Election Out of the Centralized Partnership Audit Regime, 24-33 [2017-28398]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 83, Number 1 (Tuesday, January 2, 2018)]
[Rules and Regulations]
[Pages 24-33]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-28398]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 9829]
RIN 1545-BN77


Election Out of the Centralized Partnership Audit Regime

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulation.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations regarding the 
implementation of certain portions 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. This document provides final regulations for 
electing out of the centralized partnership audit regime. The final 
regulations affect partnerships for taxable years beginning after 
December 31, 2017.

[[Page 25]]


DATES: 
    Effective date: These regulations are effective on January 2, 2018.
    Applicability Date: For dates of applicability, see Sec.  
301.6221(b)-1(f).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations under 
section 6221(b), Jennifer Black of the Office of Associate Chief 
Counsel (Procedure and Administration), (202) 317-6834 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains final regulations to amend the Procedure and 
Administration Regulations (26 CFR part 301) under Subpart--Tax 
Treatment of Partnership Items to implement the rules for electing out 
of the centralized partnership audit regime enacted by section 1101 of 
the BBA, Public Law 114-74. Section 301.6221(b)-1 provides the rules 
regarding the ability of a partnership to elect out of the centralized 
partnership audit regime, including prescribing the time, form, and 
manner for making the election.
    On June 14, 2017, the Treasury Department and the IRS published in 
the Federal Register (82 FR 27334) a notice of proposed rulemaking 
(REG-136118-15) proposing amendments to part 301 of title 26 of the 
Code of Federal Regulations (June 14 NPRM). The June 14 NPRM proposed 
rules under a number of provisions of the centralized partnership audit 
regime, including section 6221(b), regarding the election out of the 
regime. A public hearing regarding the proposed regulations was held on 
September 18, 2017. The IRS also received written public comments in 
response to the proposed regulations. After careful consideration of 
all written public comments and statements made during the public 
hearing, the portions of the proposed regulations relating to section 
6221(b) are adopted as amended by this Treasury decision. The 
amendments to the proposed regulations are discussed in the next 
section.

Summary of Comments and Explanation of Revisions

    In response to the June 14 NPRM, the IRS received 32 written 
comments, and five statements were provided at the public hearing. Of 
the 32 written comments, 16 addressed the proposed regulations under 
section 6221(b). All comments (both written and provided orally at the 
public hearing) were considered and written comments are available for 
public inspection at www.regulations.gov or upon request. This preamble 
addresses only the comments that addressed the proposed regulations 
under section 6221(b), which are the proposed regulations from the June 
14 NPRM being finalized in this Treasury Decision. Comments, or any 
portion of a comment, which relate to other aspects of the proposed 
regulations in the June 14 NPRM will be addressed when final 
regulations regarding those provisions are published.

1. Election Out of the Centralized Partnership Audit Regime

    The comments received with respect to proposed Sec.  301.6221(b)-1 
(regarding the election out of the centralized partnership audit 
regime) cover three general areas: (1) Determining the number of 
partners of the partnership for purposes of determining whether the 
partnership has 100 or fewer partners under section 6221(b); (2) 
determining what partners constitute eligible partners for purposes of 
determining whether the partnership is an eligible partnership under 
section 6221(b); and (3) the mechanics of making the election under 
section 6221(b).
A. Determining Whether the Partnership is Eligible To Elect Out of the 
Centralized Partnership Audit Regime
    Proposed Sec.  301.6221(b)-1(b)(1) provides that a partnership is 
eligible to elect out of the centralized partnership audit regime if 
the partnership has 100 or fewer partners for the taxable year, and all 
of the partners are eligible partners. Proposed Sec.  301.6221(b)-
1(b)(1)(i) provides that a partnership has 100 or fewer partners for 
the taxable year if it is required to furnish 100 or fewer statements 
under section 6031(b).
i. Determining the Number of Statements Required To Be Furnished
    Several comments suggested that statements furnished to certain 
types of partners should not be taken into account for purposes of 
determining whether the partnership is required to furnish 100 or fewer 
statements under section 6031(b) (the 100-or-fewer threshold). For 
example, one comment recommended that statements furnished to pass-
through entities and disregarded entities should not count toward the 
100-or-fewer threshold, and another comment recommended that spouses 
should count as a single partner for this purpose.
    Section 6031(b) generally requires a partnership to furnish a 
statement to each person that is a partner in the partnership during 
the partnership taxable year regarding that partner's interest in the 
partnership for such year. If a pass-through entity or disregarded 
entity is a partner in the partnership, the partnership is required to 
furnish a statement under section 6031(b) to that pass-through entity 
or disregarded entity. See Sec.  1.6031(b)-1T(a)(1) (statements 
required to be furnished to every person who was a partner (within the 
meaning of section 7701(a)(2)) at any time during the taxable year). 
Additionally, if two individuals are partners in a partnership, the 
partnership is required to furnish a statement under section 6031(b) to 
each of those individuals, regardless of whether they are married to 
one another. Id. Even though a pass-through entity or a disregarded 
entity is not an eligible partner (and a partnership with such partners 
would not be eligible to make an election under section 6221(b) 
regardless of the number of its partners), because the statute 
expressly provides that the 100-or-fewer threshold turns on the number 
of statements required to be furnished under section 6031(b), and 
section 6031(b) requires that the partnership furnish statements to all 
partners in the partnership during such taxable year regardless of 
whether the partner is a pass-through entity, a disregarded entity, or 
an individual who is married to another partner, these comments 
suggesting to the contrary were not adopted.
    One comment suggested that the IRS should establish procedures to 
quickly address uncertainties regarding whether a statement was 
required to be issued under section 6031(b) for purposes of making an 
election under section 6221(b). The comment suggested that this could 
be accomplished through the private letter ruling process. Eligible 
partnerships can file an election out of the centralized partnership 
audit regime for taxable years beginning on or after January 1, 2018. 
Until the first partnership returns for taxable years subject to the 
new regime are filed and any elections out of the new regime are 
reviewed, it is difficult to determine whether a pre-filing procedure 
for providing legal determinations regarding section 6031(b) for 
purposes of making the election under section 6221(b) would be helpful 
or appropriate. Additionally, there is long-standing guidance regarding 
whether a partnership is required to furnish a statement under section 
6031(b) to a particular person. Id. Therefore, because there is 
sufficient existing guidance regarding whether statements are required 
to be furnished under section 6031(b) and because the centralized 
partnership audit regime does not alter that existing guidance, the 
Treasury

[[Page 26]]

Department and the IRS have chosen not to adopt the suggestion to 
establish a pre-filing procedure specific to section 6221(b) in the 
final regulations. The IRS may reconsider whether a pre-filing 
procedure would be helpful after gaining experience with the election 
out procedures under section 6221(b). If it becomes apparent that a 
pre-filing procedure might prove useful in the context of section 
6221(b), the Treasury Department and the IRS will consider at that time 
whether to establish such a procedure in other guidance, forms, or 
instructions. Additionally, nothing in these regulations prohibits a 
partnership from utilizing existing procedures for requesting private 
letter rulings or other guidance from the IRS concerning section 
6031(b).
    Two comments were received with respect to Example 2 under proposed 
Sec.  301.6221(b)-1(b)(2)(iii). One comment suggested removing certain 
assumptions set forth in the example because those assumptions were not 
relevant to the conclusion reached in the example. Specifically, the 
comment suggested removing the following assumed facts--(1) that Spouse 
1 and Spouse 2 have lived in a community property state at all times 
since they were married; and (2) that Spouse 1 acquired the partnership 
interest while married to Spouse 2. The comment suggested replacing 
those assumed facts with a statement that Spouse 2 only has a community 
property interest in the partnership. A second comment recommended that 
the regulations expressly state that one spouse's community property 
interest is not taken into account for purposes of determining the 
number of statements the partnership is required to furnish under 
section 6031(b).
    The intent of Example 2 under proposed Sec.  301.6221(b)-
1(b)(2)(iii) was to illustrate that whether a partnership is required 
to furnish a statement for purposes of section 6221(b) is determined by 
looking only to section 6031(b). The example was not intended to 
illustrate any principles of the various states' community property 
laws. For these reasons, the two facts identified by the first comment 
were removed and replaced with a statement that, as a matter of state 
law, Spouse 2 has a community property interest in Spouse 1's 
partnership interest.
    The second comment suggested that the regulations under section 
6221(b) specifically address community property interests. The 
determination of whether a partnership is required to furnish a 
statement is governed by section 6031(b) and the regulations 
thereunder. Creating a specific rule potentially at odds with the 
existing rules under section 6031(b) in these regulations could result 
in confusion regarding the proper operation of existing section 6031(b) 
rules and is not necessary for implementation of section 6221(b). 
Accordingly, the second comment suggesting the regulations expressly 
state that one spouse's community property interest is not taken into 
account for purposes of determining the number of statements the 
partnership is required to furnish under section 6031(b) was not 
adopted.
ii. Constructive or de Facto Partnerships
    Several comments were received regarding the statement in the 
preamble of the June 14 NPRM that noted the IRS' intention to carefully 
scrutinize whether two or more partnerships that have elected out under 
section 6221(b) 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 preamble also listed several factors the IRS would consider when 
examining such arrangements and noted that, if two or more partnerships 
were recast under those doctrines and principles, the constructive or 
de facto partnership would be subject to the centralized partnership 
audit regime because it would not have made a timely election under 
section 6221(b). Several comments suggested rules to address those 
statements in the preamble, including suggesting that the final 
regulations should provide: (1) Clear standards and safe harbors for 
when the IRS will determine if a constructive or de facto partnership 
exists and the effects of determining that two or more partnerships are 
constructively a single partnership; (2) a rule that any constructive 
or de facto partnership should be able to appeal that determination, 
including to the United States Tax Court; and (3) a reasonable amount 
of time for a constructive or de facto partnership to make an election 
under section 6221(b).
    The statements in the preamble of the June 14 NPRM referencing the 
IRS's intention to carefully examine whether two or more partnerships 
should be recast or be treated as having formed one or more 
constructive or de facto partnerships for federal income tax purposes 
reference existing judicial doctrines and general federal tax 
principles existing outside the centralized partnership audit regime. 
These existing judicial doctrines and bodies of law under the Internal 
Revenue Code (Code) govern whether a partnership is in existence, which 
is not an issue specific to (or altered by) the centralized partnership 
audit regime. However, if the IRS were to invoke these existing 
judicial doctrines and bodies of law and recast two partnerships as one 
or determine a partnership existed where no return was filed, there 
would likely be consequences under the centralized partnership audit 
regime as outlined in the preamble to the June 14 NPRM. For that 
reason, the statements in the preamble to the June 14 NPRM were meant 
to alert taxpayers to these existing judicial doctrines and bodies of 
law and to the fact that they might be applicable. Nothing in the June 
14 NPRM or in this Treasury Decision alters these existing judicial 
doctrines and bodies of law governing whether a partnership is in 
existence. Accordingly, the final regulations do not adopt the comments 
requesting rules under the existing judicial doctrines and bodies of 
law governing whether a partnership is in existence.
    Any application by the IRS of those existing judicial doctrines and 
bodies of law to two or more partnerships would require the IRS to 
follow all applicable due process requirements, including those under 
the centralized partnership audit regime. A taxpayer would have any 
applicable administrative review in accordance with IRS procedures and 
judicial review as provided by existing provisions of law.
    With regard to the comment requesting a reasonable amount of time 
for a constructive or de facto partnership to make an election under 
section 6221(b), the time to make an election under section 6221(b) is 
specifically prescribed by statute. Section 6221(b)(1)(D)(i) expressly 
provides that an election under section 6221(b) is made on a timely 
filed return for the taxable year.
    Finally, the United States Tax Court is a court of limited 
jurisdiction. See section 7442. The Treasury Department and the IRS do 
not have authority to confer jurisdiction on the United States Tax 
Court. As the IRS gains experience with the centralized partnership 
audit regime, the IRS may consider issuing sub-regulatory guidance 
covering elections under section 6221(b) in the context of constructive 
and de facto partnerships. The comments regarding constructive and de 
facto partnerships, however, were not adopted in these final 
regulations.
B. Eligible Partners
    Under section 6221(b)(1)(C), one of the criteria for a partnership 
to make an election under section 6221(b) is that each of the partners 
of the partnership is an individual, C corporation, foreign

[[Page 27]]

entity that would be treated as a C corporation if it were a domestic 
entity, S corporation, or estate of a deceased partner. Proposed Sec.  
301.6221(b)-1(b)(3) describes these partners as ``eligible partners''. 
Proposed Sec.  301.6221(b)-1(b)(3)(ii) provides that some partners are 
not eligible partners, such as partnerships, trusts, disregarded 
entities, nominees or other similar persons that hold an interest on 
behalf of another person, and estates other than the estate of a 
deceased partner. In the case of an eligible partner that is an S 
corporation (S corporation partner), the statements required to be 
furnished by the S corporation partner under section 6037(b) for its 
taxable year ending with or within the partnership's taxable year are 
treated as statements furnished by the partnership for purposes of 
determining whether the partnership is required to furnish 100 or fewer 
statements. Section 6221(b)(2)(A)(ii). The statement furnished to the S 
corporation partner by the partnership also counts towards the 100-or-
fewer threshold. In addition, the partnership must disclose the names 
and taxpayer identification numbers (TIN) for each person with respect 
to whom the S corporation partner was required to furnish a statement 
under section 6037(b). Under section 6221(b)(2)(C), the Secretary is 
authorized by regulation or other guidance to prescribe rules similar 
to the rules for S corporation partners with respect to other types of 
persons not specifically described as eligible partners under section 
6221(b)(1)(C).
    The preamble to the June 14 NPRM explains that the Treasury 
Department and the IRS considered but did not adopt comments in 
response to Notice 2016-23, 2016-13 I.R.B. 490 (March 28, 2016) that 
suggested that the Treasury Department and the IRS exercise authority 
under section 6221(b)(2)(C) to expand the types of persons that are 
eligible partners for purposes of the election out rules under section 
6221(b). The June 14 NPRM explains that broadening the scope of the 
election out provisions to include additional types of partners or 
partnership structures would increase the administrative burden on the 
IRS because those structures and partners would need to be audited 
under the deficiency procedures. The preamble to the June 14 NPRM 
requested comments on any potential expansion of the election out 
rules, noting that comments are particularly helpful if they address 
the additional burdens that expansion of the rules would impose on the 
IRS, in addition to the decreased burden on taxpayers resulting from 
such an expansion.
    In response to the June 14 NPRM, the Treasury Department and the 
IRS received many comments similar to the comments received in response 
to Notice 2016-23 requesting that the Treasury Department and the IRS 
exercise the discretionary authority provided in section 6221(b)(2)(C) 
to expand the definition of eligible partner. Comments suggested that 
partnerships, disregarded entities, trusts (including tax-exempt 
trusts, revocable trusts, charitable remainder trusts, grantor trusts, 
and nongrantor trusts), individual retirement accounts, nominees, 
qualified pension plans, profit-sharing plans, and stock bonus plans 
should be considered eligible partners for purposes of making an 
election under section 6221(b). Comments specifically suggested that 
because certain types of entities, such as trusts, are similarly 
situated to certain eligible partners, such as S corporations because 
those entities are audited and report items to their owners similarly, 
they should be included within the definition of eligible partner, and 
that excluding them could lead to treating similarly situated taxpayers 
differently. For example, one comment noted that a tax-exempt 
organization organized as a C corporation is an eligible partner while 
a tax-exempt organization organized as a trust is not an eligible 
partner, even though both organizations are taxed the same way.
    One comment suggested that all tiered partnerships should be 
eligible to make an election under section 6221(b) under rules similar 
to the rules that apply to S corporation partners, which would require 
counting the number of statements required to be furnished by each 
pass-through partner toward the 100-or-fewer threshold under proposed 
Sec.  301.6221(b)-1(b)(2). Another comment recommended that the IRS 
develop an administrable election out for tiered partnerships. The 
comments suggested that such rules could allow for tiered partnerships 
to be collapsed down to their ultimate beneficial owners and permit 
that collapsed structure to make an election out, provided there was a 
``manageable'' number of ultimate beneficial owners and the beneficial 
owners were all eligible partners.
    In addition, multiple comments suggested that the authority granted 
in section 6221(b)(2)(C) signified a congressional expectation that the 
Treasury Department and the IRS would expand the list of eligible 
partners under section 6221(b)(1)(C). Multiple comments also suggested 
that the General Explanations of Tax Legislation Enacted in 2015 
prepared by the Joint Committee on Taxation supported an expansion of 
the section 6221(b)(1)(C) list. See Joint Comm. on Taxation, JCS-1-16, 
General Explanation of Tax Legislation Enacted in 2015, 59-60 (2016). 
Other comments observed that the differences between the election out 
rules under section 6221(b) and the small partnership exception under 
the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 
(TEFRA)--the increase from 10 to 100 partners and the inclusion of S 
corporation partners--reflected an awareness that the IRS would face 
additional administrative burdens as a result of the election out 
rules.
    Comments suggested that in some situations there would be minimal 
or no additional burdens imposed on the IRS resulting from an expansion 
of the definition of eligible partner. For example, comments suggested 
that, because there is only one additional layer of ownership beyond an 
entity that is disregarded as an entity separate from its owner for 
Federal tax purposes, adding those types of entities to the definition 
of eligible partner would not increase audit complexity or 
administrative burden for the IRS.
    Some comments suggested that maintaining the current definition of 
eligible partner in proposed Sec.  301.6221(b)-1(b)(3) would actually 
lead to more administrative burden for the IRS. For example, one 
comment suggested that because some tiered partnerships are ultimately 
owned by members of the same affiliated group, it would be more 
burdensome to conduct separate examinations (one for the partnership 
under the centralized partnership audit regime and one for the 
consolidated group under the deficiency procedures), rather than 
examining all entities as part of the same proceeding. Another comment 
observed that in some cases, certain partnership structures that are 
relatively complex and therefore difficult to audit would be able to 
elect out, while other more simple structures, which are potentially 
less burdensome to audit, could not elect out. One comment suggested 
that by not expanding the types of entities that are eligible partners 
more partnerships will be subject to the centralized partnership audit 
regime, and the IRS and taxpayers will face additional burdens because 
they have to apply the new audit rules, rather than applying 
longstanding rules familiar to both the IRS and to taxpayers.
    Other comments noted the consequences to partnerships and 
partnership interests of not expanding the definition of eligible 
partner to

[[Page 28]]

include disregarded entities or trusts. For example, one comment 
suggested that not expanding the types of entities that are eligible 
partners would result in taxpayers transferring partnership interests 
from disregarded entities to eligible partners, leading to unnecessary 
filings and paperwork with limited effect on the ultimate taxpayers' 
liabilities. Another comment suggested that not expanding the types of 
entities that are eligible partners would cause a reduction in value of 
limited partnership interests because of the increased risks and 
burdens associated with an audit under the centralized partnership 
audit regime. Another comment noted that the centralized partnership 
audit regime shifts certain administrative functions from the IRS to 
taxpayers, functions that were typically performed by the IRS under 
TEFRA.
    The Treasury Department and the IRS have carefully considered all 
of the comments suggesting an expansion of the definition of eligible 
partner, but have decided not to adopt these comments at this time. In 
making this determination, the Treasury Department and the IRS 
considered the burdens of the centralized partnership audit regime on 
taxpayers and have concluded that the interests of efficient tax 
administration outweigh those potential burdens. Accordingly, the final 
regulations do not expand the definition of eligible partner to include 
entities other than those entities expressly provided in section 
6221(b)(1)(C). After gaining experience with the centralized 
partnership audit regime, the Treasury Department and the IRS will be 
in a better position to reconsider any expansion of partnerships 
eligible to elect out of the regime.
    Expanding the current definition of eligible partner would result 
in more partnerships electing out of the centralized partnership audit 
regime. In turn, this would result in more audits under the deficiency 
procedures for taxpayers owning interests in partnerships. When a 
partnership makes a valid election out of the centralized partnership 
audit regime under section 6221(b), the IRS must follow the deficiency 
procedures to audit, assess, and collect tax from the ultimate owners 
of that partnership. Under the partnership audit procedures enacted as 
part of TEFRA, the IRS conducted a unified examination of the 
partnership's items at the partnership level, but was still required to 
separately assess and collect tax from the ultimate owners of the 
partnership (sometimes through deficiency procedures).
    The centralized partnership audit regime is designed to improve 
upon both the TEFRA rules and the deficiency procedures by providing 
for a centralized audit proceeding with respect to the partnership and 
mandating centralized assessment and collection of tax, penalties, and 
interest from the partnership. It follows then that rules designed to 
limit the number of partnerships that can elect out of the new regime 
is consistent with this objective.
    Further, for each additional type of partner that is added to the 
list of eligible partners, the IRS will be required to follow 
deficiency procedures with respect to the indirect partners of that 
partner to assess and collect tax resulting from a partnership audit 
that could otherwise be assessed and collected against a single 
partnership under the centralized partnership audit regime. As noted in 
the preamble to the June 14 NPRM, the number of partnerships has grown 
substantially in recent years and is likely to continue to grow, 
compounding the audit and collection inefficiencies extant outside of 
the new regime for the IRS with each expansion of the eligible partner 
list. It would undermine the benefits of the new regime to expand the 
group of partnerships that are eligible to elect out of the new regime. 
Moreover, it would be unwise to do so at a time before the first 
returns for taxable years subject to the new regime have been filed.
    There may be some situations where expanding eligible partners 
would not add significantly more complexity to an examination, even 
under the deficiency procedures. However, while this may occur in some 
instances, the rules under section 6221(b) are designed to be of 
general applicability to all partnerships, regardless of size and 
composition of partners. Section 6221(b)(1) sets the parameters for 
making an election out of the centralized partnership audit regime, and 
partnerships that meet these requirements are eligible to make an 
election under section 6221(b) regardless of how complex or simple 
their partnership structure is. While certain types of partnerships 
that elect out may present less audit burden than others, as the total 
number of partners increases, so too does the number and the complexity 
of deficiency proceedings. Therefore, any potential simplification of 
an audit for one particular partnership that might result from the 
expansion of the election out rules must be appropriately balanced 
against the increasing audit burden on the IRS if the total number of 
partnerships that can elect out is increased.
    The Treasury Department and the IRS acknowledge that the new rules 
are a significant change in the way partnerships have been 
traditionally audited, particularly in the imposition of an imputed 
underpayment at the partnership level. Comments have raised concerns 
that the imputed underpayment may not accurately reflect the tax 
liability that would have been owed had the partnership and the 
partners reported correctly in the reviewed year taking the partners' 
specific facts and circumstances into account. However, partnerships 
and partners have the means to mitigate those concerns by utilizing the 
modification procedures under section 6225 or making the election under 
section 6226 (the alternative to payment of the imputed underpayment).
    As the Treasury Department and the IRS gain experience with the 
centralized partnership audit regime, the definition of eligible 
partner may be revisited. Section 6221(b)(2)(C) allows the Treasury 
Department and the IRS to expand the types of eligible partners through 
``other guidance,'' which includes sub-regulatory guidance that can be 
more easily tailored and adapted as the Treasury Department and the IRS 
gain experience with the new regime. Until that time, however, the list 
of eligible partners will remain the list specifically set forth by 
Congress in section 6221(b)(1)(C).
    In addition to the comments about expanding the definition of 
eligible partner, one comment recommended clarifying the meaning and 
application of the phrase ``a nominee or other similar person that 
holds an interest on behalf of another person'' under proposed Sec.  
301.6221(b)-1(b)(3)(ii)(E). The comment stated that the meaning of the 
quoted language was unclear. The intent of this provision was not to 
create a new concept that does not currently exist in the Code and 
regulations. Instead, the intent of the provision was to include in the 
list of ineligible partners situations where the partner holds an 
interest on behalf of another person. To remove the ambiguity, the 
quoted language was clarified to remove the word ``nominee'' as a 
separate clause and provides instead that a partner is not an eligible 
partner if that partner holds an interest in the partnership on behalf 
of another person.
C. Making the Election Under Section 6221(b)
    Proposed Sec.  301.6221(b)-1(c) provides that an election out of 
the centralized partnership audit regime must be made on an eligible 
partnership's timely filed return, including extensions, for the

[[Page 29]]

taxable year to which the election applies, and, once made cannot be 
revoked without the consent of the IRS. Additionally, under proposed 
Sec.  301.6221(b)-1(c)(2), the election must include each partner's 
name, correct U.S. TIN, and Federal tax classification. If the election 
is being made by a partnership that has an S corporation as a partner, 
proposed Sec.  301.6221(b)-1(c)(2) provides that the election must also 
include each S corporation shareholder's name, correct U.S. TIN, and 
Federal tax classification. Proposed Sec.  301.6221(b)-1(c)(2) also 
provides that the election must include an affirmative statement that 
the partner is an eligible partner and any other information required 
by the IRS in forms, instructions, or other guidance. Under proposed 
Sec.  301.6221(b)-1(c)(3), if a partnership makes an election under 
section 6221(b), the partnership must notify its partners of the 
election within 30 days of making the election. Under proposed Sec.  
301.6221(b)-1(e)(2), if the IRS determines that a purported election by 
a partnership is invalid, the IRS will notify the partnership in 
writing, and the provisions of the centralized partnership audit regime 
will apply to the partnership.
    One comment suggested that the regulations clarify whether a 
``timely filed return'' under proposed Sec.  301.6221(b)-1(c)(1) is 
limited to the partnership's original return or whether it also 
includes any amended returns filed before the due date of the original 
return. The definition of whether a return is a timely filed return is 
covered by other provisions of the Code, and the proposed regulations 
do not modify the longstanding interpretation of those provisions. 
Under that longstanding interpretation, a return is timely filed if it 
is filed prior to the due date of the return (taking into account any 
applicable extensions), regardless of whether it is the original return 
filed by the partnership or a return filed subsequent to the original 
return but before the extended due date of the return. See Haggar Co. 
v. Helvering, 308 U.S. 389 (1940). Therefore, the comment requesting 
that the regulations clarify the phrase ``timely filed return'' in 
proposed Sec.  301.6221(b)-1(c)(1) was not adopted.
    Two comments were received regarding the rule under proposed Sec.  
301.6221(b)-1(c)(1) that requires consent of the IRS to revoke an 
election previously made by the partnership. One comment suggested that 
partnerships should have the ability to revoke the election under 
section 6221(b) without the consent of the IRS and suggested that such 
a rule could result in more partnerships revoking elections and 
therefore becoming subject to the centralized partnership audit regime. 
Section 6221(b) is silent as to whether a partnership may revoke its 
election.
    The June 14 NPRM allows a partnership to request revocation of its 
election under section 6221(b) with consent of the IRS. IRS consent is 
necessary for this type of election revocation because of the potential 
for detrimental effects on tax administration. By making an election 
under section 6221(b), the partnership is representing to the IRS that 
the partnership seeks to elect out of the centralized partnership audit 
regime. If a partnership is able to unilaterally revoke the election, 
the partnership is changing that representation without the IRS's 
knowledge which, under certain circumstances, could be detrimental to 
tax administration. For example, a partnership could make an election 
under section 6221(b) and subsequently revoke the election at a time 
when the period of limitations on making partnership adjustments under 
section 6235 is close to expiring, or would have already expired, even 
though the individual partners' periods of limitations on assessment 
might still be open. If unilateral revocations were permissible, the 
IRS would have to obtain protective statute extensions creating 
unnecessary burden on both partners and the IRS. Because the 
partnership's unilateral revocation of an election under section 
6221(b) could be detrimental to tax administration, it is necessary to 
require IRS consent prior to any revocation. While allowing revocation 
without consent could potentially result in more partnerships subject 
to the centralized partnership audit regime, there is no reason to 
believe that requiring consent significantly alters the number of 
potential revocations, except in situations where the revocation was 
clearly detrimental to tax administration. Accordingly, the comment 
suggesting that the partnership can revoke the election without the 
consent of the IRS was not adopted.
    Another comment recommended that the IRS provide rules on how a 
partnership requests the consent of the IRS to revoke an election and 
the standards the IRS will use to grant or deny such requests. The 
Treasury Department and the IRS have determined that these procedures 
are more appropriately addressed in non-regulatory guidance. This will 
enable the IRS to more quickly adjust the process, respond to feedback, 
and fix any potential problems as it gains more experience with 
elections under section 6221(b). Accordingly, these final regulations 
do not adopt this comment.
    Section 6221(b)(2)(B) provides that the IRS may provide an 
alternative form of identification for foreign partners. The June 14 
NPRM does not provide for a form of alternative identification for 
foreign partners, but instead requires that all partners of an eligible 
partnership have a U.S. TIN. The preamble to the June 14 NPRM explains 
that partners in a U.S partnership, including foreign partners, are 
required to have a U.S TIN, so an alternative form of identification 
may be unnecessary. However, the June 14 NPRM requested comments 
regarding situations in which a foreign partner subject to the 
centralized partnership audit regime may not otherwise be required to 
have a U.S. TIN, other than for the election under section 6221(b), and 
requested recommendations for alternative identification procedures 
that could be used in such cases.
    Two comments made suggestions regarding a possible alternative 
method for identifying foreign partners when the partnership discloses 
partner information to the IRS as part of an election under section 
6221(b). One comment recommended that ``in the case of foreign partners 
who are individuals, the final Regulations provide that the partnership 
can submit a completed Form W-8 in lieu of the foreign partner's TIN.'' 
Another comment suggested that all foreign partners should be required 
to have TINs for a partnership to be eligible to make an election under 
section 6221(b).
    Consistent with the second comment, the final regulations retain 
the approach of the proposed regulations and require a partnership to 
provide a correct U.S. TIN for all partners (foreign and domestic) as 
part of a valid election under section 6221(b). Requiring a U.S. TIN 
for all partners of a partnership treats all partners the same, 
regardless of whether they are foreign or domestic, and ensures that 
the partners of the partnership can be easily identified. However, the 
Treasury Department and the IRS intend to continue to study this issue 
and may, in the future, provide for alternative identification for 
foreign partners in forms, instructions, and other guidance. To account 
for any future forms of alternative identification for foreign 
partners, Sec.  301.6221(b)-1(c)(2) provides that a partnership must 
disclose the name and U.S. TIN, or alternative form of identification 
required by forms, instructions, or other guidance, for each partner of 
the

[[Page 30]]

partnership or each shareholder of an S corporation partner.
    Another comment stated that the language in proposed Sec.  
301.6221(b)-1(c)(2), which requires a partnership to provide 
information regarding ``each shareholder of the S corporation'', was 
not clear because it did not specify whether the partnership was 
required to provide information regarding S corporation shareholders as 
of a specific date or whether information was required of any person 
who was a shareholder at any point during the S corporation's taxable 
year. The IRS and Treasury Department agree that the language in 
proposed Sec.  301.6221(b)-1(c)(2) should be clarified. Section 
6221(b)(2)(A)(i) provides that the S corporation shareholders the 
partnership must identify are those shareholders with respect to whom 
the S corporation partner is required to furnish statements under 
section 6037(b) for the taxable year of the S corporation ending with 
or within the partnership taxable year for which the election is being 
made. Accordingly, the final regulations in Sec.  301.6221(b)-1(c)(2) 
provide that, as part of a valid election, a partnership must disclose 
the required information about each person who was a shareholder in the 
S corporation partner at any time during the taxable year of the S 
corporation ending with or within the partnership's taxable year.
    Regarding the requirement that a partnership making an election 
under section 6221(b) include an affirmative statement that each 
partner is an eligible partner, a comment was received recommending 
that the affirmative statement should appear on the bottom of the form 
for making the election or be a return attachment that could be signed 
by anyone eligible to sign the partnership return. This comment and 
recommendation concerns forms and instructions that will be prescribed 
by the IRS, and therefore the comment is outside the scope of these 
regulations. However, the IRS will consider this comment when creating 
the forms and instructions necessary to implement the election out of 
the centralized partnership audit regime.
    Two comments addressed the requirement that the partnership notify 
its partners of any election made under section 6221(b) within 30 days 
of making the election. Proposed Sec.  301.6221(b)-1(c)(3) requires a 
partnership that makes an election under section 6221(b) to notify its 
partners within 30 days of making the election. One comment requested 
that the final regulations clarify whether the partnership has to 
notify shareholders of an S corporation partner that the partnership 
has made the election. Under TEFRA, the term ``partner'' was defined to 
include both direct and indirect partners. See section 6231(a)(2) 
(prior to amendment by the BBA). Section 1101(a) of the BBA repealed 
the partnership audit procedures under TEFRA, including the definition 
of partner. As a result, the only operative definition of the term 
``partner'' in the Code is located in section 7701(a)(2). Under that 
definition, shareholders of an S corporation partner are not partners 
in the partnership making the election under section 6221(b) because 
they are not members of the partnership. Therefore, the partnership 
does not have to provide notice to the shareholders of an S corporation 
partner because those shareholders are not ``its partners'' within the 
meaning of Sec.  301.6221(b)-1(c)(3). Accordingly, because the 
regulation is clear that the partnership only has to provide notice to 
its partners, this comment recommending that the regulation be 
clarified on this point was not adopted. Further, it would be 
burdensome for the partnership making the election to have to notify 
both the S corporation and the S corporation shareholders. It should be 
sufficient that the partnership notify its partner, the S corporation. 
Whether and how the S corporation wishes to notify its shareholders is 
something that is left to the S corporation and its shareholders to 
determine.
    Two comments suggested that the IRS should add a checkbox to the 
statements required to be furnished by the partnership under section 
6031(b) indicating that the partnership has made an election under 
section 6221(b). The checkbox would serve as the notification of the 
election as required by Sec.  301.6221(b)-1(c)(3). This comment was not 
adopted because the regulations intentionally do not prescribe the 
method a partnership must use to notify its partners of the election. 
Under the regulations, the partnership has the flexibility to notify 
its partners in the manner that is in the best interests of the 
partnership and its partners. At this point, the Treasury Department 
and the IRS have considered the method the partnership notifies its 
partners to be a business decision of the partnership. Section 6221(b) 
requires only that the partnership notify its partners in the manner 
prescribed by the Treasury Department and the IRS. Accordingly, the 
Treasury Department and the IRS have refrained from regulating more 
specifically on this issue, and therefore this comment was not adopted. 
However, the proposed regulations are amended in the final regulations 
to make clear that the manner of notification is left to the 
partnership to determine.
    One comment recommended that the final regulations include a 
mechanism for allowing the partnership to make corrections to the 
election to cure any compliance errors. The Treasury Department and the 
IRS determined that these procedures, if needed, are more appropriately 
addressed in sub-regulatory guidance, which is more routinely updated 
and can be improved based upon experience. Under Sec.  301.6221(b)-1(e) 
and as explained more fully in the preamble to the June 14 NPRM, an 
election under section 6221(b) may be relied upon unless challenged by 
the IRS. That includes situations where the election is not fully 
compliant with all applicable rules. As provided under Sec.  
301.6221(b)-1(e)(2), the IRS will notify the partnership if the IRS 
determines the partnership's election is invalid. Nothing in these 
regulations prohibits the partnership from working with the IRS if an 
election is deficient to correct any minor errors. By not providing a 
correction procedure in the regulations, the IRS and the partnership 
have more flexibility to address any errors in an election that may not 
be afforded if the regulations provided for rules for some situations 
but not others. Accordingly, the comment to include a correction 
procedure in the regulations was not adopted.
    Finally, one comment recommended that the final regulations place a 
reasonable restriction on the time the IRS has to determine whether an 
election under section 6221(b) is invalid. The comment suggested that a 
period of 180 days from the filing of the return would be a reasonable 
time. This comment was not adopted because this would effectively 
impose a significant shortening of the period of limitations on when 
the IRS would be able to examine a partnership's return and make 
adjustments. Limiting the time within which the IRS may review the 
validity of an election would effectively force the IRS to decide 
within that specified time period whether it intended to review the 
election, even if the IRS had no intention at that time of ultimately 
examining the partnership's return.
    Section 6221(b) did not provide a specific period of limitations 
for a determination that an election under section 6221(b) is invalid. 
Nevertheless, the period for determining an election purportedly made 
under section 6221(b) is invalid is not unlimited. The period of 
limitations on making adjustments under section 6235 limits the time

[[Page 31]]

within which the IRS may make a partnership adjustment, which will also 
serve as a practical limitation on when the IRS must decide whether to 
determine an election under section 6221(b) is invalid. If a purported 
election is determined to be invalid by the IRS, the partnership would 
be subject to the centralized partnership audit regime, and no 
partnership adjustment could be made by the IRS after the period 
prescribed in section 6235. For the reasons state above, the comment to 
establish a separate period for evaluating elections was not adopted.
    In addition to addressing the comments received in response to the 
June 14 NPRM, this Treasury Decision also makes editorial, non-
substantive changes to the proposed regulations under section 6221(b).

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented by Executive 
Order 13563. Therefore, a regulatory impact assessment is not required.
    It is hereby certified that these rules will not have a significant 
economic impact on a substantial number of small entities. Although 
these rules may affect a substantial number of small entities, the 
economic impact is not substantial because these rules merely provides 
guidance on the statutory requirements for making an election out of 
the centralized partnership audit regime. These rules reduce the 
existing burden on partnerships to comply with the statutory 
requirements by providing clear rules and guidance regarding the 
statutory requirements for partnerships desiring to make an election 
out of the centralized partnership audit regime under section 6221(b). 
For the reasons stated, the final rules will not have a significant 
economic impact on a substantial number of small entities. Accordingly, 
a regulatory flexibility analysis under the Regulatory Flexibility Act 
(5 U.S.C. Chapter 6) is not required.
    Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business, and no comments were received.

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 website at www.irs.gov.

Drafting Information

    The principal author of these final regulations is Jennifer M. 
Black 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is 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(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 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 this paragraph (b)(2), 
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, State A. Spouse 1 acquired the 
partnership interest in such a manner that by operation of State A 
law, Spouse 2 has a community property interest in Spouse 1's 
partnership interest. 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 this paragraph (b)(2), 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

[[Page 32]]

2020 taxable year--one each to Individual A, the estate of 
Individual A, Individual B, Individual C, and Individual D. 
Therefore, for purposes of this paragraph (b)(2), 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 this 
paragraph (b)(2), 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 this paragraph (b)(2). 
Therefore, for purposes of this paragraph (b)(2), Partnership has 
two partners.

    (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) An estate of an individual other than a deceased partner, or
    (F) Any person that holds an interest in the partnership on behalf 
of another person.
    (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 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 paragraph 
(b)(3)(i) of this section. Accordingly, Partnership meets the 
requirements under this paragraph (b)(3) 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) 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 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 and correct U.S. taxpayer identification 
number (TIN) (or alternative form of identification required by forms, 
instructions, or other guidance), each partner's Federal tax 
classification, an affirmative statement that the partner is an 
eligible partner under paragraph (b)(3)(i) of this section, 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 information about each shareholder of the S 
corporation that was a shareholder at any time during the taxable year 
of the S corporation ending with or within the partnership's taxable 
year, including each shareholder's name and correct TIN (or alternative 
form of identification as prescribed by forms, instructions, or other 
guidance), each shareholder's Federal tax classification, and 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 in the form and manner determined 
by the partnership.
    (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

[[Page 33]]

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 under this 
section with its timely filed partnership return for its 2020 
taxable year. Partnership does not file an election under this 
section. Notwithstanding A's valid election under this section, with 
respect to A's interest in Partnership, A is subject to the rules 
applicable to partners 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 facts are the same as Example 1 of this 
paragraph (d)(2). The IRS mails to Partnership 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. Partnership must provide A with a 
statement under section 6226 reflecting A's share of the adjustments 
for Partnership's 2020 taxable year. A is subject to the rules 
applicable to partners in a partnership subject to the rules under 
subchapter C of chapter 63 with respect to A's interest in 
Partnership.

    (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.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
    Approved: December 22, 2017.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2017-28398 Filed 12-29-17; 8:45 am]
 BILLING CODE 4830-01-P