intervening year. Determining 
the correction amount for each intervening year is a year-by-year 
determination. The correction amount for each intervening year is the 
amount by which the reviewed year partner's chapter 1 tax for such year 
would increase if the partner's taxable income for such year was 
recomputed by taking into account any adjustments to tax attributes (as 
defined in Sec.  301.6241-1(a)(10)) under this paragraph (b)(3). 
Accordingly, the correction amount for each intervening year is the 
amount by which the chapter 1 tax that would have been imposed for the 
intervening year if any tax attribute for the intervening year had been 
adjusted after taking into account the reviewed year partner's share of 
the adjustments for the first affected year as described in paragraph 
(b)(2) of this section and if any tax attribute for the intervening 
year had been adjusted after taking into account any adjustments to tax 
attributes in any prior intervening year(s) exceeds the excess of--
    (i) The sum of--
    (A) The amount of chapter 1 tax shown by the partner on the return 
for the intervening year (which includes amounts shown on an amended 
return for such year, including an amended return filed under section 
6225(c)(2) by a reviewed year partner or an indirect partner that holds 
its interest in the partnership through its interest in the reviewed 
year partner), plus
    (B) Amounts not so shown previously assessed (or collected without 
assessment) (as defined in Sec.  1.6664-2(d) of this chapter), over
    (ii) The amount of rebates made (as defined in Sec.  1.6664-2(e) of 
this chapter).
    The definition of correction amount also may be expressed as--

Correction amount = A - (B + C - D),

Where A = the amount of chapter 1 tax that would have been imposed 
for the intervening year; B = the amount shown as chapter 1 tax on 
the return for the intervening year (taking into account amended 
returns); C = amounts not so shown previously assessed (or collected 
without assessment); and D = the amount of rebates made.

    (4) Coordination of sections 860 and 6226. If a qualified 
investment entity (QIE) within the meaning of section 860(b) receives a 
statement described in Sec.  301.6226-2(a) and correctly makes a 
determination within the meaning of section 860(e)(4) that one or more 
of the adjustments reflected in the statement is an adjustment within 
the meaning of section 860(d) with respect to that QIE for a taxable 
year, the QIE may distribute deficiency dividends within the meaning of 
section 860(f) for that taxable year and avail itself of the deficiency 
dividend procedures set forth in section 860. If the QIE utilizes the 
deficiency dividend procedures with respect to adjustments in a 
statement

[[Page 27395]]

described in Sec.  301.6226-2(a), the QIE may claim a deduction for 
deficiency dividends against the adjustments furnished to the QIE in 
the statement in calculating any correction amounts under paragraphs 
(b)(2) and (b)(3) of this section, and interest on that correction 
amount under paragraph (d) of this section, to the extent that the QIE 
makes deficiency dividend distributions under section 860(f) and 
complies with all requirements of section 860 and the regulations 
thereunder. A deficiency dividends deduction under this paragraph 
(b)(4) and section 860(a) has no effect on a QIE's liability for any 
penalties reflected in a statement described in Sec.  301.6226-2(a).
    (c) Election to pay safe harbor amount. A reviewed year partner 
receiving a statement described in Sec.  301.6226-2 may elect under 
this paragraph (c) to pay the safe harbor amount shown on the statement 
in lieu of the additional reporting year tax determined under paragraph 
(b) of this section. The election under this paragraph (c) is made on 
the reviewed year partner's return for the reporting year (as defined 
in paragraph (a) of this section) in accordance with forms and 
instructions. If a reviewed year partner making an election under this 
paragraph (c) fails to report the safe harbor amount on the partner's 
timely-filed return (determined without regard to extension) for the 
reporting year, the additional reporting year tax for the reviewed year 
partner is determined under paragraph (b) of this section.
    (d) Interest--(1) Interest on the correction amounts. Interest on 
the correction amounts determined under paragraph (b) of this section 
is the aggregate of all interest calculated for each applicable taxable 
year at the rate set forth in paragraph (d)(4) of this section. For 
each applicable taxable year, interest on the correction amount is 
calculated from the due date (without extension) of the reviewed year 
partner's return for such applicable taxable year until the amount is 
paid. For purposes of this paragraph (d)(1), the term applicable 
taxable year means the reviewed year partner's taxable year affected by 
taking into account adjustments as described in paragraph (b) of this 
section (for instance, the first affected year and any intervening year 
in which there is a correction amount).
    (2) Interest on the safe harbor amount--(i) In general. Except as 
described in paragraph (d)(2)(ii) of this section, in the case of an 
election under paragraph (c) of this section, interest on the safe 
harbor amount is calculated at the rate set forth in paragraph (d)(4) 
of this section from the due date (without extension) of the reviewed 
year partner's return for the first affected year (as defined in 
paragraph (b)(2) of this section) until the amount is paid.
    (ii) Election to pay interest safe harbor amount. In the case of an 
election under paragraph (c) of this section, a reviewed year partner 
who is an individual and who has a calendar year taxable year may elect 
to pay the interest safe harbor amount in lieu of calculating the 
interest on the safe harbor amount as described in paragraph (d)(2)(i) 
of this section. The election under this paragraph (d)(2)(ii) is made 
on the reviewed year partner's return for the reporting year (as 
defined in paragraph (a) of this section) in accordance with forms and 
instructions. If a reviewed year partner making an election under this 
paragraph (d)(2)(ii) fails to pay the interest safe harbor amount in 
full on or before the due date (without extension) for the return on 
which the election is made, interest on the safe harbor amount is 
determined under paragraph (d)(2)(i) of this section.
    (3) Interest on penalties. Interest on any penalties, additions to 
tax, or additional amounts allocated to a reviewed year partner in a 
statement described in Sec.  301.6226-2 is calculated at the rate set 
forth in paragraph (d)(4) of this section from the due date (without 
extension) of the reviewed year partner's return for the first affected 
year (as defined in paragraph (b)(2) of this section) until the amount 
is paid.
    (4) Rate of interest. For purposes of paragraph (d) of this 
section, interest is calculated using the underpayment rate under 
section 6621(a)(2) by substituting ``5 percentage points'' for ``3 
percentage points'' in section 6621(a)(2)(B).
    (e) Pass-through partners.--[Reserved]
    (f) Partners that are foreign entities.--[Reserved]
    (g) Examples. The following examples illustrate the rules of this 
section. For purposes of these examples, each partnership and partner 
has a calendar year taxable year (unless otherwise stated), no 
modifications are requested by any partnership under Sec.  301.6225-2 
(unless otherwise stated), and the highest rate of income tax in effect 
for all taxpayers is 40 percent for all relevant periods.

    Example 1. On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $1,000 and charitable 
contributions of $400. On June 1, 2023, the IRS mails a notice of 
final partnership adjustment (FPA) to Partnership for Partnership's 
2020 year disallowing the charitable contribution in its entirety 
and asserting an imputed underpayment plus a penalty of $32 (a 20 
percent accuracy-related penalty under section 6662(b)). Partnership 
makes a timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the imputed underpayment in the FPA for 
Partnership's 2020 year and files a timely petition in the Tax Court 
challenging the partnership adjustments. The Tax Court determines 
that Partnership is not entitled to any of the claimed $400 in 
charitable contributions and upholds the penalty of $32. The 
decision regarding Partnership's 2020 tax year becomes final on 
December 15, 2025. Pursuant to Sec.  301.6225-2(b)(1), the 
partnership adjustments are finally determined on December 15, 2025. 
On February 1, 2026, Partnership files the statements described 
under Sec.  301.6226-2 with the IRS and furnishes to partner A, an 
individual who was a partner in Partnership during 2020, a statement 
described in Sec.  301.6226-2. A had a 25 percent interest in 
Partnership during all of 2020 and was allocated 25 percent of all 
items from Partnership for that year. The statement shows A's share 
of ordinary income reported on Partnership's return for the reviewed 
year of $250 and A's share of the charitable contribution reported 
on Partnership's return for the reviewed year of $100. The statement 
also shows no adjustment to A's share of ordinary income, but does 
show an adjustment to A's share of the charitable contribution, a 
reduction of $100 resulting in $0 charitable contribution allocated 
to A from Partnership for 2020. In addition, the statement reports 
$8 as A's share of the penalty (25 percent of $32) related to the 
imputed underpayment resulting from the denial of the charitable 
contribution. The statement also shows A's safe harbor amount and 
interest safe harbor amount, as determined under Sec.  301.6226-
2(g). A does not elect to pay the safe harbor amount and therefore 
must pay the additional reporting year tax as determined in 
accordance with paragraph (b) of this section, in addition to A's 
share of the penalty and interest. A computes his additional 
reporting year tax as follows. First, A determines the correction 
amount for the first affected year (the 2020 taxable year) by taking 
into account A's share of the partnership adjustment (<100> 
reduction in charitable contribution) for the 2020 taxable year. A 
determines the amount by which his chapter 1 tax for 2020 would have 
increased if the $100 adjustment to the charitable contribution from 
Partnership were taken into account for that year. There is no 
adjustment to tax attributes in A's intervening years as a result of 
the adjustment to the charitable contribution for 2020. Therefore, 
A's aggregate of the adjustment amounts is the correction amount for 
2020, A's first affected year. In addition to the aggregate of the 
adjustment amount being added to the chapter 1 tax that A owes for 
2026, the reporting year, A's tax liability for 2026 includes the $8 
penalty and any interest on the correction amount for the first 
affected year and the penalty determined in accordance with 
paragraph (d) of this section. Interest on the correction amount for 
the first affected tax year runs from April 15, 2021, the due date 
of A's 2020 return (the first affected tax year) until A pays this 
amount. In addition, interest runs on the $8 penalty from April 15, 
2021, the due date of A's 2020

[[Page 27396]]

return for the first affected year until A pays this amount. On his 
2026 income tax return, A must report the additional reporting year 
tax determined in accordance with section (b) of this section, which 
is the correction amount for 2020, plus A's share of the accuracy-
related penalty determined at the partnership level ($8), and 
interest determined in accordance with paragraph (d) of this section 
on the correction amount for 2020 and the penalty.
    Example 2. The facts are the same as in Example 1 of this 
paragraph (g), except that A makes the elections under paragraphs 
(c) and (d)(ii) of this section to pay the safe harbor amount and 
interest safe harbor amount. In addition to the safe harbor amount 
and the interest safe harbor amount, A must also pay the $8 penalty 
allocated to A on the statement. Therefore, on his 2026 income tax 
return, A must report the additional reporting year tax (in this 
case, the safe harbor amount), the penalty of $8, and the interest 
safe harbor amount.
    Example 3. On its partnership return for the 2020 tax year, 
Partnership reported an ordinary loss of $500 million. On June 1, 
2023, the IRS mails an FPA to Partnership for the 2020 taxable year 
determining that $300 million of the $500 million in ordinary loss 
should be recharacterized as a long-term capital loss. Partnership 
has no long-term capital gain for its 2020 tax year. The FPA for 
Partnership's 2020 tax year reflects an adjustment of an increase in 
ordinary income of $300 million (as a result of the disallowance of 
the recharacterization of $300 million from ordinary loss to long-
term capital loss) and an imputed underpayment related to that 
adjustment, as well as an adjustment of an additional $300 million 
in long-term capital loss for 2020 which does not result in an 
imputed underpayment pursuant to under Sec.  301.6225-1(c)(2)(ii). 
Partnership makes a timely election under section 6226 in accordance 
with Sec.  301.6226-1 with respect to the imputed underpayment in 
the FPA and does not file a petition for readjustment under section 
6234. Accordingly, under Sec.  301.6226-1(b)(2) and Sec.  301.6225-
3(b)(6), the adjustment year partners (as defined in Sec.  301.6241-
1(a)(2)) do not take into account the $300 million long-term capital 
loss that does not result in an imputed underpayment. Rather, the 
reviewed year partners will take into account the $300 million long-
term capital loss. The time to file a petition expires on August 30, 
2023. Pursuant to Sec.  301.6225-2(b), the partnership adjustments 
become finally determined on August 30, 2023. On September 30, 2023, 
Partnership files with the IRS statements described in Sec.  
301.6226-2 and furnishes statements to all of its reviewed year 
partners in accordance with Sec.  301.6226-2. One partner of 
Partnership in 2020, B (an individual), had a 25 percent interest in 
Partnership during all of 2020 and was allocated 25 percent of all 
items from Partnership for that year. The statement filed with the 
IRS and furnished to B shows B's allocable share of the ordinary 
loss reported on Partnership's return for the 2020 taxable year as 
$125 million. The statement also shows an adjustment to B's 
allocable share of the ordinary loss in the amount of <$75 million>, 
resulting in a corrected ordinary loss allocated to B of $50 million 
for taxable year 2020 ($125 million originally allocated to B less 
$75 million which is B's share of the adjustment to the ordinary 
loss). In addition, the statement shows an increase to B's share of 
long-term capital loss in the amount of $75 million (B's share of 
the adjustment that did not result in the imputed underpayment with 
respect to Partnership). The statement also shows B's safe harbor 
amount and interest safe harbor amount, as determined under Sec.  
301.6226-2(g). B does not elect to pay the safe harbor amount and 
therefore must pay the additional reporting year tax as determined 
in accordance with paragraph (b) of this section. B computes his 
additional reporting year tax as follows. First, B determines the 
correction amount for the first affected year (the 2020 taxable 
year) by taking into account B's share of the partnership 
adjustments (a $75 million reduction in ordinary loss and an 
increase of $75 million in capital loss) for the 2020 taxable year. 
B determines the amount by which his chapter 1 tax for 2020 would 
have increased if the $75 adjustment to ordinary loss and the $75 
million adjustment to capital loss from Partnership were taken into 
account for that year. Second, B determines if there is any increase 
in chapter 1 tax for any intervening year as a result of the 
adjustment to the ordinary and capital losses for 2020. B's 
aggregate of the adjustment amounts is the correction amount for 
2020, B's first affected year plus any correction amounts for any 
intervening years. B is also liable for any interest on the 
correction amount for the first affected year and for any 
intervening year as determined in accordance with paragraph (d) of 
this section.
    Example 4. On its partnership return for the 2020 tax year, 
Partnership reported ordinary income of $100 million and a capital 
gain of $40 million. Partnership had four equal partners during the 
2020 tax year: E, F, G, and H, all of whom were individuals. On its 
partnership return for the 2020 tax year, the entire capital gain 
was allocated to partner E and the ordinary income was allocated to 
all partners based on their equal (25 percent) interest in 
Partnership. The IRS initiates an administrative proceeding with 
respect to Partnership's 2020 taxable year and determines that the 
capital gain should have been allocated equally to all four partners 
and that Partnership should have recognized an additional $10 
million in ordinary income. No modifications were approved by the 
IRS and no penalties are imposed. On June 1, 2023, the IRS mails an 
FPA to Partnership reflecting the reallocation of the $40 million 
capital gain so that F, G, and H each have $10 million increase in 
capital gain and E has a $30 million reduction in capital gain for 
2020. In addition, the FPA reflects the partnership adjustment 
increasing ordinary income by $10 million. The FPA reflects a 
general imputed underpayment with respect to the increase in 
ordinary income and a specific imputed underpayment with respect to 
the increase in capital gain allocated to F, G, and H. In addition, 
the FPA reflects a $30 million partnership adjustment that does not 
result in an imputed underpayment, that is, the reduction of $30 
million in capital gain with respect to E. Partnership makes a 
timely election under section 6226 in accordance with Sec.  
301.6226-1 with respect to the specific imputed underpayment 
relating to the reallocation of capital gain. Partnership does not 
file a petition for readjustment under section 6234. The time to 
file a petition expires on August 30, 2023. Pursuant to Sec.  
301.6225-2(b), the partnership adjustments become finally determined 
on August 30, 2023. Partnership timely pays and reports the general 
imputed underpayment relating to the partnership adjustment to 
ordinary income. On September 30, 2023, Partnership files with the 
IRS statements described in Sec.  301.6226-2 and furnishes 
statements to its partners reflecting their share of the partnership 
adjustments as finally determined in the FPA that relate to the 
specific imputed underpayment, that is, the reallocation of capital 
gain. The statements for F, G, and H each reflect a partnership 
adjustment of an additional $10 million of capital gain for 2020. 
The statements also show that each partner's safe harbor amount and 
interest safe harbor amount, determined under Sec.  301.6226-2(g). 
F, G, and H elect to pay the safe harbor amount and interest safe 
harbor amount. The statement for E reflects a partnership adjustment 
of a reduction of $10 million of capital gain for 2020. The 
statement also reflects that E's safe harbor amount, as determined 
under Sec.  301.6226-2(g), is $0 (<$10 million> multiplied by 40 
percent but not less than zero). F elects to pay the safe harbor 
amount, which is zero.
    Example 5. On its partnership return for the 2020 taxable year, 
Partnership reported a capital loss of $5 million. During an 
administrative proceeding with respect to Partnership's 2020 taxable 
year, the IRS mails a notice of proposed partnership adjustment 
(NOPPA) in which it proposes to disallow $2 million of the reported 
$5 million capital loss. No penalties are imposed with respect to 
the $2 million adjustment. F, a C corporation partner with a 50 
percent interest in Partnership, received 50 percent of all capital 
losses for 2020. As part of the modification process described in 
Sec.  301.6225-2(d)(2) F files an amended return for 2020 taking 
into account F's share of the partnership adjustment ($1 million 
reduction in capital loss) and pays the tax owed for 2020, including 
interest. Also as part of the modification process, F also files 
amended returns for 2021 and 2022 and paid additional tax (and 
interest) for these years because the reduction in capital loss for 
2020 affected the tax due from F for 2021 and 2022. See Sec.  
301.6225-2(d)(2)(iv). The reduction of the capital loss in 2020 did 
not affect any other taxable year of F. The IRS approves the 
modification with respect to F and on June 1, 2023, mails an FPA to 
Partnership for Partnership's 2020 year reflecting the partnership 
adjustment reducing the capital loss in the amount of $2 million. 
The FPA also reflects the modification to the imputed underpayment 
based on the amended returns filed by F taking into account F's 
share of the reduction in the capital loss. Partnership makes a 
timely election under section 6226 in

[[Page 27397]]

accordance with Sec.  301.6226-1 with respect to the imputed 
underpayment in the FPA for Partnership's 2020 year and files a 
timely petition in the Tax Court challenging the partnership 
adjustments. The Tax Court upholds the determinations in the FPA and 
the decision regarding Partnership's 2020 tax year becomes final on 
December 15, 2025. Pursuant to Sec.  301.6225-2(b)(1), the 
partnership adjustments are finally determined on December 15, 2025. 
On February 1, 2026, Partnership files the statements described 
under Sec.  301.6226-2 with the IRS and furnishes to its partners 
statements reflecting their shares of the partnership adjustment. 
The statement issued to F reflects F's share of the partnership 
adjustment for Partnership's 2020 taxable year as finally determined 
by the Tax Court. The statement shows F's share of the capital loss 
reported on Partnership's return for the reviewed year of $1 million 
and the $1 million reduction in capital losses taken into account by 
F as part of the amended return modification. The statement shows 
that F's safe harbor amount, as determined under Sec.  301.6226-
2(g), is $0 ([$1 million adjustment less the $1 million taken into 
account in the amended return] multiplied by 40 percent). F elects 
to pay the safe harbor amount, which is zero.

    (h) Applicability date--(1) In general. Except as provided in 
paragraph (h)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 14. Section 301.6226-4 is added to read as follows:


Sec.  301.6226-4  Adjustments to partners' outside bases and capital 
accounts and a partnership's basis and book value in property.--
[Reserved]

0
Par. 15. Section 301.6227-1 is added to read as follows:


Sec.  301.6227-1  Administrative adjustment request by partnership.

    (a) In general. A partnership may file a request for an 
administrative adjustment with respect to one or more items of income, 
gain, loss, deduction, or credit of the partnership (as defined in 
Sec.  301.6221(a)-1(b)(1)) and any partner's distributive share thereof 
(as described in Sec.  301.6221(a)-1(b)(2)) for any partnership taxable 
year. When filing an administrative adjustment request (AAR), the 
partnership must determine whether the adjustments requested in the AAR 
result in an imputed underpayment (as defined in Sec.  301.6241-
1(a)(3)) in accordance with Sec.  301.6227-2(a) for the reviewed year 
(as defined in Sec.  301.6241-1(a)(8)). If the adjustments requested in 
the AAR result in an imputed underpayment, the partnership must take 
the adjustments into account under the rules described in Sec.  
301.6227-2(b) unless the partnership makes an election under Sec.  
301.6227-2(c), in which case each reviewed year partner (as defined in 
Sec.  301.6241-1(a)(9)) must take the adjustments into account in 
accordance with Sec.  301.6227-3. If the adjustments requested in the 
AAR do not result in an imputed underpayment (as determined under Sec.  
301.6227-2(a)), such adjustments must be taken into account by the 
reviewed year partners (as defined in Sec.  301.6241-1(a)(9)) in 
accordance with Sec.  301.6227-3. A partner may not file an AAR except 
if the partner is doing so on behalf of the partnership in the 
partner's capacity as the partnership representative designated under 
section 6223 or if the partner is a partnership-partner (as defined in 
Sec.  301.6241-1(a)(7)) filing an AAR under Sec.  301.6227-3(c). In 
addition, a partnership may not file an AAR solely for the purpose of 
allowing the partnership to change the designation of a partnership 
representative. See Sec.  301.6223-1 (regarding designation of the 
partnership representative).
    (b) Time for filing an AAR. An AAR may only be filed by a 
partnership with respect to a partnership taxable year after a 
partnership return for that taxable year has been filed with the 
Internal Revenue Service (IRS). A partnership may not file an AAR with 
respect to a partnership taxable year more than three years after the 
later of the date the partnership return for such partnership taxable 
year was filed or the last day for filing such partnership return 
(determined without regard to extensions). In no event may an AAR be 
filed for a partnership taxable year after a notice of administrative 
proceeding with respect to such taxable year has been mailed by the IRS 
under section 6231.
    (c) Form and manner for filing an AAR--(1) In general. An AAR, 
including any required statements, forms, and schedules as described in 
this section, must be filed with the IRS in accordance with the forms, 
instructions, and other guidance prescribed by the IRS, and must be 
signed under penalties of perjury by the partnership representative (as 
defined in section 6223(a) and the regulations thereunder).
    (2) Contents of AAR filed with the IRS. A valid AAR filed with the 
IRS must include--
    (i) The adjustments requested,
    (ii) If a reviewed year partner is required to take into account 
the adjustments requested under Sec.  301.6227-3, statements described 
in paragraph (e) of this section, including any transmittal with 
respect to such statements required by forms, instructions, and other 
guidance, and
    (iii) Other information prescribed by the IRS in forms, 
instructions, or other guidance.
    (d) Copy of statement furnished to reviewed year partners in 
certain cases. If a reviewed year partner is required to take into 
account adjustments requested in an AAR under Sec.  301.6227-3, the 
partnership must furnish a copy of the statement described in paragraph 
(e) of this section to the reviewed year partner to whom the statement 
relates in accordance with the forms, instructions and other guidance 
prescribed by the IRS. If the partnership mails the statement, it must 
mail the statement to the current or last address of the reviewed year 
partner that is known to the partnership. The statement must be 
furnished to the reviewed year partner on the date the AAR is filed 
with the IRS.
    (e) Statements--(1) Contents. Each statement described in this 
paragraph (e) must include the following information:
    (i) The name and correct TIN of the reviewed year partner to whom 
the statement is being furnished;
    (ii) the current or last address of the partner that is known to 
the partnership;
    (iii) the reviewed year partner's share of items as originally 
reported on statements furnished to the partner under section 6031(b) 
and, if applicable, section 6227;
    (iv) the reviewed year partner's share of the adjustments as 
described under paragraph (c)(2) of this section;
    (v) the date the statement is furnished to the partner;
    (vi) the partnership taxable year to which the adjustments relate; 
and
    (vii) any other information required by forms, instructions, and 
other guidance prescribed by the IRS.
    (2) Determination of each partner's share of adjustments--(i) In 
general. Except as provided in paragraphs (e)(2)(ii) and (iii) of this 
section, each reviewed year partner's share of the adjustments 
requested in the AAR is determined in the same manner as each adjusted 
item was originally allocated to the reviewed year partner on the 
partnership return for the reviewed year.
    (ii) Adjusted item not reported on the partnership's return for the 
reviewed year. Except as provided in paragraph (e)(2)(iii) of this 
section, if the adjusted item was not reported on the partnership 
return for the reviewed year, each reviewed year partner's share

[[Page 27398]]

of the adjustments must be determined in accordance with how such items 
would have been allocated under rules that apply with respect to 
partnership allocations, including under the partnership agreement.
    (iii) Allocation adjustments. If an adjustment involves allocation 
of an item to a specific partner or in a specific manner, including a 
reallocation of an item, the reviewed year partner's share of the 
adjustment requested in the AAR is determined in accordance with the 
AAR.
    (f) Binding nature of AAR. Filing an AAR as described in paragraph 
(c) of this section and furnishing statements as described in paragraph 
(d) of this section are actions of the partnership under section 6223 
and the regulations thereunder. Accordingly, unless determined 
otherwise by the IRS, each partner's share of the adjustments set forth 
in a statement described in paragraph (e) of this section are binding 
on the partner pursuant to section 6223. A partner may not treat items 
on the partner's return inconsistently with how those items are treated 
on the statement that is filed with the IRS under paragraph (c) of this 
section. See Sec.  301.6222-1(c)(2) (regarding items the treatment of 
which a partner is bound to under section 6223).
    (g) Administrative proceeding for a taxable year for which an AAR 
is filed. Within the period described in section 6235, the IRS may 
initiate an administrative proceeding with respect to the partnership 
for any partnership taxable year regardless of whether the partnership 
filed an AAR with respect to such taxable year and may adjust any item 
subject to adjustment under subchapter C of chapter 63 of the Internal 
Revenue Code, including any item adjusted in an AAR filed by the 
partnership. The amount of an imputed underpayment determined by the 
partnership under Sec.  301.6227-2(a)(1), including any modifications 
determined by the partnership under Sec.  301.6227-2(a)(2), may be re-
determined by the IRS.
    (h) Notice of change to the amount of creditable foreign tax 
expenditures. [Reserved]
    (i) Applicability date--(1) In general. Except as provided in 
paragraph (h)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 16. Section 301.6227-2 is added to read as follows:


Sec.  301.6227-2  Determining and accounting for adjustments requested 
in an administrative adjustment request by the partnership.

    (a) Determining whether adjustments result in an imputed 
underpayment--(1) Determination of the imputed underpayment. The 
determination of whether adjustments requested in an administrative 
adjustment request (AAR) result in an imputed underpayment (as defined 
in Sec.  301.6241-1(a)(3)) in the reviewed year (as defined in Sec.  
301.6241-1(a)(8)) and the determination of the amount of the imputed 
underpayment, if any, is made in accordance with the rules under Sec.  
301.6225-1.
    (2) Modification of imputed underpayment for purposes of this 
section. A partnership may request modification of the amount of the 
imputed underpayment determined under paragraph (a)(1) of this section 
using only the provisions under Sec.  301.6225-2(d)(3) (regarding tax-
exempt partners), Sec.  301.6225-2(d)(4) (regarding modification of 
applicable tax rate), Sec.  301.6225-2(d)(5) (regarding specified 
passive activity losses), Sec.  301.6225-2(d)(7) (regarding certain 
qualified investment entities), or as provided in forms, instructions, 
or other guidance prescribed by the IRS with respect to AARs. The 
partnership may not modify an imputed underpayment resulting from 
adjustments requested in an AAR except as described in this paragraph 
(a)(2). When requesting modification of the amount of an imputed 
underpayment under this paragraph (a)(2):
    (i) The partnership is not required to seek the approval from the 
Internal Revenue Service (IRS) prior to modifying the amount of any 
imputed underpayment under paragraph (a)(1) of this section as reported 
on the AAR; and
    (ii) As part of the AAR filed with the IRS in accordance with 
forms, instructions, and other guidance, the partnership must--
    (A) Notify the IRS of any modification,
    (B) Describe the effect of the modification on the imputed 
underpayment,
    (C) Provide an explanation of the basis for such modification, and
    (D) Provide documentation to support the partnership's eligibility 
for the modification.
    (b) Adjustments resulting in an imputed underpayment taken into 
account by the partnership--(1) In general. Except in the case of an 
election under paragraph (c) of this section, a partnership must pay 
any imputed underpayment (as determined and modified under paragraph 
(a) of this section) resulting from the adjustments requested in an AAR 
on the date the partnership files the AAR. For the rules applicable to 
the partnership's expenditure for the imputed underpayment, as well as 
any penalties and interest paid by the partnership with respect to the 
imputed underpayment, see Sec.  301.6241-4.
    (2) Penalties and interest. The IRS may impose a penalty, addition 
to tax, and additional amount with respect to an imputed underpayment 
determined under this section in accordance with section 6233(a)(3) 
(penalties determined from the reviewed year). In addition, the IRS may 
impose a penalty, addition to tax, and additional amount with respect 
to a failure to pay an imputed underpayment on the date an AAR is filed 
in accordance with section 6233(b)(3) (penalties with respect to the 
adjustment year return). Interest on the imputed underpayment is 
determined under chapter 67 for the period beginning on the date after 
the due date of the partnership return for the reviewed year (as 
defined in Sec.  301.6241-1(a)(8)) (determined without regard to 
extension) and ending on the earlier of the date payment of the imputed 
underpayment is made, or the due date of the partnership return for the 
adjustment year (as defined in Sec.  301.6241-1(a)(1)). See section 
6233(a)(2). In the case of any failure to pay an imputed underpayment 
before the due date of the partnership return for the adjustment year, 
interest is determined in accordance with section 6233(b)(2).
    (c) Election to have adjustments resulting in an imputed 
underpayment taken into account by reviewed year partners. In lieu of 
paying the imputed underpayment under paragraph (b) of this section, 
the partnership may elect to have each reviewed year partner (as 
defined in Sec.  301.6241-1(a)(9)) take into account the adjustments 
requested in the AAR in accordance with Sec.  301.6227-3. A partnership 
makes an election under this paragraph (c) at the time the AAR is filed 
in accordance with the forms, instructions, and other guidance 
prescribed by the IRS. If the partnership makes a valid election in 
accordance with this paragraph (c), the partnership is not required to 
pay the imputed underpayment resulting from the adjustments requested 
in the AAR. Rather, each reviewed year partner must take into account 
their share of the adjustments requested in the AAR in accordance with 
Sec.  301.6227-3. If an

[[Page 27399]]

election is made under this paragraph (c), modifications requested 
under paragraph (a)(2) of this section are disregarded and all 
adjustments requested in the AAR must be taken into account by each 
reviewed year partner in accordance with Sec.  301.6227-3.
    (d) Adjustments not resulting in an imputed underpayment. If the 
adjustments requested in an AAR do not result in an imputed 
underpayment (as determined under paragraph (a) of this section), the 
partnership must furnish statements to each reviewed year partner and 
file such statements with the IRS in accordance with Sec.  301.6227-1. 
Each reviewed year partner must take into account its share of the 
adjustments requested in the AAR in accordance with Sec.  301.6227-3.
    (e) Applicability date--(1) In general. Except as provided in 
paragraph (e)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 17. Section 301.6227-3 is added to read as follows:


Sec.  301.6227-3  Adjustments requested in an administrative adjustment 
request taken into account by reviewed year partners.

    (a) In general. Each reviewed year partner (as defined in Sec.  
301.6241-1(a)(9)) is required to take into account its share of 
adjustments requested in an administrative adjustment request (AAR) if 
the partnership makes an election under Sec.  301.6227-2(c) with 
respect to such AAR. In addition, each reviewed year partner must take 
into account its share of adjustments requested in an AAR that do not 
result in an imputed underpayment (as defined in Sec.  301.6241-
1(a)(3)) as determined under Sec.  301.6227-2(a). Each reviewed year 
partner receiving a statement furnished in accordance with Sec.  
301.6227-1(b) must take into account adjustments reflected in the 
statement in the taxable year that includes the date the statement is 
furnished (reporting year) in accordance with paragraph (b) of this 
section.
    (b) Adjustments taken into account by the reviewed year partner in 
the reporting year--(1) In general. A reviewed year partner that is 
furnished a statement described in paragraph (a) of this section must 
treat the statement as if it were issued under section 6226(a)(2) and, 
on or before the due date for the reporting year must pay the 
additional reporting year tax (as defined in Sec.  301.6226-3(a)), if 
any, determined after taking into account that partner's share of the 
adjustments requested in the AAR in accordance with Sec.  301.6226-3. 
For purposes of this paragraph (b), the rules under Sec.  301.6226-3(c) 
(regarding the election to pay the safe harbor amount), Sec.  301.6226-
3(d)(2) (regarding interest on the safe harbor amount), and Sec.  
301.6226-3(d)(4) (regarding the increased rate of interest) do not 
apply, and the last sentence in Sec.  301.6226-3(b)(1) (regarding the 
prohibition on correction amounts being less than zero) is disregarded. 
Nothing in this section entitles any partner to a refund of tax imposed 
by chapter 1 of subtitle A of the Internal Revenue Code (chapter 1 tax) 
to which such partner is not entitled. For instance, a partnership-
partner (as defined in Sec.  301.6241-1(a)(7)) may not claim a refund 
with respect to its share of any adjustment.
    (2) No additional reporting year tax due. A reviewed year partner 
may reduce chapter 1 tax for the reporting year by the amount 
determined under paragraph (b)(1) of this section.
    (3) Examples. The following examples illustrate the rules of this 
paragraph (b).

    Example 1. In 2022, partner A, an individual, received a 
statement described in paragraph (a) of this section from 
Partnership with respect to Partnership's 2020 taxable year. Both A 
and Partnership are calendar taxpayers and A is not claiming any 
refundable tax credit in 2020. The only adjustment shown on the 
statement is an increase in ordinary losses. Taking into account the 
adjustment, A determines that his additional reporting year tax for 
2022 (the reporting year) is <$100> (that is, a reduction of $100.) 
A's chapter 1 tax for 2022 (without regard to any additional 
reporting year tax) is $150. Applying the rules in paragraph (b)(2) 
of this section, A's chapter 1 tax for 2022 is reduced to $50 ($150 
chapter 1 tax without regard to the additional reporting year tax 
plus <$100> additional reporting year tax).
    Example 2. The facts are the same as in Example 1 of this 
paragraph (b)(3), except A's chapter 1 tax for 2022 (without regard 
to any additional reporting year tax) is $75. Applying the rules in 
paragraph (b)(2) of this section, A's chapter 1 tax for 2022 is 
reduced by the <$100> of additional reporting year tax. Accordingly, 
A's chapter 1 tax for 2022 is $0 ($75 chapter 1 tax without regard 
to any additional reporting year tax plus <$100> of additional 
reporting year tax), A owes no chapter 1 tax for 2022, and A may 
make a claim for refund with respect to the overpayment of $25.

    (c) Reviewed year partners that are pass-through partners.--
[RESERVED]
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 18. Section 301.6241-1 is added to read as follows:


Sec.  301.6241-1  Definitions.

    (a) Definitions. For purposes of subchapter C of chapter 63 of the 
Internal Revenue Code--
    (1) Adjustment year. The term adjustment year means the partnership 
taxable year in which--
    (i) In the case of an adjustment pursuant to the decision of a 
court in a proceeding brought under section 6234, such decision becomes 
final;
    (ii) In the case of an administrative adjustment request (AAR) 
under section 6227, such AAR is made; or
    (iii) In any other case, a notice of final partnership adjustment 
is mailed under section 6231or, if the partnership waives the 
restrictions under section 6232(b) (regarding limitations on 
assessment), the date the waiver is executed by the IRS.
    (2) Adjustment year partner. The term adjustment year partner means 
any person who held an interest in a partnership at any time during the 
adjustment year.
    (3) Imputed underpayment. The term imputed underpayment means the 
amount determined in accordance with Sec.  301.6225-1.
    (4) Indirect partner. The term indirect partner means any person 
who has an interest in a partnership through their interest in one or 
more pass-through partners (as defined in paragraph (a)(5) of this 
section).
    (5) Pass-through partner. The term pass-through partner means a 
pass-through entity that holds an interest in a partnership. A pass-
through entity is a partnership as described in Sec.  301.7701-2(c)(1) 
(including a foreign entity that is classified as a partnership under 
Sec.  301.7701-3(b)(2)(i)(A) or (c)), an S corporation, a trust (other 
than a trust described in the next sentence), and a decedent's estate. 
For purposes of this paragraph (a)(5), a pass-through entity is not a 
disregarded entity described in Sec.  301.7701-2(c)(2)(i) or a trust 
that is wholly owned by only one person, whether the grantor or another 
person, and the trust reports the owner's information to payors under 
Sec.  1.671-4(b)(2)(i)(A).
    (6) Partnership adjustment. The term partnership adjustment means 
any adjustment to any item of income, gain, loss, deduction, or credit 
of a partnership (as defined in

[[Page 27400]]

Sec.  301.6221(a)-1(b)(1)), or any partner's distributive share thereof 
(as described in Sec.  301.6221(a)-1(b)(2)).
    (7) Partnership-partner. The term partnership-partner means a 
partnership that holds an interest in another partnership.
    (8) Reviewed year. The term reviewed year means the partnership 
taxable year to which a partnership adjustment relates.
    (9) Reviewed year partner. The term reviewed year partner means any 
person who held an interest in a partnership at any time during the 
reviewed year.
    (10) Tax attribute. A tax attribute is anything that can affect, 
with respect to a partnership or a partner, the amount or timing of an 
item of income, gain, loss, deduction, or credit (as defined in Sec.  
301.6221(a)-1(b)(1)) or that can affect the amount of tax due in any 
taxable year. Examples of tax attributes include, but are not limited 
to, basis and holding period, as well as the character of items of 
income, gain, loss, deduction, or credit and carryovers and carrybacks 
of such items.
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 19. Section 301.6241-2 is added to read as follows:


Sec.  301.6241-2  Bankruptcy of the Partnership.

    (a) Coordination between Title 11 and proceedings under subchapter 
C of chapter 63--(1) In general. If a partnership is a debtor in a case 
under Title 11 of the United States Code (Title 11 case), the running 
of any period of limitations under section 6235 with respect to the 
time for making a partnership adjustment (as defined in Sec.  301.6241-
1(a)(6)) and under sections 6501 and 6502 with respect to the 
assessment or collection of any imputed underpayment (as defined in 
Sec.  301.6241-1(a)(3)) determined under subchapter C of chapter 63 of 
the Internal Revenue Code (subchapter C of chapter 63) is suspended 
during the period the Internal Revenue Service (IRS) is prohibited by 
reason of the Title 11 case from making the adjustment, assessment, or 
collection until--
    (i) 60 days after the suspension ends, for adjustments or 
assessments, and
    (ii) 6 months after the suspension ends, for collection.
    (2) Interaction with section 6232(b). The filing of a proof of 
claim or request for payment (or the taking of any other action) in a 
Title 11 case is not be treated as an action prohibited by section 
6232(b) (regarding limitations on assessment).
    (3) Suspension of the time for judicial review. In a Title 11 case, 
the running of the period specified in section 6234 (regarding judicial 
review of partnership adjustments) is suspended during the period 
during which the partnership is prohibited by reason of the Title 11 
case from filing a petition under section 6234, and for 60 days 
thereafter.
    (4) Actions not prohibited. The filing of a petition under Title 11 
does not prohibit the following actions:
    (i) an administrative proceeding with respect to a partnership 
under subchapter C of chapter 63;
    (ii) the mailing of any notice with respect to a proceeding with 
respect to a partnership under subchapter C of chapter 63, including:
    (A) A notice of administrative proceeding,
    (B) a notice of proposed partnership adjustment, and
    (C) a notice of final partnership adjustment;
    (iii) a demand for tax returns;
    (iv) the assessment of any tax, including the assessment of any 
imputed underpayment with respect to a partnership; and
    (v) the issuance of notice and demand for payment of an assessment 
under subchapter C of chapter 63 (but see section 362(b)(9)(D) of Title 
11 of the United States Code regarding the timing of when a tax lien 
takes effect by reason of such assessment).
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 20. Section 301.6241-3 is added to read as follows:


Sec.  301.6241-3   Treatment where a Partnership Ceases to Exist.

    (a) Former partners take adjustments into account--(1) In general. 
Except as described in paragraphs (a)(2) and (a)(3) of this section, if 
the Internal Revenue Service (IRS) determines that any partnership 
(including a partnership-partner as defined in Sec.  301.6241-1(a)(7)) 
ceases to exist (as defined in paragraph (b)(2) of this section) before 
any partnership adjustment (as defined in Sec.  301.6241-1(a)(6)) under 
subchapter C of chapter 63 of the Internal Revenue Code (subchapter C 
of chapter 63) takes effect (as described in paragraph (c) of this 
section), the partnership adjustment is taken into account by the 
former partners (as described in paragraph (d) of this section) of the 
partnership in accordance with paragraph (e) of this section.
    (2) Partnership no longer liable for any amounts resulting from a 
partnership adjustment. A partnership that ceases to exist is no longer 
liable for any amounts resulting from a partnership adjustment required 
to be taken into account by a former partner under this section.
    (3) Partnerships making an election under section 6221(b). The 
former partners of a partnership that ceases to exist are not required 
to take a partnership adjustment into account under this section if the 
partnership has an election under section 6221(b) in effect for the 
partnership taxable year that includes the end of the reviewed year of 
the partnership subject to a proceeding to which such adjustment 
relates.
    (b) Determination that partnership ceases to exist--(1) In general. 
For purposes of this section, the IRS may, in its sole discretion, make 
a determination that a partnership ceases to exist for purposes of this 
section, but the IRS is not required to do so even if the definition in 
paragraph (b)(2) of this section applies with respect to such 
partnership. If the IRS determines that a partnership ceases to exist, 
the IRS will notify the partnership and the former partners (as defined 
in paragraph (d) of this section), in writing, within 30 days of such 
determination using the last known address of the partnership and the 
former partners.
    (2) Cease to exist defined--(i) In general. The IRS may determine 
that a partnership ceases to exist if the partnership terminates within 
the meaning of section 708(b)(1)(A), or does not have the ability to 
pay, in full, any amount due under the provisions of subchapter C of 
chapter 63 for which the partnership is or becomes liable. For purposes 
of this section, a partnership does not have the ability to pay if the 
IRS determines that the account with respect to the partnership is not 
collectible based on the information the IRS has at the time of such 
determination. For purposes of this section, a partnership does not 
cease to exist solely because--
    (A) The partnership has a technical termination under section 
708(b)(1)(B);

[[Page 27401]]

    (B) A valid election under section 6226 and the regulations 
thereunder is in effect with respect to any imputed underpayment (as 
defined in Sec.  301.6241-1(a)(3)); or
    (C) The partnership has not paid any amount required to be paid 
under subchapter C of chapter 63.
    (ii) Year in which a partnership ceases to exist. If a partnership 
terminates under section 708(b)(1)(A), the partnership ceases to exist 
on the last day of the partnership's final taxable year. If a 
partnership does not have the ability to pay, the partnership ceases to 
exist on the date that the IRS makes a determination under paragraph 
(b)(2)(i) of this section that the partnership ceases to exist.
    (iii) Limitation on IRS determination that partnership ceases to 
exist. In no event may the IRS determine that a partnership ceases to 
exist with respect to a partnership adjustment after the expiration of 
the period of limitations on collection applicable to the amount due 
resulting from such adjustment.
    (c) Partnership adjustment takes effect--(1) Full payment of 
amounts resulting from a partnership adjustment. For purposes of this 
section, a partnership adjustment under subchapter C of chapter 63 
takes effect when there is full payment of amounts resulting from a 
partnership adjustment. For purposes of this section, full payment of 
amounts resulting from a partnership adjustment means all amounts due 
under subchapter C of chapter 63 resulting from the partnership 
adjustment are fully paid by the partnership.
    (2) Partial payment of amount due by the partnership. If a 
partnership pays part, but not all, of any amount due resulting from a 
partnership adjustment before the partnership ceases to exist, the 
former partners of the partnership that has ceased to exist are not 
required to take into account any partnership adjustment to the extent 
amounts have been paid by the partnership with respect to such 
adjustment. The notification that the IRS has determined that the 
partnership has ceased to exist will include information regarding the 
portion of the partnership adjustments with respect to which 
appropriate amounts have not already been paid by the partnership and 
therefore must be taken into account by the former partners (described 
in paragraph (d) of this section) in accordance with paragraph (e) of 
this section.
    (d) Former partners--(1) Adjustment year partners--(i) In general. 
Except as described in paragraphs (d)(1)(ii) and (d)(2) of this 
section, the term former partners means the adjustment year partners 
(as defined in Sec.  301.6241-1(a)(2)) of a partnership that ceases to 
exist for the partnership taxable year to which the partnership 
adjustment relates.
    (ii) Partnership-partner ceases to exist. If the adjustment year 
partner is a partnership-partner that the IRS has determined ceased to 
exist, the partners of such partnership-partner during the partnership-
partner's taxable year that includes the end of the adjustment year (as 
defined in Sec.  301.6241-1(a)(1)) of the partnership that is subject 
to a proceeding under subchapter C of chapter 63 are the former 
partners for purposes of this section. If the partnership-partner 
ceased to exist before the partnership-partner's taxable year that 
includes the end of the adjustment year of the partnership that is 
subject to a proceeding under subchapter C of chapter 63, the former 
partners for purposes of this section are the partners of such 
partnership-partner during the partnership taxable year for which the 
final partnership return of the partnership-partner under section 6031 
is filed.
    (2) No adjustment year partners. If there are no adjustment year 
partners of a partnership that ceases to exist, the term former 
partners means the partners of the partnership during the last taxable 
year for which a partnership return under section 6031 was filed with 
respect to such partnership. For instance, if a partnership terminates 
under section 708(b)(1)(A) (and therefore ceases to exist under 
paragraph (b)(2)(i) of this section) before the adjustment year and 
files a final partnership return for the partnership taxable year of 
such partnership, the former partners for purposes of this section are 
the partners of the partnership during the partnership taxable year for 
which a final partnership return is filed.
    (e) Taking adjustments into account--(1) In general. For purposes 
of paragraph (a) of this section, a former partner of a partnership 
that ceases to exist takes a partnership adjustment into account as if 
the partnership had made an election under section 6226 and the 
regulations thereunder (regarding the alternative to payment of the 
imputed underpayment). A former partner must take into account the 
former partner's share of a partnership adjustment as set forth in the 
statement described in paragraph (e)(2) of this section in accordance 
with Sec.  301.6226-3.
    (2) Statements furnished to former partners. If a partnership is 
notified by the IRS that the partnership has ceased to exist as 
described in paragraph (b)(1) of this section, the partnership must 
furnish to each former partner a statement reflecting such former 
partner's share of the partnership adjustment required to be taken into 
account under this section and file a copy of such statement with the 
IRS in accordance with the rules under Sec.  301.6226-2, except that--
    (i) the adjustments are taken into account by the applicable former 
partner (as described in paragraph (d) of this section), rather than 
the reviewed year partners (as defined in Sec.  301.6241-1(a)(9)), and
    (ii) the partnership must furnish statements to the former partners 
and file the statements with the IRS no later than 30 days after the 
date of the notification to the partnership that the IRS has determined 
that the partnership has ceased to exist.
    (3) Authority to issue statements. If any statements required by 
paragraph (e) of this section are not timely furnished to a former 
partner and filed with the IRS in accordance with paragraph (e)(2)(ii) 
of this section, the IRS may notify the former partner in writing of 
such partner's share of the partnership adjustments based on the 
information reasonably available to the IRS at the time such 
notification is provided. For purposes of paragraph (e) of this 
section, a notification to a former partner under this paragraph (e)(3) 
is treated the same as a statement required to be furnished and filed 
under paragraph (e)(2) of this section.
    (f) Examples. The following examples illustrate the provisions of 
this section. For purposes of the examples, all partnerships and 
partners are calendar year taxpayers and no partnership has an election 
under section 6221(b) in effect with respect to any taxable year.

    Example 1. The IRS initiates a proceeding under subchapter C of 
chapter 63 with respect to the 2020 partnership taxable year of 
Partnership. During 2023, in accordance with section 6235(b), 
Partnership extends the period of limitations on adjustments under 
section 6235(a) until December 31, 2025. On February 1, 2025, the 
IRS mails Partnership a notice of final partnership adjustment (FPA) 
that determines partnership adjustments that result in a single 
imputed underpayment. Partnership does not timely file a petition 
under section 6234 and does not make a valid election under section 
6226. On May 1, 2026, the IRS mails Partnership notice and demand 
for payment of the amount due resulting from the adjustments 
determined in the FPA. Partnership fails to make a payment. On 
September 1, 2029, IRS determines Partnership ceases to exist for 
purposes of this section because the IRS has determined that 
Partnership does not have the ability to pay under paragraph 
(b)(2)(i) of this section. Under Sec.  301.6241-1(a)(1), the 
adjustment year is 2025 and A and B, both individuals, are the only 
adjustment year

[[Page 27402]]

partners of Partnership during 2025. Accordingly, under paragraph 
(d)(1) of this section, A and B are former partners. Therefore, A 
and B are required to take their share of the partnership 
adjustments determined in the FPA into account under paragraph (e) 
of this section.
    Example 2. The IRS initiates a proceeding under subchapter C of 
chapter 63 with respect to the 2020 partnership taxable year of 
Partnership. G, a partnership, is a partner of Partnership during 
2020. On February 3, 2025, the IRS mails Partnership an FPA that 
determines partnership adjustments that result in a single imputed 
underpayment. Partnership does not timely file a petition under 
section 6234, but does make a timely election under section 6226. On 
May 31, 2025, Partnership timely files and furnishes a statement to 
G as required by section 6226 and the regulations thereunder. G 
terminated under section 708(b)(1)(A) on December 31, 2024. On June 
1, 2026, the IRS determines that G ceased to exist in 2024 for 
purposes of this section in accordance with paragraph (b)(2)(i) of 
this section. J and K, individuals, were the only partners of G 
during 2024. Therefore, under paragraph (d)(1)(ii) of this section, 
J and K, the partners of G during G's 2024 partnership taxable year, 
are the former partners of G for purposes of this section. 
Therefore, J and K are required to take into account their share of 
the adjustments contained in the statement furnished by Partnership 
to G in accordance with paragraph (e) of this section.

    (g) Applicability date--(1) In general. Except as provided in 
paragraph (g)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 21. Section 301.6241-4 is added to read as follows:


Sec.  301.6241-4   Payments nondeductible.

    (a) Payments nondeductible. No deduction is allowed under subtitle 
A of the Internal Revenue Code for any payment required to be made by a 
partnership under subchapter C of chapter 63 of the Internal Revenue 
Code (subchapter C of chapter 63). Payment by a partnership of any 
amount required to be paid under subchapter C of chapter 63, including 
any imputed underpayment (as defined in Sec.  301.6241-1(a)(3)), any 
amount under Sec.  301.6226-3, or interest, penalties, additions to 
tax, or additional amounts with respect to an imputed underpayment or 
any amount under Sec.  301.6226-3, is treated as an expenditure 
described in section 705(a)(2)(B).
    (b) Applicability date--(1) In general. Except as provided in 
paragraph (b)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.
0
Par. 22. Section 301.6241-5 is added to read as follows:


Sec.  301.6241-5   Extension to Entities Filing Partnership Returns.

    (a) Entities filing a partnership return. Except as described in 
paragraph (c) of this section, an entity that files a partnership 
return for any taxable year is subject to the provisions of subchapter 
C of chapter 63 of the Internal Revenue Code (subchapter C of chapter 
63) and the regulations thereunder with respect to such taxable year 
even if it is determined that the person filing the partnership return 
was not a partnership for such taxable year. Accordingly, any item of 
income, loss, gain, deduction, or credit (as defined in Sec.  
301.6221(a)-1(b)(1)), any partner's distributive share thereof (as 
described in Sec.  301.6221(a)-1(b)(2)), and any person holding an 
interest in the entity, either directly or indirectly, at any time 
during that taxable year are subject to the provisions of subchapter C 
of chapter 63 and the regulations thereunder for such taxable year.
    (b) Partnership return filed but no entity found to exist. 
Paragraph (a) of this section also applies where a partnership return 
is filed for a taxable year, but the IRS determines that no entity 
existed at all for such taxable year. For purposes of applying 
paragraph (a) of this section, the partnership return is treated as if 
it were filed by an entity.
    (c) Exceptions. Paragraph (a) of this section does not apply to--
    (1) Entities for any taxable year for which an election under 
section 6221(b) is in effect, treating the return as if it were filed 
by a partnership for the taxable year to which the election relates, 
and
    (2) Entities for any taxable year for which a partnership return 
was filed for the sole purpose of making the election described in 
section 761(a) (regarding election out of subchapter K for certain 
unincorporated organizations).
    (d) Applicability date--(1) In general. Except as provided in 
paragraph (d)(2) of this section, this section applies to partnership 
taxable years beginning after December 31, 2017.
    (2) Election under Sec.  301.9100-22T in effect. This section 
applies to any partnership taxable year beginning after November 2, 
2015 and before January 1, 2018 for which a valid election under Sec.  
301.9100-22T is in effect.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2017-12308 Filed 6-13-17; 8:45 am]
 BILLING CODE 4830-01-P