Centralized Partnership Audit Regime, 41954-42015 [2018-17614]
Download as PDF
<![CDATA[
41954
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG–136118–15, REG–119337–17; REG–
118067–17; REG–120232–17 and REG–
120233–17]
RIN 1545–BO03; 1545–BO04
Centralized Partnership Audit Regime
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking;
notice of public hearing; withdrawal
and partial withdrawal of notices of
proposed rulemaking.
AGENCY:
This document contains
proposed regulations implementing the
centralized partnership audit regime.
This document withdraws and
reproposes certain portions of proposed
regulations implementing the
centralized partnership audit regime
that have not been finalized to reflect
the changes made by the Technical
Corrections Act of 2018, contained in
Title II of the Consolidated
Appropriations Act of 2018 (TTCA). The
proposed regulations affect partnerships
with respect to partnership taxable years
beginning after December 31, 2017, as
well as partnerships that make the
election under the Bipartisan Budget
Act of 2015 (BBA), to apply the
centralized partnership audit regime to
partnership taxable years beginning on
or after November 2, 2015 and before
January 1, 2018.
DATES: Written or electronic comments
must be received by October 1, 2018.
Outlines of topics to be discussed at the
public hearing scheduled for October 9,
2018, at 10 a.m. must be received by
October 1, 2018.
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 a.m. and
4 p.m. to CC:PA:LPD:PR (REG–136118–
15), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW,
Washington, DC 20224, or sent
electronically via the Federal
eRulemaking Portal at
www.regulations.gov (IRS REG–136118–
15).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations
under sections 6221, 6226, 6235, and
6241, Jennifer M. Black of the Office of
Associate Chief Counsel (Procedure and
Administration), (202) 317–6834;
amozie on DSK3GDR082PROD with PROPOSALS3
SUMMARY:
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
concerning the proposed regulations
under sections 6225, 6231, and 6234,
Joy E. Gerdy-Zogby of the Office of
Associate Chief Counsel (Procedure and
Administration), (202) 317–6834;
concerning the proposed regulations
under sections 6222, 6227, 6232, and
6233, Steven L. Karon of the Office of
Associate Chief Counsel (Procedure and
Administration), (202) 217–6834;
concerning the proposed regulations
under section 6225 relating to creditable
foreign tax expenditures, Larry R.
Pounders, Jr. of the Office of Associate
Chief Counsel (International), (202)
317–5465; concerning the proposed
regulations relating to chapters 3 and 4
of subtitle A of the Internal Revenue
Code (other than section 1446), Subin
Seth of the Office of Associate Chief
Counsel (International), (202) 317–5003;
concerning the proposed regulations
relating to section 1446, Ronald M.
Gootzeit of the Office of Associate Chief
Counsel (International), (202) 317–4953;
concerning the proposed regulations
under sections 704 through 706 and
§§ 301.6225–4 and 301.6226–4, Allison
R. Carmody or Meghan M. Howard of
the Office of Associate Chief Counsel
(Passthroughs and Special Industries),
(202) 317–5279; concerning the
submission of comments, the hearing, or
to be placed on the building access list
to attend the hearing, Regina Johnson,
(202) 317–6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
regulations under sections 704 through
706 to amend the Income Tax
Regulations (26 CFR part 1) under
Subpart—Partners and Partnerships and
proposed regulations under sections
6221 through 6241 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 (BBA), as amended by the
Protecting Americans from Tax Hikes
Act of 2015, Public Law 114–113 (PATH
Act) and sections 201 through 207 of the
TTCA, Public Law 115–141. This
document also withdraws portions of
proposed regulations under sections 704
through 706 and 6221 through 6241 that
were published in the Federal Register
on June 14, 2017 (REG–136118–15, 82
FR 27334), November 30, 2017(REG–
119337–17, 82 FR 56765), December 19,
2017(REG–120232–17 and REG–
120233–17, 82 FR 27071), and February
2, 2018 (REG–118067–17, 83 FR 4868).
PO 00000
Frm 00002
Fmt 4701
Sfmt 4702
Section 1101(a) of the BBA removed
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 of the Code (subchapter C
of chapter 63) contained the unified
partnership audit and litigation rules
that were commonly referred to as the
TEFRA partnership procedures or
simply TEFRA. Section 1101(b) of the
BBA also removed subchapter D of
chapter 63 of the Code and part IV of
subchapter K of chapter 1 of the Code,
rules applicable to electing large
partnerships, effective for partnership
taxable years beginning after December
31, 2017. Section 1101(c) of the BBA
replaced the TEFRA partnership
procedures and the rules applicable to
electing large partnerships with a
centralized partnership audit regime
that, in general, determines, assesses,
and collects tax at the partnership level.
On December 18, 2015, section 1101
of the BBA was amended by the PATH
Act. 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 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) (June 2017 NPRM)
proposing rules under section 6221
regarding the scope and election out of
the centralized partnership audit
regime, section 6222 regarding
consistent treatment by partners, section
6223 regarding the partnership
representative, section 6225 regarding
partnership adjustments made by the
IRS and determination of the amount of
the partnership’s liability (referred to as
the imputed underpayment), section
6226 regarding the election for partners
to take partnership adjustments into
account, section 6227 regarding
administrative adjustment requests
(AARs), and section 6241 regarding
definitions and special rules. The
Treasury Department and the IRS
received written public comments in
response to the regulations proposed in
the June 2017 NPRM, and a public
hearing regarding the proposed
regulations was held on September 18,
2017.
On November 30, 2017, the Treasury
Department and the IRS published in
the Federal Register (82 FR 56765) a
notice of proposed rulemaking (REG–
119337–17) (November 2017 NPRM)
proposing rules regarding international
provisions under the centralized
partnership audit regime, including
rules relating to the withholding of tax
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
on foreign persons, the withholding of
tax to enforce reporting on certain
foreign accounts, and the treatment of
creditable foreign tax expenditures of a
partnership. No written comments were
submitted in response to this NPRM,
and no hearing was requested or held.
On December 19, 2017, the Treasury
Department and the IRS published in
the Federal Register (82 FR 27071) a
notice of proposed rulemaking (REG–
120232–17 and REG–120233–17)
(December 2017 NPRM) proposing
administrative and procedural rules
under the centralized partnership audit
regime, including rules addressing
assessment and collection, penalties and
interest, periods of limitations on
making partnership adjustments, and
judicial review of partnership
adjustments. The regulations proposed
in the December 2017 NPRM also
provided rules addressing how passthrough partners take into account
adjustments under the alternative to
payment of the imputed underpayment
described in section 6226 and under
rules similar to section 6226 when a
partnership files an AAR under section
6227. Written comments were received
in response to the December 2017
NPRM. However, no hearing was
requested or held.
On January 2, 2018, the Treasury
Department and the IRS published in
the Federal Register (82 FR 28398) final
regulations under section 6221(b)
providing rules for electing out of the
centralized partnership audit regime.
On February 2, 2018, the Treasury
Department and the IRS published in
the Federal Register (83 FR 4868) a
notice of proposed rulemaking (REG–
118067–17) (February 2018 NPRM)
proposing rules for adjusting tax
attributes under the centralized
partnership audit regime. Written
comments were received in response to
the February 2018 NPRM. However, no
hearing was requested or held.
On March 23, 2018, Congress enacted
the TTCA, which made a number of
technical corrections to the rules under
the centralized partnership audit
regime. The amendments under the
TTCA 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 9, 2018, the Treasury
Department and the IRS published in
the Federal Register (83 FR 39331) final
regulations under section 6223
providing rules relating to partnership
representatives and final regulations
under § 301.9100–22 providing rules for
electing into the centralized partnership
audit regime for taxable years beginning
on or after November 2, 2015 and before
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
January 1, 2018. Corresponding
temporary regulations under
§ 301.9100–22T were also withdrawn.
In light of the technical corrections
made by the TTCA, to the extent
regulations have not already been
finalized, this document withdraws the
regulations proposed in the June 2017
NPRM, the November 2017 NPRM, the
December 2017 NPRM, and the
February 2018 NPRM (collectively, the
prior NPRMs) and proposes regulations
reflecting the technical corrections
made by the TTCA. The regulations
proposed in this document also include
clarifications, unrelated to the TTCA as
discussed in the Explanation of
Provisions section of this preamble. In
addition, certain regulations have been
reordered and renumbered,
typographical errors have been
corrected, nonsubstantive editorial
changes have been made, and the
applicability date provisions in the
regulations have been revised to replace
references to § 301.9100–22T with
references to § 301.9100–22. Finally, the
assumed highest rate of tax for
corporations in the examples for all
applicable periods is now 20 percent to
more closely reflect the corporate tax
rate in effect under section 11 (as
amended by section 13001 of ‘‘[a]n Act
to provide for the reconciliation
pursuant to titles II and V of the
concurrent resolution on the budget for
fiscal year 2018,’’ Public Law 115–97
(the ‘‘Act’’)).
Although this document withdraws
the prior NPRMs, the Explanation of
Provisions sections contained in the
preambles of the withdrawn NPRMs
remain relevant. Therefore, to the extent
not inconsistent with the Explanation of
Provisions section of this preamble or
the preamble to the portions of the
proposed regulations that have already
been finalized, those Explanation of
Provision sections are incorporated by
reference in this document. Federal
Register citations are provided to assist
with locating the relevant section of the
preamble in the prior NPRMs. The prior
NPRMs are also included in the
rulemaking docket for this notice of
proposed rulemaking on
www.regulations.gov.
This document does not address
written comments that were submitted
in response to the regulations proposed
in the prior NPRMs or respond to any
statements made during the public
hearing held on September 18, 2017.
Except to the extent that the written
comments relate to the final regulations
under section 6221(b) and section 6223,
such comments and any comments
received in response to this notice of
proposed rulemaking will be addressed
PO 00000
Frm 00003
Fmt 4701
Sfmt 4702
41955
when the regulations proposed in this
document are finalized.
Explanation of Provisions
1. Scope of the Centralized Partnership
Audit Regime and Partnership-Related
Item
Section 6221(a) provides for the
determination of certain adjustments at
the partnership level under the
centralized partnership audit regime.
Prior to amendment by the TTCA,
section 6221(a) provided 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, any
tax attributable thereto shall be assessed
and collected, and the applicability of
any penalty, addition to tax, or
additional amount which relates to an
adjustment to any such item or share
shall be determined at the partnership
level. Prior to amendment by the TTCA,
section 6241(a)(2) provided that the
term ‘‘partnership adjustment’’ meant
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 201(c)(2) of the TTCA
amended section 6221(a) by replacing
the phrase ‘‘items of income, gain, loss,
deduction, or credit of a partnership for
a partnership taxable year (and any
partner’s distributive share thereof)’’
with the phrase ‘‘a partnership-related
item.’’ Section 6221(a) now provides
that any adjustment to a partnershiprelated item and the applicability of any
penalty, addition to tax, or additional
amount which relates to an adjustment
to any partnership-related item shall be
determined at the partnership level.
Additionally, section 6221(a) provides
that any tax attributable to an
adjustment to a partnership-related item
shall be assessed and collected at the
partnership level.
Section 201(a) of the TTCA amended
section 6241(2) to provide that the term
‘‘partnership adjustment’’ means any
adjustment to a partnership-related
item, and the term ‘‘partnership-related
item’’ means any item or amount with
respect to the partnership (without
regard to whether or not such item or
amount appears on the partnership’s
return and including an imputed
underpayment and any item or amount
relating to any transaction with, basis
in, or liability of, the partnership) which
is relevant (determined without regard
to subchapter C of chapter 63) in
determining the tax liability of any
person under chapter 1 of the Code
E:\FR\FM\17AUP3.SGM
17AUP3
41956
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
(chapter 1) and any partner’s
distributive share thereof.
By eliminating the reference to items
of income, gain, loss, deduction, or
credit of a partnership, and instead
referring to partnership-related items,
which is broadly defined, the
amendments by the TTCA clarify that
the scope of the centralized partnership
audit regime is not narrower than the
scope of the partnership audit
procedures under TEFRA. Joint Comm.
on Taxation, JCX–6–18, Technical
Explanation of the Revenue Provisions
of the House Amendment to the Senate
Amendment to H.R. 1625 (Rules
Committee Print 115–66), 37 (2018)
(JCX–6–18). Rather, the centralized
partnership audit regime is intended to
have a scope sufficient to address those
items that would have been considered
partnership items, affected items, and
computational adjustments under
TEFRA, including the regulations. Id.
A. Proposed § 301.6221(a)–1
Proposed rules under § 301.6221(a)–1
were previously published in the
Federal Register (82 FR 27372–73) in
the June 2017 NPRM and the November
NPRM (82 FR 56776) (former proposed
§ 301.6221(a)–1). Former proposed
§ 301.6221(a)–1(a) provided 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. Former proposed § 301.6221(a)–
1(b)(1)(i) defined the phrase ‘‘items of
income, gain, loss, deduction or credit’’
to mean 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 IRS for the partnership’s taxable
year, and any information in the
partnership’s books and records for the
taxable year. In addition, former
proposed § 301.6221(a)–1(b)(1)(ii)
provided that any factors that needed to
be taken into account to determine or
allocate the tax treatment of items
adjusted under the centralized
partnership audit regime were also to be
determined at the partnership level.
Former proposed § 301.6221(a)–1(b)(2)
also addressed items included within
the phrase ‘‘partner’s distributive
share.’’ Because the TTCA’s amendment
of the scope of the centralized
partnership audit regime is
accomplished by adding a new defined
term—‘‘partnership-related item’’—the
majority of the rules under former
proposed § 301.6221(a)–1(b) that
addressed the scope of what is adjusted
at the partnership level are now
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
incorporated into proposed § 301.6241–
6 which defines the term ‘‘partnershiprelated item.’’
Proposed § 301.6221(a)–1(a) now
provides the general rule that, except as
otherwise provided under the
centralized partnership audit regime,
any adjustments to partnership-related
items and the applicability of any
penalty, addition to tax, or additional
amount that relates to an adjustment to
any such items are determined at the
partnership level. In addition, proposed
§ 301.6221(a)–1(a) provides that any
chapter 1 tax attributable to an
adjustment to a partnership-related item
is assessed and collected at the
partnership level. See section 13 of the
preamble for a discussion of special
enforcement matters pertaining to
partnership-related items that may be
adjusted outside of the centralized
partnership audit regime.
Proposed § 301.6221(a)–1(a) further
provides that any consideration
necessary to make a determination at
the partnership level under the
centralized partnership audit regime is
made at the partnership level. This
would include the period of limitations
on making adjustments under section
6235 as well as any facts necessary to
calculate any imputed underpayment
under section 6225, except as otherwise
provided under the centralized
partnership audit regime. These
determinations previously constituted
factors described under former proposed
§ 301.6221(a)–1(b)(1)(ii)(F) and (I).
B. Proposed § 301.6241–6
Proposed § 301.6241–6 defines the
term ‘‘partnership-related item.’’
Proposed § 301.6241–6(a) provides the
general rule that a partnership-related
item is any item or amount with respect
to the partnership which is relevant in
determining the tax liability of any
person under chapter 1 and any
partner’s distributive share of any such
item or amount.
Proposed § 301.6241–6(b) provides
that an item or amount is with respect
to a partnership without regard to
whether or not such item or amount
appears on the partnership return. An
item or amount is with respect to a
partnership if: The item or amount is
shown or reflected, or required to be
shown, or reflected, on a return of the
partnership; the item or amount is in the
partnership’s books and records; the
item or amount is an imputed
underpayment; the item or amount
relates to any transaction with, basis in,
or liability of the partnership; or the
item or amount relates to a transaction
under section 707(a)(2), 707(b), or
707(c).
PO 00000
Frm 00004
Fmt 4701
Sfmt 4702
Under proposed § 301.6241–6(b)(4)
and (7), an item or amount that relates
to any transaction with, or liability of,
the partnership, is with respect to a
partnership only if the item or amount
relates to a transaction or liability
between the partnership and a partner
acting in its capacity as a partner or an
indirect partner (as defined in proposed
§ 301.6241–1(a)(4)) acting in its capacity
as an indirect partner. Accordingly, an
item or amount that relates to any
transaction with or liability of the
partnership is not with respect to the
partnership if the item or amount is
reported (or reportable) solely by a
person other than the partnership, a
partner not acting in its capacity as a
partner, or an indirect partner not acting
in its capacity as an indirect partner
(except for transactions under section
707). Proposed § 301.6241–6(b)(8)
provides that any determination
necessary to make an adjustment to an
item or amount described in proposed
§ 301.6241–6(b)(1) through (b)(7) is also
an item or amount with respect to the
partnership.
Proposed § 301.6241–6(c) provides
that the determination of whether an
item or amount is relevant in
determining the tax liability of any
person under chapter 1 is made without
regard to the provisions of the
centralized partnership audit regime.
Proposed § 301.6241–6(c) also clarifies
that an item or amount of a partnership
is relevant in determining the liability of
any person under chapter 1 without
regard to whether such item or amount,
or adjustment to such item or amount,
has an effect on the tax liability of any
particular person under chapter 1.
Section 6241(2)(B)(i) does not limit
whether an item is relevant in
determining tax liability under chapter
1 to whether the item is relevant to
determining the tax liability of a partner
of the partnership under chapter 1.
Rather, the statutory language refers to
liability under chapter 1 of ‘‘any
person.’’ An item or amount is a
partnership-related item if the item or
amount is relevant in determining any
person’s liability under chapter 1 if the
item might have any effect on any
person’s liability under chapter 1
regardless of whether it actually does
have such an effect. Consequently, the
IRS is not required to determine if an
adjustment would have an actual effect
on any person’s chapter 1 liability under
the Code.
Proposed § 301.6241–6(d) provides a
list of examples of partnership-related
items. These examples are largely the
same as the items described in former
proposed § 301.6221(a)–1(b)(1) with a
few minor revisions. First, the
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
references to ‘‘foreign,’’ ‘‘tax,’’ and
‘‘§ 1.704–1(b)(4)(viii)(b)’’ in the example
regarding creditable expenditures were
removed to clarify that partnershiprelated item includes any creditable
expenditures, not just a creditable
foreign tax expenditure. Also, the
‘‘including . . .’’ phrase from each
example was removed to be consistent
with the broad scope of the centralized
partnership audit regime and does not
reflect a substantive change. No
inference should be drawn from the
removal of that language.
Proposed § 301.6241–6(e) provides
examples that illustrate the rules under
proposed § 301.6241–6.
2. Partner’s Return Must Be Consistent
With Partnership Return
Prior to enactment of the TTCA,
section 6222 provided that a partner
shall 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. Section 201(c) of the
TTCA amended section 6222 to provide
that a partner shall treat on the partner’s
return ‘‘any partnership-related item’’ in
a manner which is consistent with the
treatment of such item on the
partnership return.
amozie on DSK3GDR082PROD with PROPOSALS3
A. Proposed § 301.6222–1
Proposed rules under § 301.6222–1
were previously published in the
Federal Register (82 FR 27375–78) in
the June 2017 NPRM (former proposed
§ 301.6222–1). For an explanation of the
rules under former proposed 301.6222–
1, see 82 FR 27345–46.
Former proposed § 301.6222–1(a)
provided 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. The
reference in former proposed
§ 301.6222–1(a) to ‘‘each item of
income, gain, loss, deduction, or credit
attributable to a partnership’’ has been
replaced with a reference to ‘‘any
partnership-related item’’ to reflect the
statutory change to section 6222(a). In
addition, references throughout former
proposed § 301.6222–1 to the term
‘‘item’’ have been replaced with
references to the term ‘‘partnershiprelated item,’’ as appropriate.
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
3. Imputed Underpayment, Modification
of Imputed Underpayment, and
Adjustments That Do Not Result in an
Imputed Underpayment
Section 6225 provides rules governing
the determination of the imputed
underpayment, modification of the
imputed underpayment, and the
treatment of adjustments that do not
result in an imputed underpayment.
Section 202(c) of the TTCA amended
section 6225(a) to reflect the new term
‘‘partnership-related item’’ and to
provide that in the case of adjustments
to partnership-related items that result
in an imputed underpayment the
partnership shall pay an amount equal
to the imputed underpayment in the
adjustment year as provided in section
6232. In the case of adjustments that do
not result in an imputed underpayment,
such adjustments shall be taken into
account by the partnership in the
adjustment year.
Section 202(a) of the TTCA amended
section 6225(b)(1) to provide that the
Secretary shall determine any imputed
underpayment with respect to any
reviewed year by appropriately netting
all partnership adjustments to such
reviewed year and applying the highest
rate of tax in effect for that year under
section 1 or 11. Section 202(a) of the
TTCA also amended section 6225(b)(2)
to provide that in the case of any
adjustment that reallocates the
distributive share of any item from one
partner to another, such adjustment
shall be taken into account by
disregarding so much of such
adjustment as results in a decrease in
the amount of the imputed
underpayment.
Section 202(a) of the TTCA also
added paragraphs (b)(3) and (b)(4) to
section 6225. Section 6225(b)(3)
provides that partnership adjustments
for any reviewed year shall first be
separately determined (and netted as
appropriate) within each category of
items that are required to be taken into
account separately under section 702(a)
or other provision of the Code. Section
6225(b)(4) provides if any adjustment
would (but for section 6225(b)(4)) result
in a decrease in the amount of the
imputed underpayment, and could be
subject to any additional limitation
under the provisions of the Code (or not
allowed, in whole or in part, against
ordinary income) if such adjustment
were taken into account by any person,
such adjustment shall not be taken into
account when appropriately netting
partnership adjustments under section
6225(b)(1)(A) except to the extent
otherwise provided by the Secretary.
PO 00000
Frm 00005
Fmt 4701
Sfmt 4702
41957
Section 202(b) of the TTCA amended
several provisions relating to
modifications of imputed
underpayments. Sections 6225(c)(3),
(c)(4)(A), and (c)(5)(A)(i), which
previously referred to the ‘‘portion of
the imputed underpayment,’’ were
amended to refer to the ‘‘portion of the
adjustment.’’ This amendment clarifies
that modifications under sections
6225(c)(3), (c)(4), and (c)(5) result in
disregarding the portion of the
partnership adjustment affected by the
modification, rather than the portion of
the imputed underpayment. Section
202(c) of the TTCA also added section
6225(c)(9), which provides that the
Secretary shall establish procedures
under which the adjustments described
in section 6225(a)(2)—adjustments that
do not result in an imputed
underpayment—may be modified in
such manner as the Secretary
determines appropriate.
Section 203 of the TTCA amended
section 6225(c)(2) relating to the
procedures for partners to take
adjustments into account during
modification. Section 6225(c)(2)(A)
governs the filing of amended returns by
partners. Section 6225(c)(2)(B) provides
for an alternative procedure to the filing
of amended returns. Section
6225(c)(2)(C) provides rules for
adjustments that reallocate the
distributive share of any item from one
partner to another. Section 6225(c)(2)(D)
provides that sections 6501 and 6511
shall not apply in certain situations
related to amended returns and the
alternative procedure to filing amended
returns. Section 6225(c)(2)(E) provides
that any adjustments to tax attributes
that occur as a result of a modification
under section 6225(c)(2) are binding on
the partners and the partnership.
Section 6225(c)(2)(F) provides rules for
tiered structures, including defining the
term ‘‘relevant partner’’ to mean any
partner in the chain of ownership of any
partnerships that are partners in the
partnership requesting modification.
A. Proposed §§ 301.6225–1, 301.6225–2,
and 301.6225–3
Proposed rules under §§ 301.6225–1,
301.6225–2, and 301.6225–3 were
previously published in the Federal
Register in the June 2017 NPRM (82 FR
27382–91), the November 2017 NPRM
(82 FR 56776), and in the December
2017 NPRM (82 FR 60154) (collectively,
former proposed §§ 301.6225–1,
301.6225–2, and 301.6225–3). For an
explanation of the rules under former
proposed §§ 301.6225–1, 301.6225–2,
and 301.6225–3, see 82 FR 27350–58, 82
FR 56766–75, and 82 FR 60152–53.
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41958
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
Proposed § 301.6225–1 has been
reorganized to clarify the process for
determining an imputed underpayment.
This reorganization, when compared to
former proposed § 301.6225–1 (1) more
clearly describes the steps necessary to
determine an imputed underpayment
and adjustments that do not result in an
imputed underpayment; (2) consolidates
rules regarding adjustments that do not
result in an imputed underpayment; and
(3) relocates rules regarding creditable
expenditures to more clearly explain
how to account for creditable
expenditures in the determination of the
imputed underpayment.
Proposed § 301.6225–1(b) addresses
the calculation of the imputed
underpayment. Due to the number of
adjustments that could be made based
on the definition of partnership-related
item, the IRS will need to address
circumstances in which multiple
partnership-related items are adjusted to
address a single issue or transaction in
the administrative proceeding.
Adjusting multiple partnership-related
items that relate to the same issue or
transaction could result in an imputed
underpayment that double-counts some
of the adjustments even though, if the
partnership and partners had properly
reported the item, one or more
adjustments would have been subsumed
by another item. To prevent doublecounting the individual adjustments as
inputs into the imputed underpayment,
proposed § 301.6225–1(b)(4) provides
that the IRS may treat adjustments that
would otherwise be double-counted as
zero for purposes of determining the
imputed underpayment.
Proposed § 301.6225–1(c) describes
the different groupings in which
adjustments are placed for purposes of
determining an imputed underpayment.
These groupings are the reallocation
grouping, the credit grouping, the
creditable expenditure grouping, and
the residual grouping. Proposed
§ 301.6225–1(c)(1) provides authority
for the IRS to alter the manner in which
adjustments are grouped to
appropriately reflect the facts and
circumstances.
Proposed § 301.6225–1(c)(2) defines
the term ‘‘reallocation adjustment’’ and
provides that in general reallocation
adjustments are placed in the
reallocation grouping. Under proposed
§ 301.6225–1(c)(3), however,
reallocation adjustments to credits are
placed in the credit grouping, and under
§ 301.6225–1(c)(4), reallocation
adjustments to creditable expenditures
are placed in the creditable expenditure
grouping, similar to the rule under
former proposed § 301.6225–1(d)(2)(iv).
Proposed § 301.6225–1(c)(2)(ii) provides
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
that each reallocation adjustment results
in two separate adjustments—one
positive adjustment and one negative
adjustment. Proposed § 301.6225–1(c)(6)
provides similar rules for
recharacterization adjustments.
Proposed § 301.6225–1(c)(5)(ii)
provides rules for how to account for
adjustments to partnership-related items
that are not allocated by the partnership
to its partners under section 704(b).
Proposed § 301.6225–1(d)(2)(iii)(B)
provides that adjustments to such items,
solely for purposes of determining an
imputed underpayment, are treated as a
positive adjustment to income to the
extent appropriate. The Treasury
Department and the IRS request
comments regarding how to treat
recharacterization and reallocation
adjustments related to items that are not
allocated under section 704(b).
To incorporate the additions of
sections 6225(b)(3) and (b)(4), proposed
§ 301.6225–1(d)(1) provides that when
the IRS determines a negative
adjustment (as defined in proposed
§ 301.6225–1(d)(2)(ii)), all partnership
adjustments are placed into
subgroupings based on whether the
adjusted items are required to be taken
into account separately under section
702 and other provisions of the Code.
Proposed § 301.6225–1(d)(1) provides
authority for the IRS to alter the manner
in which adjustments are subgrouped to
appropriately reflect the facts and
circumstances.
Proposed § 301.6225–1(d)(2) provides
for the treatment of certain partnership
adjustments and defines the terms
negative adjustment and positive
adjustment. A negative adjustment is
defined as an adjustment that is a
decrease in an item of income, treated
as a decrease in an item of income, or
that is an increase in an item of credit.
A positive adjustment is an adjustment
that is not a negative adjustment.
Proposed § 301.6225–1(d)(3) requires
that positive and negative adjustments
resulting from reallocation adjustments
and recharacterization adjustments be
placed into separate subgroupings.
Proposed § 301.6225–1(e) provides
rules for appropriately netting
adjustments within each grouping or
subgrouping and provides that
adjustments are not netted between
groupings or subgroupings. The
statutory changes referencing section
702(a) and other provisions of the Code
and the general inability to net negative
adjustments result in restrictions on
netting in these proposed rules that are
broader than the restrictions described
in former proposed § 301.6225–1. The
examples in the proposed rules have
PO 00000
Frm 00006
Fmt 4701
Sfmt 4702
been revised to reflect these broader
restrictions on netting.
Proposed § 301.6225–1(f) provides
rules related to determining whether
adjustments are adjustments that do not
result in an imputed underpayment. If
the adjustments do not result in an
imputed underpayment, such
adjustments are taken into account in
accordance with § 301.6225–3.
Proposed § 301.6225–1(g) provides
the IRS may create multiple imputed
underpayments for a particular tax year.
Proposed § 301.6225–1(g)(2)(iii)(B)
allows a particular adjustment that does
not result in an imputed underpayment
to be associated with a particular
imputed underpayment. This rule
ensures that adjustments that are
appropriately associated with the
imputed underpayment will be taken
into account along with the other
adjustments underlying the imputed
underpayment if an election under
section 6226 is made with respect to
that imputed underpayment. For
example, a reallocation or
recharacterization adjustment generally
results in more than one adjustment. In
the case of a reallocation adjustment,
there are adjustments that affect at least
two partners. In a recharacterization
adjustment, there is an adjustment to
correct the characterization and an
adjustment disallowing the incorrect
characterization. As a result, if an
adjustment that does not result in an
imputed underpayment is due to a
reallocation or recharacterization
adjustment and one side of the
adjustment is used to calculate a
specific imputed underpayment, the
other side of the adjustment, which is
an adjustment that does not result in an
imputed underpayment, is associated
with that specific imputed
underpayment.
The IRS may also determine that other
adjustments that do not result in an
imputed underpayment should be
associated with a specific imputed
underpayment. An adjustment that does
not result in an imputed underpayment
and that is not associated with a
particular specific imputed
underpayment is associated with the
general imputed underpayment.
Proposed § 301.6225–2 provides
guidance on procedures to modify the
imputed underpayment. Former
§ 301.6225–2(b) provided that the effect
of modification was determined by
considering how the modification
changed the relevant portion of the
adjustment. This approach to
modification is consistent with the
amendments to section 6225(c).
Accordingly, proposed § 301.6225–2(b)
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
reflects the rule that modification affects
the portion of an adjustment.
Proposed § 301.6225–2(b)(3)(iv)
provides rules on rate modification in
the case of special allocations. Those
rules generally mirror the statutory rule
under section 6225(c)(4)(B)(ii). The rule
in the statute is complex compared with
other rate modifications in that they
require a valuation analysis. The
Treasury Department and the IRS
request comments on ways to
implement these rules efficiently.
Proposed § 301.6225–2(d)(2) provides
rules regarding amended returns and the
alternative procedure to filing amended
returns. Proposed § 301.6225–2(d)(2)
provides that a partnership may satisfy
the requirements of amended return
modification by submitting all the
information required for amended
return modification and the partners
paying any amount that would be due
if the partners had filed amended
returns. The Treasury Department and
the IRS request comments on how best
to implement the alternative procedure
to filing amended returns.
Former proposed § 301.6225–
2(d)(2)(viii) provided that partners
could raise a reasonable cause defense
under section 6664(c) (or other partnerlevel defense as described in former
proposed § 301.6226–3(i)(3)) with an
amended return in modification.
Proposed § 301.6225–(d)(2)(viii) now
provides that such partner-level
defenses should be raised through a
claim for refund that is submitted
outside of the modification process.
This rule is similar to the current rule
regarding partner-level defenses related
to adjustments that are taken into
account by partners under section 6226.
See proposed § 301.6226–3(d)(3).
Section 6225(c)(6) grants the Secretary
authority to ‘‘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 and
appropriate to carry out the purposes of
this section.’’ The Treasury Department
and the IRS have elected to use this
authority in two circumstances that
were not included in former proposed
§ 301.6225–2. First, the Treasury
Department and the IRS have concluded
that the references to the adjustment
year in section 6225(c)(5) make the
implementation of section 6225(c)(5)
unworkable. No partner would qualify
as a specified partner until the
adjustment year, but at any time during
the administrative proceeding that is
relevant to modification, the adjustment
year does not yet exist. As a result, the
only time this type of modification
could be used would be in the case of
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
an AAR because in that case, the
adjustment year is the year in which the
AAR is filed. In order for modification
under section 6225(c)(5) to be
administrable, proposed § 301.6225–
2(d)(5)(iv) provides that a ‘‘qualified
relevant partner’’ is a person that meets
the definition of a specified partner but
in a year that can be determined at the
time modification is requested. The
definition of a specified passive activity
loss has also been changed to clarify
that the years at issue do not have to be
the adjustment year.
Second, the Treasury Department and
the IRS are also exercising the authority
under section 6225(c)(6) to add a
modification for partnerships with
partners entitled to benefits under an
income tax treaty. Proposed § 301.6225–
2(d)(9) allows modification if a relevant
partner would have qualified for a
reduction or exemption from tax with
respect to a particular item under an
income tax treaty with the United
States. The Treasury Department and
the IRS request comments on this type
of modification.
Proposed § 301.6225–2(e) provides
rules for modification of certain types of
adjustments that do not result in an
imputed underpayment (as defined in
proposed § 301.6225–1(f)). Proposed
§ 301.6225–2(e) limits the ability to
modify such adjustments to certain
types of modification. The Treasury
Department and the IRS request
comments on whether the list of
allowed modifications under proposed
§ 301.6225–2(e) is sufficient.
Lastly, proposed § 301.6225–2 adopts
the term ‘‘relevant partner’’ to describe
any direct or indirect partner in the
partnership seeking modification. See
section 6225(c)(2)(F) and proposed
§ 301.6225–2(a).
Proposed § 301.6225–3 provides rules
regarding adjustments that do not result
in in an imputed underpayment. The
changes in the TTCA comport with
former proposed § 301.6225–3, which
required that the partnership take the
adjustments that do not result in an
imputed underpayment into account as
separately stated or non-separately
stated adjustments as appropriate.
B. Proposed § 301.6225–4
Proposed rules under § 301.6225–4
were previously published in the
Federal Register (83 FR 4868–82) in the
February 2018 NPRM (former proposed
§ 301.6225–4). For an explanation of the
rules under former proposed
§ 301.6225–4, see 82 FR 4877.
Proposed § 301.6225–4 sets forth rules
under which a partnership and its
partners must adjust specified tax
attributes to take into account
PO 00000
Frm 00007
Fmt 4701
Sfmt 4702
41959
partnership adjustments and the
partnership’s payment of an imputed
underpayment. Changes have been
made throughout former proposed
§ 301.6225–4 to conform to the changes
to the definition of ‘‘tax attribute’’ under
proposed § 301.6241–1(a)(10). See
section 11.A of this preamble regarding
the change to the definition of ‘‘tax
attribute.’’ In addition, the definition of
‘‘specified tax attributes’’ in proposed
§ 301.6225–4(a)(2) now includes
earnings and profits under section 312
in response to comments received
concerning the effect of partnership
adjustments on a corporate partner’s
earnings and profits.
4. 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
an imputed underpayment. Under
section 6226, the partnership may elect
to have its reviewed year partners take
into account adjustments made by the
IRS and pay any tax due as a result of
those adjustments. If this election is
made, the reviewed year partners must
pay any chapter 1 tax resulting from
taking into account the adjustments, and
the partnership is not required to pay
the imputed underpayment.
Section 206(d) of TTCA amended
section 6226(a) to clarify that if a
partnership makes a valid election
under section 6226 with respect to an
imputed underpayment, no assessment
of such imputed underpayment, levy, or
proceeding in any court for the
collection of such imputed
underpayment shall be made against
such partnership.
Section 206(e) of the TTCA amended
section 6226(b)(1) to provide that when
a partner takes into account the
adjustments, the partner’s chapter 1 tax
is adjusted by the aggregate of the
‘‘correction amounts’’ determined under
section 6226(b)(2). After amendment by
the TTCA, the correction amounts under
section 6226(b)(2) are defined as the
amounts by which the partner’s chapter
1 tax would increase ‘‘or decrease’’ for
the partner’s first affected year if the
partner’s share of the adjustments were
taken into account for that year. The
correction amounts are also the amount
by which the partner’s chapter 1 tax
would increase ‘‘or decrease’’ by reason
of the adjustment to tax attributes for
any intervening years. See section
6226(b)(2).
Section 204(a) of the TTCA added to
the Code section 6226(b)(4), which
provides that a partnership or S
corporation that receives a statement
under section 6226(a)(2) must file a
E:\FR\FM\17AUP3.SGM
17AUP3
41960
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
partnership adjustment tracking report
with the IRS and furnish statements
under rules similar to the rules of
section 6226(a)(2). If the partnership or
S corporation fails to furnish such
statements, the partnership or S
corporation must compute and pay an
imputed underpayment under rules
similar to the rules of section 6225. A
partnership that is a partner must file
the partnership adjustment tracking
report, and furnish statements or pay an
imputed underpayment,
notwithstanding any election out of the
centralized partnership audit regime
under section 6221(b) by the
partnership for the tax year that
includes the end of the reviewed year of
the audited partnership. The term
‘‘audited partnership’’ means the
partnership in the chain of ownership
that originally made the election under
section 6226. See section 6226(b)(4)(D).
A. Proposed §§ 301.6226–1, 301.6226–2,
and 301.6226–3
Proposed rules under §§ 301.6226–1,
301.6226–2, and 301.6226–3 were
previously published in the Federal
Register in the June 2017 NPRM (82 FR
27391–97), the November 2017 NPRM
(82 FR 56778–79), and the December
2017 NPRM (82 FR 60155–61)
(collectively, former proposed
§§ 301.6226–1, 301.6226–2, and
301.6226–3). For an explanation of the
rules under former proposed
§§ 301.6226–1, 301.6226–2, and
301.6226–3, see 82 FR 27358–66, 82 FR
56769–71, and 82 FR 60148–51.
Former proposed § 301.6226–1(b)(2)
provided that if a partnership makes a
valid election in accordance with
proposed § 301.6226–1, the partnership
is not liable for the imputed
underpayment to which the election
relates. To reflect the statutory change to
section 6226(a), language has been
added to proposed § 301.6226–1(b)(2) to
clarify that if a partnership makes a
valid election under section 6226 with
respect to an imputed underpayment,
the IRS may not assess such imputed
underpayment, levy, or bring a
proceeding in any court for the
collection of that imputed
underpayment against such partnership.
A similar change has also been made to
proposed § 301.6226–1(c)(2) (regarding
invalid elections) to clarify that if a final
determination is made that a purported
election under section 6226 is invalid,
the IRS may assess the imputed
underpayment with respect to which
the election was made against the
partnership without regard to the
limitations under section 6232(b).
Former proposed § 301.6226–3
provided that a reviewed year partner
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
that is furnished a statement under
section 6226(a)(2) is required to pay any
additional chapter 1 tax (additional
reporting year tax) that results from
taking into account the partnership
adjustments on that statement. As
mentioned above in this section of the
preamble, section 206(e) of the TTCA
amended section 6226(b) to provide that
decreases, as well as increases, in
chapter 1 tax that result from taking into
account partnership adjustments are
used in computing a partner’s
additional reporting year tax. Section
206(e) of the TTCA also replaced the
term ‘‘adjustment amount’’ with
‘‘correction amount.’’ Accordingly,
proposed § 301.6226–3 now refers to
‘‘correction amount’’ instead of
‘‘adjustment amount,’’ as appropriate,
and now provides that a reviewed year
partner’s chapter 1 tax for the reporting
year may be increased or decreased by
the additional reporting year tax. The
additional reporting year tax is the sum
of the correction amounts for the first
affected year and any correction
amounts for the intervening years.
Under proposed § 301.6226–3(b)(2) and
(3), the correction amounts are the
amounts by which the partner’s chapter
1 tax for the taxable year would be
increased or decreased if the partner’s
taxable income for that year were
recomputed by taking into account, in
the case of the first affected year, the
partner’s share of the partnership
adjustments reflected on the statement
furnished to the partner or, in the case
of any intervening year, any change to
tax attributes of the partner resulting
from the changes in the first affected
year. A correction amount for the first
affected year or any intervening year
may be less than zero and may be used
to offset any correction amounts from
any other year in computing the
additional reporting year tax. The
examples under proposed § 301.6226–
3(h) illustrate situations in which a
correction amount may be less than
zero.
Furthermore, the additional reporting
year tax may be less than zero and may
offset other taxes owed by the partner
on the partner’s reporting year return.
Accordingly, any references to the
additional reporting year tax as a
‘‘liability’’ have been removed from
former proposed § 301.6226–3 to
account for situations in which the
additional reporting year tax is less than
zero.
Section 6226(c)(2) provides that
interest in the case of a section 6226
election is determined at the partner
level, from the due date of the return for
the taxable year to which the increase in
chapter 1 tax is attributable, and at the
PO 00000
Frm 00008
Fmt 4701
Sfmt 4702
underpayment rate under section
6621(a)(2) (substituting 5 percent for 3
percent). As discussed above in this
section of the preamble, the TTCA
amended section 6226(b) to provide that
both increases and decreases in chapter
1 tax are used in computing a partner’s
additional reporting year tax. However,
the TTCA did not similarly amend the
reference to ‘‘increases’’ in section
6226(c)(2) with the result that interest
only applies to the increases in the
chapter 1 tax that would have resulted
from taking into account the partnership
adjustments under section 6226. No
provision under the centralized
partnership audit regime provides for
interest in the case of a decrease in
chapter 1 tax that would have resulted
in the first affected year or any
intervening year if the adjustments were
taken into account in those years.
Accordingly, proposed § 301.6226–
3(c)(1) provides that interest on the
correction amounts determined under
proposed § 301.6226–3(b) is only
calculated for taxable years for which
there is a correction amount greater than
zero, that is, taxable years for which
there would have been an increase in
chapter 1 tax if the adjustments were
taken into account.
Proposed § 301.6226–3(c)(1) further
provides that for purposes of calculating
interest on the correction amounts, any
correction amount that is less than zero
does not offset any correction amount
that is greater than zero. Although those
amounts may offset when determining
the additional reporting year tax (as
described in proposed § 301.6226–3(b)),
allowing the same offset for purposes of
calculating interest is inconsistent with
section 6226(c)(2), which provides that
interest is determined with respect to
any increase determined under section
6226(b)(2).
Proposed § 301.6226–3(d)(3) has also
been clarified to provide that if a partner
wants to raise a partner-level defense to
any penalty, addition to tax, or
additional amount, a partner must first
pay the penalty, addition to tax, or
additional amount and file a claim for
refund for the reporting year in order to
raise the defense.
As discussed above in this section of
the preamble, section 204(a) of the
TTCA amended section 6226(b) to
provide that partnerships and S
corporations that are direct or indirect
partners in an audited partnership and
that receive statements under 6226(a)(2)
must file partnership adjustment
tracking reports with the IRS and
furnish statements to their owners
under rules similar to section 6226. If no
statements are furnished, the
partnership or S corporation must
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
compute and pay an imputed
underpayment.
Former proposed § 301.6226–3(e)(1)
provided that a pass-through partner (as
defined in proposed § 301.6241–1(a)(5))
that was furnished a statement
described in proposed § 301.6226–2
(including a statement as described in
former proposed § 301.6226–3(e)(3))
must take into account the adjustments
reflected on that statement by either
furnishing statements to its partners or
by paying an amount calculated like an
imputed underpayment. Any statements
furnished under those provisions were
treated as statements described in
proposed § 301.6226–2, and any passthrough partner receiving a statement
under former proposed § 301.6226–
3(e)(3) was required to also take the
adjustments reflected on the statement
into account by furnishing statements to
its own partners or paying an amount
calculated like an imputed
underpayment. See former proposed
§ 301.6226–3(e)(3)(i) and (iv).
Although the rules under former
proposed § 301.6226–3(e) were largely
consistent with the rules under section
6226(b)(4), some changes were needed
to conform the two sets of rules. First,
proposed § 301.6226–3(a)(1) now
provides that the rules under proposed
§ 301.6226–3(a)(1) apply to a reviewed
year partner except to the extent
otherwise provided in proposed
§ 301.6226–3. Second, proposed
§ 301.6226–3(e) now includes a
requirement that the pass-through
partner must file a partnership
adjustment tracking report. Third,
proposed § 301.6226–3(e) provides a
default rule that a pass-through partner
must furnish statements to its own
partners in accordance with proposed
§ 301.6226–3(e)(3). If a pass-through
partner fails to furnish statements in
accordance with proposed § 301.6226–
3(e)(3), the pass-through partner must
compute and pay an imputed
underpayment. Additionally, language
referring to a pass-through partner
‘‘taking into account’’ the adjustments
under former proposed § 301.6226–3(e)
was removed to more closely align with
the statutory language in section
6226(b)(4). Fourth, proposed
§ 301.6226–3(e) defines and refers to the
term ‘‘audited partnership,’’ which
proposed § 301.6226–3(e)(1) defines as
the partnership that made the election
under § 301.6226–1. See section
6226(b)(4)(D). Lastly, proposed
§ 301.6226–3(e)(4) provides that the
amount a pass-through partner must
compute and pay, if it does not furnish
statements to its partners, is an
‘‘imputed underpayment.’’ See section
6226(b)(4)(A)(ii)(II).
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
Because under proposed § 301.6226–
3(e), pass-through partners compute and
pay an ‘‘imputed underpayment,’’ rather
than calculating correction amounts
under proposed § 301.6226–3(b),
references in former proposed
§ 301.6226–3(b) to amended returns
filed by indirect partners as part of
modification have been deleted. Passthrough partners computing an imputed
underpayment under proposed
§ 301.6226–3(e) may account for
modifications submitted by their
indirect partners, but non-pass-through
partners calculating correction amounts
under proposed § 301.6226–3(b) cannot.
Accordingly, the references in former
proposed § 301.6226–3(b) to amended
returns filed by indirect partners were
removed.
To reflect the change to the definition
of ‘‘tax attribute’’ under proposed
§ 301.6241–1(a)(10) (see section 11.A. of
this preamble), proposed §§ 301.6226–2
and 301.6226–3 now only refer to the
tax attributes of the partner. For
example, proposed §§ 301.6226–2(e)
and 301.6226–3(e)(3)(iii) no longer
require that the audited partnership
report any changes to partnership tax
attributes on the statements furnished to
its partners under section 6226(a)(2).
Therefore, when a partner computes the
partner’s correction amount for any
intervening year, the partner calculates
the amount by which the partner’s
chapter 1 tax for any intervening year
would increase or decrease if any tax
attribute of that partner (for example, a
net operating loss carryover or capital
loss carryover) has been adjusted after
taking into account the partner’s share
of the adjustments in the first affected
year.
Finally, references to ‘‘items’’ or
‘‘items of income, gain, loss, deduction,
or credit’’ throughout former
§§ 301.6226–1, 6226–2, and 6226–3
have been replaced with references to
‘‘partnership-related items.’’
B. Revisions to the Regulations Under
Section 6226 Unrelated to the TTCA
Amendments
In addition to the changes needed to
conform to the amendments by the
TTCA, some additional changes have
been made to former proposed
§§ 301.6226–1, 6226–2, and 6226–3.
First, proposed § 301.6226–1(b)(2) now
provides that only those adjustments
that do not result in an imputed
underpayment which are associated
with an imputed underpayment for
which an election under section 6226 is
made are included in the reviewed year
partner’s share of the partnership
adjustments reported to the partner.
Any adjustments that do not result in an
PO 00000
Frm 00009
Fmt 4701
Sfmt 4702
41961
imputed underpayment which are not
associated with an imputed
underpayment for which an election
under section 6226 is made are taken
into account under section 6225. This
change was necessary to clarify which
partnership adjustments are pushed out
in the case of multiple imputed
underpayments where the push out
election is not made with respect to all
imputed underpayments. See proposed
§ 301.6225–1(g) for rules regarding the
treatment of adjustments that do not
result in an imputed underpayment in
the context of specific imputed
underpayments.
Second, under proposed § 301.6226–
1(c)(1), an election under section 6226
is only valid if all the provisions under
proposed § 301.6226–1 (regarding
making the election) and § 301.6226–2
(regarding the furnishing of statements)
are satisfied, and an election made
under section 6226 is valid until the IRS
determines that the election is invalid.
The rule that an election is valid until
the IRS determines it is invalid was
moved from former proposed
§ 301.6226–1(c)(2) to proposed
§ 301.6226–1(c)(1) to clarify that an
election that does not fully satisfy the
requirements of proposed §§ 301.6226–
1 and 301.6226–2 is valid unless the IRS
determines that the purported election
is invalid. For example, if a partnership
makes an election in accordance with
proposed § 301.6226–1 but fails to
furnish statements to its partners, that
election is valid until the IRS
determines otherwise.
In addition, the word ‘‘final’’ was
removed from before the word
‘‘determination’’ in proposed
§ 301.6226–1(c)(2) when referring to a
determination made by the IRS that a
purported election under section 6226 is
invalid. The removal of the word ‘‘final’’
clarifies that the IRS may determine that
an election is invalid and assess and
collect the imputed underpayment to
which the purported election related
without first being required to make a
proposed or initial determination of
invalidity. Although nothing in the
regulations precludes the IRS from first
notifying the partnership of a potential
problem with an election before
determining the election is invalid,
proposed § 301.6226–1(c)(2) provides
that the IRS may determine that an
election is invalid even if the
partnership has corrected the statements
required to be filed and furnished in
accordance with proposed § 301.6226–
2(d)(3) and also provides that the IRS is
not obligated to require the correction of
any errors prior to determining an
election is invalid.
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41962
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
Third, several changes were made to
clarify that the partnership must
provide correct information in order to
make a valid election under section
6226 and in order for statements to be
properly furnished either under
proposed § 301.6226–2 or proposed
§ 301.6226–3(e)(3). Proposed
§ 301.6226–1(c)(4)(ii) requires the
partnership to provide correct
information in its election, and
proposed § 301.6226–2(e) and proposed
§ 301.6226–3(e)(3)(iii) require that the
statements filed and furnished with the
IRS include correct information.
Additionally, proposed § 301.6226–
2(d)(3) provides that if the IRS cannot
determine whether the statements filed
and furnished by the partnership are
correct because of a failure by the
partnership to comply with any
requirements (such as filing a
partnership adjustment tracking report),
the IRS may, but is not obligated to,
require the partnership to provide
additional information to substantiate
the statements. Proposed § 301.6226–
2(d)(2) extends the rules governing
corrections of errors in statements to
statements furnished by pass-through
partners under proposed § 301.6226–
3(e)(3) and to provide that, if consent of
the IRS is required for a correction, that
corrected statements may not be
furnished until the IRS provides
consent.
Fourth, duplicative language
regarding the definition of the extended
due date for the adjustment year of the
audited partnership was removed from
former proposed § 301.6226–3(e)(3)(ii)
and (e)(4)(ii).
Fifth, in proposed § 301.6226–3(g),
the word ‘‘grantor’’ has been added
between the words ‘‘wholly-owned’’
and ‘‘trusts’’ to clarify that ‘‘whollyowned trusts’’ means ‘‘wholly-owned
grantor trusts.’’
Sixth, the phrase ‘‘an entity described
in § 301.7701–2(c)(2)(i)’’ in former
proposed § 301.6226–3(j) was changed
to ‘‘a wholly-owned entity disregarded
as separate from its owner for Federal
tax purposes in the reviewed year’’ to
conform to the definition of disregarded
entity under proposed § 301.6241–
1(a)(4).
Seventh, proposed § 301.6226–3(c)(2)
now provides that interest on any
penalties, additions to tax, or additional
amounts is calculated from each
applicable taxable year until the
penalty, addition to tax, or additional
amount is paid. Former proposed
§ 301.6226–3(c)(2) provided that interest
was calculated from the first affected
year. Under proposed § 301.6226–
3(d)(2), partners calculate any penalties,
additions to tax, or additional amounts
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
that relate to the partnership
adjustments at the partner level.
Because the adjustments could create
tax effects in more than just the first
affected year (for example, as a result of
changes to tax attributes in an
intervening year), a penalty, addition to
tax, or additional amount might
likewise result in more than just the first
affected year. Accordingly, proposed
§ 301.6226–3(c)(2) provides that interest
on penalties, additions to tax, and
additional amounts runs from the
applicable taxable year (that is, the
particular tax year to which the penalty,
addition to tax, or additional amount
relates).
Finally, certain errors were corrected
in the examples under proposed
§ 301.6226–3(h). Examples 2 through 4
and 6 through 9 under former proposed
§ 301.6226–3(h) incorrectly listed the
last day to file a petition under section
6234 as the date the adjustments became
final, and examples 6 through 9
incorrectly referred to former proposed
§ 301.6226–1(b) as support for this rule.
Under proposed § 301.6226–2(b),
partnership adjustments become finally
determined on 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. The
examples under proposed § 301.6226–
3(h) now reflect that the adjustments
become final on the day after the last
day to file a petition under section 6234
to be consistent with the rule under
§ 301.6226–2(b), and incorrect
references to § 301.6226–1(b) in
Examples 6 through 9 under former
proposed § 301.6226–3(h) have been
replaced with correct references to
§ 301.6226–2(b).
Proposed § 301.6226–4
Proposed rules under §§ 301.6226–4
were previously published in the
Federal Register in the February 2018
NPRM (83 FR 4868) (former proposed
§ 301.6226–4). For an explanation of the
rules under former proposed
§ 301.6226–4, see 83 FR 4874.
Proposed § 301.6226–4 sets forth rules
for adjusting reviewed year partners’ tax
attributes to take into account
partnership adjustments when a
partnership makes an election under
section 6226. To reflect the addition of
section 6226(b)(4), proposed
§ 301.6226–3(e)(4) now provides that a
reviewed year partner that is a passthrough partner must pay an imputed
underpayment if the pass-through
partner does not furnish statements. In
addition, changes have been made
throughout former proposed
§ 301.6226–4 to conform to the change
PO 00000
Frm 00010
Fmt 4701
Sfmt 4702
to the definition of ‘‘tax attribute’’ under
proposed § 301.6241–1(a)(10). See
section 11.A of this preamble. These
changes reflect that the adjustments to
tax attributes taken into account by a
partner should be consistent, regardless
of whether the partner files an amended
return during modification, participates
in the alternative procedure to filing an
amended return, or receives a statement
under section 6226. Accordingly, the
proposed regulations under section
6226 have been revised to refer only to
the tax attributes of the partner in the
intervening years. Additionally,
clarifying changes were made in
proposed § 301.6226–4(b) to conform to
the terminology used in proposed
§ 301.6226–3. Lastly, an incorrect crossreference in former proposed
§ 301.6226–4(c)(4)(iii) has been replaced
with the correct cross-reference.
5. Administrative Adjustment Requests
Section 6227 provides a mechanism
for a partnership to file an AAR to
correct errors on a partnership return for
a prior year. Prior to amendment by the
TTCA, section 6227(a) provided that 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 or any partnership taxable
year. Section 201(c) of the TTCA
amended section 6227(a) by striking
‘‘items of income, gain, loss, deduction,
or credit of the partnership’’ and
inserting ‘‘partnership-related items.’’
Prior to amendment by the TTCA,
section 6227(b) provided that any
adjustment requested in an AAR is
taken into account for the partnership
taxable year in which the AAR is made.
Section 206(p) of the TTCA amended
section 6227(b) by striking ‘‘is made’’
both places it appears and inserting ‘‘is
filed.’’
Prior to amendment by the TTCA,
section 6227(b)(1) provided that if an
adjustment results in an imputed
underpayment, the adjustment may be
determined and taken into account by
the partnership 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 206(p) of the TTCA amended
section 6227(b)(1) by striking the
reference to ‘‘paragraphs (2), (6), and
(7)’’ of section 6225(c) (relating to
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
modification) and inserting ‘‘paragraphs
(2), (7), and (9)’’ of section 6225(c). As
a result, section 6227(b)(1) provides that
adjustments requested in an AAR are
taken into account by the partnership
under rules similar to section 6225
(except for sections 6225(c)(2), (7), and
(9)). As amended by TTCA, section
6225(c)(2) provides rules allowing for
amended returns and an alternative
procedure to filing amended returns for
purposes of modification, section
6225(c)(7) provides that information
required to be submitted for purposes of
modification be submitted within 270
days from the date on which the notice
of a proposed partnership adjustment is
mailed under section 6231, and section
6225(c)(9) provides for modification
with respect to adjustments that do not
result in an imputed underpayment.
Lastly, section 206(f) of the TTCA
added section 6227(d) to provide that
the Secretary shall issue regulations or
other guidance which provide for the
proper coordination of section 6227 and
section 905(c).
A. Proposed §§ 301.6227–1, 301.6227–2,
and 301.6227–3
Proposed rules under §§ 301.6227–1,
301.6227–2, and 301.6227–3 were
previously published in the Federal
Register (82 FR 27397–99) in the June
2017 NPRM, November 2017 NPRM (82
FR 56779), and December 2017 NPRM
(82 FR 60161) (collectively, former
proposed §§ 301.6227–1, 301.6227–2,
and 301.6227–3). For an explanation of
the rules under former proposed
§§ 301.6227–1, 301.6227–2, and
301.6227–3, see 82 FR 27366–69, 82 FR
56769, and 82 FR 60151.
Former proposed § 301.6227–1(a)
provided that 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 or if the partner is a
partnership-partner filing an AAR under
former proposed § 301.6227–3(c).
Proposed § 301.6227–3(c), however,
does not provide for the filing of an
AAR by a partnership-partner. Rather,
under proposed § 301.6227–3(c), a
partnership-partner takes into account
adjustments requested in an AAR by the
partnership in which it is a partner by
following the rules under proposed
§ 301.6226–3(e) (except to the extent
otherwise provided). Proposed
§ 301.6227–1(a) therefore is changed to
remove the reference to partnershippartners, and now only refers to
partners filing AARs in their capacity as
a partnership representative.
Proposed § 301.6227–2(a)(1) provides
the rules for determining whether an
imputed underpayment results from
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
adjustments requested in an AAR by
referring to the rules under proposed
§ 301.6225–1. Under proposed
§ 301.6227–2(a)(2), in the case of an
AAR, a partnership may reduce an
imputed underpayment as a result of
certain modifications permitted under
proposed § 301.6225–2. Under former
proposed § 301.6227–2(a)(2), these
modifications included modifications
that relate to tax-exempt partners
(proposed § 301.6225–2(d)(3)), rate
modification (proposed § 301.6225–
2(d)(4)), modification related to certain
passive losses of publicly traded
partnerships (proposed § 301.6225–
2(d)(5)), modification applicable to
qualified investment entities described
in section 860 (proposed § 301.6225–
2(d)(7)), and other modifications to the
extent permitted under future IRS
guidance (proposed § 301.6225–
2(d)(10)). Proposed § 301.6227–2(a)(2)
adopts this same list of modifications
and adds modifications related to the
composition of the groupings that factor
into the calculation of the imputed
underpayment (proposed § 301.6225–
2(d)(6)(ii)) and modifications related to
tax treaties (proposed § 301.6225–
2(d)(9)).
Proposed § 301.6227–2(a)(2) provides
that other types of modification, such as
modification under proposed
§ 301.6225–2(d)(2) with respect to
amended returns, including the
alternative procedure to filing amended
returns, and modification under
proposed § 301.6225–2(d)(8) with
respect to closing agreements, are not
available in the case of an AAR.
Modifications with respect to
adjustments that do not result in an
imputed underpayment also are also not
available in the case of an AAR.
Former proposed § 301.6227–2(a)(2)(i)
provided that a partnership did not
need to seek IRS approval prior to
modifying an imputed underpayment
that results from adjustments requested
in an AAR. Section 6227(b)(1) does not
explicitly carve out section
6225(c)(8),which states that any
modification to the imputed
underpayment made under section
6225(c) shall be made only upon
approval of such modification by the
Secretary. Section 6227(b)(1) does
provide, however, that partnerships take
into account adjustments requested in
an AAR under rules similar to the rules
under section 6225. In proposing rules
similar to the rules under section 6225
for the purposes of requesting an AAR
and taking into account adjustments, the
Treasury Department and the IRS have
determined it is more efficient and
beneficial for both the IRS and for
partnerships to be able to apply
PO 00000
Frm 00011
Fmt 4701
Sfmt 4702
41963
modifications when filing an AAR
without first securing approval of
permitted modifications. Accordingly,
although any modifications in
connection with an AAR are subject to
IRS approval, the rules under proposed
§ 301.6227–2(a)(2)(i) provide that the
partnership is not required to obtain the
approval from the IRS before applying
modifications when calculating the
amount of the imputed underpayment
the partnership needs to pay when filing
the AAR. Proposed § 301.6227–
2(a)(2)(ii) also provides, however, that
modifications to an imputed
underpayment resulting from
adjustments requested in an AAR may
not be applied by the partnership if the
AAR that is filed does not include
notification to the IRS of the
modification, a description of the effect
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.
Under proposed § 301.6227–3, a
reviewed year partner that receives a
statement described in proposed
§ 301.6227–1(d) must treat that
statement as if it were provided under
section 6226(a)(2). Former proposed
§ 301.6227–3(b)(1) also provided that
the restriction in former proposed
§ 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.
Proposed § 301.6227–3(b)(1) no longer
needs to address that restriction because
the restriction in former proposed
§ 301.6226–3(b)(1) no longer exists.
Therefore, the exception in former
proposed § 301.6227–3(b)(1) has been
eliminated. Additionally, the provision
in former proposed § 301.6227–3(b)(2),
stating that when the additional
reporting tax results in being less than
zero the partner may reduce his chapter
1 tax for the reporting year, is moved to
proposed § 301.6227–3(b)(1).
Former proposed § 301.6227–1
included a reserved paragraph regarding
notice of change to amounts of
creditable foreign tax expenditures.
Proposed § 301.6227–1 also reserves this
same paragraph and does not contain
rules to coordinate sections 6227 and
905(c). The Treasury Department and
the IRS seek comments regarding the
coordination of sections 6227 and 905(c)
for consideration in future guidance.
Lastly, the reference to ‘‘items of
income, gain, loss, deduction, or credit
of the partnership’’ in former proposed
§ 301.6227–1(a) has been replaced with
E:\FR\FM\17AUP3.SGM
17AUP3
41964
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
6. Notices of Proceedings and
Adjustments
B. Revisions to the Regulations Under
Section 6227 Unrelated to the TTCA
Amendments
amozie on DSK3GDR082PROD with PROPOSALS3
a reference to ‘‘partnership-related
items.’’
Section 6231(a) provides that the
Secretary shall mail to the partnership
and to the partnership representative a
notice of any administrative proceeding
initiated at the partnership level, notice
of any proposed partnership adjustment
resulting from that proceeding
(NOPPA), and notice of any final
partnership adjustment (FPA). Prior to
amendment by the TTCA, section
6231(a) also provided that any FPA
shall be mailed no earlier than 270 days
after the date on which the NOPPA is
mailed. Such notices shall be sufficient
if mailed to the last known address of
the partnership and the partnership
representative, even if the partnership
has terminated its existence. See section
6231(a) flush language (prior to
amendment by the TTCA).
Prior to amendment by the TTCA, the
statute did not limit the period for the
IRS to propose adjustments under the
centralized partnership audit regime.
Section 206(h) of the TTCA amended
section 6231 to address this issue. As
amended, section 6231(b)(1) provides
that any NOPPA shall not be mailed
later than the date determined under
section 6235(a)(1), which is generally
the date that is 3 years after the later of:
(1) The date on which the partnership
return for the taxable year was filed, (2)
the return due date for the taxable year,
or (3) the date on which the partnership
filed an AAR with respect to the taxable
year.
Section 206(h) of the TTCA makes a
conforming amendment to section
6231(a) to reflect the addition of the
period of limitations to made
partnership adjustments. Prior to
amendment, section 6231(a) provided
that ‘‘Such notices shall be sufficient if
mailed to the last known address of the
partnership representative or the
partnership (even if the partnership has
terminated its existence).’’ The
amendment replaced the words ‘‘Such
notices’’ with ‘‘Any notice of final
partnership adjustment.’’
Section 201(c) of the TTCA also
makes a conforming amendment to
section 6231(a) by striking the phrase
‘‘all items of income, gain, loss,
deduction, or credit of the partnership’’
and inserting ‘‘all partnership-related
items.’’
Proposed § 301.6227–1(a) now
coordinates the rules regarding the filing
of an AAR and the revocation of a
designation of the partnership
representative under § 301.6223–1.
Former proposed § 301.6227–1(a)
provided that the partnership may not
file an AAR solely for the purpose of
allowing the partnership to change the
designation of a partnership
representative. Proposed § 301.6227–
1(a) now adds that when the partnership
changes the designation of the
partnership representative or the
appointment of a designated individual
in conjunction with the filing of an
AAR, the change in designation or
appointment is treated as occurring
prior to the filing of the AAR.
Former proposed § 301.6227–1(b)
provided that an AAR may not be filed
after a notice of administrative
proceeding (NAP) has been mailed. To
account for situations in which the IRS
mails a NAP, but then withdraws it,
proposed § 301.6227–1(b) now provides
that an AAR may not be filed after a
NAP has been mailed, except when the
NAP has been withdrawn under
proposed § 301.6231–1(f).
Additions were also made in
proposed § 301.6227–3(c) to clarify the
rules for pass-through partners,
unrelated to the changes made by the
TTCA. First, proposed § 301.6227–
3(c)(1) provides that when a passthrough partner takes into account
adjustments requested in an AAR in
accordance with proposed § 301.6226–
3(e), the pass-through partner must
provide the information described in
proposed § 301.6227–3(c)(3) as opposed
to the information in described in
proposed § 301.6226–3(e)(3)(iii) when
furnishing statements to its partners.
Second, under proposed § 301.6227–
3(c)(1), a pass-through partner that
computes and pays an imputed
underpayment in accordance with
proposed § 301.6226–3(e)(4) may not
take into account any modifications.
Third, proposed § 301.6227–3(c)(4)
provides that when a pass-through
partner furnishes a statement to an
affected partner under proposed
§ 301.6227–3(c), the affected partner
must treat that statement as if it were a
statement described in proposed
§ 301.6227–3(a) that was furnished to
such affected partner.
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
A. Proposed § 301.6231–1
Proposed rules under § 301.6231–1
were previously published in the
Federal Register (82 FR 60161–62) in
the December 2017 NPRM (former
proposed § 301.6231–1). For an
explanation of the rules under former
PO 00000
Frm 00012
Fmt 4701
Sfmt 4702
proposed § 301.6231–1, see 82 FR
60151–52.
Although not required by statute,
former proposed § 301.6231–1(b)(1)
provided a period of limitations for
making partnership adjustment. That
section provided that a NOPPA may not
be mailed after the expiration of the
period described in section 6235(a)(1),
including any extensions of that period
and after applying any of the special
rules in section 6235(c) (providing
additional time for situations where no
return is filed, fraud, and other specified
reasons).
Former proposed § 301.6231–1(c)
provided that NAPs, NOPPAs, and FPAs
are sufficient if mailed to the last known
address of the partnership and the
partnership representative. As discussed
above in this section of the preamble,
section 6231(a) now provides that any
FPA is sufficient if mailed to the last
known address of the partnership and
the partnership representative. The
Treasury Department and the IRS have
determined that while the last known
address requirement under section
6231(a) only applies to a notice of final
partnership adjustment, the IRS will
also mail the NAP and the NOPPA to
the last known address of the
partnership and the partnership
representative.
Accordingly, because the rules under
former proposed § 301.6231–1(b)(1) and
(c) are consistent with the statutory
changes to section 6231(a), those rules
are unchanged. The only change to
former proposed § 301.6231–1 was to
replace references to ‘‘item of income,
gain, loss, deduction, or credit’’ and to
a ‘‘partner’s distributive share’’ in
former proposed § 301.6231–1(a)(1) with
a reference to ‘‘partnership-related
item’’.
7. Assessment, Collection, and Payment
of Imputed Underpayments
Section 6232(a) provides rules for the
assessment, collection, and payment of
imputed underpayments. Section 206(g)
of the TTCA amended section 6232(a) to
clarify that the assessment of any
imputed underpayment is not subject to
the deficiency procedures under
subchapter B of chapter 63 of the Code
and to clarify that in the case of an AAR,
the underpayment may be assessed
when the AAR is filed. See JCX–6–18,
at 48.
Section 6232(b) provides limitations
on the assessment of an imputed
underpayment. Section 206(g) of the
TTCA amended section 6232(b) to
correct a reference to ‘‘assessment of a
deficiency’’ to now refer to ‘‘assessment
of an imputed underpayment.’’ Section
206(p) of the TTCA also amends section
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
6232(b) to strike the reference to ‘‘this
chapter’’ and replace it with ‘‘this
subtitle (other than subchapter B of this
chapter).’’
Section 205 of the TTCA added a new
subsection (f) to section 6232 to provide
a mechanism for collection of tax due in
the case of a failure of a partnership or
S corporation to pay an imputed
underpayment or specified similar
amount. Under section 6232(f)(1), if any
amount of any imputed underpayment
to which section 6225 applies or any
specified similar amount as defined in
section 6232(f)(2) has not been paid by
the date which is 10 days after the date
on which the Secretary provides notice
and demand for such payment, the
Secretary may assess upon each partner
of the partnership a tax equal to such
partner’s proportionate share of such
amount.
Under section 6232(f)(2), the term
‘‘specified similar amount’’ means the
amount determined under section
6226(b)(4)(ii)(II) and any amount
assessed upon a partner under section
6232(f)(1)(B) that is a partnership or an
S corporation. Section 206(g)(2)(B) of
the TTCA amended section 6232(b) to
provide that the limitations on
assessment with respect to an imputed
underpayment do not apply in the case
of a specified similar amount defined in
section 6232(f)(2).
The Treasury Department and the IRS
are not proposing rules under section
6232(f) at this time. The Treasury
Department and the IRS request
comments with respect to section
6232(f), including the determination of
a partner’s proportionate share of the
unpaid amount, for consideration with
respect to future guidance.
A. Proposed § 301.6232–1
Proposed rules under § 301.6232–1
were previously published in the
Federal Register (82 FR 60162–63) in
the December 2017 NPRM (former
proposed § 301.6232–1). For an
explanation of the rules under former
proposed §§ 301.6232–1, see 82 FR
60152.
Former proposed § 301.6232–1(a)
provided that because the centralized
partnership audit regime under
subchapter C of chapter 63 applies to an
assessment of an imputed
underpayment, the deficiency
procedures under subchapter B of
chapter 63 do not apply. Former
proposed § 301.6232–1(b) provided that
the IRS may assess an underpayment
reflected on an AAR on the date the
AAR is filed. Former proposed
§ 301.6232–1(c) provided limitations on
assessment of the imputed
underpayment, except as otherwise
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
provided in § 301.6232–1. Because the
rules under former proposed
§ 301.6232–1(a) and (b) are consistent
with the statutory changes to section
6232(a), those rules are unchanged.
Proposed § 301.6232–1(c) is generally
the same as former proposed
§ 301.6232–1(c). However, changes were
made to take into account section
206(g)(2)(B) of TTCA, providing that the
limitations on assessment do not apply
to specified similar amounts, and
section 206(p) of TTCA, providing that
the limitations on assessments under
proposed § 301.6232–1(c) apply except
as otherwise provided in subtitle F of
the Code (other than deficiency
procedures under subchapter B of
chapter 63).
With respect to former proposed
§ 301.6232–1(d), the reference to ‘‘items
of income, gain, loss, deduction, or
credit’’ in former proposed § 301.6232–
1(d)(1)(i) was replaced with a reference
to ‘‘partnership-related items.’’
8. Interest and Penalties Related to
Imputed Underpayments
Section 6233 provides rules related to
interest and penalties with respect to
imputed underpayments. Section 206(i)
of the TTCA amended section 6233 by
adding a new subsection (c), which
provides a cross-reference to section
6603 for rules allowing deposits to
suspend the running of interest on
potential underpayments.
A. Proposed §§ 301.6233(a)–1 and
301.6233(b)–1
Proposed rules under §§ 301.6233(a)–
1 and 301.6233(b)–1 were previously
published in the Federal Register (82
FR 60163–65) in the December 2017
NPRM (former proposed §§ 301.6233(a)–
1 and 301.6233(b)–1). For an
explanation of the rules under former
proposed §§ 301.6233(a)–1 and
301.6233(b)–1, see 82 FR 60152–53.
Proposed § 301.6233(a)–1 provides
rules for determining interest and
penalties from the reviewed year, and
proposed § 301.6233(b)–1 provides rules
for determining interest and penalties
from the adjustment year. Neither
former proposed § 301.6233(a)–1 nor
former proposed § 301.6233(b)–1
provided rules regarding deposits to
suspend the running of interest on
underpayments. The Treasury
Department and the IRS are not
proposing rules regarding the
interaction of the deposit rules under
section 6603 and the interest rules
under section 6233. However, the
Treasury Department and the IRS
request comments for consideration in
future guidance regarding the
PO 00000
Frm 00013
Fmt 4701
Sfmt 4702
41965
interaction between section 6603 and
the interest rules under section 6233.
Former proposed § 301.6233(a)–
1(c)(2)(ii)(C) provided a definition of
‘‘negative adjustment’’ and defined that
term through reference to ‘‘items of
income, gain, loss, deduction, or
credit.’’ Proposed § 301.6225–1 now
uses the term ‘‘negative adjustment’’
and the phrase ‘‘items of income, gain,
loss, deduction, or credit’’ has been
removed from subchapter C of chapter
63. To reflect these changes, proposed
§ 301.6233(a)–1(c)(2)(ii)(C) now
provides that a ‘‘decreasing adjustment’’
is ‘‘an adjustment to a partnershiprelated item that resulted in a decrease
to the imputed underpayment.’’
Example 3 under proposed
§ 301.6233(a)–1(c)(3) also reflects
changes to former proposed
§§ 301.6225–1 and 301.6225–2.
Former proposed § 301.6233(a)–
1(c)(2)(ii), regarding how to calculate
the portion of the imputed
underpayment to which a penalty
applies, referred to ‘‘non-credit
partnership adjustments’’ and ‘‘credit
adjustments.’’ Under proposed
§ 301.6225–1(e)(3)(iii) certain
adjustments to creditable expenditures
are treated as an adjustment to a credit
and may impact the calculation of the
imputed underpayment. To properly
account for such adjustments when
determining the portion of an imputed
underpayment subject to a penalty, the
term ‘‘non-credit partnership
adjustment’’ was changed to ‘‘a
partnership adjustment that is not an
adjustment to a credit or treated as an
adjustment to a credit,’’ and the term
‘‘credit adjustment’’ changed to ‘‘an
adjustment to a credit or treated as an
adjustment to a credit.’’
Former proposed § 301.6233(a)–
1(c)(2)(iii)(B), regarding the application
of the substantial understatement
penalty under section 6662(d)(1)(A)(i) to
imputed underpayments, provided that
taxable income meant the net ordinary
business income or loss of the
partnership. The reference to ‘‘ordinary
business’’ failed to account for other
sources of income of the partnership
that are appropriate to consider for
purposes of the substantial
understatement penalty. Therefore,
proposed § 301.6233(a)–1(c)(2)(iii)(B)
now provides that for purposes of
determining the amount of tax required
to be shown on the return it is the net
income or loss of the partnership that is
treated as taxable income. See Page 5 of
Form 1065, Return of Partnership
Income.
Former proposed § 301.6233(a)–
1(c)(2)(v), pertaining to reasonable cause
and good faith defenses, provided that
E:\FR\FM\17AUP3.SGM
17AUP3
41966
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
partner-level defenses may not be raised
in a proceeding of the partnership
except as provided under the
modification procedures pertaining to
amended returns and partner closing
agreements. For clarity, this provision
has been moved to proposed
§ 301.6233(a)–1(c)(1). Furthermore, the
provision allowing partner-level
defenses to penalties to be raised under
the modification procedures has been
removed. A partner may raise a partnerlevel defense by filing a claim for refund
under procedures existing outside of the
centralized partnership audit regime or
through an agreement with the IRS
regarding an adjustment to a
partnership-related item.
amozie on DSK3GDR082PROD with PROPOSALS3
9. Judicial Review of Partnership
Adjustments
Section 6234(a) provides that within
90 days after the date on which an FPA
is mailed under section 6231 with
respect to any partnership taxable year,
the partnership may file a petition for
readjustment for such taxable year with
the Tax Court, the district court in
which the partnership’s principal place
of business is located, or the Court of
Federal Claims. Prior to amendment by
the TTCA, section 6234(b)(1) provided
that a petition for readjustment under
section 6234 may be filed in a district
court of the United States or the Court
of Federal Claims only if the partnership
filing the petition deposits with the
Secretary, on or before the date the
petition is filed, the amount of the
imputed underpayment. Section 206(j)
of the TTCA amended section 6234(b)(1)
to clarify that the amount of the
jurisdictional deposit that the
partnership must make in order to file
a readjustment petition in a district
court or the Court of Federal Claims is
the amount of (as of the date of the filing
of the petition) the imputed
underpayment, penalties, additions to
tax, and additional amounts with
respect to the imputed underpayment.
See JCX–6–18, at 49.
A. Proposed § 301.6234–1
Proposed rules under § 301.6234–1
were previously published in the
Federal Register (82 FR 60165–66) in
the December 2017 NPRM (former
proposed § 301.6234–1). For a further
explanation of the rules under former
proposed § 301.6234–1, see 82 FR
60153.
Former proposed § 301.6234–1(b)
provided that a partnership may file a
petition for a readjustment of any
partnership adjustment in a district
court or the Court of Federal Claims
‘‘only if the partnership filing the
petition deposits with the [IRS], on or
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
before the date the petition is filed, the
amount of any imputed underpayment
resulting from the partnership
adjustment.’’
To reflect the amendment to section
6234(b)(1) made by section 206(j) of the
TTCA regarding the amount of the
deposit, proposed § 301.6234–1(b) now
provides that amount required to be
deposited is the amount (as of the date
of the filing of the petition) of any
imputed underpayment and any
penalties, additions to tax, and
additional amounts with respect to such
imputed underpayment.
To account for the possibility that
multiple imputed underpayments may
be reflected in an FPA, proposed
§ 301.6234–1(b) also now provides that
the partnership must only deposit the
amount of any imputed underpayment
to which the petition for readjustment
relates and the amount of any penalties,
additions to tax, and additional amounts
with respect to such imputed
underpayment.
10. Period of Limitations on Making
Adjustments
Section 6235 provides the period of
limitations on making adjustments
under the centralized partnership audit
regime. Under section 6235(a), the
general rule is that no adjustment for
any partnership taxable year may be
made after the later of three specified
dates. Section 206(k) of the TTCA
amended section 6235(a) by inserting
‘‘or section 905(c)’’ after ‘‘Except as
otherwise provided in this section.’’ The
amendment makes clear that the period
of limitations on making adjustments
under the centralized partnership audit
regime does not limit the period for
notification of the Secretary and
redetermination of tax under section
905(c) with respect to foreign tax
redeterminations.
In addition, section 206(k) of the
TTCA amended section 6235 by striking
paragraph (d), which provided for a
suspension of the period on making
adjustments when the Secretary mails
an FPA. That provision was similar to
a provision that existed under TEFRA,
but the provision has no effect on
making adjustments under the
centralized partnership audit regime.
See JCX–6–18, at 49–50.
A. Proposed § 301.6235–1
Proposed rules under § 301.6235–1
were previously published in the
Federal Register (82 FR 60166–67) in
the December 2017 NPRM (former
proposed § 301.6235–1). For an
explanation of the rules under former
proposed § 301.6235–1, see 82 FR
60153–54.
PO 00000
Frm 00014
Fmt 4701
Sfmt 4702
Proposed § 301.6235–1(a) now reflects
the amendments to section 6235 to
provide an exception for section 905(c)
and to remove the reference to section
6235(d).
11. Definitions and Special Rules
A. Proposed § 301.6241–1
Proposed rules under § 301.6241–1
were previously published in the
Federal Register (82 FR 27399–400) in
the June 2017 NPRM (former proposed
§ 301.6241–1). For an explanation of the
rules under former proposed
§ 301.6241–1, see 82 FR 27369.
Former proposed § 301.6241–1(a)(1)
defined 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). Section 206(p) of the TTCA
amended section 6227 to provide that
an AAR is ‘‘filed,’’ as opposed to
‘‘made.’’ To reflect this amendment,
proposed § 301.6241–1(a)(1) now
provides that an AAR is ‘‘filed’’ and not
‘‘made.’’
Former proposed § 301.6241–1(a)(3)
defined the term ‘‘imputed
underpayment’’ as the amount
determined under § 301.6225–1.
Because an imputed underpayment may
also be computed and paid pursuant to
proposed § 301.6226–3(e)(4) (relating to
pass-through partners) as well as under
proposed § 301.6227–2 and § 301.6227–
3(c) (relating to AARs), proposed
§ 301.6241–1(a)(3) now refers to
imputed underpayments determined
under those provisions. Proposed
§ 301.6241–1(a)(3) was also clarified to
provide that an imputed underpayment
calculated under section 6225 is
calculated under section 6225 and the
regulations thereunder.
Proposed § 301.6241–1(a)(4) now
provides that the term ‘‘indirect
partner’’ includes a person that holds an
interest in the partnership through a
wholly owned entity that is disregarded
as separate from its owner for Federal
income tax purposes, such as a
disregarded entity or grantor trust. This
change from the language in the former
proposed regulations clarifies that a
partnership may seek modification
under proposed § 301.6225–2 based on
indirect partners holding an interest
through a disregarded entity or grantor
trust.
Proposed § 301.6241–1(a)(6) now
provides that the term ‘‘partnership
adjustment’’ means any adjustment to a
partnership-related item (as defined in
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
proposed § 301.6241–6), and such term
includes a portion of a partnership
adjustment.
Former proposed § 301.6241–1(a)(10)
defined a tax attribute as 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 or that can affect the amount of
tax due in any taxable year. As
discussed in section 4.A. of this
preamble, section 203(a) of the TTCA
amended section 6225 to provide an
alternative procedure to filing amended
returns during modification under
which a partner agrees to take into
account adjustments to the tax attributes
‘‘of such partner’’. Section
6225(c)(2)(B)(ii). To reflect the
amendment to section 6225(c)(2)(B)
regarding tax attributes of a partner, the
phrase ‘‘with respect to a partnership or
a partner’’ was removed from the
definition of tax attribute under former
proposed § 301.6241–1(a)(10). The
reference to ‘‘items of income, gain, loss,
deduction, or credit’’ in former
proposed § 301.6241–1(a)(10) was also
replaced with a reference to
‘‘partnership-related item.’’
amozie on DSK3GDR082PROD with PROPOSALS3
B. Proposed § 301.6241–2
Proposed rules under § 301.6241–2
were previously published in the
Federal Register (82 FR 27400) in the
June 2017 NPRM (former proposed
§ 301.6241–2). Former proposed
§ 301.6241–2 provided for coordination
between Title 11 of the United States
Code, which deals with bankruptcy, and
the centralized partnership audit
regime. Because the amendments by the
TTCA did not affect section 6241(6), the
rules under former proposed
§ 301.6241–2 are unchanged. For an
explanation of the rules under former
proposed § 301.6241–2, see 82 FR
27369–70.
C. Proposed § 301.6241–3
Proposed rules under § 301.6241–3
were previously published in the
Federal Register (82 FR 27400–02) in
the June 2017 NPRM (former proposed
§ 301.6241–3). For an explanation of the
rules under former proposed
§ 301.6241–3, see 82 FR 27370–71.
Former proposed § 301.6241–3(a)(3)
provided that the rules requiring former
partners to take into account
adjustments of a partnership which the
IRS determined had ceased to exist did
not apply to the former partners of a
partnership that had elected out of the
centralized partnership audit regime
under section 6221(b). Because under
section 6226(b)(4) a partnership-partner
that has elected out of the centralized
partnership audit regime may be liable
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
for an imputed underpayment in the
case of a push out election, proposed
§ 301.6241–3(a)(3) now provides that
the rules under proposed § 301.6241–3
apply to a partnership-partner and its
former partners, regardless of whether
the partnership-partner has elected out
of the centralized partnership audit
regime. Accordingly, under proposed
§ 301.6241–3(a)(3), the former partners
of any partnership that may be liable for
an imputed underpayment, including a
partnership-partner that has elected out
of the centralized partnership audit
regime, will be required to take into
account a partnership adjustment if the
IRS determines that such partnership
ceased to exist before the partnership
adjustment had taken effect. Example 2
under proposed § 301.6241–3(f)
illustrates this rule.
Former proposed § 301.6241–3(b)(2)(i)
provided 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 has
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. To reflect
the amendment to section 708 by the
Act to eliminate technical terminations,
the reference to section 708(b)(1)(B) was
removed from former proposed
§ 301.6241–3(b)(2)(i). In addition, a rule
was added to former proposed
§ 301.6241–3(b)(2)(i) to provide that a
partnership also does not cease to exist
solely because it furnished statements in
accordance with proposed § 301.6226–
3(e)(3). This change clarifies that
partnership-partners that properly
furnish statements in accordance with
proposed § 301.6226–3(e)(3) (and
therefore are not liable for an imputed
underpayment) are treated the same as
an audited partnership who made a
valid election under section 6226.
Additional clarifications were made
to proposed § 301.6241–3. First, the
phrase ‘‘any amounts’’ in former
proposed § 301.6241–3(a)(2) was
replaced with the phrase ‘‘any unpaid
amounts.’’ This clarification was made
to eliminate the implication that the
partnership was not liable for the
original amount due and to clarify that
if the IRS determines that a partnership
has ceased to exist, the partnership is no
longer liable for any remaining unpaid
amounts due under subchapter C of
chapter 63, meaning that if the
partnership had made a prior payment,
the IRS can retain that payment.
Second, former proposed § 301.6241–
PO 00000
Frm 00015
Fmt 4701
Sfmt 4702
41967
3(b)(2)(iii) provided that the IRS may
not determine that a partnership has
ceased to exist after the expiration of the
period of limitations on collection.
Proposed § 301.6241–3(b)(2)(iii) now
provides that the period relevant to this
determination is the period of
limitations on collection with respect to
the imputed underpayment that was
assessed against the partnership that
ceased to exist. Finally, prior references
to section 708(b)(1)(A) in former
proposed § 301.6241–3(b)(2), (d)(2), and
(f) were changed to refer to section
708(b)(1) to reflect the amendment to
section 708 made by the Act.
D. Proposed § 301.6241–4
Proposed rules under § 301.6241–4
were previously published in the
Federal Register (82 FR 27402) in the
June 2017 NPRM (former proposed
§ 301.6241–4). For an explanation of the
rules under former proposed
§ 301.6241–4, see 82 FR 27371.
Former proposed § 301.6241–4
provided that payments made by a
partnership under the centralized
partnership audit regime, including
payment of any imputed underpayment
and any amount under proposed
§ 301.6226–3, were not deductible to the
partnership. Because the payment
amount for a partnership-partner in the
case of a push out election is referred to
as an imputed underpayment, reference
to any amount under § 301.6226–3 in
former proposed § 301.6241–4 became
superfluous and thus was removed.
E. Proposed § 301.6241–5
Proposed rules under § 301.6241–5
were previously published in the
Federal Register (82 FR 27402) in the
June 2017 NPRM (former proposed
§ 301.6241–5). For an explanation of the
rules under former proposed
§ 301.6241–5, see 82 FR 27371.
Former proposed § 301.6241–5
provided rules for extending the
centralized partnership audit regime to
entities filing partnership returns.
References in former proposed
§ 301.6241–5(a) to ‘‘items of income,
gain, loss, deduction, or credit’’ and
‘‘partner’s distributive share’’ were
replaced with a reference to
‘‘partnership-related item.’’ Proposed
§ 301.6241–5(c) now also reflects the
fact that certain business arrangements,
which may not be classified as entities,
can file partnership returns to make an
election under section 761(a). Under
proposed § 301.6241–5(c), the
centralized partnership audit regime
does not apply in that case
notwithstanding the filing of a
partnership return.
E:\FR\FM\17AUP3.SGM
17AUP3
41968
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
12. Coordination With Other Chapters of
the Code
Section 201(b) of the TTCA added
section 6241(9) to the Code regarding
the coordination of the centralized
partnership audit regime with chapters
of the Code other than chapter 1.
Section 6241(9)(A) provides that the
centralized partnership audit regime
shall not apply with respect to any tax
imposed (including any amount
required to be deducted or withheld)
under chapter 2, 2A, 3, or 4 of subtitle
A of the Code, except that any
partnership adjustment determined
under the centralized partnership audit
regime for purposes of chapter 1 shall be
taken into account for purposes of
determining any such tax to the extent
that such adjustment is relevant to such
determination. Section 6241(9)(B)
provides that in the case of any tax
imposed (including any amount
required to be deducted or withheld)
under chapters 3 and 4 of the Code,
which is determined with respect to a
partnership adjustment, such tax shall
be so determined with respect to the
reviewed year and shall be so imposed
(or so required to be deducted or
withheld) with respect to the
adjustment year.
Section 201(b) also added section
6501(c)(12) to the Code regarding the
statute of limitation on assessment of
taxes under chapter 2 or 2A which are
attributable to any partnership
adjustment. Section 6501(c)(12)
provides in the case of any partnership
adjustment determined under the
centralized partnership audit regime,
the period for assessment of any tax
imposed under chapter 2 or 2A of the
Code which is attributable to such
adjustment shall not expire before the
date that is one year after one of two
events. In the case of an adjustment
pursuant to the decision of a court in a
proceeding brought under section 6234,
the period for assessment shall not
expire before the date that is one year
after the decision becomes final. In any
other case, the period for assessment
shall not expire before the date that is
one year after 90 days after the date on
which the FPA is mailed under section
6231.
amozie on DSK3GDR082PROD with PROPOSALS3
A. Proposed § 301.6241–7
Former proposed § 301.6221(a)–1(d)
provided that nothing in subchapter C
of chapter 63 precluded the IRS from
making any adjustment to an item of a
partnership (as described in the prior
version of § 301.6221(a)–1(b)) outside of
the centralized partnership audit regime
for purposes of determining tax imposed
by provisions of the Code other than
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
chapter 1. Accordingly, under former
proposed § 301.6221(a)–1(d), the IRS
was not precluded from examining a
partnership’s compliance with its
obligations under chapters 3 and 4 (or
any other chapter of the Code other than
chapter 1) in a proceeding outside of the
centralized partnership audit regime.
Former proposed § 301.6221(a)–1(f)
provided examples to illustrate this
concept.
The rules contained in former
proposed § 301.6221(a)–1(d), and the
examples in former proposed
§ 301.6221(a)–1(f), are consistent with
section 6241(9)(A). However, given that
these concepts are now codified in
section 6241, the rules and examples
under former proposed § 301.6221(a)–
1(d) and (f) are now under proposed
§ 301.6241–7(a)(1) and (2). References to
‘‘items of income, gain, loss, deduction,
or credit’’ were replaced with references
to ‘‘partnership-related item’’ as defined
under proposed § 301.6241–6. Other
editorial changes were made to reflect
revisions to former proposed
§ 301.6221(a)–1.
Proposed § 301.6241–7(a)(1) provides
that the centralized partnership audit
regime does not apply with respect to
any tax imposed (including any amount
required to be deducted or withheld)
under any chapter of the Code other
than chapter 1, including chapter 2, 2A,
3, or 4 of the Code. Accordingly, for
purposes of determining taxes under
chapters of the Code other than chapter
1, the IRS may make adjustments to
partnership-related items in proceedings
not subject to the centralized
partnership audit regime. However, to
the extent an adjustment to a
partnership-related item or a
determination made under the
centralized partnership audit regime is
relevant in determining tax outside of
chapter 1, such adjustment or
determination must be taken into
account in determining that non-chapter
1 tax. Proposed § 301.6241–7(a)(2)
provides examples to illustrate these
concepts.
Proposed § 301.6241–7(b) provides
rules for coordinating the centralized
partnership audit regime with chapters
3 and 4 of the Code. Proposed
§ 301.6241–7(b)(1) restates the rule in
section 6241(9)(B) regarding the timing
of withholding for tax imposed under
chapters 3 and 4 that is determined with
respect to a partnership adjustment.
Proposed § 301.6241–7(b)(2) defines the
terms chapter 3, chapter 4, and amount
subject to withholding.
Former proposed §§ 301.6225–1(a)(4)
and 301.6226–2(h) provided rules to
coordinate the collection of tax in the
case of partnership adjustments to
PO 00000
Frm 00016
Fmt 4701
Sfmt 4702
amounts subject to withholding under
chapters 3 and 4, including rules for
when the partnership pays an imputed
underpayment resulting from such an
adjustment and rules for when the
partnership makes the election under
section 6226 with respect to such an
imputed underpayment. These rules
now fall within proposed § 301.6241–
7(b)(3) and (b)(4). Proposed § 301.6241–
7(b)(4) now provides that a partnership
required to pay tax under chapter 3 or
chapter 4 when it makes an election
under section 6226 is required to pay
the tax before the due date of the
partnership return for the adjustment
year (without regard to extension).
13. Other Amendments by the TTCA to
the Centralized Partnership Audit
Regime
Section 206(l) of the TTCA amended
section 6241 by adding a new provision,
section 6241(11), providing for the
treatment of special enforcement
matters. Under section 6241(11), in the
case of partnership-related items which
involve special enforcement matters, the
Secretary may prescribe regulations
pursuant to which the centralized
partnership audit regime (or any portion
thereof) does not apply to such items,
and that such items are subject to
special rules (including rules related to
assessment and collection) as the
Secretary determines to be necessary for
the effective and efficient enforcement
of the Code. For purposes of section
6241(11), the term ‘‘special enforcement
matters’’ means: (1) Failure to comply
with the requirements of section
6226(b)(4)(A)(ii) (regarding the
requirement for a pass-through partner
to furnish statements or compute and
pay an imputed underpayment); (2)
assessments under section 6851
(relating to termination assessments of
income tax) or section 6861 (relating to
jeopardy assessments of income, estate,
gift, and certain excise taxes); (3)
criminal investigations; (4) indirect
methods of proof of income; (5) foreign
partners or partnerships; and (6) other
matters that the Secretary determines by
regulation present special enforcement
considerations. Rules under this
provision may be provided in future
guidance. The Treasury Department and
the IRS are considering proposing rules
under section 6241(11)(B)(vi) (dealing
with other matters that present special
enforcement considerations) which
allow certain partnership-related items
reported solely by persons other than
the partnership to be adjusted outside
the centralized partnership audit
regime. The Treasury Department and
the IRS request comments on this
provision, including whether there are
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
any additional special enforcement
considerations that should be addressed
through regulations.
Section 206(m) of the TTCA amended
section 6241 by adding a new provision,
section 6241(12), to clarify that a U.S.
shareholder of a controlled foreign
corporation (CFC) which is a partner of
a partnership shall be treated as a
partner of such partnership for purposes
of the centralized partnership audit
regime. The U.S. shareholder’s
distributive share of the partnership is
the U.S. shareholder’s pro rata share of
the CFC’s Subpart F income determined
under rules similar to section 951(a)(2).
Similarly, a taxpayer that makes a
Qualified Electing Fund (QEF) election
with respect to a passive foreign
investment company (PFIC) that is a
partner in a partnership shall be treated
as a partner of such partnership. In this
case, a taxpayer’s distributive share of
the partnership is the taxpayer’s pro rata
share of the PFIC’s ordinary earnings
and net capital gain determined under
rules similar to section 1293(b).
Consequently, in both circumstances,
the U.S. shareholder of a CFC and the
taxpayer of a PFIC will be treated as the
adjustment year partner or reviewed
year partner under the centralized
partnership audit regime, where
applicable. Regulatory authority was
also given to issue regulations or other
guidance as necessary or appropriate to
carry out the purpose of the provision,
including regulations which apply the
rule in similar circumstances or with
respect to similarly situated persons.
Consequently, in both circumstances,
the U.S. shareholder of a CFC and the
taxpayer of a PFIC will be treated as the
adjustment year partner or reviewed
year partner under proposed
§§ 301.6241–1(a)(2) and 301.6241–
1(a)(9) where applicable.
amozie on DSK3GDR082PROD with PROPOSALS3
Special Analyses
This regulation is not subject to
review under section 6(b) of Executive
Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Department of the
Treasury and the Office of Management
and Budget regarding review of tax
regulations.
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.
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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.
Comments and Public Hearing
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
rules. All comments will be available at
www.regulations.gov or upon request.
A public hearing has been scheduled
for October 9, 2018, beginning at 10 a.m.
in the Auditorium of the Internal
Revenue Building, 1111 Constitution
Avenue NW, Washington, DC. Due to
building security procedures, visitors
must enter at the Constitution Avenue
entrance. In addition, 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
more 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 an outline of the topics to
be discussed and the time to be devoted
to each topic by October 1, 2018. Submit
a signed paper or electronic copy of the
outline as prescribed in this preamble
under the ADDRESSES heading. A period
of 10 minutes will be allotted 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, Steven L.
Karon, and Brittany Harrison of the
Associate Chief Counsel (Procedure and
Administration). However, other
personnel from the Treasury
Department and the IRS participated in
their development.
PO 00000
Frm 00017
Fmt 4701
Sfmt 4702
41969
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Withdrawal of Notices of Proposed
Rulemaking and Partial Withdrawal of
Notice of Proposed Rulemaking
Accordingly, under the authority of
26 U.S.C. 7805, the notices of proposed
rulemaking (REG–119337–17, REG–
120232–17, REG–120233–17, and REG–
118067–17) that were published in the
Federal Register on November 30, 2017
(82 FR 56765), December 19, 2017 (82
FR 27071), and February 2, 2018 (83 FR
4868) are withdrawn. Also under the
authority of 26 U.S.C. 7805,
301.6221(a)–1, 301.6222–1, 301.6225–1,
301.6225–2, 301.6225–3, 301.6225–4,
301.6226–1, 301.6226–2, 301.6226–3,
301.6226–4, 301.6227–1, 301.6227–2,
301.6227–3 of the notice of proposed
rulemaking (REG–136118–15) published
in the Federal Register on June 14, 2017
(82 FR 27334) is withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 301
are proposed to be amended as follows:
PART 1—INCOME TAX
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.704–1 is amended
by:
■ 1. Adding paragraph (b)(1)(viii).
■ 2. Adding a sentence to the end of
paragraph (b)(2)(iii)(a).
■ 3. Adding paragraphs (b)(2)(iii)(f),
(b)(2)(iv)(i)(4), and (b)(4)(xi) through
(xv).
The additions read as follows:
■
§ 1.704–1
Partner’s distributive share.
*
*
*
*
*
(b) * * *
(1) * * *
(viii) Items relating to a final
determination under the centralized
partnership audit regime—(a) In
general. Certain items of income, gain,
loss, deduction or credit may result
from a final determination under
subchapter C of chapter 63 of the
Internal Revenue Code (subchapter C of
chapter 63) (relating to the centralized
partnership audit regime). Special rules
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41970
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
under section 704(b) and § 1.704–1(b)
apply to these items that take into
account that the item relates to the
reviewed year (as defined in
§ 301.6241–1(a)(8) of this chapter) but
occurs in the adjustment year (as
defined in § 301.6241–1(a)(1) of this
chapter). See paragraphs (b)(2)(iii)(a)
and (f), (b)(2)(iv)(i)(4), and (b)(4)(xi)
through (xv) of this section.
(b) Successors—(1) In general. In the
case of a transfer or liquidation of a
partnership interest subsequent to a
reviewed year, a successor has the
meaning provided in paragraph
(b)(1)(viii)(b) of this section. In the case
of a subsequent transfer by a successor
of a partnership interest, the principles
of paragraph (b)(1)(viii)(b) of this section
will also apply to the new successor.
(2) Identifiable transferee partner.
Except as otherwise provided in
paragraph (b)(1)(viii)(b)(3) of this
section, in the case of a transfer of all
or part of a partnership interest during
or subsequent to the reviewed year, a
successor is the partner to which the
reviewed year transferor partner’s
capital account carried over (or would
carry over if the partnership maintained
capital accounts) under paragraph
(b)(2)(iv)(l) of this section (an
identifiable transferee partner).
(3) Unidentifiable transferee partner.
If, after exercising reasonable diligence,
the partnership cannot determine an
identifiable transferee partner under
paragraph (b)(1)(viii)(b)(2) of this
section, each partner in the adjustment
year that is not an identifiable transferee
partner and was not a partner in the
reviewed year, (an unidentifiable
transferee partner) is a successor to the
extent of the proportion of its interest in
the partnership to the total interests of
unidentifiable transferee partners in the
partnership (considering all facts and
circumstances).
(4) Liquidation of partnership interest.
In the case of a liquidation of a partner’s
entire interest in the partnership during
or subsequent to the reviewed year, the
successors to the liquidated partner are
certain adjustment year partners (as
defined in § 301.6241–1(a)(2) of this
chapter) as provided in this paragraph
(b)(1)(viii)(b)(4). The determination of
the extent to which the adjustment year
partners are treated as successors under
this section must be made in a manner
that reflects the extent to which the
adjustment year partners’ interests in
the partnership increased as a result of
the liquidating distribution (considering
all facts and circumstances).
(2) * * *
(iii) * * *
(a) * * * Notwithstanding any other
sentence of this paragraph (b)(2)(iii)(a),
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
an allocation of any of the following
will be substantial only if the allocation
is described in paragraph (b)(2)(iii)(f) of
this section: an expenditure for any
payment required to be made by a
partnership under subchapter C of
chapter 63 (relating to the centralized
partnership audit regime), adjustments
reflected on a statement furnished to a
pass-through partner (as defined in
§ 301.6241–1(a)(5) of this chapter) under
§ 301.6226–3(e)(4) of this chapter, or
interest, penalties, additions to tax, or
additional amounts described in section
6233.
*
*
*
*
*
(f) Certain expenditures under the
centralized partnership audit regime—
(1) In general. The economic effect of an
allocation of an expenditure for any
payment required to be made by a
partnership under subchapter C of
chapter 63 (as described in § 301.6241–
4(a) of this chapter) is substantial only
if the expenditure is allocated in the
manner described in this paragraph
(b)(2)(iii)(f). For partnerships with
allocations that do not satisfy paragraph
(b)(2)(ii) of this section, see paragraph
(b)(4)(xi) of this section.
(2) Expenditures for imputed
underpayments or similar amounts.
Except as otherwise provided, an
expenditure for an imputed
underpayment, as defined in
§ 301.6241–1(a)(3) of this chapter, is
allocated to the reviewed year partner
(or its successor, as defined in
paragraph (b)(1)(viii)(b) of this section)
in proportion to the allocation of the
notional item (as described in
§ 301.6225–4(b) of this chapter) to
which the expenditure relates, taking
into account modifications under
§ 301.6225–2 of this chapter attributable
to that partner.
(3) Interest, penalties, additions to
tax, or additional amounts described in
section 6233. An expenditure for
interest, penalties, additions to tax, or
additional amounts as determined
under section 6233 (or penalties and
interest described in § 301.6226–
3(e)(4)(iv) of this chapter) is allocated to
the reviewed year partner (or its
successor, as defined in paragraph
(b)(1)(viii)(b) of this section) in
proportion to the allocation of the
portion of the imputed underpayment
with respect to which the penalty
applies or related notional item to
which it relates (whichever is
appropriate), taking into account
modifications under § 301.6225–2 of
this chapter attributable to that partner.
(4) Imputed underpayments unrelated
to notional items. In the case of an
imputed underpayment that results
PO 00000
Frm 00018
Fmt 4701
Sfmt 4702
from a partnership adjustment for which
no notional items are created under
§ 301.6225–4(b)(2) of this chapter, the
expenditure must be allocated to the
reviewed year partner (or its successor,
as defined in paragraph (b)(1)(viii)(b) of
this section) that would have borne the
economic benefit or burden of the
partnership adjustment if the
partnership and its partners had
originally reported in a manner
consistent with the partnership
adjustment that resulted in the imputed
underpayment with respect to the
reviewed year.
(iv) * * *
(i) * * *
(4) Certain expenditures under the
centralized partnership audit regime.
Notwithstanding paragraph
(b)(2)(iv)(i)(1) of this section, the
economic effect of an allocation of an
expenditure for any payment required to
be made by a partnership under
subchapter C of chapter 63 (as described
in § 301.6241–4(a) of this chapter) is
substantial only if the expenditure is
allocated in the manner described in
paragraph (b)(2)(iii)(f) of this section.
For partnerships with allocations that
do not satisfy paragraph (b)(2)(ii) of this
section, see paragraph (b)(4)(xii) of this
section.
*
*
*
*
*
(4) * * *
(xi) Notional items under the
centralized partnership audit regime.
An allocation of a notional item (as
described in § 301.6225–4(b)(3) of this
chapter) does not have substantial
economic effect within the meaning of
paragraph (b)(2) of this section.
However, the allocation of a notional
item of income or gain described in
§ 301.6225–4(b)(3)(ii) and (iv) of this
chapter, or expense or loss described in
§ 301.6225–4(b)(3)(iii) and (v) of this
chapter, will be deemed to be in
accordance with the partners’ interests
in the partnership if the notional item
is allocated in the manner in which the
corresponding actual item would have
been allocated in the reviewed year
under the rules of this section, treating
successors (as defined in paragraph
(b)(1)(viii)(b) of this section) as reviewed
year partners. Additionally, the
allocation of a notional item of expense
or loss described in § 301.6225–
4(b)(3)(iv) of this chapter, or a notional
item of income or gain described in
§ 301.6225–4(b)(3)(v) of this chapter,
will be deemed to be in accordance with
the partners’ interests in the partnership
if the notional item is allocated to the
reviewed year partners (or their
successors as defined in paragraph
(b)(1)(viii)(b) of this section) in the
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
manner in which the excess item was
allocated in the reviewed year.
(xii) Certain section 705(a)(2)(B)
expenditures under the centralized
partnership audit regime. An allocation
of an expenditure for any payment
required to be made by a partnership
under subchapter C of chapter 63
(relating to the centralized partnership
audit regime and as described in
§ 301.6241–4(a) of this chapter) will be
deemed to be in accordance with the
partners’ interests in the partnership, as
provided in paragraph (b)(3) of this
section, only if the expenditure is
allocated in the manner described in
paragraph (b)(2)(iii)(f) of this section
and if the partners’ distribution rights
are reduced by the partners’ shares of
the imputed underpayment.
(xiii) Partnership adjustments that do
not result in an imputed underpayment
under the centralized partnership audit
regime. An allocation of an item arising
from a partnership adjustment that does
not result in an imputed underpayment
(as defined in § 301.6225–1(f) of this
chapter) does not have substantial
economic effect within the meaning of
paragraph (b)(2) of this section.
However, the allocation of such an item
will be deemed to be in accordance with
the partners’ interests in the partnership
if allocated in the manner in which the
item would have been allocated in the
reviewed year under the rules of this
section, treating successors as defined in
paragraph (b)(1)(viii)(b) of this section
as reviewed year partners.
(xiv) Partnership adjustments subject
to an election under section 6226. An
allocation of an item arising from a
partnership adjustment that results in
an imputed underpayment for which an
election is made under § 301.6226–1 of
this chapter does not have substantial
economic effect within the meaning of
paragraph (b)(2) of this section.
However, the allocation of such an item
will be deemed to be in accordance with
the partners’ interests in the partnership
if allocated in the adjustment year (as
defined in § 301.6241–1(a)(1) of this
chapter) in the manner in which the
item would have been allocated under
the rules of this section (or otherwise
taken into account under subtitle A of
the Code) in the reviewed year (as
defined in § 301.6241–1(a)(8) of this
chapter), followed by any intervening
years (as defined in § 301.6226–3(b)(3)
of this chapter), concluding with the
reporting year (as defined in
§ 301.6226–3(a) of this chapter).
(xv) Substantial economic effect
under sections 168(h) and
514(c)(9)(E)(i)(ll). An allocation
described in paragraphs (b)(4)(xi)
through (xiv) of this section will be
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
deemed to have substantial economic
effect for purposes of sections 168(h)
and 514(c)(9)(E)(i)(ll) if the allocation is
deemed to be in accordance with the
partners’ interests in the partnership
under the applicable rules set forth in
paragraphs (b)(4)(xi) through (xiv) of
this section.
*
*
*
*
*
■ Par. 3. Section 1.705–1 is amended by
adding paragraph (a)(10) to read as
follows:
§ 1.705–1 Determination of basis of
partner’s interest.
(a) * * *
(10) For rules relating to determining
the adjusted basis of a partner’s interest
in a partnership following a final
determination under subchapter C of
chapter 63 of the Internal Revenue Code
(relating to the centralized partnership
audit regime), see §§ 301.6225–4 and
301.6226–4 of this chapter.
*
*
*
*
*
■ Par. 4. Section 1.706–4 is amended by
redesignating paragraphs (e)(2)(viii)
through (xi) as paragraphs (e)(2)(ix)
through (xii), respectively, and adding a
new paragraph (e)(2)(viii) to read as
follows:
§ 1.706–4 Determination of distributive
share when a partner’s interest varies.
*
*
*
*
*
(e) * * *
(2) * * *
(viii) Any item arising from a final
determination under subchapter C of
chapter 63 of the Internal Revenue Code
(relating to the centralized partnership
audit regime) with respect to a
partnership adjustment resulting in an
imputed underpayment for which no
election is made under § 301.6226–1 of
this chapter or for which a pass-through
partner (as defined in § 301.6241–
1(a)(5)) pays an imputed underpayment
under § 301.6226–3(e)(4).
*
*
*
*
*
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 5. The authority citation for part
301 continues to read in part as follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 6. Section 301.6221(a)–1 is added
to read as follows:
■
§ 301.6221(a)–1 Determination at
partnership level.
(a) In general. Except as otherwise
provided under subchapter C of chapter
63 of the Internal Revenue Code
(subchapter C of chapter 63) and the
regulations thereunder, any adjustment
to a partnership-related item (as defined
in § 301.6241–6) is determined, any tax
PO 00000
Frm 00019
Fmt 4701
Sfmt 4702
41971
imposed by chapter 1 of subtitle A of
the Internal Revenue Code (Code)
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 partnership-related item is
determined at the partnership level
under subchapter C of chapter 63. Any
consideration necessary to make a
determination at the partnership level
under subchapter C of chapter 63,
including the period of limitations on
making partnership adjustments under
section 6235 or facts necessary to
calculate an imputed underpayment
under section 6225, is also made at the
partnership level except as otherwise
provided under subchapter C of chapter
63 and the regulations thereunder. For
rules relating to assessment and
collection in a proceeding involving
inconsistent treatment of a partnershiprelated item, see § 301.6222–1; in the
case of modification under section
6225(c), see § 301.6225–2; in the case of
an election under section 6226, see
§ 301.6226–3. For rules relating to tax
imposed (including any amount
required to be deducted or withheld) by
chapter 2, 2A, 3 or 4 of subtitle A of the
Code, see section 6241(9) and
§ 301.6241–7. For rules relating to
special enforcement matters, see
§ 301.6241–8.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 7. Section 301.6222–1 is added to
read as follows:
§ 301.6222–1 Partner’s return must be
consistent with partnership return.
(a) Consistent treatment of
partnership-related items—(1) In
general. The treatment of partnershiprelated items (as defined in § 301.6241–
6) on a partner’s return must be
consistent with the treatment of such
items on the partnership return in all
respects, including the amount, timing,
and characterization of such items. A
partner has not satisfied the requirement
of this paragraph (a) if the treatment of
the partnership-related item on the
partner’s return is consistent with how
such 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
E:\FR\FM\17AUP3.SGM
17AUP3
41972
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
filed. For rules relating to the election
to be treated as having reported the
inconsistency where the partner treats a
partnership-related 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
§ 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 partnershippartner must treat partnership-related
items of 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 a partnershiprelated item 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 a partnershiprelated item on a partnership return
includes—
(i) The treatment of such 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 such 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
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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
$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
PO 00000
Frm 00020
Fmt 4701
Sfmt 4702
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 partnershiprelated 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) and § 301.6232–1(d).
(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,
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
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
partnership-related items and the effect
of inconsistent treatment) do not apply
to partnership-related 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
partnership-related item is treated
inconsistently.
(2) Coordination with section 6223.
Paragraph (c)(1) of this section is not
applicable to a partnership-related 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
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
apply with respect to the partner’s
treatment of a partnership-related 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 a partnership-related 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 such 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 a partnershiprelated 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 to one
partnership-related item does not report
the inconsistent treatment of another
partnership-related 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 such 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 a
partnership-related 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 partnershiprelated 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
PO 00000
Frm 00021
Fmt 4701
Sfmt 4702
41973
partner’s return, including items that are
not partnership-related items. 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
E:\FR\FM\17AUP3.SGM
17AUP3
41974
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
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 a partnershiprelated item if the partner—
(i) Demonstrates that the treatment of
such 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 partnership-related
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 the partnershiprelated 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
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
(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
partnership taxable years beginning
after December 31, 2017.
(2) Election under § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par 8. Section 301.6225–1 is added to
read as follows:
§ 301.6225–1 Partnership Adjustment by
the Internal Revenue Service.
(a) Imputed underpayment based on
partnership adjustments—(1) In general.
In the case of any partnership
adjustments (as defined in § 301.6241–
1(a)(6)) by the Internal Revenue Service
(IRS), if the adjustments result in an
imputed underpayment (as determined
in accordance with paragraph (b) of this
section), the partnership must pay an
amount equal to such imputed
underpayment in accordance with
paragraph (a)(2) of this section. If the
adjustments do not result in an imputed
underpayment (as described in
paragraph (f) of this section), such
adjustments must be taken into account
by the partnership in the adjustment
year (as defined in § 301.6241–1(a)(1))
in accordance with § 301.6225–3.
Partnership adjustments may result in
more than one imputed underpayment
pursuant to paragraph (g) of this section.
Each imputed underpayment
determined under this section is based
PO 00000
Frm 00022
Fmt 4701
Sfmt 4702
solely on partnership adjustments with
respect to a single taxable year.
(2) Partnership pays the imputed
underpayment. An imputed
underpayment (determined in
accordance with paragraph (b) of this
section and included in a notice of final
partnership adjustment (FPA) under
section 6231(a)(3)) must be paid by the
partnership in the same manner as if the
imputed underpayment were a tax
imposed for the adjustment year in
accordance with § 301.6232–1. The FPA
will include the amount of any imputed
underpayment, as modified under
§ 301.6225–2 if applicable, unless the
partnership waives its right to such FPA
under section 6232(d)(2). See
§ 301.6232–1(d)(2). For the alternative to
payment of the imputed underpayment
by the partnership, see § 301.6226–1. If
a partnership pays an imputed
underpayment, the partnership’s
expenditure for the imputed
underpayment is taken into account by
the partnership in accordance with
§ 301.6241–4. For interest and penalties
with respect to an imputed
underpayment, see section 6233.
(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(a)(2) is determined in
accordance with paragraph (b) of this
section without regard to any
modification under § 301.6225–2.
Modifications under § 301.6225–2, if
allowed by the IRS, may change the
amount of an imputed underpayment
set forth in the NOPPA and determined
in accordance with paragraph (b) of this
section. Only the partnership
adjustments set forth in a NOPPA are
taken into account for purposes of
determining an imputed underpayment
under this section and any modification
under § 301.6225–2.
(b) Determination of an imputed
underpayment—(1) In general. In the
case of any partnership adjustment by
the IRS, an imputed underpayment is
determined by—
(i) Grouping the partnership
adjustments in accordance with
paragraph (c) of this section and, if
appropriate, subgrouping such
adjustments in accordance with
paragraph (d) of this section;
(ii) Netting the adjustments in
accordance with paragraph (e) of this
section;
(iii) Calculating the total netted
partnership adjustment in accordance
with paragraph (b)(2) of this section;
(iv) Multiplying the total netted
partnership adjustment by the highest
rate of Federal income tax in effect for
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
the reviewed year under section 1 or 11;
and
(v) Increasing or decreasing the
product that results under paragraph
(b)(1)(iv) of this section by—
(A) Any amounts treated under
paragraph (e)(3)(ii) of this section as net
positive adjustments (as defined in
paragraph (e)(4)(i) of this section); and
(B) Any net negative adjustments (as
defined in paragraph (e)(4)(ii) of this
section), except net negative
adjustments resulting from reallocation
adjustments to credits as described in
paragraph (d)(3)(ii) of this section and
creditable tax expenditures described in
paragraph (e)(3)(iii) of this section.
(2) Calculation of the total netted
partnership adjustment. For purposes of
determining an imputed underpayment
under paragraph (b)(1) of this section,
the total netted partnership adjustment
is the sum of all net positive
adjustments in the reallocation grouping
described in paragraph (c)(2) of this
section and the residual grouping
described in paragraph (c)(5) of this
section.
(3) Adjustments to items for which tax
has been collected under chapters 3 and
4. A partnership adjustment is
disregarded for purposes of calculating
the total netted partnership adjustment
under paragraph (b)(2) of this section to
the extent that the IRS has collected the
tax required to be withheld under
chapter 3 or chapter 4 (as defined in
§ 301.6241–7(b)(2)(ii) and (iii)) that is
attributable to the partnership
adjustment. See § 301.6241–7(b)(3) for
rules that apply when a partnership
pays an imputed underpayment that
includes a partnership adjustment to an
amount subject to withholding (as
defined in § 301.6241–7(b)(2)(i)) under
chapter 3 or chapter 4 for which such
tax has not yet been collected.
(4) Treatment of adjustment as zero
for purposes of calculating the imputed
underpayment. If the effect of a
partnership adjustment under chapter 1
of subtitle A of the Internal Revenue
Code (Code) to any person is reflected
in another adjustment taken into
account under this section, the IRS may
treat an adjustment as zero solely for
purposes of calculating the imputed
underpayment.
(c) Grouping of partnership
adjustments—(1) In general. To
determine an imputed underpayment
under paragraph (b) of this section,
partnership adjustments are placed into
one of four groupings. These groupings
are the reallocation grouping described
in paragraph (c)(2) of this section, the
credit grouping described in paragraph
(c)(3) of this section, the creditable
expenditure grouping described in
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
paragraph (c)(4) of this section, and the
residual grouping described in
paragraph (c)(5) of this section.
Adjustments in groupings may be
placed in subgroupings, as appropriate,
in accordance with paragraph (d) of this
section. The IRS may, in its discretion,
group adjustments in a manner other
than the manner described in this
paragraph (c) when such grouping
would appropriately reflect the facts
and circumstances. For requests to
modify the groupings, see § 301.6225–
2(d)(6).
(2) Reallocation grouping—(i) In
general. Any adjustment that allocates
or reallocates a partnership-related item
to and from a particular partner or
partners is a reallocation adjustment.
Except in the case of an adjustment to
a credit (as described in paragraph (c)(3)
of this section) or to a creditable
expenditure (as described in paragraph
(c)(4) of this section), reallocation
adjustments are placed in the
reallocation grouping. Adjustments that
reallocate a credit to and from a
particular partner or partners are placed
in the credit grouping (see paragraph
(c)(3) of this section), and adjustments
that reallocate a creditable expenditure
to and from a particular partner or
partners are placed in the creditable
expenditure grouping (see paragraph
(c)(4) of this section).
(ii) Each reallocation adjustment
results in at least two separate
adjustments. Each reallocation
adjustment generally results in at least
two separate adjustments. One
adjustment reverses the effect of the
improper allocation of a partnershiprelated item, and the other adjustment
effectuates the proper allocation of the
partnership-related item. Generally, a
reallocation adjustment results in one
positive adjustment (as defined in
paragraph (d)(2)(iii) of this section) and
one negative adjustment (as defined in
paragraph (d)(2)(ii) of this section).
(3) Credit grouping. Each adjustment
to a partnership-related item that is
reported or could be reported by a
partnership as a credit on the
partnership’s return, including a
reallocation adjustment, is placed in the
credit grouping.
(4) Creditable expenditure grouping—
(i) In general. Each adjustment to a
creditable expenditure, including a
reallocation adjustment to a creditable
expenditure, is placed in the creditable
expenditure grouping.
(ii) Adjustment to a creditable
expenditure—(A) In general. For
purposes of this section, an adjustment
to a partnership-related item is treated
as an adjustment to a creditable
expenditure if any person could take the
PO 00000
Frm 00023
Fmt 4701
Sfmt 4702
41975
item that is adjusted (or item as adjusted
if the item was not originally reported
by the partnership) as a credit. See
§ 1.704–1(b)(4)(ii) of this chapter. For
instance, if the adjustment is a
reduction of qualified research
expenses, the adjustment is to a
creditable expenditure for purposes of
this section because any person
allocated the qualified research
expenses by the partnership could claim
a credit with respect to their allocable
portion of such expenses under section
41, rather than a deduction under
section 174.
(B) Creditable foreign tax
expenditures. The creditable
expenditure grouping includes each
adjustment to a creditable foreign tax
expenditure (CFTE) as defined in
§ 1.704–1(b)(4)(viii)(b) of this chapter,
including any reallocation adjustment to
a CFTE.
(5) Residual grouping—(i) In general.
Any adjustment to a partnership-related
item not described in paragraph (c)(2),
(3), or (4) of this section is placed in the
residual grouping.
(ii) Adjustments to partnershiprelated items that are not allocated
under section 704(b). The residual
grouping includes any adjustment to a
partnership-related item that derives
from an item that would not have been
required to be allocated by the
partnership to a reviewed year partner
under section 704(b).
(6) Recharacterization adjustments—
(i) Recharacterization adjustment
defined. An adjustment that changes the
character of a partnership-related item is
a recharacterization adjustment. For
instance, an adjustment that changes a
loss from ordinary to capital or from
active to passive is a recharacterization
adjustment.
(ii) Grouping recharacterization
adjustments. A recharacterization
adjustment is placed in the appropriate
grouping as described in paragraphs
(c)(2) through (5) of this section.
(iii) Recharacterization adjustments
result in two partnership adjustments.
In general, a recharacterization
adjustment results in at least two
separate adjustments in the appropriate
grouping under paragraph (c)(6)(ii) of
this section. One adjustment reverses
the improper characterization of the
partnership-related item, and the other
adjustment effectuates the proper
characterization of the partnershiprelated item. A recharacterization
adjustment results in two adjustments
regardless of whether the amount of the
partnership-related item is being
adjusted. Generally, recharacterization
adjustments result in one positive
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41976
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
adjustment and one negative
adjustment.
(d) Subgroupings—(1) In general. If
any partnership adjustment within any
grouping described in paragraph (c) of
this section is a negative adjustment, the
adjustments within that grouping are
subgrouped in accordance with this
paragraph (d). If all partnership
adjustments within the groupings are
positive adjustments, this paragraph (d)
does not apply, and no adjustment
within the groupings is subgrouped in
accordance with this paragraph (d). The
IRS may, in its discretion, subgroup
adjustments in a manner other than the
manner described in this paragraph (d)
when such subgrouping would
appropriately reflect the facts and
circumstances. For requests to modify
the subgroupings, see § 301.6225–
2(d)(6).
(2) Definition of negative adjustments
and positive adjustments—(i) In general.
For purposes of this section, partnership
adjustments made by the IRS are treated
as follows:
(A) An increase in an item of gain is
treated as an increase in an item of
income;
(B) A decrease in an item of gain is
treated as a decrease in an item of
income;
(C) An increase in an item of loss or
deduction is treated as a decrease in an
item of income; and
(D) A decrease in an item of loss or
deduction is treated as an increase in an
item of income.
(ii) Negative adjustment. A negative
adjustment is any adjustment that is a
decrease in an item of income, a
partnership adjustment treated under
paragraph (d)(2)(i) of this section as a
decrease in an item of income, or an
increase in an item of credit.
(iii) Positive adjustment—(A) In
general. A positive adjustment is any
adjustment that is not a negative
adjustment as defined in paragraph
(d)(2)(ii) of this section.
(B) Treatment of adjustments that
cannot be allocated under section
704(b). For purposes of determining an
imputed underpayment under this
section, an adjustment described in
paragraph (c)(5)(ii) of this section that
could result in an increase in income or
decrease in a loss, deduction, or credit
for any person without regard to any
particular person’s specific
circumstances is treated as a positive
adjustment to income to the extent
appropriate.
(3) Subgrouping rules—(i) In general.
Except as otherwise provided in this
paragraph (d)(3), an adjustment is
subgrouped according to how the
adjustment would be required to be
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
taken into account separately under
section 702(a) or any other provision of
the Code or regulations applicable to the
adjusted partnership-related item. For
purposes of creating subgroupings
under this section, if any adjustment
could be subject to any preference,
limitation, or restriction under the Code
(or not allowed, in whole or in part,
against ordinary income) if taken into
account by any person, the adjustment
is placed in a separate subgrouping from
all other adjustments within the
grouping. A negative adjustment that is
not otherwise required to be placed in
its own subgrouping under this
paragraph (d)(3) must be placed in the
same subgrouping as another
adjustment if the negative adjustment
and the other adjustment would have
been properly netted at the partnership
level and such netted amount would
have been required to be allocated to the
partners of the partnership as a single
partnership-related item for purposes of
section 702(a) or other provision of the
Code and regulations.
(ii) Subgrouping reallocation
adjustments—(A) Reallocation
adjustments in the reallocation
grouping. Each positive adjustment and
each negative adjustment resulting from
a reallocation adjustment as described
in paragraph (c)(2)(ii) of this section is
placed in its own separate subgrouping
within the reallocation grouping. For
instance, if the reallocation adjustment
reallocates a deduction from one partner
to another partner, the decrease in the
deduction (positive adjustment)
allocated to the first partner is placed in
a subgrouping within the reallocation
grouping separate from the increase in
the deduction (negative adjustment)
allocated to the second partner. If a
particular partner or group of partners
has two or more reallocation
adjustments allocable to such partner or
group, such adjustments may be
subgrouped in accordance with
paragraph (d)(3)(i) of this section and
netted in accordance with paragraph (e)
of this section.
(B) Reallocation adjustments in the
credit grouping. In the case of a
reallocation adjustment to a credit,
which is placed in the credit grouping
pursuant to paragraph (c)(3) of this
section, the decrease in credits allocable
to one partner or group of partners is
treated as a positive adjustment, and the
increase in credits allocable to another
partner or group of partners is treated as
a negative adjustments. Each positive
adjustment and each negative
adjustment resulting from a reallocation
adjustment to credits is placed in its
own separate subgrouping within the
credit grouping.
PO 00000
Frm 00024
Fmt 4701
Sfmt 4702
(iii) Subgroupings within the
creditable expenditure grouping—(A) In
general. Each adjustment in the
creditable expenditure grouping
described in paragraph (c)(4) of this
section is subgrouped in accordance
with this paragraph (d)(3)(iii).
(B) Subgroupings for adjustments to
CFTEs. Each adjustment to a CFTE is
subgrouped based on the separate
category of income to which the CFTE
relates in accordance with section
904(d) and the regulations thereunder,
and to account for any different
allocation of the CFTE between
partners. Two or more adjustments to
CFTEs are included within the same
subgrouping only if each adjustment
relates to CFTEs in the same separate
category, and each adjusted partnershiprelated item would be allocated to the
partners in the same ratio had those
items been properly reflected on the
partnership return for the reviewed
year.
(C) Other creditable expenditures.
[Reserved]
(iv) Subgrouping recharacterization
adjustments. Each positive adjustment
and each negative adjustment resulting
from a recharacterization adjustment as
described in paragraph (c)(6) of this
section is placed in its own separate
subgrouping within the residual
grouping. If a particular partner or group
of partners has two or more
recharacterization adjustments allocable
to such partner or group, such
adjustments may be subgrouped in
accordance with paragraph (d)(3)(i) of
this section and netted in accordance
with paragraph (e) of this section.
(e) Netting adjustments within each
grouping or subgrouping—(1) In general.
All adjustments within a subgrouping
determined in accordance with
paragraph (d) of this section are netted
in accordance with this paragraph (e) to
determine whether there is a net
positive adjustment (as defined in
paragraph (e)(4)(i) of this section) or net
negative adjustment (as defined in
paragraph (e)(4)(ii) of this section) for
that subgrouping. If paragraph (d) of this
section does not apply because a
grouping only includes positive
adjustments, all adjustments in that
grouping are netted in accordance with
this paragraph (e). For purposes of this
paragraph (e), netting means summing
all adjustments together within each
grouping or subgrouping, as
appropriate.
(2) Limitations on netting
adjustments. Positive adjustments and
negative adjustments may only be
netted against each other if they are in
the same grouping or subgrouping in
accordance with the rules in paragraphs
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
(c) and (d) of this section. An
adjustment in one grouping or
subgrouping may not be netted against
an adjustment in any other grouping or
subgrouping. Adjustments from one
taxable year may not be netted against
adjustments from another taxable year.
(3) Results of netting adjustments
within groupings or subgroupings—(i)
Groupings other than the credit and
creditable expenditure groupings.
Except as described in paragraphs
(e)(3)(ii) and (iii) of this section, each
net positive adjustment (as defined in
paragraph (e)(4)(i) of this section) with
respect to a particular grouping or
subgrouping that results after netting the
adjustments in accordance with this
paragraph (e) is included in the
calculation of the total netted
partnership adjustment under paragraph
(b)(2) of this section. Each net negative
adjustment (as defined in paragraph
(e)(4)(ii) of this section) with respect to
a grouping or subgrouping that results
after netting the adjustments in
accordance with this paragraph (e) is
excluded from the calculation of the
total netted partnership adjustment
under paragraph (b)(2) of this section.
Adjustments underlying a net negative
adjustment described in the preceding
sentence are adjustments that do not
result in an imputed underpayment (as
described in paragraph (f) of this
section).
(ii) Credit grouping. Any net positive
adjustment or net negative adjustment
in the credit grouping (including any
such adjustment with respect to a
subgrouping within the credit grouping)
is excluded from the calculation of the
total netted partnership adjustment. A
net positive adjustment or net negative
adjustment described in this paragraph
(e)(3)(ii) is taken into account under
paragraph (b)(1)(v) of this section,
except for negative adjustments to
credits resulting from a reallocation
adjustment that were placed in a
separate subgrouping pursuant to
paragraph (d)(3)(ii)(B) of this section. A
negative adjustment to a credit placed in
its separate subgrouping under
paragraph (d)(3)(ii)(B) of this section is
treated as an adjustment that does not
result in an imputed underpayment in
accordance with paragraph (f)(1)(i) of
this section.
(iii) Treatment of creditable
expenditures—(A) Creditable foreign tax
expenditures. A net decrease to a CFTE
in any CFTE subgrouping (as described
in paragraph (d)(3)(iii)(B) of this section)
is treated as a net positive adjustment
described in paragraph (e)(3)(ii) of this
section. A net increase to a CFTE in any
CFTE subgrouping is treated as a net
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
negative adjustment described in
paragraph (e)(3)(i) of this section.
(B) Other creditable expenditures.
[Reserved]
(4) Net positive adjustment and net
negative adjustment defined—(i) Net
positive adjustment. A net positive
adjustment means an amount that is
greater than zero which results from
netting adjustments within a grouping
or subgrouping in accordance with this
paragraph (e). A net positive adjustment
includes a positive adjustment that was
not netted with any other adjustment. A
net positive adjustment includes a net
decrease in an item of credit.
(ii) Net negative adjustment. A net
negative adjustment means any amount
which results from netting adjustments
within a grouping or subgrouping in
accordance with this paragraph (e) that
is not a net positive adjustment (as
defined in paragraph (e)(4)(i) of this
section). A net negative adjustment
includes a negative adjustment that was
not netted with any other adjustment.
(f) Partnership adjustments that do
not result in an imputed
underpayment—(1) In general. Except
as otherwise provided in paragraph (e)
of this section, a partnership adjustment
does not result in an imputed
underpayment if—
(i) After grouping, subgrouping, and
netting the adjustments as described in
paragraphs (c), (d), and (e) of this
section, the result of netting with
respect to any grouping or subgrouping
that includes a particular partnership
adjustment is a net negative adjustment
(as described in paragraph (e)(4)(ii) of
this section); or
(ii) The calculation under paragraph
(b)(1) of this section results in an
amount that is zero or less than zero.
(2) 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 (b)(2) of this section) is taken
into account by the partnership in the
adjustment year in accordance with
§ 301.6225–3. If the partnership makes
an election pursuant to section 6226
with respect to an imputed
underpayment, the adjustments that do
not result in that imputed
underpayment that are associated with
that imputed underpayment (as
described in paragraph (g)(2)(iii)(B) of
this section) are taken into account by
the reviewed year partners in
accordance with § 301.6226–3.
(g) 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
PO 00000
Frm 00025
Fmt 4701
Sfmt 4702
41977
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 facts and circumstances
and nature of the partnership
adjustments. See § 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 (described in paragraph
(d)(2)(ii) of this section) and a specific
imputed underpayment (described in
paragraph (d)(2)(iii) of this section).
Each type of imputed underpayment is
separately calculated in accordance
with 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 (f) of this section) that
are not taken into account to determine
a specific imputed underpayment under
paragraph (g)(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 (g)(2)(iii) of this section, if
any, and all adjustments that do not
result in that general imputed
underpayment (as described in
paragraph (e) of this section) are
associated with that general imputed
underpayment.
(iii) Specific imputed
underpayment—(A) In general. The IRS
may, in its discretion, designate a
specific imputed underpayment with
respect to adjustments to a partnershiprelated 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 or on such other
basis as the IRS determines properly
reflects the facts and circumstances. 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
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41978
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
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
(g)(2)(iii)(A) 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
grouping and netting result in net
negative adjustments and are
disregarded in calculating the specific
imputed underpayment.
(B) Adjustments that do not result in
an imputed underpayment associated
with a specific imputed underpayment.
If the IRS designates a specific imputed
underpayment, the IRS will designate
which adjustments that do not result in
an imputed underpayment, if any, are
appropriate to associate with that
specific imputed underpayment. If the
adjustments underlying that specific
imputed underpayment are reallocation
adjustments or recharacterization
adjustments, the net negative
adjustment that resulted from the
reallocation or recharacterization is
associated with the specific imputed
underpayment. Any adjustments that do
not result in an imputed underpayment
that are not associated with a specific
imputed underpayment under this
paragraph (d)(2)(iii)(B) are associated
with the general imputed
underpayment.
(h) 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 § 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
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
$105 instead of $100 ($5 adjustment) and that
the ordinary deduction was <$80> instead of
<$70> (<$10> adjustment). Pursuant to
paragraph (c) of this section, the adjustments
are both in the residual grouping. The <$10>
adjustment to the ordinary deduction would
result in a decrease in the imputed
underpayment if netted with the $5
adjustment to ordinary income. Because the
<$10> adjustment to the ordinary deduction
might be limited if taken into account by any
person, it is grouped in a separate
subgrouping from the $5 adjustment to
ordinary income. The total netted
partnership adjustment is $5, which results
in an imputed underpayment of $2. The
<$10> adjustment to the ordinary deduction
is a net negative amount and is an adjustment
that does not result in an imputed
underpayment which is taken into account
by Partnership in the adjustment year in
accordance with § 301.6225–3.
Example 2. The facts are the same as
Example 1 of this paragraph (h), except that
the <$10> adjustment would not be limited
if taken into account by any of its partners
(direct or indirect). The IRS may, in its
discretion, group the $5 adjustment and the
<$10> adjustment together in the residual
grouping. As a result, the $5 and the <$10>
adjustments are netted under paragraph (e) of
this section. Such netting results in a net
negative adjustment (as defined under
paragraph (e)(4)(ii)) in the residual grouping
of <$5> under paragraph (e) of this section.
Pursuant to paragraph (f) of this section, the
<$5> net negative adjustment is an
adjustment that does not result in an imputed
underpayment. Therefore, since the only net
adjustment is an adjustment that does not
result in an imputed underpayment, there is
no imputed underpayment.
Example 3. 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
Partnership’s 2019 taxable year, the IRS
determines that ordinary income is $500
($200 adjustment), long-term capital gain is
$200 ($75 adjustment), long-term capital loss
is <$25> ($50 adjustment), the depreciation
deduction is <$70> ($30 adjustment), and the
tax credit is $3 ($2 adjustment). Pursuant to
paragraph (c) of this section, the tax credit is
in the credit grouping under paragraph (c)(3)
of this section. The remaining adjustments
are part of the residual grouping under
paragraph (c)(5) of this section. Pursuant to
paragraph (d)(2) of this section, all of the
adjustments in the residual grouping are
positive adjustments. Because there are no
negative adjustments, there is no need for
further subgrouping within the residual
grouping. Under paragraph (b)(2), the
adjustments in the residual grouping are
summed for a total netted partnership
adjustment of $355. Under paragraph
(b)(1)(iv) of this section, the total netted
partnership adjustment is multiplied by 40
percent (highest tax rate in effect), which
results in $142. Under paragraph (b)(1)(iv) of
this section, the $142 is increased by the $2
credit adjustment, resulting in an imputed
underpayment of $144.
PO 00000
Frm 00026
Fmt 4701
Sfmt 4702
Example 4. 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. There are no other
adjustments for the 2019 taxable year. This
recharacterization adjustment results in two
adjustments in the residual grouping
pursuant to paragraph (c)(6) of this section:
an increase in ordinary income of $125 ($125
adjustment) as well as a decrease of longterm capital gain of $125 (<$125>
adjustment). The decrease in long-term
capital gain is a negative adjustment under
paragraph (d)(2)(ii) of this section and the
increase in ordinary income is a positive
adjustment under paragraph (d)(2)(iii) of this
section. Under paragraph (d)(3)(i) of this
section, the adjustment to long-term capital
gain is placed in a subgrouping separate from
the adjustment to ordinary income because
the reduction of long-term capital gain is
required to be taken into account separately
pursuant to section 702(a). The $125 decrease
in long-term capital gain is a net negative
adjustment in the long-term capital
subgrouping and as a result is an adjustment
that does not result in an imputed
underpayment under paragraph (f) of this
section. The $125 increase in ordinary
income results in a net positive adjustment
under paragraph (e)(4)(i) of this section.
Because the ordinary subgrouping is the only
subgrouping resulting in a net positive
adjustment, $125 is the total netted
partnership adjustment under paragraph
(b)(2) of this section. Under paragraph
(b)(1)(iv) of this section, $125 is multiplied
by 40 percent resulting in an imputed
underpayment of $50.
Example 5. Partnership reported a $100
deduction for certain expenses on its 2019
partnership return and an additional $100
deduction with respect to the same type of
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
the 2019 residual grouping). For 2020, the
IRS determines that Partnership should have
reported a deduction of $125 with respect to
these expenses (<$25> adjustment in the
2020 residual grouping). There are no other
adjustments for the 2019 and 2020
partnership taxable years. Pursuant to
paragraph (e)(2) of this section, the
adjustments for 2019 and 2020 are not netted
with each other. The 2019 adjustment of $25
is the only adjustment for that year and a net
positive adjustment under paragraph (e)(4)(i)
of this section, and therefore the total netted
partnership adjustment for 2019 is $25
pursuant to paragraph (b)(2) of this section.
The $25 total netted partnership adjustment
is multiplied by 40 percent resulting in an
imputed underpayment of $10 for
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
Partnership’s 2019 taxable year. The $25
increase in the deduction for 2020 a net
negative adjustment under paragraph
(e)(4)(ii) of this section is an adjustment that
does not result in an imputed underpayment
for that year. Therefore, there is no imputed
underpayment for 2020.
Example 6. On its partnership return for
the 2020 taxable year, Partnership reported
ordinary income of $100 and a capital gain
of $50. 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 instead of $50 and that
Partnership should have recognized an
additional $10 in ordinary income. In the
NOPPA mailed by the IRS, the IRS may
determine pursuant to paragraph (g) 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.
Example 7. On its partnership return for
the 2020 taxable year, Partnership reported a
recourse liability of $100. During an
administrative proceeding with respect to
Partnership’s 2020 taxable year, the IRS
determines that the $100 recourse liability
should have been reported as a $100
nonrecourse liability. Under paragraph
(d)(2)(iii)(B), the adjustment to the character
of the liability results in a $100 increase in
income because such recharacterization of a
liability could result in up to $100 in taxable
income if taken into account by any person.
The $100 increase in income is a positive
adjustment in the residual grouping under
paragraph (c)(5)(ii) of this section. There are
no other adjustments for the 2020
partnership taxable year. The $100 positive
adjustment is treated as a net positive
adjustment under paragraph (e)(4)(i) of this
section, and the total netted partnership
adjustment under paragraph (b)(2) of this
section is $100. Pursuant to paragraph (b)(1)
of this section, the total netted partnership
adjustment is multiplied by 40 percent for an
imputed underpayment of $40.
Example 8. Partnership reports on its 2019
partnership return $400 of CFTEs in the
general category under section 904(d). The
IRS initiates an administrative proceeding
with respect to Partnership’s 2019 taxable
year and determines that the amount of
CFTEs was $300 instead of $400 (<$100>
adjustment to CFTEs). No other adjustments
are made for the 2019 taxable year. The
<$100> adjustment to CFTEs is placed in the
creditable expenditure grouping described in
paragraph (c)(4) of this section. Pursuant to
paragraph (e)(3)(iii) of this section, the
decrease to CFTEs in the creditable
expenditure grouping is treated as a positive
adjustment to (decrease in) credits in the
credit grouping under paragraph (c)(3) of this
section. Because no other adjustments have
been made, the $100 decrease in credits
produces an imputed underpayment of $100
under paragraph (b)(1) of this section.
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
Example 9. Partnership reports on its 2019
partnership return $400 of CFTEs in the
passive category under section 904(d). The
IRS initiates an administrative proceeding
with respect to Partnership’s 2019 taxable
year and determines that the CFTEs reported
by Partnership were general category instead
of passive category CFTEs. No other
adjustments are made. Under the rules in
paragraph (c)(6) of this section, an
adjustment to the category of a CFTE is
treated as two separate adjustments: An
increase to general category CFTEs of $400
and a decrease to passive category CFTEs of
$400. Both adjustments are included in the
creditable expenditure grouping under
paragraph (c)(4) of this section, but they are
included in separate subgroupings.
Therefore, the two amounts do not net.
Instead, the $400 increase to CFTEs in the
general category subgrouping is treated as a
net negative adjustment under paragraph
(e)(3)(iii)(A) of this section and is an
adjustment that does not result in an imputed
underpayment under paragraph (f) of this
section. The decrease to CFTEs in the passive
category subgrouping of the creditable
expenditure grouping results in a decrease in
CFTEs. Therefore, pursuant to paragraph
(e)(3)(iii)(A) of this section, it is treated as a
decrease in credits in the credit grouping
under paragraph (c)(3) of this section, which
results in an imputed underpayment of $400
under paragraph (b)(1) of this section.
Example 10. Partnership has two partners,
A and B. Under the partnership agreement,
$100 of the CFTE is specially allocated to A
for the 2019 taxable year. The IRS initiates
an administrative proceeding with respect to
Partnership’s 2019 taxable year and
determines that $100 of CFTE should be
reallocated from A to B. Because the
adjustment reallocates a creditable
expenditure, paragraph (c)(4) of this section
provides that it is included in the creditable
expenditure grouping rather than the
reallocation grouping. The partnership
adjustment is a <$100> adjustment to general
category CFTE allocable to A and an increase
of $100 to general category CFTE allocable to
B. Pursuant to paragraph (d)(3)(iii) of this
section, the <$100> adjustment to general
category CFTE and the increase of $100 to
general category CFTE are included in
separate subgroupings in the creditable
expenditure grouping. The $100 increase in
general category CFTEs, B-allocation
subgrouping, is a net negative adjustment,
which does not result in an imputed
underpayment and is therefore taken into
account by the partnership in the adjustment
year in accordance with § 301.6225–3. The
net decrease to CFTEs in the generalcategory, A-allocation subgrouping, is treated
as a decrease to credits in the credit grouping
under paragraph (c)(3) of this section,
resulting in an imputed underpayment of
$100 under paragraph (b)(1) of this section.
Example 11. Partnership has two partners,
A and B. Partnership owns two entities, DE1
and DE2, that are disregarded as separate
from their owner for Federal tax purposes
and are operating in and paying taxes to
foreign jurisdictions. The partnership
agreement provides that all items from DE1
and DE2 are allocable to A and B in the
PO 00000
Frm 00027
Fmt 4701
Sfmt 4702
41979
following manner. Items related to DE1: To
A 75% and to B 25%. Items related to DE2:
To A 25% and to B 75%. On Partnership’s
2018 return, Partnership reports CFTEs in the
general category of $300, $100 with respect
to DE1 and $200 with respect to DE2.
Partnership allocates the $300 of CFTEs $125
and $175 to A and B respectively. During an
administrative proceeding with respect to
Partnership’s 2018 taxable year, the IRS
determines that Partnership understated the
amount of creditable foreign tax paid by DE2
by $40 and overstated the amount of
creditable foreign tax paid by DE1 by $80. No
other adjustments are made. Because the two
adjustments each relate to CFTEs that are
subject to different allocations, the two
adjustments are in different subgroupings
under paragraph (d)(3)(iii)(B) of this section.
The adjustment reducing the CFTEs related
to DE1 results in a decrease in CFTEs within
that subgrouping and under paragraph
(e)(3)(iii)(A) of this section is treated as a
decrease in credits in the credit grouping
under paragraph (c)(3) of this section and
results in an imputed underpayment of $80
under paragraph (b)(1) of this section. The
increase of $40 of general category CFTE
related to the DE2 subgrouping results in an
increase in CFTEs within that subgrouping
and is treated as a net negative adjustment,
which does not result in an imputed
underpayment and is taken into account in
the adjustment year in accordance with
§ 301.6225–3.
(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 § 301.9100–22 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
§ 301.9100–22T is in effect.
■ Par. 9. Section 301.6225–2 is added to
read as follows:
§ 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(a)(2) 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 in paragraph (c) of
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41980
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
this section. A partnership may request
modification with respect to a
partnership adjustment (as defined in
§ 301.6241–1(a)(6)) that does not result
in an imputed underpayment (as
described in § 301.6225–1(f)(1)(ii)) as
described in paragraph (e) of this
section. Only the partnership
representative may request modification
under this section. See section 6223 and
§ 301.6223–2 for rules regarding the
binding authority of the partnership
representative. For purposes of this
section, the term relevant partner means
any person for whom modification is
requested by the partnership that is—
(1) A reviewed year partner (as
defined in § 301.6241–1(a)(9)),
including any pass-through partner (as
defined in § 301.6241–1(a)(5)), except
for any reviewed year partner that is a
wholly-owned entity disregarded as
separate from its owner for Federal tax
purposes, or
(2) An indirect partner (as defined in
§ 301.6241–1(a)(4)) except for any
indirect partner that is a wholly-owned
entity disregarded as separate from its
owner for Federal tax purposes.
(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. 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). See paragraph (e) of this
section for the effect of modification on
adjustments that do not result in an
imputed underpayment. A modification
may increase or decrease an imputed
underpayment by affecting the extent to
which adjustments factor into the
determination of the imputed
underpayment (as described in
paragraph (b)(2) of this section), the tax
rate that is applied in calculating the
imputed underpayment (as described in
paragraph (b)(3) of this section), and the
number and composition of imputed
underpayments, including the
placement of adjustments in groupings
and subgroupings (if applicable) (as
described in paragraph (b)(4) of this
section), as well as to the extent of other
modifications allowed under rules
provided in forms, instructions, or other
guidance prescribed by the IRS (as
described in paragraph (b)(5) of this
section). If a partnership requests more
than one modification under this
section, modifications are taken into
account in the following order:
(i) Modifications that affect the extent
to which an adjustment factors into the
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
determination of the imputed
underpayment under paragraph (b)(2) of
this section;
(ii) Modification of the number and
composition of imputed underpayments
under paragraph (b)(4) of this section;
(iii) Modifications that affect the tax
rate under paragraph (b)(3) of this
section.
(2) Modifications that affect
partnership adjustments for purposes of
determining the imputed
underpayment. If the IRS approves
modification with respect to a
partnership adjustment, such
partnership adjustment is excluded
from the determination of the imputed
underpayment as determined under
§ 301.6225–1(b). This paragraph (b)(2)
applies to modifications under—
(i) Paragraph (d)(2) of this section
(amended returns and the alternative
procedure to filing amended returns);
(ii) Paragraph (d)(3) of this section
(tax exempt status);
(iii) Paragraph (d)(5) of this section
(specified passive activity losses);
(iv) Paragraph (d)(7) of this section
(qualified investment entities);
(v) Paragraph (d)(8) of this section
(closing agreements), if applicable;
(vi) Paragraph (d)(9) of this section
(tax treaty modifications), if applicable;
and
(vii) Paragraph (d)(10) of this section
(other modifications), if applicable.
(3) Modifications that affect the tax
rate—(i) In general. If the IRS approves
a modification with respect to the tax
rate applied to a partnership
adjustment, such modification results in
a reduction in tax rate applied to the
total netted partnership adjustment with
respect to the partnership adjustments
in accordance with this paragraph (b)(3).
A modification of the tax rate does not
affect how the partnership adjustment
factors into the calculation of the total
netted partnership adjustment. This
paragraph (b)(3) applies to
modifications under—
(A) Paragraph (d)(4) of this section
(rate modification);
(B) Paragraph (d)(8) of this section
(closing agreements), if applicable;
(C) Paragraph (d)(9) of this section
(tax treaty modifications), if applicable;
and
(D) Paragraph (d)(10) of this section
(other modifications), if applicable.
(ii) Determination of the imputed
underpayment in the case of rate
modification. Except as described in
paragraph (b)(3)(iv) of this section, in
the case of an approved modification
described under paragraph (b)(3)(i) of
this section, the imputed underpayment
is the sum of the total netted
partnership adjustment consisting of the
PO 00000
Frm 00028
Fmt 4701
Sfmt 4702
net positive adjustments not subject to
rate reduction under paragraph (b)(3)(i)
of this section (taking into account any
approved modifications under
paragraph (b)(2) of the section), 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 paragraph (b)(4) of this section).
The total netted partnership adjustment
not subject to rate reduction under
paragraph (b)(3)(i) of this section (taking
into account any approved
modifications under paragraph (b)(2) of
the section) is determined by
multiplying the partnership adjustments
included in the total netted partnership
adjustment that are not subject to rate
modification under paragraph (b)(3)(i) of
this section (including any partnership
adjustment that remains after applying
paragraph (b)(3)(iii) of this section) by
the highest tax rate (as described in
§ 301.6225–1(b)(1)(iv)).
(iii) Calculation of rate-modified
netted partnership adjustment in the
case of a rate modification. The ratemodified netted partnership adjustment
is determined as follows—
(A) Determine each relevant partner’s
distributive share of the partnership
adjustments subject to an approved
modification under paragraph (b)(3)(i) of
this section based on how each
adjustment subject to rate modification
would be properly allocated under
section 702 to such relevant partner in
the reviewed year (as defined in
§ 301.6241–1(a)(8)).
(B) Multiply each partnership
adjustment determined under paragraph
(b)(3)(iii)(A) of this section by the tax
rate applicable to such adjustment based
on the approved modification described
under paragraph (b)(3)(i) 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
modification described under paragraph
(b)(3)(i) of this section.
(iv) Rate modification in the case of
special allocations. If an imputed
underpayment results from adjustments
to more than one partnership-related
item and any relevant partner for whom
modification described under paragraph
(b)(3)(i) of this section is approved has
a distributive share of such items that is
not the same with respect to all such
items, the imputed underpayment as
modified based on the modification
types described under paragraph
(b)(3)(i) of this section is determined as
described in paragraphs (b)(3)(ii) and
(iii) of this section except that each
relevant partner’s distributive share is
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
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
approved modification under
paragraphs (d)(2) and (3) and (d)(5)
through (10) of this section with respect
to any relevant partner. Upon request by
the IRS, the partnership may be required
to provide the relevant 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) Modification of the number and
composition of imputed
underpayments. Once approved by the
IRS, a modification under paragraph
(d)(6) of this section affects the manner
in which adjustments are placed into
groupings and subgroupings (as
described in § 301.6225–1(c) and (d)) or
whether the IRS designates one or more
specific imputed underpayments (as
described in § 301.6225–1(g)). If the IRS
approves a request for modification
under this paragraph (b)(4), the imputed
underpayment and any specific imputed
underpayment affected by or resulting
from the modification is determined
according to the rules of § 301.6225–1
subject to any other modifications
approved by the IRS under this section.
(5) Other modifications. The effect of
other modifications described in
paragraph (d)(10) of this section,
including the order that such
modification will be taken into account
for purposes of paragraph (b)(1) of this
section, may be set forth 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, and include the
information required by, the forms,
instructions, and other guidance
prescribed by the IRS. The partnership
representative must submit any request
for modification and all relevant
information (including information
required under paragraphs (c)(2) and
paragraph (d) of this section) to the IRS
within the time described in paragraph
(c)(3) of this section. The IRS will notify
the partnership representative in writing
of the approval or denial, in whole or
in part, of any request for modification.
A request for modification, including a
request by the IRS for information
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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 are 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
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 to
provide information the IRS determines
is necessary to substantiate a request for
modification within the time
restrictions described in paragraph (c) of
this section.
(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
partnership’s structure, allocations,
ownership, and ownership changes, its
relevant partners for each taxable year
relevant to the request for modification,
as well as the partnership agreement as
defined in § 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
a relevant partner that is an indirect
partner, the partnership representative
must provide to the IRS any information
that the IRS may require relevant to any
pass-through partner through which the
relevant partner holds its interest in the
partnership. For instance, if the
partnership requests modification with
PO 00000
Frm 00029
Fmt 4701
Sfmt 4702
41981
respect to an amended return filed by a
relevant 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 relevant 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 the IRS
grants an extension of time, 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.
The IRS may, in its discretion, grant a
request for extension of the 270-day
period described in paragraph (c)(3)(i) of
this section provided the partnership
submits such request to the IRS, in the
form and manner prescribed by forms,
instructions, or other guidance, before
expiration of such period, as extended
by any prior extension granted under
this paragraph (c)(3)(ii).
(iii) Expiration of the 270-day period
by agreement. The 270-day period
described in paragraph (c)(3)(i) of this
section (including any extensions under
paragraph (c)(3)(ii) of this section)
expires as of the date the partnership
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(b)(2)(A);
§ 301.6231–1(b)(2).
(4) Approval of modification by the
IRS. Notification of approval will be
provided to the partnership 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 before
expiration of the 270-day period in
paragraph (c)(3)(i) of this section plus
any extension granted by the IRS under
paragraph (c)(3)(ii) of this section.
(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 relevant partner
provided all of the partnership
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41982
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
adjustments properly allocable to such
relevant partner are taken into account
and any amount due is paid in
accordance with this paragraph (d)(2) of
this section. Only adjustments to
partnership-related items or adjustments
to a relevant partner’s tax attributes
affected by adjustments to partnershiprelated items may be taken into account
on an amended return under paragraph
(d)(2) of this section. A partnership may
request a modification for purposes of
this paragraph (d)(2) by submitting a
modification request based on the
alternative procedure to filing amended
returns as described in paragraph
(d)(2)(x) of this section. The partnership
may not request an additional
modification of any imputed
underpayment for a partnership taxable
year under this section with respect to
any relevant partner that files an
amended return (or utilizes the
alternative procedure to filing amended
returns) under paragraph (d)(2) of this
section or with respect to any
partnership adjustment allocated to
such relevant partner.
(ii) Requirements for approval of a
modification request based on amended
return. Except as otherwise provided
under alternative procedures described
in paragraph (d)(2)(x) of this section, an
amended return modification request
under this paragraph (d)(2) will not be
approved unless the provisions of this
paragraph (d)(2)(ii) are satisfied.
(A) Full payment required. An
amended return modification request
under paragraph (d)(2) of this section
will not be approved unless the relevant
partner filing the amended return has
paid all tax, penalties, additions to tax,
additional amounts, and interest due as
a result of taking into account the
adjustments in the first affected year (as
defined in § 301.6226–3(b)(2)) and all
modification years (as described in
paragraph (d)(2)(ii)(B) of this section) at
the time such return is filed with the
IRS.
(B) Amended returns for all relevant
taxable years must be filed.
Modification under paragraph (d)(2) of
this section will not be approved by the
IRS unless a relevant 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 § 301.6241–1(a)(10)) of
the relevant partner is affected by reason
of taking into account the relevant
partner’s distributive share of all
partnership adjustments 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
the relevant partner’s tax attributes of
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
taking into account the relevant
partner’s distributive share of the
partnership adjustments in the first
affected year.
(C) Amended returns for partnership
adjustments that reallocate distributive
shares. Except as described in this
paragraph (d)(2)(ii)(C), in the case of a
partnership adjustment that reallocates
the distributive share of any
partnership-related 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 file amended returns in
accordance with paragraph (d)(2) of this
section and all such returns are
approved by the IRS for modification
purposes. The IRS may determine that
the requirements of this paragraph
(d)(2)(ii)(C) are satisfied even if not all
relevant partners affected by such
adjustment file amended returns
provided the remaining relevant
partners affected by the reallocation take
into account their distributive share of
the adjustment through other
modifications approved by the IRS
(including the alternative procedures to
filing amended returns under paragraph
(d)(2)(x) of this section) or if a passthrough partner takes into account the
relevant adjustments in accordance with
paragraph (d)(2)(vi) of this section. For
instance, in the case of an adjustment
that reallocates a loss from one partner
to another, the IRS may determine that
the requirements of this paragraph
(d)(2)(ii)(C) have been satisfied if one
affected relevant partner files an
amended return taking into account the
adjustment and the other affected
relevant partner signs a closing
agreement with the IRS taking into
account the adjustments.
(iii) Form and manner for filing
amended returns. A relevant partner
must file all amended returns required
for modification under paragraph (d)(2)
of this section with the IRS in
accordance with forms, instructions,
and other guidance prescribed by the
IRS. Except as otherwise provided
under alternative procedures described
in paragraph (d)(2)(x) of this section, 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 each relevant
partner signed under penalties of
perjury by such partner stating that all
of the amended returns required to be
filed under paragraph (d)(2) of this
section has been filed (including the
date on which such amended returns
PO 00000
Frm 00030
Fmt 4701
Sfmt 4702
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) Period of limitations. Generally,
the period of limitations under sections
6501 and 6511 do not apply to an
amended return filed under this
paragraph (d)(2) provided the amended
return otherwise meets the requirements
of paragraph (d)(2) of this section.
(v) Amended returns in the case of
adjustments allocated through certain
pass-through partners. A request for
modification related to an amended
return of a relevant partner that is an
indirect partner holding its interest in
the partnership through a pass-through
partner that could be subject to tax
under chapter 1 on the partnership
adjustments that are properly allocated
to such pass-through partner will not be
approved unless the partnership—
(A) Establishes that the pass-through
partner is not subject to chapter 1 tax on
the adjustments that are properly
allocated to such pass-through partner;
or
(B) Requests modification with
respect to the adjustments resulting in
chapter 1 tax for the pass-through
partner, including full payment of such
chapter 1 tax for the first affected year
and all modification years under
paragraph (d)(2) of this section or in
accordance with forms, instructions, or
other guidance prescribed by the IRS.
(vi) Amended returns in the case of
pass-through partners—(A) Passthrough partners may file amended
returns. A relevant partner that is a
pass-through partner, including a
partnership-partner (as defined in
§ 301.6241–1(a)(7)) that has a valid
election under section 6221(b) in effect
for a partnership taxable year, may, in
accordance with forms, instructions,
and other guidance provided by the IRS
and solely for purposes of modification
under paragraph (d)(2) of this section,
take into account its share of the
partnership adjustments and determine
and pay an amount calculated in the
same manner as the amount computed
under § 301.6226–3(e)(4)(iii) subject to
paragraph (d)(2)(vi)(B) of this section.
(B) Modifications with respect to
upper-tier partners of the pass-through
partner. In accordance with forms,
instructions, and other guidance
provided by the IRS, for purposes of
determining and calculating the amount
a pass-through partner must pay under
paragraph (d)(2)(vi)(A) of this section,
the pass-through partner may take into
account modifications with respect to
its direct and indirect partners to the
extent that such modifications are
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
requested by the partnership requesting
modification and approved by the IRS
under this section.
(vii) Limitations on amended
returns—(A) In general. A relevant
partner may not file an amended return
with respect to partnership adjustments
or with respect to an imputed
underpayment except as described in
paragraph (d)(2) of this section.
(B) Further amended returns
restricted. If a relevant 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.
(viii) Penalties. The applicability of
any penalties, additions to tax, or
additional amounts that relate to an
adjustment to a partnership-related item
is determined at the partnership level in
accordance with section 6221(a).
However, the amount of penalties,
additions to tax, and additional amounts
a relevant partner must pay under
paragraph (d)(2)(ii)(A) of this section for
the first affected year and for any
modification year is based on the
underpayment or understatement of tax,
if any, reflected on the amended return
filed by the relevant partner under this
paragraph (d)(2). For instance, if after
taking into account the adjustments, the
return of the relevant partner for the
first affected year or any modification
year reflects an underpayment or an
understatement that falls below the
applicable threshold for the imposition
of a penalty under section 6662(d), no
penalty would be due from that relevant
partner for such year. A relevant partner
may raise a partner-level defense (as
described in § 301.6226–3(d)(3)) by first
paying the penalty, addition to tax, or
additional amount with the amended
return filed under this paragraph (d)(2)
and then filing a claim for refund in
accordance with forms, instructions,
and other guidance.
(ix) Effect on tax attributes binding.
Any adjustments to the tax attributes of
any relevant partner which are affected
by modification under paragraph (d)(2)
of this section are binding on the
relevant partner with respect to the first
affected year and all modification years
(as defined in paragraph (d)(2)(ii)(B) of
this section). A failure to adjust any tax
attribute in accordance with this
paragraph (d)(2)(ix) is a failure to treat
a partnership-related item in a manner
which is consistent with the treatment
of such item on the partnership return
within the meaning of section 6222. The
provisions of section 6222(c) and
§ 301.6222–1(c) (regarding notification
of inconsistent treatment) do not apply
with respect to tax attributes under this
paragraph (d)(2)(ix).
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
(x) Alternative procedure to filing
amended returns—(A) In general. A
partnership may satisfy the
requirements of paragraph (d)(2) of this
section by submitting on behalf of a
relevant partner, in accordance with
forms, instructions, and other guidance
provided by the IRS, all information and
payment of any tax, penalties, additions
to tax, additional amounts, and interest
that would be required to be provided
if the relevant partner were filing an
amended return under paragraph (d)(2)
of this section, except as otherwise
provided in relevant forms, instructions,
and other guidance provided by the IRS.
A relevant partner for which the
partnership seeks modification under
this paragraph (d)(2)(x) must agree to
take into account, in accordance with
forms, instructions, and other guidance
provided by the IRS, adjustments to any
tax attributes of such relevant partner. A
modification request submitted in
accordance with the alternative
procedure under this paragraph (d)(2)(x)
is not a claim for refund with respect to
any person.
(B) Modifications with respect to
reallocation adjustments. A submission
made in accordance with this paragraph
(d)(2)(x) with respect to any relevant
partner is treated as if such relevant
partner filed an amended return for
purposes of paragraph (d)(2)(ii)(C) of
this section (regarding the requirement
that all relevant partners affected by a
reallocation must file an amended
return to be eligible to for the
modification under paragraph (d)(2) of
this section) provided the submission is
with respect to the first affected year
and all modification years of such
relevant partner as required under
paragraph (d)(2) of this section.
(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
relevant 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 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 taxexempt partner not subject to tax. Only
the portion of the partnership
adjustments properly allocated to a taxexempt partner with respect to which
the partner would not be subject to tax
PO 00000
Frm 00031
Fmt 4701
Sfmt 4702
41983
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 for the reviewed year with respect to
adjustments that are attributable to a
relevant partner that is a C corporation
and adjustments with respect to capital
gains or qualified dividends that are
attributable to a relevant 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 for the reviewed
year 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 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)) that is
a relevant partner, the imputed
underpayment is determined without
regard to the adjustment that the
partnership demonstrates would be
reduced by 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) or
qualified relevant partner (as defined in
paragraph (d)(5)(iv) of this section).
(ii) Specified passive activity loss. A
specified passive activity loss carryover
amount for any specified partner or
qualified relevant 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—
(A) At the end of the first affected year
(affected year loss); or
(B) At the end of either—
(1) The specified partner’s taxable
year in which or with which the
adjustment year (as defined in
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41984
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
§ 301.6241–1(a)(1)) of the partnership
ends, reduced to the extent any such
partner has utilized any portion of its
affected 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 other
year; or
(2) The most recent year for which the
publicly traded partnership has filed a
return under section 6031.
(iii) Specified partner. A specified
partner is a person that for each taxable
year beginning with the first affected
year through the person’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;
(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) Qualified relevant partner. A
qualified relevant partner is a relevant
partner that meets the three
requirements to be a specified partner
(as described in paragraphs
(d)(5)(iii)(A), (B), and (C) of this section)
for each year beginning with the first
affected year through described in
paragraph (d)(5)(ii)(B)(2) of this section.
(v) 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. In the case of a
qualified relevant partner, the
partnership must report, in accordance
with forms, instructions, or other
guidance prescribed by the IRS, to each
qualified relevant partner the amount of
that qualified relevant partner’s
reduction of its suspended passive loss
carryovers at the end of the taxable year
for which the partnership’s next return
is due to be filed under section 6031 to
be taken into account by the qualified
relevant partner on the partner’s return
for the year that includes the end of the
partnership’s taxable year for which the
partnership’s next return is due to be
filed under section 6031. The reduction
in suspended passive loss carryovers as
reported to a specified partner under
this paragraph (d)(5)(v) is a
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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—(i) In general. A
partnership may request modification of
the number or composition of any
imputed underpayment included in the
NOPPA by requesting that the IRS
include one or more partnership
adjustments in a particular grouping or
subgrouping (as described in
§ 301.6225–1(c) and (d)) or specific
imputed underpayments (as described
in § 301.6225–1(g)) different from the
grouping, subgrouping, or imputed
underpayment set forth in the NOPPA.
For example, a partnership may request
under this paragraph (d)(6) that one or
more partnership adjustments taken into
account to determine a general imputed
underpayment set forth in the NOPPA
be taken into account to determine a
specific imputed underpayment.
(ii) Request for particular treatment
regarding limitations or restrictions. A
modification request under paragraph
(d)(6) of this section includes a request
that one or more partnership
adjustments be treated as if no
limitations or restrictions under
§ 301.6225–1(d) apply and as a result
such adjustments may be subgrouped
with other adjustments.
(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 relevant
partner where the modification is based
on deficiency dividends distributed as
described in section 860(f) by a relevant
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
under this paragraph (d)(7) is available
only to the extent that the deficiency
dividends take into account adjustments
described in § 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), § 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
PO 00000
Frm 00032
Fmt 4701
Sfmt 4702
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) Closing agreements. A partnership
may request modification based on a
closing agreement entered into by the
IRS and the partnership or any relevant
partner, or both if appropriate, pursuant
to section 7121. If modification under
this paragraph (d)(8) is approved by the
IRS, any partnership adjustment that is
taken into account under such closing
agreement and for which any required
payment under the closing agreement is
made will not be taken into account in
determining the imputed underpayment
under § 301.6225–1. Generally, the IRS
will not approve any additional
modification under this section with
respect to a relevant partner to which a
modification under this paragraph (d)(8)
has been approved.
(9) Tax treaty modifications. A
partnership may request a modification
under this paragraph (d)(9) with respect
to a relevant partner’s distributive share
of an adjustment to a partnershiprelated item if the relevant partner—
(i) Was a foreign person who would
have qualified, under an income tax
treaty with the United States, for a
reduction or exemption from tax with
respect to such partnership-related item
in the reviewed year;
(ii) Would have derived the item
(within the meaning of § 1.894–1(d) of
this chapter) had it been taken into
account properly in the partnership’s
reviewed year return; and
(iii) Is not otherwise prevented under
the income tax treaty with the United
States from claiming such reduction or
exemption with respect to the reviewed
year at the time the modification under
this paragraph (d)(9) is requested.
(10) Other modifications. A
partnership may request a modification
not otherwise described in paragraph (d)
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
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) Modification of adjustments that
do not result in an imputed
underpayment. A partnership may
request modification of adjustments that
do not result in an imputed
underpayment (as described in
§ 301.6225–1(f)(1)(ii)) using
modifications described in paragraph
(d)(2) of this section (amended returns
and the alternative procedure to filing
amended returns), paragraph (d)(6) of
this section (number and composition of
the imputed underpayment), paragraph
(d)(8) of this section (closing
agreements), or, if applicable, paragraph
(d)(10) of this section (other
modifications).
(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, each
partnership and its relevant partners are
calendar year taxpayers, all relevant
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. Partnership has two partners
during its 2019 partnership taxable year: P
and S. P is a partnership, and S is an S
Corporation. P has four partners during its
2019 partnership taxable year: A, C, T and
DE. A is an individual, C is a C Corporation,
T is a trust, and DE is a wholly-owned entity
disregarded as separate from its owner for
Federal tax purposes. The owner of DE is B,
an individual. T has two beneficiaries during
its 2019 taxable year: F and G, both
individuals. S has 3 shareholders during its
2019 taxable year: H, I, and J, all individuals.
For purposes of this section, if Partnership
requests modification with respect to A, B, C,
F, G, H, I, and J, those persons are all relevant
partners (as defined in paragraph (a) of this
section). P, S, and DE are not relevant
partners (as defined in paragraph (a) of this
section) because DE is a wholly-owned entity
disregarded as separate from its owner for
Federal tax purposes and modification was
not requested with respect to P and S.
Example 2. The IRS initiates an
administrative proceeding with respect to
Partnership’s 2019 taxable year. 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
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
percent tax rate). Partner A, an individual,
held a 20 percent interest in Partnership
during 2019. Partnership timely requests
modification under paragraph (d)(2) of this
section based on A’s 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 the tax rate applicable to A for
the 2019 tax year. No tax attribute in any
other taxable year of A is affected by A’s
taking into account A’s share of the
partnership adjustment for 2019. In
accordance with paragraph (d)(2)(iii) of this
section, Partnership’s partnership
representative provides the IRS with
documentation demonstrating that A filed
the 2019 return and paid all tax and interest
due. The IRS approves the modification and,
in accordance with paragraph (b)(2) of this
section, the $20 increase in ordinary income
allocable to A is not included in the
calculation of the total netted partnership
adjustment (determined in accordance with
§ 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 3. The IRS initiates an
administrative proceeding with respect to
Partnership’s 2019 taxable year. Partnership
has two equal partners during its entire 2019
taxable year: An individual, A, and a
partnership-partner, B. During all of 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 proposing 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 timely requests modification
under paragraph (d)(3) of this section with
respect to B’s partner, C, a tax-exempt entity.
In accordance with paragraph (d)(3)(iii) of
this section, Partnership’s partnership
representative provides the IRS with
documentation substantiating to the IRS’s
satisfaction that C held a 25 percent indirect
interest in Partnership through its interest in
B during the 2019 taxable year, that C was
a tax-exempt entity defined in paragraph
(d)(3)(ii) of this section during the 2019
taxable year, and that C was not subject to
tax with respect to its entire distributive
share of the partnership adjustment allocated
to B (which is $25 (50 percent × 50 percent
× $100)). The IRS approves the modification
and, in accordance with paragraph (b)(2) of
this section, the $25 increase in ordinary
income allocated to C, through B, is not
included in the calculation of the total netted
partnership adjustment (determined in
accordance with § 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).
Example 4. The facts are the same as in
Example 3 of this paragraph (f), except $10
PO 00000
Frm 00033
Fmt 4701
Sfmt 4702
41985
of the $25 of the adjustment allocated to C
is unrelated business taxable income (UBTI)
as defined in section 512 because it is debtfinanced income within the meaning of
section 514 (no section 512 UBTI
modifications apply) 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 $15 of the $25 of ordinary
income allocated to C that is not UBTI.
Therefore, only a modification of $15 ($25
less $10) of the total $100 partnership
adjustment may be approved by the IRS
under paragraph (d)(3) of this section and, in
accordance with paragraph (b)(2) of this
section, excluded when determining the
imputed underpayment for Partnership’s
2019 taxable year. The total netted
partnership adjustment (determined in
accordance with § 301.6225–1) is reduced to
$85 ($100 less $15), and the imputed
underpayment is reduced to $34 (total netted
partnership adjustment of $85, after
modification, multiplied by 40 percent).
Example 5. The facts are the same as in
Example 3 of this paragraph (f), except that
Partnership also timely requests modification
under paragraph (d)(2) with respect to an
amended return filed by B, and, in
accordance with (d)(2)(iii) of this section,
Partnership’s partnership representative
provides the IRS with documentation
demonstrating that B filed the 2019 return
and paid all tax and interest due. B reports
50 percent of the partnership adjustments
($50) on its amended return, and B calculates
an amount under paragraph (d)(2)(vi)(A) of
this section and § 301.6226–3(e)(4)(iii) that,
pursuant to paragraph (d)(2)(vi)(B) of this
section, takes into account the modification
under paragraph (d)(3) approved by the IRS
with respect to B’s partner C, a tax-exempt
entity. B makes a payment pursuant to
paragraph (d)(2)(ii)(A) of this section, and the
IRS approves the requested modification.
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 § 301.6225–1) is $50, and
the imputed underpayment, after
modification, is $20.
Example 6. The facts are the same as in
Example 3 of this paragraph (f), except that
in addition to the modification with respect
to tax-exempt entity C, which reduced the
imputed underpayment by excluding from
the determination of the imputed
underpayment $25 of the $100 partnership
adjustment reflected in the NOPPA,
Partnership timely requests modification
under paragraph (d)(2) of this section with
respect to an amended return filed by
individual D, and, in accordance with
(d)(2)(iii) of this section, Partnership’s
partnership representative provides the IRS
with documentation demonstrating that D
filed the 2019 return and paid all tax and
interest due. D’s amended return for D’s 2019
taxable year takes into account D’s share of
the partnership adjustment (50 percent of B’s
50 percent interest in Partnership, or $25)
and D paid the tax and interest due as a
result of taking into account D’s share of the
partnership adjustment in accordance with
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41986
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
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. The
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 § 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 7. The IRS initiates an
administrative proceeding with respect to
Partnership’s 2019 taxable year. All of
Partnership’s partners during its 2019 taxable
year are individuals. The IRS mails a NOPPA
to Partnership for the 2019 taxable year
proposing three partnership adjustments. The
first partnership adjustment is an increase to
ordinary income of $75 for 2019. The second
partnership adjustment is an increase in the
depreciation deduction allowed for 2019 of
$25, which under § 301.6225–1(d)(2)(i) is
treated as a $25 decrease in income. The
third adjustment is an increase in long-term
capital gain of $10 for 2019. In accordance
with § 301.6225–1, the total netted
partnership adjustment is $85 ($75 increase
in ordinary income + $10 increase in longterm capital gain), resulting in an imputed
underpayment of $34 ($85 multiplied by 40
percent). The $25 decrease in income as a
result of the increase in depreciation is an
adjustment that does not result in an imputed
underpayment under § 301.6225–1(f). Under
the partnership agreement in effect for
Partnership’s 2019 taxable year, the longterm capital gain and the increase in
depreciation is specially allocated to B and
the increase in ordinary income is specially
allocated to A. Partnership requests a
modification under paragraph (d)(6) of this
section to determine a specific imputed
underpayment with respect to the $75
adjustment to ordinary income allocated to
A. The specific imputed underpayment is
with respect to $75 of the increase in income
specially allocated to A and the general
imputed underpayment is with respect to $10
of the increase in capital gain and the $25
increase in depreciation deduction specially
allocated to B. If the modification is
approved by the IRS, the specific imputed
underpayment is $30 ($75 multiplied by 40
percent), the general imputed underpayment
is $4 ($10 multiplied by 40 percent), and the
increase in depreciation of $25 remains an
adjustment that does not result in an imputed
underpayment under § 301.6225–1(f) and is
associated with the general imputed
underpayment.
Example 8. Partnership has two reviewed
year partners, C1 and C2, both of which are
C corporations. The IRS mails to Partnership
a NOPPA with two adjustments, both based
on rental real estate activity. The first
adjustment is an increase of rental real estate
income of $100 attributable to Property A.
The second adjustment is an increase of
rental real estate loss of $30 attributable to
Property B. The Partnership did not treat the
leasing arrangement with respect to Property
A and Property B as an appropriate economic
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
unit for purposes of section 469. If the $100
increase in income attributable to Property A
and the $30 increase in loss attributable to
Property B were included in the same
subgrouping and netted, then taking the $30
increase in loss into account would result in
a decrease in the amount of the imputed
underpayment. Also, the $30 increased loss
might be limited or restricted if taken into
account by any person under the passive
activity rules under section 469. For instance,
under section 469, rental activities of the two
properties could be treated as two activities,
which could limit a partner’s ability to claim
the loss. In addition to the potential
limitations under section 469, there are other
potential limitations that might apply if the
$30 loss were taken into account by any
person. Therefore, in accordance with
§ 301.6225–1(d), the two adjustments are
placed in separate subgroupings within the
residual grouping, the total netted
partnership adjustment is $100, the imputed
underpayment is $40 ($100 × 40 percent),
and the $30 increase in loss is an adjustment
that does not result in an imputed
underpayment under § 301.6225–1(f).
Partnership requests modification under
paragraph (d)(6) of this section,
substantiating to the satisfaction of the IRS
that C1 and C2 are publicly traded C
corporations, and therefore, the passive
activity loss limitations under section 469 of
the Code do not apply. Partnership also
substantiates to the satisfaction of the IRS
that no other limitation or restriction applies
that would prevent the grouping of the $100
with the $30 loss. The IRS approves
Partnership’s modification request and places
the $100 of income and the $30 loss into the
subgrouping in the residual grouping under
the rules described in § 301.6225–1(c)(5).
Under § 301.6225–1(e), because the two
adjustments are in one subgrouping, they are
netted together, resulting in a total netted
partnership adjustment of $70 ($100 plus
<$30>) and an imputed underpayment of $28
($70 × 40 percent). After modification, there
are not adjustments treated as an adjustment
that does not result in an imputed
underpayment under § 301.6225–1(f) because
the $30 loss is now netted with the $100 of
income.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 10. Section 301.6225–3 is added
to read as follows:
§ 301.6225–3 Treatment of partnership
adjustments that do not result in an
imputed underpayment.
(a) In general. Partnership
adjustments (as defined in § 301.6241–
1(a)(6)) that do not result in an imputed
underpayment (as described in
PO 00000
Frm 00034
Fmt 4701
Sfmt 4702
§ 301.6225–1(f)) are taken into account
by a partnership in the adjustment year
(as defined in § 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
(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 nonseparately stated loss for the adjustment
year depending on whether the
adjustment is to a partnership-related
item that is an item of income or loss.
(2) Separately stated items. In the case
of a partnership adjustment to
partnership-related 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 an
adjustment to a partnership-related item
that is reported or could be reported by
a partnership as a credit on the
partnership’s return for the reviewed
year (as defined in § 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 reallocates
a partnership-related item to or from a
particular partner or partners that also
does not result in an imputed
underpayment pursuant to § 301.6225–
1(f) is taken into account by the
partnership in the adjustment year as a
separately stated item or a nonseparately 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
§ 301.6241–1(a)(2)) who are also
reviewed year partners (as defined in
§ 301.6241–1(a)(9)) with respect to
whom the amount was reallocated.
(5) Adjustments taken into account by
partners as part of the modification
process. If, as part of modification under
§ 301.6225–2, a relevant partner (as
defined in § 301.6225–2(a)) takes into
account a partnership adjustment that
would not result in an imputed
underpayment, and the IRS approves
the modification, such partnership
adjustment is not taken into account by
the partnership in the adjustment year
in accordance with § 301.6225–1(a).
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
(6) Effect of election under section
6226. If a partnership makes a valid
election under § 301.6226–1 with
respect to an imputed underpayment, a
partnership adjustment that does not
result in an imputed underpayment and
that is associated with such imputed
underpayment as described in
§ 301.6225–1(g) is taken into account by
the reviewed year partners in
accordance with § 301.6226–3 and is not
taken into account under this section.
(c) Treatment of adjustment year
partners. The rules under subchapter K
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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 11. Section 301.6225–4 is added
to read as follows:
amozie on DSK3GDR082PROD with PROPOSALS3
§ 301.6225–4 Effect of a partnership
adjustment on specified tax attributes of
partnerships and their partners.
(a) Adjustments to specified tax
attributes—(1) In general. When there is
a partnership adjustment (as defined in
§ 301.6241–1(a)(6)), the partnership and
its adjustment year partners (as defined
in § 301.6241–1(a)(2)) generally must
adjust their specified tax attributes (as
defined in paragraph (a)(2) of this
section) in accordance with the rules in
this section. For a partnership
adjustment that results in an imputed
underpayment (as defined in
§ 301.6241–1(a)(3)), specified tax
attributes are generally adjusted by
making appropriate adjustments to the
book value and basis of partnership
property under paragraph (b)(2) of this
section, creating notional items based
on the partnership adjustment under
paragraph (b)(3) of this section,
allocating those notional items as
described in paragraph (b)(5) of this
section, and determining the effect of
those notional items for the partnership
and its reviewed year partners (as
defined in § 301.6241–1(a)(9)) or their
successors (as defined in § 1.704–
1(b)(1)(viii)(b) of this chapter) under
paragraph (b)(6) of this section.
Paragraph (c) of this section describes
how to treat an expenditure for any
payment required to be made by a
partnership under subchapter C of
chapter 63 of the Internal Revenue Code
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
(subchapter C of chapter 63) including
any imputed underpayment. Paragraph
(d) of this section describes adjustments
to tax attributes of a partnership and its
partners in the case of a partnership
adjustment that does not result in an
imputed underpayment (as described in
§ 301.6225–1(f)).
(2) Specified tax attributes. Specified
tax attributes are the tax basis and book
value of a partnership’s property,
amounts determined under section
704(c), adjustment year partners’ bases
in their partnership interests,
adjustment year partners’ capital
accounts determined and maintained in
accordance with § 1.704–1(b)(2) of this
chapter, and earnings and profits under
section 312.
(3) Timing. Adjustments to specified
tax attributes under this section are
made in the adjustment year (as defined
in § 301.6241–1(a)(1)). Thus, to the
extent that an adjustment to a specified
tax attribute under this section is
reflected on a federal tax return, the
partnership adjustment is generally first
reflected on any return filed with
respect to the adjustment year.
(4) Effect of other sections. The
determination of specified tax attributes
under this section is not conclusive as
to tax attributes of a partnership or its
partners determined under other
sections of the Internal Revenue Code
(Code), including the subchapter C of
chapter 63. For example, a partnership
that files an administrative adjustment
request (AAR) under section 6227
adjusts partnership tax attributes as
appropriate. Further, to the extent a
partner or partnership appropriately
adjusted its tax attributes prior to a final
determination under subchapter C of
chapter 63 with respect to a partnership
adjustment (for example, in the context
of an amended return modification
described in § 301.6225–2(d)(2), the
alternative procedure to filing amended
returns as described in § 301.6225–
2(d)(2)(x), or a closing agreement
described in § 301.6225–2(d)(8)), those
tax attributes are not adjusted under this
section. Similarly, to the extent a
partner filed a return inconsistent with
the treatment of items on a partnership
return, a reviewed year partner (or its
successor) does not adjust its tax
attributes to the extent the partner’s
prior return was consistent with the
partnership adjustment. For the rules
regarding consistent treatment by
partners, see § 301.6222–1.
(5) Election under section 6226—(i) In
general. Except as otherwise provided
in paragraph (a)(5)(ii) of this section, tax
attributes of a partnership and its
partners are adjusted for a partnership
adjustment that results in an imputed
PO 00000
Frm 00035
Fmt 4701
Sfmt 4702
41987
underpayment with respect to which an
election is made under § 301.6226–1 in
accordance with § 301.6226–4, and not
the rules of this section.
(ii) Pass-through partners and indirect
partners. A pass-through partner (as
defined in § 301.6241–1(a)(5)) that is a
partnership and pays an imputed
underpayment under § 301.6226–3(e)(4)
treats its share of each partnership
adjustment reflected on the relevant
statement as a partnership adjustment
described in paragraph (a)(1) of this
section, treats the imputed
underpayment under § 301.6226–
3(e)(4)(iii) as an imputed underpayment
determined under § 301.6225–1 for
purposes of § 1.704–1(b)(2)(iii)(a) and (f)
of this chapter, treats items arising from
an adjustment that does not result in an
imputed underpayment as an item
under paragraph (d) of this section, and
finally treats amounts with respect to
any penalties, additions to tax, and
additional amounts and interest
computed as an amount described in
§ 1.704–1(b)(2)(iii)(f)(3) of this chapter.
(6) Reflection of economic
arrangement. This section and the rules
in § 1.704–1(b)(1)(viii), (b)(2)(iii)(a) and
(f), (b)(2)(iv)(i)(4), and (b)(4)(xi), (xii),
(xiii), (xiv), and (xv) of this chapter must
be interpreted in a manner that reflects
the economic arrangement of the parties
and the principles of subchapter K of
the Code, taking into account the rules
of the centralized partnership audit
regime.
(b) Adjusting specified tax attributes
in the case of a partnership adjustment
that results in an imputed
underpayment—(1) In general. This
paragraph (b) applies with respect to
each partnership adjustment that was
taken into account in the determination
of the imputed underpayment under
§ 301.6225–1, except to the extent
partner or partnership tax attributes
were already adjusted as part of the
partnership adjustment.
(2) Book value and basis of
partnership property. Partnership-level
specified tax attributes must be adjusted
under this paragraph (b)(2). Specifically,
the partnership must make appropriate
adjustments to the book value and basis
of property to take into account any
partnership adjustment. No adjustments
are made with respect to property that
was held by the partnership in the
reviewed year but is no longer held by
the partnership in the adjustment year.
Amounts determined under section
704(c) must also be adjusted to take into
account the partnership adjustment.
(3) Creation of notional items based
on partnership adjustment—(i) In
general. In order to give appropriate
effect to each partnership adjustment for
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41988
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
partner-level specified tax attributes,
notional items are created with respect
to each partnership adjustment, except
as provided in paragraph (b)(4) of this
section.
(ii) Increase in income or gain. In the
case of a partnership adjustment that is
an increase to income or gain, a notional
item of income or gain is created in an
amount equal to the partnership
adjustment.
(iii) Increase in expense or loss. In the
case of a partnership adjustment that is
an increase to an expense or a loss, a
notional item of an expense or loss is
created in an amount equal to the
partnership adjustment.
(iv) Decrease in income or gain. In the
case of a partnership adjustment that is
a decrease to income or gain, a notional
item of expense or loss is created in an
amount equal to the partnership
adjustment.
(v) Decrease in expense or loss. In the
case of a partnership adjustment that is
a decrease to an expense or to a loss, a
notional item of income or gain is
created in an amount equal to the
partnership adjustment.
(vi) Credits. If a partnership
adjustment reflects a net increase or net
decrease in credits as determined in
accordance with § 301.6225–1, the
partnership may have one or more
notional items of income, gain, loss, or
deduction that reflects the change in the
item that gives rise to the credit, and
those items are treated as items in
paragraph (b)(3)(ii), (iii), (iv), or (v) of
this section. For example, if a
partnership adjustment is to a credit, a
notional item of deduction may be
created when appropriate. See section
280C.
(4) Situations in which notional items
are not created—(i) In general. In the
case of a partnership adjustment
described in this paragraph (b)(4), or
when the creation of a notional item
would duplicate a specified tax attribute
or an actual item already taken into
account, notional items are not created.
Nevertheless, in these situations
specified tax attributes are adjusted for
the partnership and its reviewed year
partners or their successors (as defined
in § 1.704–1(b)(i)(viii)(b) of this chapter)
in a manner that is consistent with how
the partnership adjustment would have
been taken into account under the
partnership agreement in effect for the
reviewed year taking into account all
facts and circumstances. See § 1.704–
1(b)(2)(iii)(f)(4) of this chapter for rules
for allocating the expenditure for an
imputed underpayment in these
circumstances.
(ii) Adjustments for non-section
704(b) items. Notional items are not
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
created for a partnership adjustment
that does not derive from items that
would have been allocated in the
reviewed year under section 704(b). See
paragraph (e) of this section, Example 5.
(iii) Section 705(a)(2)(B) expenditures.
Notional items are not created for a
partnership adjustment that is a change
of an item of deduction to a section
705(a)(2)(B) expenditure.
(iv) Tax-exempt income. Notional
items are not created for a partnership
adjustment to an item of income of a
partnership exempt from tax under
subtitle A of the Code.
(5) Allocation of the notional items.
Notional items are allocated to the
reviewed year partners or their
successors under § 1.704–1(b)(4)(xi) of
this chapter.
(6) Effect of notional items—(i) In
general. The partnership creates
notional items of income, gain, loss,
deduction, or credit in order to make
appropriate adjustments to specified tax
attributes. See paragraph (e), Example 1
of this section.
(ii) Partner capital accounts. For
purposes of capital accounts determined
and maintained in accordance with
§ 1.704–1(b)(2) of this chapter, a
notional item of income, gain, loss,
deduction or credit is treated as an item
of income, gain, loss, deduction or
credit (including for purposes of
determining book value). Similar
adjustments may be appropriate for
partnerships that do not determine and
maintain capital accounts in accordance
with § 1.704–1(b)(2) of this chapter.
(iii) Partner’s basis in its interest—(A)
In general. Except as otherwise
provided, the basis of a partner’s
interest in a partnership is adjusted (but
not below zero) to reflect any notional
item allocated to the partner by treating
the notional item as an item described
in section 705(a).
(B) Special basis rules. The basis of a
partner’s interest in a partnership is not
adjusted for any notional items
allocated to the partner—
(1) When a partner that is not a taxexempt entity (as defined in § 301.6225–
2(d)(3)(ii)) is a successor under § 1.704–
1(b)(1)(viii)(b) of this chapter to a
reviewed year tax-exempt partner, to the
extent that the IRS approved a
modification under § 301.6225–2
because the tax-exempt partner was not
subject to tax; or
(2) When the notional item would be
allocated to a successor that is related
(within the meaning of sections 267(b)
or 707(b)) to the reviewed year partner,
the successor acquired its interest from
the reviewed year partner in a
transaction (or series of transactions) in
which not all gain or loss is recognized
PO 00000
Frm 00036
Fmt 4701
Sfmt 4702
during an administrative adjustment
proceeding with respect to the
partnership’s reviewed year under
subchapter C of chapter 63, and a
principal purpose of the interest transfer
(or transfers) was to shift the economic
burden of the imputed underpayment
among the related parties.
(c) Determining a partner’s share of
an expenditure for any payment
required to be made by a partnership
under subchapter C of chapter 63.
Payment by a partnership of any amount
required to be paid under subchapter C
of chapter 63 as described in
§ 301.6241–4(a) is treated as an
expenditure described in section
705(a)(2)(B). Rules for determining
whether the economic effect of an
allocation of these expenses is
substantial are provided in § 1.704–
1(b)(2)(iii)(f) of this chapter and rules for
determining whether an allocation of
these expenses is deemed to be in
accordance with the partners’ interests
in the partnership are provided in
§ 1.704–1(b)(4)(xii) of this chapter.
(d) Adjusting tax attributes for a
partnership adjustment that does not
result in an imputed underpayment.
The rules under subchapter K of the
Code apply in the case of a partnership
adjustment that does not result in an
imputed underpayment. See
§ 301.6225–3(c). Accordingly, tax
attributes (as defined in § 301.6241–
1(a)(10)) of a partnership and its
partners are adjusted under those rules.
An item arising from a partnership
adjustment that does not result in an
imputed underpayment (as defined in
§ 301.6225–1(f)) is allocated under
§ 1.704–1(b)(4)(xiii) of this chapter.
(e) Examples. The following examples
illustrate the rules of this section. For
purposes of these examples, unless
otherwise stated, Partnership is subject
to the provisions of subchapter C of
chapter 63, Partnership and its partners
are calendar year taxpayers, all partners
are U.S. persons, and the highest rate of
income tax in effect for all taxpayers is
20 percent for all relevant periods.
Example 1. (i) In 2019, A, B, and C are
individuals that form Partnership. A
contributes Whiteacre, which is unimproved
land with an adjusted basis of $400 and a fair
market value of $1,000, and B and C each
contribute $1,000 in cash. The partnership
agreement provides that all income, gain,
loss, and deduction will be allocated in equal
1⁄3 shares among the partners. The
partnership agreement also provides that the
partners’ capital accounts will be determined
and maintained in accordance with § 1.704–
1(b)(2)(iv) of this chapter, distributions in
liquidation of the partnership (or any
partner’s interest) will be made in accordance
with the partners’ positive capital account
balances, and any partner with a deficit
E:\FR\FM\17AUP3.SGM
17AUP3
41989
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
balance in his capital account following the
liquidation of his interest must restore that
deficit to the partnership (as provided in
§ 1.704–1(b)(2)(ii)(b)(2) and (3) of this
chapter).
(ii) Upon formation, Partnership has the
following assets and capital accounts:
Partnership
basis
Book
Value
Cash .............................................................................
Whiteacre .....................................................................
$2,000
400
........................
$2,000
1,000
................
$2,000
1,000
................
Totals ....................................................................
2,400
3,000
3,000
Outside
basis
Book
Value
A
B
C
$400
1,000
1,000
$1,000
1,000
1,000
$1,000
1,000
1,000
................
2,400
3,000
3,000
(iii) In 2019, Partnership makes a $120
payment for Asset that it treats as a
deductible expense on its partnership return.
Partnership
basis
Book
Outside
basis
Value
Book
Value
Cash .............................................................................
Whiteacre .....................................................................
Asset ............................................................................
$1,880
400
0
$1,880
1,000
0
$1,880
1,000
120
A
B
C
$360
960
960
$960
960
960
$1,000
1,000
1,000
Totals ....................................................................
2,280
2,880
3,000
................
2,280
2,880
3,000
(iv) Partnership does not file an AAR for
2020. In 2021 (the adjustment year) it is
finally determined that Partnership’s $120
expenditure was not allowed as a deduction
in 2019 (the reviewed year), but rather was
the acquisition of an asset for which cost
recovery deductions are unavailable.
Accordingly, the IRS makes a partnership
adjustment that disallows the entire $120
deduction, which results in an imputed
underpayment of $48 ($120 × 40 percent).
Partnership did not request modification
under § 301.6225–2. Partnership pays the $48
imputed underpayment.
(v) Partnership first determines its tax
attribute adjustments resulting from the
partnership adjustment by applying
paragraph (b) of this section. Pursuant to
paragraph (b)(2) of this section, Partnership
must re-state the basis and book value of
Asset to $120. Further, pursuant to paragraph
(b)(3)(v) of this section, a $120 notional item
of income is created. The $120 item of
notional income is allocated in equal shares
($40) to A, B, and C in 2021 under § 1.704–
1(b)(4)(xi) of this chapter. Accordingly, in
2021 Partnership increases the capital
accounts of A, B, and C by $40 each, and
increases A, B, and C’s outside bases by $40
each under paragraph (b)(6)(ii) and (iii) of
this section, respectively.
(vi) As described in paragraph (c) of this
section, Partnership’s payment of the $48
imputed underpayment is treated as an
expenditure described in section 705(a)(2)(B)
under § 301.6241–4. Under § 1.704–
1(b)(4)(xii) of this chapter, Partnership
determines each partner’s properly allocable
share of this expenditure in 2021 by
allocating the expenditure in proportion to
the allocations of the notional item to which
the expenditure relates. Accordingly, each of
A, B, and C have a properly allocable share
of $16 each, which is the same proportion (1⁄3
Partnership
basis
Book
each) in which A, B, and C share the $120
item of notional income. Thus, A, B and C’s
capital accounts are each decreased by $16 in
2021 and A, B and C’s outside bases are each
decreased by $16 in 2021. The allocation of
the expenditure under the partnership
agreement has economic effect under
§ 1.704–1(b)(2)(ii) of this chapter and,
because the allocation of the expenditure is
determined in accordance with § 1.704–
1(b)(2)(iii)(f) of this chapter, the economic
effect of these allocations is deemed to be
substantial.
(vii) The payment is also reflected by a $48
decrease in partnership cash for book
purposes under § 1.704–1(b)(4)(ii) of this
chapter. Therefore, in 2021, A’s basis in
Partnership is $384 and his capital account
is $984. B and C each have a basis and capital
account of $984.
Outside
basis
Value
Book
Value
$1,832
400
120
$1,832
1,000
120
$1,832
1,000
120
A
B
C
$384
984
984
$984
984
984
$984
984
984
Totals ....................................................................
amozie on DSK3GDR082PROD with PROPOSALS3
Cash .............................................................................
Whiteacre .....................................................................
Asset ............................................................................
2,352
2,952
2,952
................
2,352
2,952
2,952
Example 2. (i) The facts are the same as in
Example 1 of this paragraph (e), except the
IRS approves modification under § 301.6225–
2(d)(3) with respect to A, which is a taxexempt entity, and under § 301.6225–2(d)(4)
with respect to C, which is a corporation
subject to a tax rate of 20 percent. These
modifications reduce Partnership’s overall
imputed underpayment from $48 to $30.
(ii) As in Example 1 of this paragraph (e),
Partnership determines its tax attribute
adjustments resulting from the partnership
adjustment by applying paragraph (b) of this
section. Pursuant to paragraph (b)(3)(v) of
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
this section, a $120 notional item of income
is created. The $120 item of notional income
is allocated in equal shares ($40) to A, B, and
C in 2021 under § 1.704–1(b)(4)(xi) of this
chapter. Accordingly, in 2021 Partnership
increases the capital accounts of A, B, and C
by $40 each, and increases A, B, and C’s
outside bases by $40 each under paragraph
(b)(6)(ii) and (iii) of this section, respectively.
(iii) However, the modifications affect how
Partnership must allocate the imputed
underpayment expenditure among A, B, and
C in 2021 (the adjustment year) pursuant to
§ 1.704–1(b)(2)(iii)(f) of this chapter.
PO 00000
Frm 00037
Fmt 4701
Sfmt 4702
Specifically, Partnership allocates the $24
expenditure in 2021 in proportion to the
allocation of the notional item to which it
relates (which is 1⁄3 each as in Example 1 of
this paragraph (e)), but it must also take into
account modifications attributable to each
partner. Accordingly, B’s allocation is $16
(its share of the imputed underpayment, for
which no modification occurred), and A and
C have properly allocable shares of $0 and
$8, respectively (their shares, taking into
account modification). Thus, A’s capital
account is decreased by $0, B’s capital
account is decreased by $16, and C’s capital
E:\FR\FM\17AUP3.SGM
17AUP3
41990
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
account is decreased by $8 in 2021 and their
respective outside bases are decreased by the
same amounts in 2021.
(iv) The payment is also reflected by a $24
decrease in partnership cash for book
purposes. Therefore, in 2021, A’s basis in
Partnership is $400 and his capital account
Partnership
basis
Book
is $1000, B’s basis and capital account are
both $984, and C’s basis and capital account
are both $992.
Outside
basis
Value
Book
Value
$1,856
400
120
$1,856
1,000
120
$1,856
1,000
120
A
B
C
$400
984
992
$1,000
984
992
$1,000
984
992
Totals ....................................................................
amozie on DSK3GDR082PROD with PROPOSALS3
Cash .............................................................................
Whiteacre .....................................................................
Asset ............................................................................
2,376
2,976
2,976
................
2,376
2,976
2,976
Example 3. The facts are the same as in
Example 1 of this paragraph (e). However, in
2020, C transfers its entire interest in
Partnership to D (an individual) for cash.
Under § 1.704–1(b)(2)(iv)(l) of this chapter,
C’s capital account carries over to D. In 2021,
the year the IRS determines that
Partnership’s $120 expense is not allowed as
a deduction, D is C’s successor under
§ 1.704–1(b)(1)(viii)(b)(2) of this chapter with
respect to specified tax attributes and the
payment of the imputed underpayment
treated as an expenditure under section
705(a)(2)(B).
Example 4. The facts are the same as in
Example 1 of this paragraph (e), except that
the partnership agreement provides that the
section 705(a)(2)(B) expenditure for imputed
underpayments made by the partnership are
specially allocated to A (all other items
continue to be allocated in equal shares).
Accordingly, in 2021, the section 705(a)(2)(B)
expenditure is allocated entirely to A, which
reduces its capital account by $48, which has
economic effect under § 1.704–1(b)(2)(ii) of
this chapter. However, the economic effect of
this allocation is not substantial under
§ 1.704–1(b)(2)(iii)(a) of this chapter because
it is not allocated in the manner described in
§ 1.704–1(b)(2)(iii)(f) of this chapter. The
allocation will also not be deemed to be in
accordance with the partners’ interests in the
partnership under § 1.704–1(b)(3)(ix) of this
chapter because it is not allocated pursuant
to the rules under § 1.704–1(b)(4)(xii) of this
chapter.
Example 5. (i) In 2019, Partnership has two
partners, A and B. Both A and B have a $0
basis in their interests in Partnership.
Further, Partnership has a $200 liability as
defined in § 1.752–1(a)(4) of this chapter. The
liability is treated as a nonrecourse liability
as defined in § 1.752–1(a)(2) of this chapter
so that A and B both are treated as having
a $100 share of the liability under § 1.752–
3 of this chapter. In 2021 (the adjustment
year), the IRS determines that the liability
was inappropriately classified as a
nonrecourse liability, should have been
classified as a recourse liability as defined in
§ 1.752–1(a)(1) of this chapter, and that A
should have no share of the recourse liability
under § 1.752–2 of this chapter. The
recharacterization of the liability from
nonrecourse to recourse and the decrease in
A’s share of partnership liabilities are
adjustments that are not allocated under
section 704(b) under § 301.6225–1(c)(5)(ii).
As a result of the adjustments, the IRS
includes in the residual grouping $100 of
increased income to account for the
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
cumulative effects of these adjustments to
reflect the $100 decrease in A’s share of
partnership liabilities under §§ 1.752–1(c)
and 1.731–1(a)(1)(i) of this chapter and
determines an imputed underpayment of $40
($100 × 40 percent). Partnership does not
request modification under § 301.6225–2.
Partnership pays the $40 imputed
underpayment.
(ii) Pursuant to paragraph (b)(4)(ii) of this
of this section, notional items are not created
with respect to this partnership adjustment.
Instead, under paragraph (b)(4)(i) of this
section, specified tax attributes are adjusted
in a manner that is consistent with how the
partnership adjustment would have been
taken into account under the partnership
agreement in effect for the reviewed year
taking into account all facts and
circumstances. In this case, no specified tax
attributes are adjusted.
(iii) However, because A would have borne
the economic burden of the partnership
adjustment if the partnership and its partners
had originally reported in a manner
consistent with the partnership adjustment,
the $40 imputed underpayment section
705(a)(2)(B) expenditure is allocated to A
under § 1.704–1(b)(2)(iii)(f)(4) of this chapter.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 12. Section 301.6226–1 is added
to read as follows:
§ 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 this section is no longer liable for
the imputed underpayment (as defined
in § 301.6241–1(a)(3)) to which the
election applies. If a notice of final
partnership adjustment (FPA) mailed
under section 6231 includes more than
PO 00000
Frm 00038
Fmt 4701
Sfmt 4702
one imputed underpayment (as
described in § 301.6225–1(g)), a
partnership may make an election under
this section with respect to one or more
imputed underpayments identified in
the FPA. See § 301.6226–2(f) regarding
the determination of each reviewed year
partner’s (as defined in § 301.6241–
1(a)(9)) share of the partnership
adjustments (as defined in § 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 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 § 301.6226–3. If an election
is made under this section, any
modification approved by the IRS under
§ 301.6225–2 is taken into account by
the reviewed year partners in
accordance with § 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 (and no
assessment of tax, levy, or proceeding in
any court for the collection of such
imputed underpayment may be made
against such partnership). Any
adjustments that do not result in an
imputed underpayment described in
§ 301.6225–1(f) that are associated with
an imputed underpayment (as described
in § 301.6225–1(g)) for which an
election under this section is made are
not taken into account by the
partnership in the adjustment year (as
defined in § 301.6241–1(a)(1)) and
instead each reviewed year partners’
share of the adjustment determined in
accordance with § 301.6226–2(f) must
be included on the statement described
in § 301.6226–2.
(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
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
and § 301.6226–2 (regarding statements
filed with the Internal Revenue Service
(IRS) and furnished to reviewed year
partners) are satisfied. However, an
election under this section is valid until
the IRS determines that the election is
invalid. 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
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, the IRS may assess the
imputed underpayment against the
partnership (without regard to the
limitations under section 6232(b)), and
the partnership must pay the imputed
underpayment under section 6225 and
any penalties and interest under section
6233. An election under this section
may be determined to be invalid even if
a correction is made in accordance with
§ 301.6226–2(d)(2) or if a correction is
not made as required in accordance
with § 301.6226–2(d)(3). However, the
IRS has no obligation to require
correction of errors discovered by the
IRS and may determine an election to be
invalid without providing an
opportunity to correct under
§ 301.6226–2(d)(3).
(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
the following correct information—
(A) The name, address, and 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,
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
(E) Each reviewed year partner’s
name, address, and 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 § 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 and the applicability
of 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 any partnershiprelated items (as defined in § 301.6241–
6) reflected on a statement described in
§ 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 § 301.6222–1(c)(2)
(regarding partnership-related 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
§ 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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 13. Section 301.6226–2 is added
to read as follows:
§ 301.6226–2 Statements furnished to
partners and filed with the IRS.
(a) In general. A partnership that
makes an election under § 301.6226–1
must furnish to each reviewed year
partner (as defined in § 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 § 301.6241–
1(a)(6)) associated with the imputed
underpayment for which an election
under § 301.6226–1 is made. The
statements furnished to the reviewed
year partners under this section are in
PO 00000
Frm 00039
Fmt 4701
Sfmt 4702
41991
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 to each reviewed year
partner with respect to each reviewed
year (as defined in § 301.6241–1(a)(8))
subject to an election under § 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 this paragraph (b).
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 sells his
interest in Partnership and informs
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
setting forth a single imputed underpayment.
Partnership makes a timely election under
section 6226 in accordance with § 301.6226–
1 with respect to the imputed underpayment
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
E:\FR\FM\17AUP3.SGM
17AUP3
41992
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
because unknown to Partnership, A had
moved. After undertaking reasonable
diligence to obtain the correct address of A,
Partnership is unable to ascertain the correct
address. Therefore, pursuant to paragraph
(b)(2) of this section, Partnership properly
furnished the statement to A when it mailed
the statement to 456 Broad St.
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. Because the
statement was returned as undeliverable and
Partnership did not undertake reasonable
diligence to obtain the correct address for A,
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 setting forth a
single imputed underpayment. Partnership
makes a timely election under section 6226
in accordance with § 301.6226–1 with respect
to the imputed underpayment. 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
prescribed by the IRS.
(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
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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
and § 301.6226–3(e)(3)(ii)), 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 and § 301.6226–
3(e)(3)(ii)), 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. The partnership
may not furnish corrected statements
unless it receives consent of the IRS to
make the correction.
(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 and § 301.6226–
3(e)(3) or the IRS cannot determine
whether the statements furnished or
filed by the partnership are correct
because of a failure by the partnership
to comply with any requirement under
this section or § 301.6226–3(e), the IRS
may require the partnership to correct
such errors in accordance with
paragraph (d)(1) of this section or to
provide additional information as
necessary. Failure by the partnership to
correct an error or to provide
information when required by the IRS
may be treated by the IRS as a failure
to properly furnish correct statements to
partners and file the correct statements
with the IRS as described in paragraphs
(b) and (c) of this section or in
§ 301.6226–3(e)(3). Whether the IRS
requires the partnership to correct any
errors discovered by the IRS or provide
additional information is discretionary
on the part of the IRS and the IRS is
under no obligation to require the
partnership to provide additional
information or to correct any errors
discovered or brought to the IRS’s
attention at any time.
(4) Adjustments in the corrected
statements taken into account by the
reviewed year partners. The adjustments
included on a corrected statement are
PO 00000
Frm 00040
Fmt 4701
Sfmt 4702
taken into account by a reviewed year
partner in accordance with § 301.6226–
3 for the reporting year (as defined in
§ 301.6226–3(a)).
(e) Content of the statements. Each
statement described in paragraph (a) of
this section must include the following
correct information:
(1) The name and 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 approved by the IRS
with respect to the reviewed year
partner (or with respect to any indirect
partner (as defined in § 301.6241–
1(a)(4)) that holds its interest in the
partnership through its interest in the
reviewed year partner);
(6) The applicability of any penalty,
addition to tax, or additional amount
determined at the partnership level that
relates to any adjustments allocable to
the reviewed year partner and the
adjustments to which the penalty,
addition to tax, or additional amount
relates, the section of the Internal
Revenue Code (Code) under which each
penalty, addition to tax, or additional
amount is imposed, and the applicable
rate of each penalty, addition to tax, or
additional amount determined at the
partnership level;
(7) The date the statement is
furnished to the reviewed year partner;
(8) The partnership taxable year to
which the adjustments relate; and
(9) Any other information required by
forms, instructions, and other guidance
prescribed by the IRS.
(f) Determination of each partner’s
share of adjustments—(1) Adjustments
and other amounts—(i) In general.
Except as described in paragraphs
(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 are reported to the reviewed
year partner in the same manner as each
adjusted partnership-related item was
originally allocated to the reviewed year
partner on the partnership return for the
reviewed year.
(ii) Adjusted partnership-related 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 partnership-
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
related item was not reported on the
partnership return for the reviewed
year, each reviewed year partner’s share
of the adjustments must be determined
in accordance with how such
partnership-related 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 a partnership-related
item to a specific partner or in a specific
manner, including a reallocation of such
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. Any modifications
approved by the IRS with respect to the
reviewed year partner (or with respect
to any indirect partner (as defined in
§ 301.6241–1(a)(4)) that holds its
interest in the partnership through its
interest in the reviewed year partner)
under § 301.6225–2 are disregarded for
purposes of determining each partner’s
share of the adjustments under
paragraph (f)(1) of this section.
(g) Coordination with other provisions
under subtitle A of the 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 section, the
partner may be able to avail itself of the
deficiency dividend procedure
described in § 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. A partnership that makes an
election under § 301.6226–1 with
respect to an imputed underpayment
must pay the amount of tax required to
be withheld under chapter 3 or chapter
4, if any, in accordance with
§ 301.6241–7(b)(4).
(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 § 301.9100–22 in
effect. This section applies to any
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
partnership taxable year beginning after
November 2, 2015 and before January 1,
2018 for which a valid election under
§ 301.9100–22 is in effect.
■ Par. 14. Section 301.6226–3 is added
to read as follows:
§ 301.6226–3 Adjustments taken into
account by partners.
(a) Effect of taking adjustments into
account on tax imposed by chapter 1.
Except as otherwise provided in this
section, 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 § 301.6241–
1(a)(9)) for the taxable year that includes
the date a statement was furnished in
accordance with § 301.6226–2 (the
reporting year) is increased by the
additional reporting year tax, or if the
additional reporting year tax is less than
zero, decreased by such amount. The
additional reporting year tax is the
aggregate of the correction amounts
(determined in accordance with
paragraph (b) of this section). In
addition to being liable for the
additional reporting year tax, a reviewed
year partner must also calculate and pay
for the reporting year any penalties,
additions to tax, and additional amounts
(as determined under paragraph (d) of
this section). Finally, a reviewed year
partner must also calculate and pay for
the reporting year any interest (as
determined under paragraph (c) of this
section).
(b) Determining the aggregate of the
correction amounts—(1) In general. For
purposes of paragraph (a) of this section,
the aggregate of the correction amounts
is the sum of the correction amounts
described in paragraphs (b)(2) and (3) of
this section. A correction amount under
paragraph (b)(2) or (3) of this section
may be less than zero, and any
correction amount that is less than zero
may reduce any other correction amount
with the result that the aggregate of the
correction amounts under this
paragraph (b)(1) may also be less than
zero. However, see paragraphs (c) and
(d) of this section requiring a separate
determination of interest and penalties,
additions to tax, and additional amounts
on the correction amount for each
applicable taxable year (as defined in
paragraph (c)(1) of this section) without
regard to the correction amount for any
other applicable taxable year.
(2) Correction amount for the first
affected year—(i) In general. 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
or decrease for the first affected year if
PO 00000
Frm 00041
Fmt 4701
Sfmt 4702
41993
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 § 301.6241–1(a)(6)) reflected
on the statement described in
§ 301.6226–2 with respect to the
partner.
(ii) Calculation of the correction
amount for the first affected year. The
correction amount is the amount of
chapter 1 tax that would have been
imposed for the first affected year if the
items as adjusted in the statement
described in § 301.6226–2 had been
reported as such on the return for the
first affected year less 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, or alternative to an
amended return submitted, under
section 6225(c)(2) by the reviewed year
partner), plus
(B) Amounts not so shown previously
assessed (or collected without
assessment) (as defined in § 1.6664–2(d)
of this chapter), less
(C) The amount of rebates made (as
defined in § 1.6664–2(e) of this chapter).
(iii) Definition of the correction
amount for the first affected year. The
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 (or
alternatives)); 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—(i) In general. 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 or
decrease if the partner’s taxable income
for such year was recomputed by taking
into account any adjustments to tax
attributes (as defined in § 301.6241–
1(a)(10)) of the partner under this
paragraph (b)(3).
E:\FR\FM\17AUP3.SGM
17AUP3
41994
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
(ii) Calculation of the correction
amount for the intervening years. The
correction amount for each intervening
year is the amount of chapter 1 tax that
would have been imposed for the
intervening year if any tax attribute of
the partner 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 of the
partner for the intervening year had
been adjusted, after taking into account
any adjustments to tax attributes of the
partner in any prior intervening year(s))
exceeds less 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, or alternative to an
amended return submitted, under
section 6225(c)(2) by a reviewed year
partner), plus
(B) Amounts not so shown previously
assessed (or collected without
assessment) (as defined in § 1.6664–2(d)
of this chapter), less
(C) The amount of rebates made (as
defined in § 1.6664–2(e) of this chapter).
(iii) Definition of the correction
amount for the intervening years. The
correction amount also may be
expressed as—
Correction amount = A¥(B + C ¥D),
amozie on DSK3GDR082PROD with PROPOSALS3
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 (or alternatives)); 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
§ 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
described in § 301.6226–2(a), the QIE
may claim a deduction for deficiency
dividends against the adjustments
furnished to the QIE in the statement in
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
calculating any correction amounts
under paragraphs (b)(2) and (3) of this
section, and interest on such correction
amounts under paragraph (c) 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.
(c) 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 in which
there was a correction amount greater
than zero at the rate set forth in
paragraph (c)(3) 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
(c)(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 greater than zero).
For purposes of calculating interest
under this paragraph (c), a correction
amount under paragraph (b)(2) or (3) of
this section for an applicable taxable
year that is less than zero does not
reduce the correction amount for any
other applicable taxable year.
(2) Interest on penalties. Interest on
any penalties, additions to tax, or
additional amounts determined under
paragraph (d) of this section is
calculated at the rate set forth in
paragraph (c)(3) of this section from the
due date (without extension) of the
reviewed year partner’s return for the
applicable taxable year until the amount
is paid.
(3) Rate of interest. For purposes of
paragraph (c) 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).
(d) Penalties—(1) Applicability
determined at the partnership level. In
the case of a partnership that makes an
election under section 6226, the
applicability of any penalty, addition to
tax, and additional amount that relates
to an adjustment to any partnershiprelated item is determined at the
partnership level in accordance with
section 6221(a). The partnership’s
reviewed year partners are liable for
such penalties, additions to tax, and
additional amounts as determined
under paragraph (d)(2) of this section.
PO 00000
Frm 00042
Fmt 4701
Sfmt 4702
(2) Amount calculated at partner
level. A reviewed year partner calculates
the amount of any penalty, addition to
tax, or additional amount relating to the
partnership adjustments taken into
account under paragraph (b)(1) of this
section as if the correction amount were
an underpayment or understatement of
the reviewed year partner for the first
affected year or intervening year, as
applicable. The calculation of any
penalty, addition to tax, or additional
amount is based on the characteristics
of, and facts and circumstances
applicable to, the reviewed year partner
for the first affected year or intervening
year, as applicable after taking into
account the partnership adjustments
reflected on the statement. If after taking
into account the partnership
adjustments in accordance with this
section, the reviewed year partner does
not have an underpayment, or has an
understatement that falls below the
applicable threshold for the imposition
of a penalty, no penalty is due from that
reviewed year partner under this
paragraph (d)(2). For penalties in the
case of a pass-through partner that
makes a payment under paragraph (e)(4)
of this section, see paragraph (e)(4)(iv)
of this section.
(3) Partner-level defenses to penalties.
A reviewed year partner claiming that a
penalty, addition to tax, or additional
amount that relates to a partnership
adjustment reflected on a statement
described in § 301.6226–2 (or paragraph
(e)(3) of this section) is not due because
of a partner-level defense must first pay
the penalty and file a claim for refund
for the reporting year. Partner-level
defenses are limited to those that are
personal to the reviewed year partner
(for example, a reasonable cause and
good faith defense under section 6664(c)
that is based on the facts and
circumstances applicable to the
partner).
(e) Pass-through partners—(1) In
general. Except as provided in
paragraph (e)(6) of this section, if a passthrough partner (as defined in
§ 301.6241–1(a)(5)) is furnished a
statement described in § 301.6226–2
(including a statement described in
paragraph (e)(3) of this section) with
respect to adjustments of a partnership
that made an election under § 301.6226–
1 (audited partnership), the passthrough partner must file with the IRS
a partnership adjustment tracking report
in accordance with forms, instructions,
or other guidance prescribed by the IRS
on or before the due date described in
paragraph (e)(3)(ii) of this section, and
file and furnish statements in
accordance with paragraph (e)(3) of this
section. The pass-through partner must
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
comply with paragraph (e) of this
section with respect to each statement
furnished to the pass-through partner.
(2) Failure to file and furnish required
documents—(i) Failure to timely file
and furnish statements. If any passthrough partner fails to timely file and
furnish correct statements in accordance
with paragraph (e)(3) of this section, the
pass-through partner must compute and
pay an imputed underpayment, as well
as any penalties, additions to tax,
additional amounts, and interest with
respect to the adjustments reflected on
the statement furnished to the passthrough partner in accordance with
paragraph (e)(4) of this section. The IRS
may assess such imputed underpayment
against such pass-through partner
without regard to the limitations under
section 6232(b). See § 301.6232–1(c)(2).
A failure to furnish statements in
accordance with paragraph (e)(3) of this
section is treated as a failure to timely
pay an imputed underpayment required
under paragraph (e)(4)(i) of this section,
unless the pass-through partner
computes and pays an imputed
underpayment in accordance with
paragraph (e)(4) of this section. See
section 6651(i).
(ii) Failures relating to partnership
adjustment tracking report. Failure to
timely file the partnership adjustment
tracking report as required in paragraph
(e)(1) of this section, or filing such
report without showing the information
required under paragraph (e)(1) of this
section, is subject to the penalty
imposed by section 6698.
(3) Furnishing statements to
partners—(i) In general. A pass-through
partner described in paragraph (e)(1) of
this section must furnish a statement
that includes the items required by
paragraph (e)(3)(iii) of this section to
each partner that held an interest in the
pass-through partner at any time during
the taxable year of the pass-through
partner to which the adjustments in the
statement furnished to the pass-through
partner relate (affected partner). The
statements described in this paragraph
(e)(3) must be filed with the IRS by the
due date prescribed in paragraph
(e)(3)(ii) of this section. Except as
otherwise provided in paragraphs
(e)(3)(ii), (iii), and (v) of this section, the
rules applicable to statements described
in § 301.6226–2 are applicable to
statements described in this paragraph
(e)(3).
(ii) Time for filing and furnishing the
statements. The pass-through partner
must file with the IRS and furnish to its
affected partners the statements
described in paragraph (e)(3) of this
section no later than the extended due
date for the return for the adjustment
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
year (as defined in § 301.6241–1(a)(1)) of
the audited partnership. For purposes of
this section, the extended due date is
the extended due date under section
6081 regardless of whether the audited
partnership is required to file a return
for the adjustment year or timely files a
request for an extension under section
6081 and the regulations thereunder.
(iii) Contents of statements. Each
statement described in paragraph (e)(3)
of this section must include the
following correct information—
(A) The name and taxpayer
identification number (TIN) of the
audited partnership;
(B) The adjustment year of the audited
partnership;
(C) The extended due date for the
return for the adjustment year of the
audited partnership (as described in
paragraph (e)(3)(ii) of this section);
(D) The date on which the audited
partnership furnished its statements
required under § 301.6226–2(b);
(E) The name and TIN of the
partnership that furnished the statement
to the pass-through partner if different
from the audited partnership;
(F) The name and TIN of the passthrough partner;
(G) The pass-through partner’s taxable
year to which the adjustments reflected
on the statements described in
paragraph (e)(3) of this section relates;
(H) The name and TIN of the affected
partner to whom the statement is being
furnished;
(I) The current or last address of the
affected partner that is known to the
pass-through partner;
(J) The affected partner’s share of
items as originally reported to such
partner under section 6031(b) and, if
applicable, section 6227, for the taxable
year to which the adjustments reflected
on the statement furnished to the passthrough partner relate;
(K) The affected partner’s share of
partnership adjustments determined
under § 301.6226–2(f)(1) as if the
affected partner were the reviewed year
partner and the pass-through partner
were the partnership;
(L) Modifications approved by the IRS
with respect to the affected partner that
holds its interest in the audited
partnership through the pass-through
partner;
(M) The applicability of any penalties,
additions to tax, or additional amounts
that relate to any adjustments allocable
to the affected partner and the
adjustments allocated to the affected
partner to which such penalties,
additions to tax, or additional amounts
relate, the section of the Internal
Revenue Code under which each
penalty, addition to tax, or additional
PO 00000
Frm 00043
Fmt 4701
Sfmt 4702
41995
amount is imposed, and the applicable
rate of each penalty, addition to tax, or
additional amount; and
(N) Any other information required by
forms, instructions, and other guidance
prescribed by the IRS.
(iv) Affected partner must take into
account the adjustments. A statement
furnished to an affected partner in
accordance with paragraph (e)(3) of this
section is treated as if it were a
statement described in § 301.6226–2. An
affected partner that is a pass-through
partner must take into account the
adjustments reflected on such a
statement in accordance with this
paragraph (e). An affected partner that is
not a pass-through partner must take
into account the adjustments reflected
on such a statement in accordance with
this section by treating references to
‘‘reviewed year partner’’ as ‘‘affected
partner’’. For purposes of this paragraph
(e)(3)(iv), an affected partner that is not
a pass-through partner takes into
account the adjustments in accordance
with this section by determining its
reporting year based on the date upon
which the audited partnership
furnished its statements to its reviewed
year partners (as described in paragraph
(a) of this section). No addition to tax
under section 6651 related to any
additional reporting year tax will be
imposed if an affected partner that is not
a pass-through partner reports and pays
the additional reporting year tax within
30 days of the extended due date for the
return for the adjustment year of the
audited partnership (as described in
paragraph (e)(3)(ii) of this section).
(v) Adjustments subject to chapters 3
and 4. If a pass-through partner
furnishes statements to its affected
partners in accordance with paragraph
(e)(3) of this section, the pass-through
partner must comply with the
requirements of § 301.6241–7(b)(4), and
an affected partner must comply with
the requirements of paragraph (f) of this
section. For purposes of applying both
§ 301.6241–7(b)(4) and paragraph (f) of
this section, as appropriate, references
to the ‘‘partnership’’ should be replaced
with references to the ‘‘pass-through
partner’’; references to the ‘‘reviewed
year partner’’ should be replaced with
references to the ‘‘affected partner’’;
references to the statement required
under paragraph (a) of this section and
its due date should be replaced with
references to the statement required
under paragraph (e)(3) of this section
and its due date described in paragraph
(e)(3)(ii) of this section; references to the
‘‘reporting year’’ should be read in
accordance with paragraph (e)(3)(iv) of
this section; and references to the
partnership return should be read as
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41996
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
references to the return for the
adjustment year of the audited
partnership as described in paragraph
(e)(3)(ii) of this section.
(4) Pass-through partner pays an
imputed underpayment—(i) In general.
If a pass-through partner described in
paragraph (e)(1) of this section does not
furnish statements in accordance with
paragraph (e)(3) of this section, the passthrough partner must compute and pay
an imputed underpayment determined
under paragraph (e)(4)(iii) of this
section. The pass-through partner must
also pay any penalties, additions to tax,
additional amounts, and interest as
determined under paragraph (e)(4)(iv) of
this section. A failure to timely pay an
imputed underpayment required under
this paragraph (e)(4) is subject to
penalty under section 6651(i).
(ii) Time of payment. A pass-through
partner must file a partnership
adjustment tracking report and compute
and pay the imputed underpayment and
any penalties, additions to tax,
additional amounts, and interest, as
described in paragraph (e)(4)(i) of this
section, in accordance with forms,
instructions, and other guidance no later
than the extended due date for the
return for the adjustment year of the
audited partnership.
(iii) Computation of the imputed
underpayment. The imputed
underpayment under paragraph (e)(4)(i)
of this section is computed in the same
manner as an imputed underpayment
under section 6225 and § 301.6225–1,
except that adjustments reflected on the
statement furnished to the pass-through
partner under § 301.6226–2 are treated
as partnership adjustments (as defined
in § 301.6241–1(a)(6)) for the first
affected year. Any modification
approved by the IRS under § 301.6225–
2 with respect to the pass-through
partner (including any modifications
with respect to a relevant partner (as
defined in § 301.6225–2(a)) that holds
its interest in the audited partnership
through its interest in the pass-through
partner) reflected on the statement
furnished to the pass-through partner
under § 301.6226–2 (or paragraph (e)(3)
of this section) is taken into account in
calculating the imputed underpayment
under this paragraph (e)(4)(iii). Any
modification that was not approved by
the IRS under § 301.6225–2 may not be
taken into account in calculating the
imputed underpayment under this
paragraph (e)(4)(iii).
(iv) Penalties and interest—(A)
Penalties. A pass-through partner must
compute and pay any applicable
penalties, additions to tax, and
additional amounts on the imputed
underpayment calculated under
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
paragraph (e)(4)(iii) of this section as if
such amount were an imputed
underpayment for the pass-through
partner’s first affected year. See
§ 301.6233(a)–1(c).
(B) Interest. A pass-through partner
must pay interest on the imputed
underpayment calculated under
paragraph (e)(4)(iii) of this section in
accordance with paragraph (c) of this
section as if such imputed
underpayment were an imputed
underpayment due for the first affected
year.
(v) Adjustments that do not result in
an imputed underpayment.
Adjustments taken into account under
paragraph (e)(4) of this section that do
not result in an imputed underpayment
(as defined in § 301.6225–1(f)) are taken
into account by the pass-through partner
in accordance with § 301.6225–3 in the
taxable year of the pass-through partner
that includes the date the imputed
underpayment required under
paragraph (e)(4)(i) of this section is paid.
If, after making the computation
described in paragraph (e)(4)(iii) of this
section, no imputed underpayment
exists and therefore no payment is
required under paragraph (e)(4)(i) of this
section, the adjustments that did not
result in an imputed underpayment are
taken into account by the pass-through
partner in accordance with § 301.6225–
3 in the taxable year of the pass-through
partner that includes the date the
statement described in § 301.6226–2 (or
paragraph (e)(3) of this section) is
furnished to the pass-through partner.
(vi) Coordination with chapters 3 and
4. If a pass-through partner pays an
imputed underpayment described in
paragraph (e)(4)(i) of this section,
§ 301.6241–7(b)(3) applies to the passthrough partner by substituting ‘‘passthrough partner’’ for ‘‘partnership’’
where § 301.6241–7(b)(3) refers to the
partnership that pays the imputed
underpayment.
(5) Treatment of pass-through
partners that are not partnerships—(i) S
corporations. For purposes of this
paragraph (e), an S corporation is
treated as a partnership and its
shareholders are treated as partners.
(ii) Trusts and estates. Except as
provided in paragraph (g) of this
section, for purposes of paragraph (e) of
this section, a trust and its beneficiaries,
and an estate and its beneficiaries are
treated in the same manner as a
partnership and its partners.
(6) Pass-through partners subject to
chapter 1 tax. A pass-through partner
that is subject to tax under chapter 1 of
the Code on the adjustments (or a
portion of the adjustments) reflected on
the statement furnished to such partner
PO 00000
Frm 00044
Fmt 4701
Sfmt 4702
under § 301.6226–2 (or paragraph (e)(3)
of this section) takes the adjustments
into account under this paragraph (e)(6)
when the pass-through partner
calculates and pays the additional
reporting year tax as determined under
paragraph (b) of this section and
furnishes statements to its partners in
accordance with paragraph (e)(3) of this
section. Notwithstanding the prior
sentence, a pass-through partner is only
required to include on a statement
under paragraph (e)(3) of this section
the adjustments that would be required
to be included on statements furnished
to owners or beneficiaries under
sections 6037 and 6034A, as applicable,
if the pass-through partner had correctly
reported the items for the year to which
the adjustments relate. If the passthrough partner fails to comply with the
requirements of this paragraph (e)(6),
the pass-through partner must compute
and pay an imputed underpayment, as
well as any penalties, additions to tax,
additional amounts, and interest with
respect to the adjustments reflected on
the statement furnished to such partner
in accordance with paragraph (e)(4) of
this section.
(f) Partners subject to withholding
under chapters 3 and 4. A reviewed
year partner that is subject to
withholding under § 301.6241–7(b)(4)
must file an income tax return for the
reporting year to report its additional
reporting year tax and its share of any
penalties, additions to tax, additional
amounts, and interest (notwithstanding
any filing exception in § 1.6012–
1(b)(2)(i) or § 1.6012–2(g)(2)(i) of this
chapter). The amount of tax paid by a
partnership under § 301.6241–7(b)(4) is
allowed as a credit under section 33 to
the reviewed year partner to the extent
that the tax is allocable to the reviewed
year partner (within the meaning of
§ 1.1446–3(d)(2) of this chapter) or is
actually withheld from the reviewed
year partner (within the meaning of
§ 1.1464–1(a) or § 1.1474–3 of this
chapter). The credit is allowed against
the reviewed year partner’s income tax
liability for its reporting year. The
reviewed year partner must substantiate
the credit by attaching the applicable
Form 1042–S, ‘‘Foreign Person’s U.S.
Source Income Subject to Withholding,’’
or Form 8805, ‘‘Foreign Partner’s
Information Statement of Section 1446
Withholding Tax,’’ to its income tax
return for the reporting year, as well as
satisfying any other requirements
prescribed by the IRS in forms and
instructions.
(g) Treatment of disregarded entities
and wholly-owned grantor trusts. In the
case of a reviewed year partner that is
a wholly-owned entity disregarded as
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
separate from its owner for Federal tax
purposes in the reviewed year or a trust
that is wholly owned by only one
person in the reviewed year, whether
the grantor or another person, and
where the trust reports the owner’s
information to payors under § 1.671–
4(b)(2)(i)(A) of this chapter and that is
furnished a statement described in
§ 301.6226–2 (or paragraph (e)(3) of this
section), the owner of the disregarded
entity or wholly-owned grantor trust
must take into account the adjustments
reflected on that statement in
accordance with this section as if the
owner were the reviewed year partner.
(h) Examples. The following examples
illustrate the rules of this section. For
purposes of these examples, each
partnership is subject to subchapter C of
chapter 63 of the Code, each partnership
and partner has a calendar year taxable
year, no modifications are requested by
any partnership under § 301.6225–2
(unless otherwise stated), no penalties,
additions to tax, or additional amounts
are determined at the partnership level
(unless otherwise stated), all persons are
U.S. persons (unless otherwise stated),
the highest rate of income tax in effect
for is 40 percent for all relevant periods,
the highest rate of income tax in effect
for corporations is 20 percent for all
relevant periods, and the highest rate of
tax for individuals for capital gains is 15
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
determining that a 20 percent accuracyrelated penalty under section 6662(b) applies
to the disallowance of the charitable
contribution, and setting forth a single
imputed underpayment with respect to such
adjustments. Partnership makes a timely
election under section 6226 in accordance
with § 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 applicability
of the penalty. The decision regarding
Partnership’s 2020 tax year becomes final on
December 15, 2025. Pursuant to § 301.6226–
2(b), the partnership adjustments are finally
determined on December 15, 2025. On
February 2, 2026, Partnership files the
statements described under § 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
§ 301.6226–2. A had a 25 percent interest in
Partnership during all of 2020 and was
allocated 25 percent of all items from
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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 that a 20 percent accuracyrelated penalty under section 6662(b)
applies. A must pay the additional reporting
year tax as determined in accordance with
paragraph (b) of this section, in addition to
A’s penalties 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
or decreased 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
correction amounts is the correction amount
for 2020, A’s first affected year. In addition
to the aggregate of the correction amounts
being added to the chapter 1 tax that A owes
for 2026, the reporting year, A must calculate
a 20 percent accuracy-related penalty on A’s
underpayment attributable to the $100
adjustment to the charitable contribution, as
well as interest on the correction amount for
the first affected year and the penalty
determined in accordance with paragraph (c)
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 penalty from April 15, 2021, the due
date of A’s 2020 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 paragraph (b) of this section,
which is the correction amount for 2020, plus
the accuracy-related penalty determined in
accordance with paragraph (d) of this section,
and interest determined in accordance with
paragraph (c) of this section on the correction
amount for 2020 and the penalty.
Example 2. On its partnership return for
the 2020 tax year, Partnership reported an
ordinary loss of $500. On June 1, 2023, the
IRS mails an FPA to Partnership for the 2020
taxable year determining that $300 of the
$500 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 (as a
result of the disallowance of the
recharacterization of $300 from ordinary loss
to long-term capital loss) and an imputed
underpayment related to that adjustment, as
PO 00000
Frm 00045
Fmt 4701
Sfmt 4702
41997
well as an adjustment of an additional $300
in long-term capital loss for 2020 which does
not result in an imputed underpayment
under § 301.6225–1(f). Partnership makes a
timely election under section 6226 in
accordance with § 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
§ 301.6226–1(b)(2) and § 301.6225–3(b)(6),
the adjustment year partners (as defined in
§ 301.6241–1(a)(2)) do not take into account
the $300 long-term capital loss that does not
result in an imputed underpayment. Rather,
the $300 long-term capital loss is taken into
account by the reviewed year partners. The
time to file a petition expires on August 30,
2023. Pursuant to § 301.6226–2(b), the
partnership adjustments become finally
determined on August 31, 2023. On
September 30, 2023, Partnership files with
the IRS statements described in § 301.6226–
2 and furnishes statements to all of its
reviewed year partners in accordance with
§ 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. The statement also shows an
adjustment to B’s allocable share of the
ordinary loss in the amount of <$75>,
resulting in a corrected ordinary loss
allocated to B of $50 for taxable year 2020
($125 originally allocated to B less $75 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 (B’s share of the
adjustment that did not result in the imputed
underpayment with respect to Partnership). B
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 reduction in ordinary loss
and an increase of $75 in long-term capital
loss) for the 2020 taxable year. B determines
the amount by which his chapter 1 tax for
2020 would have increased or decreased if
the $75 adjustment to ordinary loss and the
$75 adjustment to long-term capital loss from
Partnership were taken into account for that
year. Second, B determines if there is any
increase or decrease 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 correction 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 (c)
of this section.
Example 3. On its partnership return for
the 2020 tax year, Partnership, a domestic
partnership, reported U.S. source dividend
income of $2,000. On June 1, 2023, the IRS
mails an FPA to Partnership for Partnership’s
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
41998
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
2020 year increasing the amount of U.S.
source dividend income to $4,000 and
determining that a 20 percent accuracyrelated penalty under section 6662(b) applies
to the increase in U.S. source dividend
income. Partnership makes a timely election
under section 6226 in accordance with
§ 301.6226–1 with respect to the imputed
underpayment in the FPA for Partnership’s
2020 year and does not file a petition for
readjustment under section 6234. The time to
file a petition expires on August 30, 2023.
Pursuant to § 301.6226–2(b), the partnership
adjustments become finally determined on
August 31, 2023. On September 30, 2023,
Partnership files the statements described
under § 301.6226–2 with the IRS and
furnishes to partner C, a nonresident alien
individual who was a partner in Partnership
during 2020 (and remains a partner in
Partnership in 2023), a statement described
in § 301.6226–2. C had a 50 percent interest
in Partnership during all of 2020 and was
allocated 50 percent of all items from
Partnership for that year. The statement
shows C’s share of U.S. source dividend
income reported on Partnership’s return for
the reviewed year of $1,000 and an
adjustment to U.S. source dividend income
of $1,000. In addition, the statement reports
that a 20 percent accuracy-related penalty
under section 6662(b) applies. Under
§ 301.6241–7(b)(4)(i), because the additional
$1,000 in U.S. source dividend income
allocated to C is an amount subject to
withholding (as defined in § 301.6241–
7(b)(2)), Partnership must pay the amount of
tax required to be withheld on the
adjustment. See §§ 1.1441–1(b)(1) and
1.1441–5(b)(2)(i)(A) of this chapter. Under
§ 301.6241–7(b)(4)(ii), Partnership may
reduce the amount of withholding tax it must
pay because it has valid documentation from
2020 that establishes that C was entitled to
a reduced rate of withholding in 2020 on U.S.
source dividend income of 10 percent
pursuant to a treaty. Partnership withholds
$100 of tax from C’s distributive share, remits
the tax to the IRS, and files the necessary
return and information returns required by
§ 1.1461–1 of this chapter. On his 2023
return, C must report the additional reporting
year tax determined in accordance with
paragraph (b) of this section, the accuracyrelated penalty determined in accordance
with paragraph (d) of this section, and
interest determined in accordance with
paragraph (c) of this section on the correction
amount for the first affected year, the
correction amount for any intervening year,
and the penalty. Under paragraph (f) of this
section, C may claim the $100 withholding
tax paid by Partnership pursuant to
§ 301.6241–7(b)(4)(i) as a credit under section
33 against C’s income tax liability on his
2023 return.
Example 4. On its partnership return for
the 2020 tax year, Partnership reported
ordinary income of $100 and a long-term
capital gain of $40. 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 long-term capital gain was
allocated to partner E and the ordinary
income was allocated to all partners based on
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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 long-term capital gain
should have been allocated equally to all four
partners and that Partnership should have
recognized an additional $10 in ordinary
income. On June 1, 2023, the IRS mails an
FPA to Partnership reflecting the reallocation
of the $40 long-term capital gain so that F,
G, and H each have $10 increase in long-term
capital gain and E has a $30 reduction in
long-term capital gain for 2020. In addition,
the FPA reflects the partnership adjustment
increasing ordinary income by $10. 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
long-term capital gain allocated to F, G, and
H. In addition, the FPA reflects a $30
partnership adjustment that does not result
in an imputed underpayment, that is, the
reduction of $30 in long-term capital gain
with respect to E that is associated with the
specific imputed underpayment in
accordance with § 301.6225–1(g)(2)(iii)(B).
Partnership makes a timely election under
section 6226 in accordance with § 301.6226–
1 with respect to the specific imputed
underpayment relating to the reallocation of
long-term 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 § 301.6226–
2(b), the partnership adjustments become
finally determined on August 31, 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
§ 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 long-term capital gain. The
statements for F, G, and H each reflect a
partnership adjustment of an additional $10
of long-term capital gain for 2020. The
statement for E reflects a partnership
adjustment of a reduction of $30 of long-term
capital gain for 2020. All partners must
report the additional reporting year tax as
determined in accordance with paragraph (b)
of this section in the partners’ reporting year,
which is 2023. They compute their
additional reporting year tax as follows. First,
they determine the correction amount for the
first affected year (the 2020 taxable year) by
taking into account their share of the
partnership adjustments for the 2020 taxable
year. They each determine the amount by
which their chapter 1 tax for 2020 would
have increased or decreased if the adjustment
to long-term capital gain from Partnership
were taken into account for that year.
Second, they determine if there is any
increase or decrease in chapter 1 tax for any
intervening year as a result of the adjustment
to the long-term capital gain for 2020. Their
aggregate of the correction amounts is the
sum of the correction amount for 2020, their
first affected year and any correction
PO 00000
Frm 00046
Fmt 4701
Sfmt 4702
amounts for any intervening years. They are
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 (c) of this section.
Example 5. On its partnership return for
the 2020 taxable year, Partnership reported a
long-term capital loss of $500. 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
$200 of the reported $500 long-term capital
loss, the only adjustment. Accordingly, the
imputed underpayment reflected in the
NOPPA is $80 ($200 × 40 percent). F, a C
corporation partner with a 50 percent interest
in Partnership, received 50 percent of all
long-term capital losses for 2020. As part of
the modification process described in
§ 301.6225–2(d)(2), F files an amended return
for 2020 taking into account F’s share of the
partnership adjustment ($100 reduction in
long-term 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 pays
additional tax (and interest) for these years
because the reduction in long-term capital
loss for 2020 affected the tax due from F for
2021 and 2022. See § 301.6225–2(d)(2). The
reduction of the long-term capital loss in
2020 did not affect any other taxable year of
F. This is the only modification requested.
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 long-term capital loss in the
amount of $200. 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 long-term capital loss. Therefore, the
imputed underpayment in the FPA is $40
($100 × 40 percent). Partnership makes a
timely election under section 6226 in
accordance with § 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 § 301.6226–2(b), the partnership
adjustments are finally determined on
December 15, 2025. On February 1, 2026,
Partnership files the statements described
under § 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 long-term capital loss
adjustment for the reviewed year of $100, as
well as the $100 long-term capital loss taken
into account by F as part of the amended
return modification. Accordingly, in
accordance with paragraph (b) of this section,
when F computes its correction amounts for
the first affected year (the 2020 taxable year)
and the intervening years (the 2021 through
2026 taxable years), F computes any increase
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
or decrease in chapter 1 tax for those years
using the returns for the 2020, 2021, and
2022 taxable years as amended during the
modification process.
Example 6. Partnership has two equal
partners for the 2020 tax year: I (an
individual) and J (a partnership). For the
2020 tax year, J has two equal partners—K
and L—both individuals. On June 1, 2023,
the IRS mails an FPA to Partnership for
Partnership’s 2020 year increasing
Partnership’s ordinary income by $500,000
and asserting an imputed underpayment of
$200,000. Partnership makes a timely
election under section 6226 in accordance
with § 301.6226–1 with respect to the
imputed underpayment in the FPA for
Partnership’s 2020 year and does not file a
petition for readjustment under section 6234.
The time to file a petition expires on August
30, 2023. Pursuant to § 301.6226–2(b), the
partnership adjustments become finally
determined on August 31, 2023. Therefore,
Partnership’s adjustment year is 2023, the
due date of the adjustment year return is
March 15, 2024 and the extended due date
for the adjustment year return is September
16, 2024. On October 12, 2023, Partnership
timely files with the IRS statements
described in § 301.6226–2 and timely
furnishes statements to its partners reflecting
their share of the partnership adjustments as
finally determined in the FPA. The
statements to I and J each reflect a
partnership adjustment of $250,000 of
ordinary income. I takes its share of the
adjustments reflected on the statements
furnished by Partnership into account on I’s
return for the 2023 tax year in accordance
with paragraph (b) of this section. On April
1, 2024, J files the adjustment tracking report
and files and furnishes statements to K and
L reflecting each partner’s share of the
adjustments reflected on the statements
Partnership furnished to J. K and L must take
their share of adjustments reflected on the
statements furnished by J into account on
their returns for the 2023 tax year in
accordance with paragraph (b) of this section
by treating themselves as reviewed year
partners for purposes of that paragraph.
Example 7. On its partnership return for
the 2020 tax year, Partnership reported that
it placed Asset, which had a depreciable
basis of $210,000, into service in 2020 and
depreciated Asset over 5 years, using the
straight-line method. Accordingly,
Partnership claimed depreciation of $42,000
in each year related to Asset. Partnership has
two equal partners for the 2020 tax year: M
(a partnership) and N (an S corporation). For
the 2020 tax year, N has one shareholder, O,
who is an individual. On June 1, 2023, the
IRS mails an FPA to Partnership for
Partnership’s 2020 year. In the FPA, the IRS
determines that Asset should have been
depreciated over 7 years instead of 5 years
and adjusts the depreciation for the 2020 tax
year to $30,000 instead of $42,000 resulting
in a $12,000 adjustment. This adjustment
results in an imputed underpayment of
$4,800 ($12,000 × 40 percent). Partnership
makes a timely election under section 6226
in accordance with § 301.6226–1 with respect
to the imputed underpayment in the FPA for
Partnership’s 2020 year and does not file a
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
petition for readjustment under section 6234.
The time to file a petition expires on August
30, 2023. Pursuant to § 301.6226–2(b), the
partnership adjustments become finally
determined on August 31, 2023. On October
12, 2023, Partnership timely files with the
IRS statements described in § 301.6226–2 and
furnishes statements to its partners reflecting
their share of the partnership adjustments as
finally determined in the FPA. The
statements to M and N reflect a partnership
adjustment of $6,000 of ordinary income for
the 2020 tax year. On February 1, 2024, N
takes the adjustments into account under
paragraph (e)(3) of this section by filing an
adjustment tracking reporting and issuing a
statement to O reflecting her share of the
adjustments reported to N on the statement
it received from Partnership. M does not
furnish statements and instead chooses to
calculate and pay an imputed underpayment
under paragraph (e)(4) of this section equal
to $1,200 ($6,000 × 40 percent) on the
adjustments reflected on the statement it
received from Partnership plus interest on
the amount calculated in accordance with
paragraph (e)(4)(iv)(B) of this section. On her
2023 return, O properly takes the
adjustments into account under this section.
Therefore, O reports and pays the additional
reporting year tax determined in accordance
with paragraph (b) of this section, which is
the correction amount for 2020 plus any
correction amounts for 2021 and 2022 (if the
adjustments in 2020 resulted in any changes
to the tax attributes of O in those years), and
pays interest determined in accordance with
paragraph (c) of this section on the correction
amounts for each of those years.
Example 8. On its partnership return for
the 2020 tax year, Partnership reported
$1,000 of ordinary loss. Partnership has two
equal partners for the 2020 tax year: P and
Q, both S corporations. For the 2020 tax year,
P had one shareholder, R, an individual. For
the 2020 tax year, Q had two shareholders,
S and T, both individuals. On June 1, 2023,
the IRS mails an FPA to Partnership for
Partnership’s 2020 year determining $500 of
the $1,000 of ordinary loss should be
recharacterized as $500 of long-term capital
loss and $500 of the ordinary loss should be
disallowed. The FPA asserts an imputed
underpayment of $400 ($1,000 × 40 percent)
with respect to the $1,000 reduction to
ordinary loss and reflecting an adjustment
that does not result in an imputed
underpayment of a $500 capital loss.
Partnership makes a timely election under
section 6226 in accordance with § 301.6226–
1 with respect to the imputed underpayment
in the FPA for Partnership’s 2020 year and
does not file a petition for readjustment
under section 6234. The time to file a
petition expires on August 30, 2023.
Pursuant to § 301.6226–2(b), the partnership
adjustments become finally determined on
August 31, 2023. On October 12, 2023,
Partnership timely files with the IRS
statements described in § 301.6226–2 and
furnishes statements to its partners reflecting
their share of the partnership adjustments as
finally determined in the FPA. The
statements to P and Q each reflect a
partnership adjustment of a $500 increase in
ordinary income and a $250 increase in
PO 00000
Frm 00047
Fmt 4701
Sfmt 4702
41999
capital loss in accordance with § 301.6225–
3(b)(6). P takes the adjustments into account
under paragraph (e)(3) of this section by
timely filing an adjustment tracking reporting
and furnishing a statement to R. Q timely
filed an adjustment tracking report but
chooses not to furnish statements and instead
must calculate and pay an imputed
underpayment under paragraph (e)(4) of this
section as well as interest on the imputed
underpayment determined under paragraph
(e)(4)(iv)(B) of this section on the imputed
underpayment. After applying the rules set
forth in § 301.6225–1, Q calculates the
imputed underpayment that it is required to
pay of $200 ($500 adjustment to ordinary
income × 40 percent). Q also has one
adjustment that does not result in an imputed
underpayment—the $250 increase to capital
loss. On its 2023 return, Q reports and
allocates the $250 capital loss to its
shareholders for its 2023 taxable year as a
capital loss as provided in § 301.6225–3. Q
must file the adjustment tracking report and
pay the amounts due under paragraph (e)(4)
of this section no later than September 15,
2024, the extended due date of Partnership’s
return for the 2023 year, which is the
adjustment year.
Example 9. On its partnership return for
the 2020 tax year, Partnership reported a
$1,000 long-term capital gain on the sale of
Stock. Partnership has two equal partners for
the 2020 tax year: U (an individual) and V
(a partnership). For the 2020 tax year, V has
two equal partners: W (an individual) and X
(a partnership). For the 2020 tax year, X has
two equal partners: Y and Z, both of which
are C corporations. On June 1, 2023, the IRS
mails a NOPPA to Partnership for
Partnership’s 2020 year proposing a $500
increase in the long-term capital gain from
the sale of Stock and an imputed
underpayment of $200 ($500 × 40 percent).
On July 17, 2023, Partnership timely submits
a request to modify the rate used in
calculating the imputed underpayment under
§ 301.6225–2(d)(4). Partnership submits
sufficient information demonstrating that
$375 of the $500 adjustment is allocable to
individuals (50 percent of the $500
adjustment allocable to U and 25 percent of
the $500 adjustment allocable to W) and the
remaining $125 is allocable to C corporations
(the indirect partners Y and Z). The IRS
approves the modification and the imputed
underpayment is reduced to $81.25 (($375 ×
15 percent) + ($125 × 20 percent)). See
§ 301.6225–2(b)(3). No other modifications
are requested. On February 28, 2024, the IRS
mails an FPA to Partnership for Partnership’s
2020 year determining a $500 increase in the
long-term capital gain on the sale of Stock
and asserting an imputed underpayment of
$81.25 after taking into account the approved
modifications. Partnership makes a timely
election under section 6226 in accordance
with § 301.6226–1 with respect to the
imputed underpayment in the FPA for
Partnership’s 2020 year and does not file a
petition for readjustment under section 6234.
The time to file a petition expires on May 28,
2024. Pursuant to § 301.6226–2(b), the
partnership adjustments become finally
determined on May 29, 2024. On July 26,
2024, Partnership timely files with the IRS
E:\FR\FM\17AUP3.SGM
17AUP3
42000
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
statements described in § 301.6226–2 and
furnishes statements to its partners reflecting
their share of the partnership adjustments as
finally determined in the FPA. The
statements to U and V each reflect a
partnership adjustment of a $250 increase in
long-term capital gain. V timely files the
adjustment tracking report but fails to furnish
statements and therefore must calculate and
pay an imputed underpayment under
paragraph (e)(4) of this section as well as
interest on the imputed underpayment
determined under paragraph (e)(4)(iv)(B) of
this section. On February 3, 2025, V pays an
imputed underpayment of $43.75 (($125 × 20
percent for the adjustments allocable to X) +
($125 × 15 percent for the adjustments
allocable to W)) which takes into account the
rate modifications approved by the IRS with
respect to Y and Z. V must also pay any
interest on the amount as determined in
accordance with paragraph (e)(4)(iv)(B) of
this section. V must file the adjustment
tracking report and pay the amounts due
under paragraph (e)(4) of this section no later
than September 15, 2025, the extended due
date of Partnership’s return for the 2024 year,
which is the adjustment year.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 15. Section 301.6226–4 is added
to read as follows:
§ 301.6226–4 Effect of a partnership
adjustment on tax attributes of partnerships
and their partners.
(a) Adjustments to tax attributes—(1)
In general. When a partnership
adjustment (as defined in § 301.6241–
1(a)(6)) is taken into account by the
reviewed year partners (as defined in
§ 301.6241–1(a)(9)) or affected partners
(as described in § 301.6226–3(e)(3)(i))
pursuant to an election made by a
partnership under § 301.6226–1, the
partnership and its reviewed year
partners or affected partners must adjust
their tax attributes (as defined in
§ 301.6241–1(a)(10)) in accordance with
the rules in this section.
(2) Application to pass-through
partners and indirect partners. To the
extent a pass-through partner (as
defined in § 301.6241–1(a)(5)) pays an
imputed underpayment under
§ 301.6226–3(e)(4)(iii), such passthrough partner and its affected partners
or their successors must make
adjustments to their tax attributes in
accordance with the rules in
§ 301.6225–4.
(3) Allocation of partnership
adjustments. Partnership adjustments
are allocated to the reviewed year
partners or affected partners under
§ 1.704–1(b)(4)(xiv) of this chapter.
(b) Adjusting tax attributes of a
partnership and its partners when an
election under section 6226 is made. For
partnership adjustments that are taken
into account by the reviewed year
partners or affected partners because an
election is made under § 301.6226–1,
the partnership adjustments to be taken
into account by each partner are
determined under § 301.6226–2(f).
Accordingly, the reviewed year partners
or affected partners must take into
account the partnership adjustments as
reflected on the statements described in
§ 301.6226–2 or § 301.6226–3(e)(3) in
accordance with § 301.6226–3. The
reviewed year partners or affected
partners and the partnership adjust
partnership tax attributes affected by
reason of an adjustment reflected on the
Book
$1200
........................
........................
$1200
................
................
$1500
................
................
Totals ....................................................................
1200
1200
1500
Example. (i) In 2021, J, K and L form
Partnership by each contributing $500 in
exchange for partnership interests that share
all items of income, gain, loss and deduction
in identical shares. Partnership immediately
purchases Asset on January 1, 2021 for
$1,500, which it depreciates using the
straight-line method with a 10-year recovery
period beginning in 2021 ($150) so that each
partner has a $50 distributive share of the
depreciation, resulting in an outside basis of
$450 for each partner. Accordingly, at the
end of 2022, J, K and L have an outside basis
and capital account of $400 each ($500 less
$50 of their respective allocable shares of
depreciation in 2021 and $50 in 2022).
Value
Asset ............................................................................
amozie on DSK3GDR082PROD with PROPOSALS3
Partnership
basis
statements described in § 301.6226–2 or
§ 301.6226–3(e)(3) with respect to the
reviewed year (as defined in
§ 301.6241–1(a)(8)), except to the extent
partner or partnership tax attributes
were already adjusted as part of the
partnership adjustment. Additionally,
reviewed year partners or affected
partners adjust their partner tax
attributes that are affected by the
adjustments reflected on the statements
described in § 301.6226–2 or
§ 301.6226–3(e)(3), but these
adjustments to partner tax attributes are
calculated with respect to each year
beginning with the first affected year (as
defined in § 301.6226–3(b)(2)(i)),
followed by any intervening years (as
defined in § 301.6226–3(b)(3)(i)),
concluding with the reporting year (as
defined in § 301.6226–3(a)).
(c) Example. The following example
illustrates the rules of this section. For
purposes of this example, Partnership is
subject to the provisions of subchapter
C of chapter 63 of the Internal Revenue
Code, Partnership and its partners are
calendar year taxpayers, all partners are
U.S. persons, and the highest rate of
income tax in effect for all taxpayers is
40 percent for all relevant periods.
(ii) The IRS initiates an administrative
proceeding with respect to Partnership’s
2021 taxable year (reviewed year) and in
2023 (adjustment year) finally determines
that Asset should have been depreciated with
a 20-year recovery period beginning in 2021,
resulting in a $75 partnership adjustment
that results in an imputed underpayment.
The IRS does not initiate an administrative
proceeding with respect to Partnership’s
2022 taxable year, and Partnership does not
file an administrative adjustment request for
that taxable year. Partnership makes an
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
election under § 301.6226–1 with respect to
the imputed underpayment. Therefore, J, K
and L each are furnished a statement
described in § 301.6226–2 by Partnership
reflecting the $25 income adjustment for
2021.
(iii) Tax attributes of the partners must be
adjusted to reflect the $75 partnership
adjustment reflected on the statements
described in § 301.6226–2 that is taken into
account in equal shares ($25) by J, K, and L
with respect to 2021. Specifically, J, K and
L’s outside bases and capital accounts must
PO 00000
Frm 00048
Fmt 4701
Sfmt 4702
Outside
basis
Book
Value
J
K
L
$400
400
400
$400
400
400
$500
500
500
................
1200
1200
1500
be increased $25 each with respect to the
2021 tax year. As a result, J, K and L each
have an outside basis and capital account of
$425 ($400 plus $25 of income realized with
respect to 2021). Asset’s basis and book value
must also be changed in 2023. Thus, after
adjusting tax attributes of the partners to take
into account the election under § 301.6226–
1 and taking into account other activities of
Partnership in 2023, accounts are stated as
follows:
E:\FR\FM\17AUP3.SGM
17AUP3
42001
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
Partnership
basis
Book
Value
Asset ............................................................................
$1275
........................
........................
$1275
................
................
$1500
................
................
Totals ....................................................................
1275
1275
1500
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 16. Section 301.6227–1 is added
to read as follows:
amozie on DSK3GDR082PROD with PROPOSALS3
§ 301.6227–1 Administrative adjustment
request by partnership.
(a) In general. A partnership may file
a request for an administrative
adjustment with respect to any
partnership-related item (as defined in
§ 301.6241–6) 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 in accordance with
§ 301.6227–2(a) for the reviewed year
(as defined in § 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 § 301.6227–2(b) unless the
partnership makes an election under
§ 301.6227–2(c), in which case each
reviewed year partner (as defined in
§ 301.6241–1(a)(9)) must take the
adjustments into account in accordance
with § 301.6227–3. If the adjustments
requested in the AAR do not result in
an imputed underpayment (as
determined under § 301.6227–2(a)),
such adjustments must be taken into
account by the reviewed year partners
in accordance with § 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. In
addition, a partnership may not file an
AAR solely for the purpose of changing
the designation of a partnership
representative or changing the
appointment of a designated individual.
See § 301.6223–1 (regarding designation
of the partnership representative). When
the partnership changes the designation
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
of the partnership representative (or
appointment of the designated
individual) in conjunction with the
filing of an AAR in accordance with
§ 301.6223–1(e), the change in
designation (or appointment) is treated
as occurring prior to the filing of the
AAR.
(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). Except as provided in
§ 301.6231–1(f), an AAR may not 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
§ 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
prescribed by the IRS, 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
PO 00000
Frm 00049
Fmt 4701
Sfmt 4702
Outside
basis
Book
Value
J
K
L
$425
425
425
$425
425
425
$500
500
500
................
1275
1275
1500
take into account adjustments requested
in an AAR under § 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 correct
information:
(i) The name and 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 partnership-related item was
originally allocated to the reviewed year
partner on the partnership return for the
reviewed year.
(ii) Adjusted partnership-related 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 partnershiprelated item was not reported on the
partnership return for the reviewed
year, each reviewed year partner’s share
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
42002
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
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 a
partnership-related 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 partnershiprelated 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 § 301.6222–1(c)(2)
(regarding partnership-related 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 and the regulations thereunder, 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
partnership-related item, including any
partnership-related item adjusted in an
AAR filed by the partnership. The
amount of an imputed underpayment
determined by the partnership under
§ 301.6227–2(a)(1), including any
modifications determined by the
partnership under § 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 (i)(2) of
this section, this section applies to
partnership taxable years beginning
after December 31, 2017.
(2) Election under § 301.9100–22 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
§ 301.9100–22 is in effect.
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
Par. 17. Section 301.6227–2 is added
to read as follows:
■
§ 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 in the reviewed year (as
defined in § 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
§ 301.6225–1.
(2) Modification of imputed
underpayment for purposes of this
section. A partnership may apply
modifications to the amount of the
imputed underpayment determined
under paragraph (a)(1) of this section
using only the provisions under
§ 301.6225–2(d)(3) (regarding taxexempt partners), § 301.6225–2(d)(4)
(regarding modification of applicable
tax rate), § 301.6225–2(d)(5) (regarding
specified passive activity losses),
§ 301.6225–2(d)(6)(ii) (regarding
limitations or restrictions in the
grouping of adjustments), § 301.6225–
2(d)(7) (regarding certain qualified
investment entities), § 301.6225–2(d)(9)
(regarding tax treaty modifications), 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 applying modifications to 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 applying
modifications to the amount of any
imputed underpayment under
paragraph (a)(1) of this section reported
on the AAR; and
(ii) As part of the AAR filed with the
IRS in accordance with forms,
instructions, and other guidance
prescribed by the IRS, 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
PO 00000
Frm 00050
Fmt 4701
Sfmt 4702
(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 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 § 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
§ 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
§ 301.6241–1(a)(1)). See section
6233(a)(2). In the case of any failure to
pay an imputed underpayment by the
due date of the partnership return for
the adjustment year, interest is
determined in accordance with section
6233(b)(2).
(3) Coordination with chapters 3 and
4—(i) Coordination when partnership
pays an imputed underpayment. If a
partnership pays an imputed
underpayment resulting from
adjustments requested in an AAR under
paragraph (b)(1) of this section, the rules
in § 301.6241–7(b)(3) apply to treat the
partnership as having paid the amount
required to be withheld under chapter 3
or chapter 4 (as defined in § 301.6241–
7(b)(2)).
(ii) Coordination when partnership
elects to have adjustments taken into
account by reviewed year partners. If a
partnership elects under paragraph (c)
of this section to have its reviewed year
partners take into account adjustments
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
requested in an AAR, the rules in
§ 301.6226–2(g)(3) apply to the
partnership, and the rules in
§ 301.6226–3(f) apply to the reviewed
year partners that take into account the
adjustments pursuant to § 301.6227–3.
(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 § 301.6241–1(a)(9)) take into
account the adjustments requested in
the AAR in accordance with
§ 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 liable for, nor
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 § 301.6227–3. If an
election is made under this paragraph
(c), modifications applied 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 § 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 § 301.6227–
1. Each reviewed year partner must take
into account its share of the adjustments
requested in the AAR in accordance
with § 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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 18. Section 301.6227–3 is added
to read as follows:
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
§ 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 § 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 § 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 § 301.6241–1(a)(3)) as
determined under § 301.6227–2(a). Each
reviewed year partner receiving a
statement furnished in accordance with
§ 301.6227–1(d) must take into account
adjustments reflected in the statement
in the reviewed year partner’s 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. Except as
provided in paragraph (c) of this
section, 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
report and pay the additional reporting
year tax (as defined in § 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 § 301.6226–3. A
reviewed year partner may, in
accordance with § 301.6226–3(a), reduce
chapter 1 tax for the reporting year
where the additional reporting year tax
is less than zero. For purposes of
paragraph (b) of this section, the rule
under § 301.6226–3(c)(3) (regarding the
increased rate of interest) does not
apply. 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 § 301.6241–1(a)(7)) may not
claim a refund with respect to its share
of any adjustment.
(2) 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
year taxpayers and A is not claiming any
refundable tax credit in 2020. The only
adjustment shown on the statement is an
PO 00000
Frm 00051
Fmt 4701
Sfmt 4702
42003
increase in ordinary loss. 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)(2), except A’s
chapter 1 tax for 2022 (without regard to any
additional reporting year tax) is $75.
Applying the rules in paragraph (b)(1) 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—(1) In general.
Except as provided in this paragraph (c),
if a statement described in paragraph (a)
of this section (including a statement
described in this paragraph (c)(1)) is
furnished to a reviewed year partner
that is a pass-through partner (as
defined in § 301.6241–1(a)(5)), the passthrough partner must take into account
the adjustments reflected on that
statement in accordance with
§ 301.6226–3(e) by treating the
partnership that filed the AAR as the
partnership that made an election under
§ 301.6226–1. A pass-through partner
that furnishes statements in accordance
with § 301.6226–3(e)(3) must provide
the information described in paragraph
(c)(3) of this section in lieu of the
information described in § 301.6226–
3(e)(3)(iii) on the statements the passthrough partner furnishes to its partners.
A pass-through partner that computes
and pays an imputed underpayment in
accordance with § 301.6226–3(e)(4)(iii)
may not apply any modifications to the
amount of imputed underpayment. For
purposes of this paragraph (c)(1), the
statement furnished to the pass-through
partner by the partnership filing the
AAR is treated as if it were a statement
issued under section 6226(a)(2) and
described in § 301.6226–2.
(2) Adjustments that do not result in
an imputed underpayment. If the
adjustments requested in an AAR do not
result in an imputed underpayment (as
described in § 301.6227–2(d)),
§ 301.6226–3(e)(2) does not apply. The
pass-through partner must take into
account the adjustments reflected on the
statement described in paragraphs (a) or
(c)(1) of this section in accordance with
§ 301.6226–3(e)(3), except that the pass-
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
42004
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
through partner must provide the
information described in paragraph
(c)(3) of this section in lieu of the
information described in § 301.6226–
3(e)(3)(iii) on the statements the passthrough partner furnishes to its partners.
(3) Contents of statements. Each
statement described in paragraph (c)(1)
or (2) of this section must include the
following correct information—
(i) The name and taxpayer
identification number (TIN) of the
partnership that filed the AAR with
respect to the adjustments reflected on
the statements described in paragraph
(c)(1) of this section;
(ii) The adjustment year (as defined in
§ 301.6241–1(a)(1)) of the partnership
described in paragraph (c)(3)(i) of this
section;
(iii) The extended due date for the
return for the adjustment year of the
partnership described in paragraph
(c)(3)(i) of this section (as described in
§ 301.6226–3(e)(3)(ii));
(iv) The date on which the
partnership described in paragraph
(c)(3)(i) of this section furnished its
statements required under § 301.6227–
2(d);
(v) The name and TIN of the
partnership that furnished the statement
to the pass-through partner if different
from the partnership described in
paragraph (c)(3)(i) of this section;
(vi) The name and TIN of the passthrough partner;
(vii) The pass-through partner’s
taxable year to which the adjustments
set forth in the statement described in
paragraph (c)(1) of this section relate;
(viii) The name and TIN of the
affected partner (as defined in
§ 301.6226–3(e)(3)(i)) to whom the
statement is being furnished;
(ix) The current or last address of the
affected partner that is known to the
pass-through partner;
(x) The affected partner’s share of
items as originally reported to such
partner under section 6031(b) and, if
applicable, section 6227, for the taxable
year to which the adjustments reflected
on the statement furnished to the passthrough partner relate;
(xi) The affected partner’s share of
partnership adjustments determined
under § 301.6227–1(e)(2) as if the
affected partner were the reviewed year
partner and the partnership were the
pass-through partner;
(xii) Any other information required
by forms, instructions, and other
guidance prescribed by the IRS.
(4) Affected partners must take into
account the adjustments. A statement
furnished to an affected partner in
accordance with paragraph (c)(1) or (2)
of this section is to be treated by the
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
affected partner as if it were a statement
described in paragraph (a) of this
section. The affected partner must take
into account its share of the adjustments
reflected on such a statement in
accordance with this section by treating
references to ‘‘reviewed year partner’’ as
‘‘affected partner.’’ When taking into
account the adjustments as described in
§ 301.6226–3(e)(3)(iv), the rules under
§ 301.6226–3(c)(3) (regarding the
increased rate of interest) do not apply.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 19. Section 301.6231–1 is added
to read as follows:
§ 301.6231–1 Notice of proceedings and
adjustments.
(a) Notices to which this section
applies. In the case of any
administrative proceeding under
subchapter C of chapter 63 of the
Internal Revenue Code (subchapter C of
chapter 63), including an administrative
proceeding with respect to an
administrative adjustment request
(AAR) filed by a partnership under
section 6227, the following notices must
be mailed to the partnership and the
partnership representative (as described
in section 6223 and § 301.6223–1)—
(1) Notice of any administrative
proceeding initiated at the partnership
level with respect to an adjustment of
any partnership-related item (as defined
in § 301.6241–6) for any partnership
taxable year under subchapter C of
chapter 63 (notice of administrative
proceeding (NAP));
(2) Notice of any proposed
partnership adjustment resulting from
an administrative proceeding under
subchapter C of chapter 63 (notice of
proposed partnership adjustment
(NOPPA)); and
(3) Notice of any final partnership
adjustment resulting from an
administrative proceeding under
subchapter C of chapter 63 (notice of
final partnership adjustment (FPA)).
(b) Time for mailing notices—(1)
Notice of proposed partnership
adjustment. A NOPPA is timely if it is
mailed before the expiration of the
period for making adjustments under
section 6235(a)(1) (including any
extensions under section 6235(b) and
any special rules under section 6235(c)).
PO 00000
Frm 00052
Fmt 4701
Sfmt 4702
(2) Notice of final partnership
adjustment. An FPA may not be mailed
earlier than 270 days after the date on
which the NOPPA is mailed unless the
partnership agrees, in writing, with the
Internal Revenue Service (IRS) to waive
the 270-day period. See § 301.6225–
2(c)(3)(iii) for the effect of a waiver
under this paragraph (b)(2) on the 270period for requesting a modification
under section 6225(c). See § 301.6232–
1(d)(2) for the rules regarding a waiver
of the limitations on assessment under
§ 301.6232–1(c).
(c) Last known address. A notice
described in paragraph (a) of this
section is sufficient if mailed to the last
known address of the partnership
representative and the partnership (even
if the partnership or partnership
representative has terminated its
existence).
(d) Notice mailed to partnership
representative—(1) In general. A notice
described in paragraph (a) of this
section will be treated as mailed to the
partnership representative if the notice
is mailed to the partnership
representative that is reflected in the
IRS records as of the date the letter is
mailed.
(2) No partnership representative in
effect. In any case in which no
partnership representative designation
is in effect in accordance with
§ 301.6223–1(f), a notice described in
paragraph (a) of this section mailed to
‘‘PARTNERSHIP REPRESENTATIVE’’ at
the last known address of the
partnership satisfies the requirements of
this section.
(e) Restrictions on additional FPAs
after petition filed. The IRS may mail
more than one FPA to any partnership
for any partnership taxable year.
However, except in the case of fraud,
malfeasance, or misrepresentation of a
material fact, the IRS may not mail an
FPA to a partnership with respect to a
partnership taxable year after the
partnership has filed a timely petition
for readjustment under section 6234
with respect to an FPA issued with
respect to such partnership taxable year.
(f) Withdrawal of NAP or NOPPA. The
IRS may, without consent of the
partnership, withdraw any NAP or
NOPPA. A NAP or NOPPA that has
been withdrawn by the IRS has no effect
for purposes of subchapter C of chapter
63. For instance, if the IRS withdraws a
NAP with respect to a partnership
taxable year, the prohibition under
section 6227(c) on filing an AAR after
the mailing of a NAP no longer applies
with respect to such taxable year.
(g) Rescission of FPA. The IRS may,
with the consent of the partnership,
rescind any FPA. An FPA that is
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
rescinded is not an FPA for purposes of
subchapter C of chapter 63, and the
partnership cannot bring a proceeding
under section 6234 with respect to such
FPA.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 20. Section 301.6232–1 is added
to read as follows:
amozie on DSK3GDR082PROD with PROPOSALS3
§ 301.6232–1 Assessment, collection, and
payment of imputed underpayment.
(a) In general. An imputed
underpayment determined under
subchapter C of chapter 63 of the
Internal Revenue Code (Code) is
assessed and collected in the same
manner as if the imputed underpayment
were a tax imposed by subtitle A of the
Code for the adjustment year (as defined
in § 301.6241–1(a)(1)) except that the
deficiency procedures under subchapter
B of chapter 63 of the Code do not apply
to an assessment of an imputed
underpayment. Accordingly, no notice
under section 6212 is required for, and
the restrictions under section 6213 do
not apply to, the assessment of any
imputed underpayment. See paragraph
(c) of this section for limitations on
assessment and paragraph (d) of this
section for exceptions to restrictions on
adjustments.
(b) Payment of the imputed
underpayment. Upon receipt of notice
and demand from the Internal Revenue
Service (IRS), an imputed
underpayment must be paid by the
partnership at the place and time stated
in the notice. In the case of an
adjustment requested in an
administrative adjustment request
(AAR) under section 6227(b)(1) that is
taken into account by the partnership
under § 301.6227–2(b), payment of the
imputed underpayment is due on the
date the AAR is filed. The IRS may
assess the amount of the imputed
underpayment reflected on the AAR on
the date the AAR is filed. For interest
with respect to an imputed
underpayment, see § 301.6233(a)–1(b).
(c) Limitation on assessment—(1) In
general. Except as otherwise provided
by this section or subtitle F of the Code
(except for subchapter B of chapter 63),
no assessment of an imputed
underpayment may be made (and no
levy or proceeding in any court for the
collection of an imputed underpayment
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
may be made, begun, or prosecuted)
before—
(i) The close of the 90th day after the
day on which a notice of a final
partnership adjustment (FPA) under
section 6231(a)(3) was mailed; and
(ii) If a petition for readjustment is
filed under section 6234 with respect to
such FPA, the decision of the court has
become final.
(2) Specified similar amount. The
limitations under paragraph (c)(1) of
this section do not apply in the case of
a specified similar amount as defined in
section 6232(f)(2).
(d) Exceptions to restrictions on
adjustments and assessments—(1)
Adjustments treated as mathematical or
clerical errors—(i) In general. A notice
to a partnership that, on account of a
mathematical or clerical error appearing
on the partnership return or as a result
of a failure by a partnership-partner (as
defined in § 301.6241–1(a)(7)) to comply
with section 6222(a), the IRS has
adjusted or will adjust partnershiprelated items (as defined in § 301.6241–
6) to correct the error or to make the
items consistent under section 6222(a)
and has assessed or will assess any
imputed underpayment (determined in
accordance with § 301.6225–1) resulting
from the adjustment is not considered
an FPA under section 6231(a)(3). A
petition for readjustment under section
6234 may not be filed with respect to
such notice. The limitations under
section 6232(b) and paragraph (c) of this
section do not apply to an assessment
under this paragraph (d)(1)(i). For the
definition of mathematical or clerical
error generally, see section 6213(g)(2).
For application of mathematical or
clerical error in the case of inconsistent
treatment by a partner that fails to give
notice, see § 301.6222–1(b).
(ii) Request for abatement—(A) In
general. Except as provided in
paragraph (d)(1)(ii)(B) of this section, a
partnership that is mailed a notice
described in paragraph (d)(1)(i) of this
section may file with the IRS, within 60
days after the date of such notice, a
request for abatement of any assessment
of an imputed underpayment specified
in such notice. Upon receipt of the
request, the IRS must abate the
assessment. Any subsequent assessment
of an imputed underpayment with
respect to which abatement was made is
subject to the provisions of subchapter
C of chapter 63 of the Code, including
the limitations under paragraph (c) of
this section.
(B) Adjustments with respect to
inconsistent treatment by a partnershippartner. If an adjustment that is the
subject of a notice described in
paragraph (d)(1)(i) of this section is due
PO 00000
Frm 00053
Fmt 4701
Sfmt 4702
42005
to the failure of a partnership-partner to
comply with section 6222(a), paragraph
(d)(1)(ii)(A) of this section does not
apply, and abatement of any assessment
specified in such notice is not available.
However, prior to assessment, a
partnership-partner that has failed to
comply with section 6222(a) may
correct the inconsistency by filing an
administrative adjustment request under
section 6227 or filing an amended
partnership return and furnishing
amended statements, as appropriate.
(iii) Partnerships that have an election
under section 6221(b) in effect. In the
case of a partnership-partner that has an
election under section 6221(b) in effect
for the reviewed year (as defined in
§ 301.6241–1(a)(8)), any tax resulting
from an adjustment due to the
partnership-partner’s failure to comply
with section 6222(a) may be assessed
with respect to the reviewed year
partners (as defined in § 301.6241–
1(a)(9)) of the partnership-partner (or
indirect partners of the partnershippartner, as defined in § 301.6241–
1(a)(4)). Such tax may be assessed in the
same manner as if the tax were on
account of a mathematical or clerical
error appearing on the reviewed year
partner’s or indirect partner’s return,
except that the procedures under
section 6213(b)(2) for requesting an
abatement of such assessment do not
apply.
(2) Partnership may waive limitations.
A partnership may at any time by a
signed notice in writing filed with the
IRS waive the limitations under
paragraph (c) of this section (whether or
not an FPA under section 6231(a)(3) has
been mailed by the IRS at the time of the
waiver).
(e) Limit on amount of imputed
underpayment where no proceeding is
begun. If no proceeding under section
6234 is begun with respect to an FPA
under section 6231(a)(3) before the close
of the 90th day after the day on which
such FPA was mailed, the amount for
which the partnership is liable under
section 6225 with respect to such FPA
cannot exceed the amount determined
in such FPA.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 21. Section 301.6233(a)–1 is
added to read as follows:
E:\FR\FM\17AUP3.SGM
17AUP3
42006
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
§ 301.6233(a)–1 Interest and penalties
determined from reviewed year.
(a) Interest and penalties with respect
to the reviewed year. Except to the
extent provided in section 6226(c) and
the regulations thereunder, in the case
of a partnership adjustment (as defined
in § 301.6241–1(a)(6)) for a reviewed
year (as defined in § 301.6241–1(a)(8)), a
partnership is liable for—
(1) Interest computed in accordance
with paragraph (b) of this section; and
(2) Any penalty, addition to tax, or
additional amount as provided under
paragraph (c) of this section.
(b) Computation of interest with
respect to partnership adjustments for
the reviewed year. The interest imposed
on an imputed underpayment resulting
from partnership adjustments for the
reviewed year is the interest that would
be imposed under chapter 67 of the
Internal Revenue Code (Code) if the
imputed underpayment were treated as
an underpayment of tax for the
reviewed year. The interest imposed on
an imputed underpayment under this
paragraph (b) begins on the day after the
due date of the partnership return
(without regard to extension) for the
reviewed year and ends on the earlier
of—
(1) The date prescribed for payment
(as described in § 301.6232–1(b));
(2) The due date of the partnership
return (without regard to extension) for
the adjustment year (as defined in
§ 301.6241–1(a)(1)); or
(3) The date the imputed
underpayment is fully paid.
(c) Penalties with respect to
partnership adjustments for the
reviewed year—(1) In general. In
accordance with section 6221(a), the
applicability of any penalties, additions
to tax, and additional amounts that
relate to an adjustment to any
partnership-related item for the
reviewed year is determined at the
partnership level as if the partnership
had been an individual subject to tax
imposed by chapter 1 of subtitle A of
the Code for the reviewed year, and the
imputed underpayment were an actual
underpayment of tax or understatement
for such year. Nothing in this paragraph
(c)(1) affects the application of any
penalty, addition to tax, or additional
amount that may apply to the
partnership or to any reviewed year
partner (as defined in § 301.6241–
1(a)(9)) or to any indirect partner (as
defined in § 301.6241–1(a)(4)) that is
unrelated to an adjustment to a
partnership-related item under
subchapter C of chapter 63 of the Code.
A partner-level defense (as described in
§ 301.6226–3(d)(3)) may not be raised in
a proceeding of the partnership.
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
(2) Coordination with accuracyrelated and fraud penalty provisions—
(i) In general. In the case of penalties
imposed under section 6662, section
6662A, and section 6663 with respect to
partnership adjustments in accordance
with paragraph (c)(1) of this section, the
rules described in paragraphs (c)(2)(ii),
(iii), (iv), and (v) of this section apply.
(ii) Determining the portion of the
imputed underpayment to which a
penalty applies—(A) In general. In the
case of penalties imposed under section
6662, section 6662A, and section 6663,
paragraph (c)(2)(ii) of this section
applies if—
(1) There is at least one adjustment
with respect to which no penalty has
been imposed and at least one
adjustment with respect to which a
penalty has been imposed; or
(2) There are at least two adjustments
with respect to which penalties have
been imposed and the penalties have
different rates.
(B) Calculating the portion of the
imputed underpayment to which the
penalty applies. In computing the
portion of an imputed underpayment to
which a penalty applies, adjustments
that do not result in the imputed
underpayment (as described in
§ 301.6225–1(f)) are not taken into
account. The portion of an imputed
underpayment to which a penalty
applies is calculated as follows—
(1) All the partnership adjustments
that resulted in the imputed
underpayment are grouped together
according to whether they are
adjustments with respect to which a
penalty has been imposed and, if so,
according to rate of penalty. Decreasing
adjustments as defined in paragraph
(c)(2)(ii)(C) of this section are grouped
in accordance with paragraphs
(c)(2)(ii)(D) and (E) of this section.
(2) Within each grouping described in
paragraph (c)(2)(ii)(B)(1) of this section,
multiply the portion of each partnership
adjustment that is not an adjustment to
a credit or treated as an adjustment to
a credit under § 301.6225–1(e)(3)(iii) by
the rate that applied to such portion
when calculating the imputed
underpayment. See §§ 301.6225–
1(b)(1)(iv), 301.6225–2(b)(3).
(3) Within each grouping, add the
amounts that were calculated under
paragraph (c)(2)(ii)(B)(2) of this section.
(4) Within each grouping, increase or
decrease the amounts that were
calculated under paragraph
(c)(2)(ii)(B)(3) of this section by any
adjustments to credits (or adjustments
treated as adjustments to credits under
§ 301.6225–1(e)(3)(iii)).
(C) Decreasing adjustments. An
adjustment to a partnership-related item
PO 00000
Frm 00054
Fmt 4701
Sfmt 4702
that resulted in a decrease to the
imputed underpayment is a decreasing
adjustment.
(D) Grouping of decreasing
adjustments. Decreasing adjustments are
grouped under paragraph (c)(2)(ii)(B)(1)
of this section in the following order—
(1) First, decreasing adjustments are
grouped with partnership adjustments
with respect to which no penalties have
been imposed until the amount of the
adjustments remaining in this group is
zero in accordance with paragraph
(c)(2)(ii)(E) of this section;
(2) Second, decreasing adjustments
remaining after application of paragraph
(c)(2)(ii)(D)(1) of this section (taking into
account application of paragraph
(c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with
respect to which a penalty has been
imposed at a 20 percent rate;
(3) Third, decreasing adjustments
remaining after application of paragraph
(c)(2)(ii)(D)(2) of this section (taking into
account application of paragraph
(c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with
respect to which a penalty has been
imposed at a 30 percent rate;
(4) Fourth, decreasing adjustments
remaining after application of paragraph
(c)(2)(ii)(D)(3) of this section (taking into
account application of paragraph
(c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with
respect to which a penalty has been
imposed at a 40 percent rate;
(5) Fifth, decreasing adjustments
remaining after application of paragraph
(c)(2)(ii)(D)(4) of this section (taking into
account application of paragraph
(c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with
respect to which a penalty has been
imposed at a 75 percent rate.
(E) Decreasing adjustments that
reduce a grouping to zero. If, when
allocating the decreasing adjustments
under paragraph (c)(2)(ii)(D) of this
section, the amount calculated in
paragraph (c)(2)(ii)(B) of this section for
a particular grouping equals zero, any
remaining decreasing adjustments (or
portion thereof) that would otherwise
reduce the amount to less than zero are
allocated to the next grouping in
sequential order under paragraph
(c)(2)(ii)(D) of this section.
(F) Fraud penalties under section
6663. If any portion of an imputed
underpayment is determined by the IRS
to be attributable to fraud, the entire
imputed underpayment is treated as
attributable to fraud. This paragraph
(c)(2)(ii)(F) does not apply to any
portion of the imputed underpayment
the partnership establishes by a
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
preponderance of the evidence is not
attributable to fraud.
(iii) Substantial understatement
penalty under section 6662(d)—(A) In
general. For purposes of application of
the penalty under section 6662(d)
(substantial understatement of income
tax), the imputed underpayment is
treated as an understatement under
section 6662(d)(2). To determine
whether an imputed underpayment
treated as an understatement under this
paragraph (c)(3)(iii)(A) is a substantial
understatement under section
6662(d)(1), the rules of section
6662(d)(1)(A) apply by treating the
amount described in paragraph
(c)(2)(iii)(B) of this section as the tax
required to be shown on the return for
the taxable year under section
6662(d)(1)(A)(i).
(B) Amount of tax required to be
shown on the return. The amount
described in this paragraph (c)(2)(iii)(B)
is the tax that would result by treating
the net income or loss of the partnership
for the reviewed year, reflecting any
partnership adjustments as finally
determined, as taxable income
described in section 1(c) (determined
without regard to section 1(h)).
(iv) Reportable transaction
understatement under section 6662A.
For purposes of application of the
penalty under section 6662A (reportable
transaction understatement penalty), the
portion of an imputed underpayment
attributable to an item described under
section 6662A(b)(2) is treated as a
reportable transaction understatement
under section 6662A(b).
(v) Reasonable cause and good faith.
For purposes of determining whether a
partnership satisfies the reasonable
cause and good faith exception under
section 6664(c) or (d) with respect to a
penalty under section 6662, section
6662A, or section 6663, the partnership
is treated as the taxpayer. See § 1.6664–
4 of this chapter. Accordingly, the facts
and circumstances taken into account to
determine whether the partnership has
established reasonable cause and good
faith are the facts and circumstances
applicable to the partnership.
(3) Examples. The following examples
illustrate the rules of paragraph (c) of
this section. For purposes of these
examples, each partnership has a
calendar taxable year, and the highest
tax rate in effect for all taxpayers is 40
percent for all relevant periods.
Example 1. One adjustment with respect to
which a penalty is imposed. In an
administrative proceeding with respect to
Partnership’s 2018 partnership return, the
IRS determines that Partnership understated
ordinary income by $100. The $100
understatement is due to negligence or
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
disregard of rules or regulations under
section 6662(c), and a 20-percent accuracyrelated penalty applies under section 6662(a).
The IRS also determines that Partnership
understated long-term capital gain by $300,
but no penalty applies with respect to that
adjustment. Partnership does not request
modification of the imputed underpayment
under section 6225 and does not raise any
penalty defenses prior to issuance of the
notice of final partnership adjustment (FPA).
In the FPA, the IRS determines that the
imputed underpayment is $160 (($100 +
$300) × 40 percent). In determining the
penalty, the $100 adjustment (to which the
20-percent penalty relates) is grouped
separately from the $300 adjustment (to
which no penalty applies). The portion of the
imputed underpayment to which the 20percent penalty applies is $40 ($100 × 40
percent), and the penalty is $8 ($40 × 20
percent).
Example 2. More than one adjustment with
respect to which the same rate of penalty is
imposed. The facts are the same as in
Example 1 of this paragraph (c)(3), except
that the IRS determines that Partnership also
overstated its credits by $10. The
overstatement of credits is due to negligence
or disregard of rules or regulations under
section 6662(c), and a 20-percent accuracyrelated penalty applies under section 6662(a).
Because the Partnership did not request
modification, the imputed underpayment is
$170 (($100 + $300) × 40 percent) + $10). In
determining the penalty, the $10 credit
adjustment and the $100 understatement of
income, both of which are adjustments with
respect to which the 20-percent accuracyrelated penalty is imposed, are grouped
together. Accordingly, the portion of the
imputed underpayment to which the 20percent accuracy-related penalty applies is
$50 (($100 × 40 percent) + $10), and the
penalty is $10 ($50 × 20 percent).
Example 3. Decreasing adjustment. The
facts are the same as in Example 2 of this
paragraph (c)(3), except that there is also an
adjustment that reduces ordinary income by
$50. In calculating the imputed
underpayment under § 301.6225–1 and
§ 301.6225–2, the partnership demonstrates
to the satisfaction of the IRS that the $50
decrease to ordinary income is appropriately
netted with the $100 increase in ordinary
income. Therefore, the $50 reduction in
ordinary income is an adjustment that
resulted in the imputed underpayment and
therefore a decreasing adjustment described
in paragraph (c)(2)(ii)(C) of this section.
Because Partnership did not request any
further modifications, the imputed
underpayment is $150 (($100¥$50) + $300)
× 40 percent) + $10). To determine the
portion of the imputed underpayment to
which the 20-percent accuracy-related
penalty applies, the $50 reduction to
ordinary income is grouped with the $300
adjustment to long-term capital gain (in
accordance with paragraph (c)(2)(ii)(D) of this
section). Accordingly, the portion of the
imputed underpayment to which the 20percent accuracy-related penalty applies is
$50 (($100 × 40 percent) + $10), and the
penalty is $10 ($50 × 20 percent).
Example 4. Two adjustments with respect
to which penalties of different rates have
PO 00000
Frm 00055
Fmt 4701
Sfmt 4702
42007
been imposed. The facts are the same as in
Example 3 of this paragraph (c)(3), except
that the $300 adjustment to long-term capital
gain is due to a gross valuation misstatement.
A 40-percent accuracy-related penalty under
section 6662(a) and (h) applies to the portion
of the imputed underpayment attributable to
the gross valuation misstatement. The
imputed underpayment is $150 (($100¥$50)
+ $300) × 40 percent) + $10). Under
paragraph (c)(2)(ii)(B) of this section, the
adjustment to long-term capital gain (the
adjustment to which the 40-percent penalty
relates) and the adjustments to ordinary
income and credits (the adjustments to which
the 20-percent penalty relates) are grouped
separately. In accordance with paragraph
(c)(2)(ii)(D) of this section, because all
partnership adjustments other than the
decreasing adjustment are subject to
penalties, the $50 reduction in ordinary
income (the decreasing adjustment) is
allocated to the grouping of adjustments with
respect to which the 20-percent penalty is
imposed. The amount described under
paragraph (c)(2)(ii)(B) of this section with
respect to the 20-percent penalty grouping is
$30 (($100 × 40 percent)¥($50 × 40 percent)
+ $10). Therefore, the portion of the imputed
underpayment to which the 20 percent
accuracy-related penalty applies is $30 and
the penalty is $6 ($30 × 20 percent). The
portion of the imputed underpayment to
which the 40-percent gross valuation
misstatement penalty applies is $120 ($300 ×
40 percent), and the penalty is $48 ($120 ×
40 percent). The accuracy-related penalty
under section 6662(a) is $54.
Example 5. Modification with respect to
tax-exempt partner. The IRS initiates an
administrative proceeding with respect to
Partnership’s 2019 taxable year. Partnership
has four equal partners during its 2019
taxable year: two partners are partnerships, A
and B; one partner is a tax-exempt entity, C;
and the fourth partner is an individual, D.
The IRS timely mails a notice of proposed
partnership adjustment (NOPPA) to
Partnership for its 2019 taxable year
proposing a single partnership adjustment
increasing Partnership’s ordinary income by
$400,000. The $400,000 increase in income is
due to negligence or disregard of rules or
regulations under section 6662(c). A 20percent accuracy-related penalty under
section 6662(a) and (c) applies to the portion
of the imputed underpayment attributable to
the negligence or disregard of the rules or
regulations. In the NOPPA, the IRS
determines an imputed underpayment of
$160,000 ($400,000 × 40 percent) and that the
20-percent penalty applies to the entire
imputed underpayment. The penalty is
$32,000 ($160,000 × 20 percent). Partnership
requests modification under § 301.6225–
2(d)(3) (regarding tax-exempt partners) with
respect to the amount of additional income
allocated to C, and the IRS approves the
request. After modification of the imputed
underpayment, the imputed underpayment is
$120,000 (($400,000¥$100,000) × 40
percent), and the penalty is $24,000
($120,000 × 20 percent).
Example 6. Amended return modification.
The facts are the same as in Example 5 of this
paragraph (c)(3), except in addition to the
E:\FR\FM\17AUP3.SGM
17AUP3
42008
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
modification with respect to C’s tax-exempt
status, Partnership requests a modification
under § 301.6225–2(d)(2) (regarding amended
returns) with respect to the $100,000 of
additional income allocated to D. In
accordance with the rules under § 301.6225–
2(d)(2), D files an amended return for D’s
2019 taxable year taking into account
$100,000 of additional ordinary income. In
addition, in accordance with § 301.6225–
2(d)(2)(viii), D takes into account on D’s
return the 20-percent accuracy-related
penalty for negligence or disregard of rules or
regulations that relates to the ordinary
income adjustment. D’s tax attributes for
other taxable years are not affected. The IRS
approves the modification. As a result,
Partnership’s total netted partnership
adjustment under § 301.6225–1(b)(2) is
$200,000 ($400,000 less $100,000 allocable to
C and $100,000 taken into account by D). The
imputed underpayment, after modification, is
$80,000 ($200,000 × 40 percent), and the
penalty is $16,000 ($80,000 × 20 percent).
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 22. Section 301.6233(b)–1 is
added to read as follows:
amozie on DSK3GDR082PROD with PROPOSALS3
§ 301.6233(b)–1 Interest and penalties with
respect to the adjustment year return.
(a) Interest and penalties with respect
to failure to pay imputed underpayment
on the date prescribed. In the case of
any failure to pay an imputed
underpayment on the date prescribed
for such payment (as described in
§ 301.6232–1(b)), a partnership is liable
for—
(1) Interest as determined under
paragraph (c) of this section; and
(2) Any penalty, addition to tax, or
additional amount as determined under
paragraph (d) of this section.
(b) Imputed underpayments to which
this section applies. This section applies
to the portion of an imputed
underpayment determined by the IRS
under section 6225(a)(1), or an imputed
underpayment resulting from
adjustments requested by a partnership
in an administrative adjustment request
under section 6227, that is not paid by
the date prescribed for payment under
§ 301.6232–1(b).
(c) Interest. Interest determined under
this paragraph (c) is the interest that
would be imposed under chapter 67 of
the Internal Revenue Code (Code) by
treating any unpaid amount of the
imputed underpayment as an
underpayment of tax imposed for the
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
adjustment year (as defined in
§ 301.6241–1(a)(1)). The interest under
this paragraph (c) begins on the date
prescribed for payment (as described in
§ 301.6232–1(b)) and ends on the date
payment of the imputed underpayment
is made.
(d) Penalties. If a partnership fails to
pay an imputed underpayment by the
date prescribed for payment (as
described in § 301.6232–1(b)), section
6651(a)(2) applies to such failure, and
any unpaid amount of the imputed
underpayment is treated as if it were an
underpayment of tax for purposes of
part II of subchapter A of chapter 68 of
the Code. For purposes of this section,
the penalty under 6651(a)(2) is applied
by treating the unpaid amount of the
imputed underpayment as the unpaid
amount shown as tax on a return
required under subchapter A of chapter
61 of the Code.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 23. Section 301.6234–1 is added
to read as follows:
§ 301.6234–1 Judicial review of
partnership adjustment.
(a) In general. Within 90 days after
the date on which a notice of a final
partnership adjustment (FPA) under
section 6231(a)(3) with respect to any
partnership taxable year is mailed, a
partnership may file a petition for a
readjustment of any partnership
adjustment (as defined in § 301.6241–
1(a)(6)) reflected in the FPA for such
taxable year (without regard to whether
an election under section 6226 has been
made with respect to any imputed
underpayment (as defined in
§ 301.6241–1(a)(3)) reflected in such
FPA) with—
(1) The Tax Court;
(2) The district court of the United
States for the district in which the
partnership’s principal place of business
is located; or
(3) The Court of Federal Claims.
(b) Jurisdictional requirement for
bringing action in district court or Court
of Federal Claims. A petition for
readjustment under this section with
respect to any partnership adjustment
may be filed in a district court of the
United States or the Court of Federal
Claims only if the partnership filing the
petition deposits with the Internal
PO 00000
Frm 00056
Fmt 4701
Sfmt 4702
Revenue Service (IRS), on or before the
date the petition is filed, the amount of
(as of the date of the filing of the
petition) any imputed underpayment (as
shown on the FPA) and any penalties,
additions to tax, and additional amounts
with respect to such imputed
underpayment. If there is more than one
imputed underpayment reflected in the
FPA, the partnership must deposit the
amount of each imputed underpayment
to which the petition for readjustment
relates and the amount of any penalties,
additions to tax, and additional amounts
with respect to each such imputed
underpayment.
(c) Treatment of deposit as payment
of tax. Any amount deposited in
accordance with paragraph (b) of this
section, while deposited, will not be
treated as a payment of tax for purposes
of the Internal Revenue Code (Code).
Notwithstanding the preceding
sentence, an amount deposited in
accordance with paragraph (b) of this
section will be treated as a payment of
tax for purposes of chapter 67 of the
Code (relating to interest). Interest will
be allowed and paid in accordance with
section 6611.
(d) Effect of decision dismissing
action. If an action brought under this
section is dismissed other than by
reason of a rescission of the FPA under
section 6231(d) and § 301.6231–1(g), the
decision of the court dismissing the
action is considered as its decision that
the FPA is correct.
(e) Amount deposited may be applied
against assessment. If the limitations on
assessment under section 6232(b) and
§ 301.6232–1(c) no longer apply with
respect to an imputed underpayment for
which a deposit under paragraph (b) of
this section was made, the IRS may
apply the amount deposited against any
such imputed underpayment that is
assessed.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 24. Section 301.6235–1 is added
to read as follows:
§ 301.6235–1 Period of limitations on
making adjustments.
(a) In general. Except as provided in
section 6235(c), section 905(c) or
paragraph (b) of this section (regarding
extensions), no partnership adjustment
(as defined in § 301.6241–1(a)(6)) for
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
any partnership taxable year may be
made after the later of the date
that is—
(1) Three years after the latest of—
(i) The date on which the partnership
return for such taxable year was filed;
(ii) The return due date (as defined in
section 6241(3)) for the taxable year; or
(iii) The date on which the
partnership filed an administrative
adjustment request with respect to such
taxable year under section 6227; or
(2) The date described in paragraph
(b) of this section with respect to a
request for modification; or
(3) The date described in paragraph
(c) of this section with respect to a
notice of proposed partnership
adjustment.
(b) Modification requested under
section 6225(c)—(1) In general. For
purposes of paragraph (a)(2) of this
section, in the case of any request for
modification of any imputed
underpayment under section 6225(c),
the date by which the Internal Revenue
Service (IRS) may make a partnership
adjustment is the date that is 270 days
(plus the number of days of an
extension of the period for requesting
modification (as described in
§ 301.6225–2(c)(3)(i)) agreed to by the
IRS under section 6225(c)(7) and
§ 301.6225–2(c)(3)(ii)) after the date on
which everything required to be
submitted to the IRS pursuant to section
6225(c) is so submitted.
(2) Date on which everything is
required to be submitted—(i) In general.
For purposes of paragraph (b)(1) of this
section, the date on which everything
required to be submitted to the IRS
pursuant to section 6225(c) is so
submitted is the earlier of—
(A) The date the period for requesting
modification ends (including
extensions) as described in § 301.6225–
2(c)(3)(i) and (ii); or
(B) The date the period for requesting
modification expires as a result of a
waiver of the prohibition on mailing a
notice of final partnership adjustment
(FPA) under § 301.6231–1(b)(2). See
§ 301.6225–2(c)(3)(iii).
(ii) Incomplete submission has no
effect. A determination by the IRS that
the information submitted as part of a
request for modification is incomplete
has no effect on the applicability of
paragraph (b)(2) of this section.
(c) Notice of proposed partnership
adjustment. For purposes of paragraph
(a)(3) of this section, the date by which
the IRS may make a partnership
adjustment is the date that is 330 days
(plus the number of days of an
extension of the modification period (as
described in § 301.6225–2(c)(3)(i))
agreed to by the IRS under section
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
6225(c)(7) and § 301.6225–2(c)(3)(ii))
after the date the last notice of proposed
partnership adjustment (NOPPA) under
section 6231(a)(2) is mailed, regardless
of whether modification is requested by
the partnership under section 6225(c).
(d) Extension by agreement. The
periods described in paragraphs (a), (b),
and (c) of this section (including any
extension of those periods pursuant to
this paragraph (d)) may be extended by
an agreement, in writing, entered into
by the partnership and the IRS before
the expiration of such period.
(e) Examples. The following examples
illustrate the rules of this section. For
purposes of these examples, each
partnership has a calendar taxable year.
Example 1. Partnership timely files its
partnership return for the 2020 taxable year
on March 1, 2021. On September 1, 2023,
Partnership files an administrative
adjustment request (AAR) under section 6227
with respect to its 2020 taxable year. As of
September 1, 2023, the IRS has not initiated
an administrative proceeding under
subchapter C of chapter 63 of the Internal
Revenue Code with respect to Partnership’s
2020 taxable year. Therefore, as of September
1, 2023, under paragraph (a)(1) of this
section, the period for making partnership
adjustments with respect to Partnership’s
2020 taxable year expires on September 1,
2026.
Example 2. Partnership timely files its
partnership return for the 2020 taxable year
on the due date, March 15, 2021. On
February 1, 2023, the IRS mails to
Partnership and the partnership
representative of Partnership (PR) a notice of
administrative proceeding under section
6231(a)(1) with respect to Partnership’s 2020
taxable year. Assuming no AAR has been
filed with respect to Partnership’s 2020
taxable year and the IRS has not yet mailed
a NOPPA under section 6231(a)(2) with
respect to Partnership’s 2020 taxable year,
the period for making partnership
adjustments for Partnership’s 2020 taxable
year expires on the date determined under
paragraph (a)(1) of this section, March 15,
2024.
Example 3. The facts are the same as in
Example 2 of this paragraph (e), except that
on June 1, 2023, pursuant to § 301.6235–1(d),
PR signs an agreement extending the period
for making partnership adjustments under
section 6235(a)(1) for Partnership’s 2020
taxable year to December 31, 2025. In
addition, on June 2, 2025, the IRS mails to
Partnership and PR a timely NOPPA under
section 6231(a)(2). Pursuant to § 301.6225–
2(c)(3)(i), the period for requesting
modification expires on February 27, 2026
(270 days after June 2, 2025, the date the
NOPPA is mailed), but PR does not submit
a request for modification on or before this
date. Under paragraph (c) of this section, the
date for purposes of paragraph (a)(3) of this
section is April 28, 2026, the date that is 330
days from the mailing of the NOPPA.
Because April 28, 2026 is later than the date
under paragraph (a)(1) of this section
(December 31, 2025, as extended under
PO 00000
Frm 00057
Fmt 4701
Sfmt 4702
42009
paragraph (d) of this section), and because no
modification was requested, paragraph (a)(2)
of this section is not applicable, April 28,
2026 is the date on which the period for
making partnership adjustments expires
under section 6235.
Example 4. The facts are the same as in
Example 3 of this paragraph (e), except that
PR notifies the IRS that Partnership will be
requesting modification. On January 5, 2026,
PR and the IRS agree to extend the period for
requesting modification pursuant to section
6225(c)(7) and § 301.6225–2(c)(3)(ii) for 45
days—from February 27, 2026 to April 13,
2026. PR submits the request for modification
to the IRS on April 13, 2026. Therefore, the
date determined under paragraph (b) of this
section is February 22, 2027, which is 270
days after the date everything required to be
submitted was so submitted pursuant to
paragraph (b)(2) of this section plus the
additional 45-day extension of the period for
requesting modification agreed to by PR and
the IRS. Because February 22, 2027 is later
than the date under paragraph (a)(1) of this
section (December 31, 2025, as extended
under paragraph (d) of this section) and the
date under paragraph (a)(3) of this section
(June 12, 2026, which is 330 days from the
date the NOPPA was mailed plus the 45-day
extension under section 6225(c)(7)), February
22, 2027 is the date on which the period for
making partnership adjustments expires
under section 6235.
Example 5. The facts are the same as in
Example 4 of this paragraph (e), except that
PR does not request an extension of the
period for requesting modification. On
February 1, 2026, PR submits a request for
modification and PR, and the IRS agree in
writing to waive the prohibition on mailing
an FPA pursuant to § 301.6231–1(b)(2).
Pursuant to § 301.6225–2(c)(3)(iii), the period
for requesting modification expires as of
February 1, 2026, rather than February 27,
2026. Accordingly, under paragraph (b)(2) of
this section, the date on which everything
required to be submitted pursuant to section
6225(c) is so submitted is February 1, 2026,
and the 270-day period described in
paragraph (b)(1) of this section begins to run
on that date. Therefore, the date for purposes
of paragraph (a)(2) of this section is October
29, 2026, which is 270 days after February 1,
2026, the date on which everything required
to be submitted under section 6225(c) is so
submitted. Because October 29, 2026 is later
than the date under paragraph (a)(1) of this
section (December 31, 2025, as extended
under paragraph (d) of this section) and the
date under paragraph (a)(3) of this section
(April 28, 2026), October 29, 2026 is the date
on which the period for making partnership
adjustments expires under section 6235.
Example 6. The facts are the same as in
Example 5 of this paragraph (e), except PR
completes its submission of information to
support a request for modification on July 1,
2025, but does not execute a waiver pursuant
to § 301.6231–1(b)(2). Therefore, pursuant to
paragraph (b)(2) of this section, February 26,
2026, the date the period requesting
modification expires, is the date on which
everything required to be submitted pursuant
to section 6225(c) is so submitted. As a
result, the 270-day period described in
E:\FR\FM\17AUP3.SGM
17AUP3
42010
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
paragraph (b)(1) of this section expires on
November 23, 2026. Because November 23,
2026 is later than the date under paragraph
(a)(1) of this section (December 31, 2025, as
extended under paragraph (d) of this section)
and the date under paragraph (a)(3) of this
section (April 28, 2026), November 23, 2026
is the date on which the period for making
partnership adjustments expires under
section 6235.
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 25. Section 301.6241–1 is added
to read as follows:
amozie on DSK3GDR082PROD with PROPOSALS3
§ 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 filed; or
(iii) In any other case, a notice of final
partnership adjustment is mailed under
section 6231 or, if the partnership
waives the restrictions under section
6232(b) (regarding limitations on
assessment), 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. Except as
otherwise provided in this paragraph
(a)(3), the term imputed underpayment
means the amount determined in
accordance with section 6225 and the
regulations thereunder. In the case of an
election under section 6226, the term
imputed underpayment means the
amount determined in accordance with
§ 301.6226–3(e)(4). In the case of an
administrative adjustment request, the
term imputed underpayment means the
amount determined in accordance with
§ 301.6227–2 or § 301.6227–3(c).
(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)
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
of this section) or through a whollyowned entity disregarded as separate
from its owner for Federal tax purposes.
(5) Pass-through partner. The term
pass-through partner means a passthrough entity that holds an interest in
a partnership. A pass-through entity is
a partnership as described in
§ 301.7701–2(c)(1) (including a foreign
entity that is classified as a partnership
under § 301.7701–3(b)(2)(i)(A) or (c)), an
S corporation, a trust (other than a
wholly-owned trust disregarded as
separate from its owner for Federal tax
purposes), and a decedent’s estate. For
purposes of this paragraph (a)(5), a passthrough entity is not a wholly-owned
entity disregarded as separate from its
owner for Federal tax purposes.
(6) Partnership adjustment. The term
partnership adjustment means any
adjustment to a partnership-related item
(as defined in § 301.6241–6) and
includes any portion of a partnership
adjustment.
(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 the amount or
timing of a partnership-related item (as
defined in § 301.6241–6) 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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 26. Section 301.6241–2 is added
to read as follows:
§ 301.6241–2
partnership.
Bankruptcy of the
(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
PO 00000
Frm 00058
Fmt 4701
Sfmt 4702
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
§ 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
§ 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.
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
(2) Election under § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 27. Section 301.6241–3 is added
to read as follows:
amozie on DSK3GDR082PROD with PROPOSALS3
§ 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 (3) of
this section, if the Internal Revenue
Service (IRS) determines that any
partnership (including a partnershippartner as defined in § 301.6241–1(a)(7))
ceases to exist (as defined in paragraph
(b)(2) of this section) before any
partnership adjustment (as defined in
§ 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 unpaid amounts resulting from a
partnership adjustment. A partnership
that ceases to exist is no longer liable for
any unpaid amounts resulting from a
partnership adjustment required to be
taken into account by a former partner
under this section.
(3) Application of this section to
partnership-partners. This section
applies to a partnership-partner and its
former partners, regardless of whether
the partnership-partner has an election
under section 6221(b) in effect for any
relevant partnership taxable year.
(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), or does
not have the ability to pay, in full, any
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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 amount due
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 the partnership
has—
(A) A valid election under section
6226 and the regulations thereunder in
effect with respect to any imputed
underpayment (as defined in
§ 301.6241–1(a)(3));
(B) Received a statement under
section 6226(a)(2) (or § 301.6226–3(e))
and has furnished statements to its
partners in accordance with § 301.6226–
3(e)(3); or
(C) 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), 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
assessment made against the
partnership for 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 (as defined in
paragraph (d) of this section) of the
PO 00000
Frm 00059
Fmt 4701
Sfmt 4702
42011
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 § 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 § 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) (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
E:\FR\FM\17AUP3.SGM
17AUP3
amozie on DSK3GDR082PROD with PROPOSALS3
42012
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
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 § 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
§ 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 § 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 each partnership is
subject to the provisions of subchapter
C of chapter 63 of the Code (unless
otherwise stated).
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
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 June 2, 2025, 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, the
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 § 301.6241–1(a)(1), the
adjustment year is 2025 and A and B, both
individuals, are the only adjustment year
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 P, a partnership. G, a partnership that has
an election under section 6221(b) in effect for
the 2020 taxable year, is a partner of P during
2020 and for every year thereafter. On
February 3, 2025, the IRS mails P an FPA that
determines partnership adjustments that
result in a single imputed underpayment. P
does not timely file a petition under section
6234 and does not make a timely election
under section 6226. On May 6, 2025, the IRS
mails P notice and demand for payment of
the amount due resulting from the
adjustments determined in the FPA. P does
not make a payment. On September 1, 2025,
the IRS determines P ceases to exist for
purposes of this section because the IRS has
determined that P does not have the ability
to pay under paragraph (b)(2)(i) of this
section. G terminated under section 708(b)(1)
on December 31, 2024. On September 1,
2025, 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 P 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 § 301.9100–22 in
effect. This section applies to any
PO 00000
Frm 00060
Fmt 4701
Sfmt 4702
partnership taxable year beginning after
November 2, 2015 and before January 1,
2018 for which a valid election under
§ 301.9100–22 is in effect.
■ Par. 28. Section 301.6241–4 is added
to read as follows:
§ 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
§ 301.6241–1(a)(3)), or interest,
penalties, additions to tax, or additional
amounts with respect to an imputed
underpayment, 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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 29. Section 301.6241–5 is added
to read as follows:
§ 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
entity filing the partnership return was
not a partnership for such taxable year.
Accordingly, any partnership-related
item (as defined in § 301.6241–6) 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
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
partnership return is treated as if it were
filed by an entity.
(c) Exceptions. Paragraph (a) of this
section does not apply to—
(1) 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) 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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 30. Section 301.6241–6 is added
to read as follows:
amozie on DSK3GDR082PROD with PROPOSALS3
§ 301.6241–6
Partnership-related Item.
(a) In general. The term partnershiprelated item means—
(1) Any item or amount with respect
to the partnership (as described in
paragraph (b) of this section) which is
relevant in determining the tax liability
of any person under chapter 1 of subtitle
A of the Internal Revenue Code (chapter
1) (as described in paragraph (c) of this
section), and
(2) Any partner’s distributive share of
any such item or amount.
(b) Item or amount with respect to the
partnership. For purposes of this
section, an item or amount is with
respect to the partnership without
regard to whether or not such item or
amount appears on the partnership
return. An item or amount is with
respect to the partnership if—
(1) The item or amount is shown or
reflected, or required to be shown or
reflected, on a return of the partnership
under section 6031, the regulations
thereunder, or the forms and
instructions prescribed by the Internal
Revenue Service (IRS) for the
partnership’s taxable year;
(2) The item or amount is in the
partnership’s books or records;
(3) The item or amount is an imputed
underpayment;
(4) The item or amount relates to a
transaction with the partnership by a
partner acting in its capacity as a
partner or by an indirect partner (as
defined in § 301.6241–1(a)(4)) acting its
capacity as an indirect partner;
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
(5) The item or amount relates to a
transaction that is described in section
707(a)(2), 707(b), or 707(c);
(6) The item or amount relates to basis
in the partnership;
(7) The item or amount relates to a
liability of the partnership that is
reported or reportable by a partner
acting in its capacity as a partner or an
indirect partner acting in its capacity as
an indirect partner, including such
partner or indirect partner’s share of the
liability; or
(8) Any legal or factual
determinations necessary to make an
adjustment to an item or amount
described in paragraphs (b)(1) through
(7) of this section, such as a
determination regarding—
(i) The validity of any election made
by the partnership,
(ii) The partnership’s accounting
practices and methods;
(iii) Whether a partnership exists for
tax purposes and whether multiple
partnerships should be treated as a
single partnership;
(iv) Whether any items or transactions
of the partnership lack economic
substance or should otherwise be
disregarded, collapsed, recharacterized,
or attributed to other persons;
(v) Whether a partnership terminates
under section 708(b)(1) or as a result of
a transaction under Rev. Rul. 99–6
(1999–1 C.B. 432) (see § 601.601(d)(2) of
this chapter); or
(vi) The type of partnership interest
held by any partner.
(c) Relevant in determining the tax
liability of any person under chapter 1.
For purposes of this section, an item or
amount is relevant in determining the
tax liability of any person under chapter
1 without regard to application of
subchapter C of chapter 63 of the
Internal Revenue Code (subchapter C of
chapter 63) and without regard to
whether such item or amount, or
adjustment to such item or amount, has
an effect on the tax liability of any
particular person under chapter 1.
(d) Examples of partnership-related
items. The term partnership-related item
includes—
(1) The character, timing, source, and
amount of the partnership’s income,
gain, loss, deductions, and credits;
(2) The character, timing, and source
of the partnership’s activities;
(3) The character, timing, source,
value, and amount of any contributions
to, and distributions from, the
partnership;
(4) The partnership’s basis in its
assets, the character and type of the
assets, and the value (or revaluation
such as under § 1.704–1(b)(2)(iv)(f) or (s)
of this chapter) of the assets;
PO 00000
Frm 00061
Fmt 4701
Sfmt 4702
42013
(5) The amount and character of
partnership liabilities and any changes
to those liabilities from the preceding
tax year;
(6) The category, timing, and amount
of the partnership’s creditable
expenditures;
(7) Any item or amount resulting from
a partnership termination;
(8) Any item or amount relating to an
election under section 754;
(9) Partnership allocations and any
special allocations; and
(10) Whether any person is a partner
in the partnership.
(e) Examples. The following examples
illustrate the provisions of this section.
For purposes of these examples,
Partnership is subject to the provisions
of subchapter C of chapter 63 and all
taxpayers are calendar year taxpayers.
Example 1. Partnership enters into a
transaction with A to purchase widgets for
$100 in taxable year 2020. A is not a partner
of Partnership or an indirect partner of
Partnership. The transaction is not a
transaction described in 707(a)(2), 707(b), or
707(c). Partnership pays A $100 for the
widgets. Any deduction or expense of the
Partnership for the purchase of the widgets
is an item or amount that relates to a
transaction with Partnership and is relevant
to determining the liability of any person
under chapter 1 pursuant to paragraph (c) of
this section. Therefore, the deduction or
expense is a partnership-related item.
However, the income to A resulting from the
transaction with Partnership is not an item or
amount with respect to Partnership under
paragraph (b) of this section because
although the amount of income relates to a
transaction with Partnership, the amount of
income is reported or reportable by A, and
A is not a partner (direct or indirect) of
Partnership. Accordingly, the amount of
income reportable by A is not a partnershiprelated item.
Example 2. B loans Partnership $100 in
Partnership’s 2020 taxable year. Partnership
makes an interest payment to B in 2020 of
$5. B is a partner in Partnership in the 2020
taxable year, but B loaned the $100 to
Partnership in a capacity other than B’s
capacity as a partner. Partnership’s liability
relating to the loan by B to Partnership and
the $5 of interest expense paid by the
Partnership are items or amounts that relates
to a transaction with or liability of
Partnership and are relevant to determining
the liability of any person under chapter 1
pursuant to paragraph (c) of this section.
However, the treatment of the loan by B and
the amount of interest income received by B
are not items or amounts with respect to
Partnership under paragraph (b) of this
section because although they relate to a
transaction with or liability of Partnership,
the loan and interest income are reportable
by B, and B was not acting in his capacity
as a partner when he loaned the $100 to
Partnership. Accordingly, the loan as treated
by B and the amount of interest income to
B is not a partnership-related item.
E:\FR\FM\17AUP3.SGM
17AUP3
42014
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
(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 § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 31. Section 301.6241–7 is added
to read as follows:
§ 301.6241–7 Coordination with Other
Chapters of the Internal Revenue Code.
amozie on DSK3GDR082PROD with PROPOSALS3
(a) Coordination with other
chapters—(1) In general. Subchapter C
of chapter 63 of the Internal Revenue
Code (subchapter C of chapter 63) only
applies to tax imposed by chapter 1 of
the Internal Revenue Code (Code) and
not to any tax imposed (including any
amount required to be deducted or
withheld) under any chapter of the Code
other than chapter 1 of the Code
(chapter 1), including chapter 2, 2A, 3,
or 4 of the Code. Accordingly, for
purposes of determining taxes imposed
under chapters of the Code other than
chapter 1, the Internal Revenue Service
(IRS) may make an adjustment to any
partnership-related item (as defined in
§ 301.6241–6) in a proceeding that is not
under subchapter C of chapter 63. To
the extent an adjustment or
determination is made under subchapter
C of chapter 63 for purposes of chapter
1 and is relevant in determining tax
imposed under a chapter of the Code
other than chapter 1, such adjustment or
determination must be taken into
account for purposes of determining
such tax.
(2) Examples. The following examples
illustrate the rules of this paragraph (a)
as applied to cases in which a
partnership has a withholding
obligation under chapter 3 or chapter 4
with respect to income that the
partnership earns. For purposes of these
examples, each partnership is subject to
the provisions of subchapter C of
chapter 63 of the Code, and the
partnership and its partners are calendar
year taxpayers.
Example 1. Partnership, a partnership
created or organized in the United States, has
two equal partners, A and B. A is a
nonresident alien who is a resident of
Country A, and B is a U.S. citizen. In 2018,
Partnership earned $200 of U.S. source
royalty income. Partnership was required to
withhold 30 percent of the gross amount of
the royalty income allocable to A unless
Partnership had documentation that it could
rely on to establish that A was entitled to a
reduced rate of withholding. See §§ 1.1441–
1(b)(1) and 1.1441–5(b)(2)(i)(A) of this
chapter. Partnership withheld $15 from the
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
$100 of royalty income allocable to A based
on its incorrect belief that A is entitled to a
reduced rate of withholding under the U.S.Country A Income Tax Treaty. In 2020, the
IRS determines in an examination of
Partnership’s Form 1042, Annual
Withholding Tax Return for U.S. Source
Income of Foreign Persons, that Partnership
should have withheld $30 instead of $15 on
the $100 of royalty income allocable to A
because Partnership failed to obtain
documentation from A establishing a valid
treaty claim for a reduced rate of
withholding. The tax imposed on Partnership
for its failure to withhold on that income,
however, is not a tax imposed by chapter 1.
Rather, it is a tax imposed by chapter 3,
which is not a partnership-related item under
§ 301.6241–6. Therefore, in accordance with
section 6221(a), the adjustment to increase
Partnership’s withholding tax liability by $15
is not determined under subchapter C of
chapter 63, and instead must be determined
as part of the Form 1042 examination.
Example 2. Partnership, a partnership
created or organized in the United States, has
two equal partners, A and B. A is a
nonresident alien who is a resident of
Country A, and B is a U.S. citizen. In 2018,
Partnership earned $100 of U.S. source
dividend income. Partnership was required
to report the dividend income on its 2018
Form 1065, U.S. Return of Partnership
Income, and withhold 30 percent of the gross
amount of the dividend income allocable to
A unless Partnership had documentation that
it could rely on to establish that A was
entitled to a reduced rate of withholding. See
§§ 1.1441–1(b)(1) and 1.1441–5(b)(2)(i)(A) of
this chapter. In 2020, in an examination of
Partnership’s Form 1042, the IRS determines
that Partnership earned but failed to report
the $100 of U.S. source dividend income in
2018. The adjustment to increase
Partnership’s dividend income by $100 is an
adjustment to a partnership-related item. The
tax imposed on Partnership for its failure to
withhold on that income, however, is not a
tax imposed by chapter 1; rather, it is a tax
imposed by chapter 3. Pursuant to
§ 301.6221(a)-1(a), only chapter 1 tax
attributable to adjustments to partnershiprelated items is assessed under subchapter C
of chapter 63. Therefore, because the tax
imposed with respect to the adjustment is a
chapter 3 tax, under paragraph (a)(1) of this
section, the IRS may determine, assess, and
collect chapter 3 tax attributable to an
adjustment to a partnership-related item
without conducting a proceeding under
subchapter C of chapter 63. Accordingly, the
IRS may determine the chapter 3 tax in the
examination of Partnership’s Form 1042 by
adjusting Partnership’s withholding tax
liability by an additional $15 for failing to
withhold on the $50 of dividend income
allocable to A. However, the IRS must initiate
an administrative proceeding under
subchapter C of chapter 63 to make any
adjustments for purposes of chapter 1
attributable to the income. If the IRS
subsequently initiates an administrative
proceeding under subchapter C of chapter 63
and makes an adjustment to the same item
of income, the portion of the dividend
income allocable to A will be disregarded in
PO 00000
Frm 00062
Fmt 4701
Sfmt 4702
the calculation of the total netted partnership
adjustment to the extent that the chapter 3
tax has been collected with respect to such
income. See § 301.6225–1(b)(3).
(b) Coordination with chapters 3 and
4—(1) In general. In the case of any tax
imposed under chapter 3 or chapter 4
that is determined with respect to a
partnership adjustment determined
under subchapter C of chapter 63 for
purposes of chapter 1, such tax is
determined with respect to the reviewed
year (as defined in § 301.6241–1(a)(8))
and is imposed (or required to be
deducted and withheld) with respect to
the adjustment year (as defined in
§ 301.6241–1(a)(1)).
(2) Definitions. The following
definitions apply for purposes of this
paragraph (b) and the regulations under
subchapter C of chapter 63.
(i) Amount subject to withholding.
The term amount subject to withholding
means an amount subject to
withholding (as defined in § 1.1441–2(a)
of this chapter), a withholdable payment
(as defined in § 1.1473–1(a) of this
chapter), or the allocable share of
effectively connected taxable income (as
computed under § 1.1446–2(b) of this
chapter).
(ii) Chapter 3. The term chapter 3
means sections 1441 through 1464 of
subtitle A of the Code, but does not
include section 1443(b).
(iii) Chapter 4. The term chapter 4
means sections 1471 through 1474 of
subtitle A of the Code.
(3) Partnership pays an imputed
underpayment. If a partnership pays an
imputed underpayment (as determined
under § 301.6225–1(b)) and the total
netted partnership adjustment (as
calculated under § 301.6225–1(b)(2))
includes a partnership adjustment to an
amount subject to withholding, the
partnership is treated as having paid (at
the time that the imputed
underpayment is paid) the amount
required to be withheld with respect to
that partnership adjustment under
chapter 3 or chapter 4 for purposes of
applying §§ 1.1463–1 and 1.1474–4 of
this chapter. See § 301.6225–1(b)(3) for
the coordination rule that applies for
calculating an imputed underpayment
when an adjustment is made to an
amount subject to withholding for
which tax has been collected under
chapter 3 or chapter 4.
(4) Partnership makes an election
under section 6226 with respect to an
imputed underpayment—(i) In general.
A partnership that makes an election
under § 301.6226–1 with respect to an
imputed underpayment must pay the
amount of tax required to be withheld
under chapter 3 or chapter 4 on the
amount of any adjustment set forth in
E:\FR\FM\17AUP3.SGM
17AUP3
Federal Register / Vol. 83, No. 160 / Friday, August 17, 2018 / Proposed Rules
amozie on DSK3GDR082PROD with PROPOSALS3
the statement described in § 301.6226–
2(a) to the extent that it is an adjustment
to an amount subject to withholding,
and the IRS has not already collected
tax attributable to the adjustment under
chapter 3 or chapter 4. The partnership
must pay the amount due under this
paragraph (b)(4)(i) on or before the due
date of the partnership return for the
adjustment year (without regard to
extension), and must make the payment
in the manner prescribed by the IRS in
forms, instructions, and other guidance.
For the rules governing partners subject
to the taxes imposed by chapters 3 and
4 when the partner receives a statement
under § 301.6226–2, see § 301.6226–3(f).
See § 301.6226–3(e)(3)(v) for the
application of the rules of this
paragraph (b)(4) to pass-through
partners (as defined in § 301.6241–
1(a)(5)).
(ii) Reduced rate of tax. A partnership
may reduce the amount of tax it is
required to pay under paragraph (b)(4)(i)
of this section to the extent that it can
associate valid documentation from a
reviewed year partner pursuant to the
regulations under chapter 3 or chapter
4 (other than pursuant to § 1.1446–6 of
this chapter) with the portion of the
adjustment that would have been
VerDate Sep<11>2014
22:10 Aug 16, 2018
Jkt 244001
subject to a reduced rate of tax in the
reviewed year. For this purpose, the
partnership may rely on documentation
that the partnership possesses that is
valid with respect to the reviewed year
(determined without regard to the
expiration after the reviewed year of any
validity period prescribed in § 1.1441–
1(e)(4)(ii), § 1.1446–1(c)(2)(iv)(A), or
§ 1.1471–3(c)(6)(ii) of this chapter), or
new documentation that the partnership
obtains from the reviewed year partner
that includes a signed affidavit stating
that the information and representations
associated with the documentation are
accurate with respect to the reviewed
year.
(iii) Reporting requirements. A
partnership required to pay tax under
paragraph (b)(4)(i) of this section must
file the appropriate return and issue
information returns as required by
regulations under chapter 3 or chapter
4. For return and information return
requirements, see § 1.1446–3(d)(1)(iii);
§ 1.1461–1(b), (c); § 1.1474–1(c), (d) of
this chapter. The partnership must file
the return and issue information returns
for the year that includes the date on
which the partnership pays the tax
required to be withheld under
paragraph (b)(4)(i) of this section. The
PO 00000
Frm 00063
Fmt 4701
Sfmt 9990
42015
partnership must report the information
on the return and information returns in
the manner prescribed by the IRS in
forms, instructions, and other guidance.
(iv) Partners subject to withholding. A
reviewed year partner that is subject to
withholding under paragraph (b)(4)(i) of
this section must follow the rules under
§ 301.6226–3(f).
(c) Applicability date—(1) In general.
Except as provided in paragraph (c)(2)
of this section, this section applies to
partnership taxable years beginning
after December 31, 2017.
(2) Election under § 301.9100–22 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
§ 301.9100–22 is in effect.
■ Par. 32. Section 301.6241–8 is added
to read as follows:.
§ 301.6241–8 Treatment of special
enforcement matters—[Reserved]
Douglas W. O’Donnell,
Acting Deputy Commissioner for Service and
Enforcement.
[FR Doc. 2018–17614 Filed 8–13–18; 4:15 pm]
BILLING CODE 4830–01–P
E:\FR\FM\17AUP3.SGM
17AUP3
]]>Agencies
[Federal Register Volume 83, Number 160 (Friday, August 17, 2018)]
[Proposed Rules]
[Pages 41954-42015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-17614]
[[Page 41953]]
Vol. 83
Friday,
No. 160
August 17, 2018
Part IV
Department of the Treasury
-----------------------------------------------------------------------
Internal Revenue Service
-----------------------------------------------------------------------
26 CFR Parts 1 and 301
Centralized Partnership Audit Regime; Proposed Rule
Federal Register / Vol. 83 , No. 160 / Friday, August 17, 2018 /
Proposed Rules
[[Page 41954]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-136118-15, REG-119337-17; REG-118067-17; REG-120232-17 and REG-
120233-17]
RIN 1545-BO03; 1545-BO04
Centralized Partnership Audit Regime
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking; notice of public hearing;
withdrawal and partial withdrawal of notices of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations implementing the
centralized partnership audit regime. This document withdraws and
reproposes certain portions of proposed regulations implementing the
centralized partnership audit regime that have not been finalized to
reflect the changes made by the Technical Corrections Act of 2018,
contained in Title II of the Consolidated Appropriations Act of 2018
(TTCA). The proposed regulations affect partnerships with respect to
partnership taxable years beginning after December 31, 2017, as well as
partnerships that make the election under the Bipartisan Budget Act of
2015 (BBA), to apply the centralized partnership audit regime to
partnership taxable years beginning on or after November 2, 2015 and
before January 1, 2018.
DATES: Written or electronic comments must be received by October 1,
2018. Outlines of topics to be discussed at the public hearing
scheduled for October 9, 2018, at 10 a.m. must be received by October
1, 2018.
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 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
136118-15), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224, or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov (IRS REG-136118-15).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
under sections 6221, 6226, 6235, and 6241, Jennifer M. Black of the
Office of Associate Chief Counsel (Procedure and Administration), (202)
317-6834; concerning the proposed regulations under sections 6225,
6231, and 6234, Joy E. Gerdy-Zogby of the Office of Associate Chief
Counsel (Procedure and Administration), (202) 317-6834; concerning the
proposed regulations under sections 6222, 6227, 6232, and 6233, Steven
L. Karon of the Office of Associate Chief Counsel (Procedure and
Administration), (202) 217-6834; concerning the proposed regulations
under section 6225 relating to creditable foreign tax expenditures,
Larry R. Pounders, Jr. of the Office of Associate Chief Counsel
(International), (202) 317-5465; concerning the proposed regulations
relating to chapters 3 and 4 of subtitle A of the Internal Revenue Code
(other than section 1446), Subin Seth of the Office of Associate Chief
Counsel (International), (202) 317-5003; concerning the proposed
regulations relating to section 1446, Ronald M. Gootzeit of the Office
of Associate Chief Counsel (International), (202) 317-4953; concerning
the proposed regulations under sections 704 through 706 and Sec. Sec.
301.6225-4 and 301.6226-4, Allison R. Carmody or Meghan M. Howard of
the Office of Associate Chief Counsel (Passthroughs and Special
Industries), (202) 317-5279; concerning the submission of comments, the
hearing, or to be placed on the building access list to attend the
hearing, Regina Johnson, (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed regulations under sections 704
through 706 to amend the Income Tax Regulations (26 CFR part 1) under
Subpart--Partners and Partnerships and proposed regulations under
sections 6221 through 6241 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 (BBA), as amended
by the Protecting Americans from Tax Hikes Act of 2015, Public Law 114-
113 (PATH Act) and sections 201 through 207 of the TTCA, Public Law
115-141. This document also withdraws portions of proposed regulations
under sections 704 through 706 and 6221 through 6241 that were
published in the Federal Register on June 14, 2017 (REG-136118-15, 82
FR 27334), November 30, 2017(REG-119337-17, 82 FR 56765), December 19,
2017(REG-120232-17 and REG-120233-17, 82 FR 27071), and February 2,
2018 (REG-118067-17, 83 FR 4868).
Section 1101(a) of the BBA removed 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 of
the Code (subchapter C of chapter 63) contained the unified partnership
audit and litigation rules that were commonly referred to as the TEFRA
partnership procedures or simply TEFRA. Section 1101(b) of the BBA also
removed subchapter D of chapter 63 of the Code and part IV of
subchapter K of chapter 1 of the Code, rules applicable to electing
large partnerships, effective for partnership taxable years beginning
after December 31, 2017. Section 1101(c) of the BBA replaced the TEFRA
partnership procedures and the rules applicable to electing large
partnerships with a centralized partnership audit regime that, in
general, determines, assesses, and collects tax at the partnership
level.
On December 18, 2015, section 1101 of the BBA was amended by the
PATH Act. 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 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) (June 2017 NPRM) proposing rules under section 6221
regarding the scope and election out of the centralized partnership
audit regime, section 6222 regarding consistent treatment by partners,
section 6223 regarding the partnership representative, section 6225
regarding partnership adjustments made by the IRS and determination of
the amount of the partnership's liability (referred to as the imputed
underpayment), section 6226 regarding the election for partners to take
partnership adjustments into account, section 6227 regarding
administrative adjustment requests (AARs), and section 6241 regarding
definitions and special rules. The Treasury Department and the IRS
received written public comments in response to the regulations
proposed in the June 2017 NPRM, and a public hearing regarding the
proposed regulations was held on September 18, 2017.
On November 30, 2017, the Treasury Department and the IRS published
in the Federal Register (82 FR 56765) a notice of proposed rulemaking
(REG-119337-17) (November 2017 NPRM) proposing rules regarding
international provisions under the centralized partnership audit
regime, including rules relating to the withholding of tax
[[Page 41955]]
on foreign persons, the withholding of tax to enforce reporting on
certain foreign accounts, and the treatment of creditable foreign tax
expenditures of a partnership. No written comments were submitted in
response to this NPRM, and no hearing was requested or held.
On December 19, 2017, the Treasury Department and the IRS published
in the Federal Register (82 FR 27071) a notice of proposed rulemaking
(REG-120232-17 and REG-120233-17) (December 2017 NPRM) proposing
administrative and procedural rules under the centralized partnership
audit regime, including rules addressing assessment and collection,
penalties and interest, periods of limitations on making partnership
adjustments, and judicial review of partnership adjustments. The
regulations proposed in the December 2017 NPRM also provided rules
addressing how pass-through partners take into account adjustments
under the alternative to payment of the imputed underpayment described
in section 6226 and under rules similar to section 6226 when a
partnership files an AAR under section 6227. Written comments were
received in response to the December 2017 NPRM. However, no hearing was
requested or held.
On January 2, 2018, the Treasury Department and the IRS published
in the Federal Register (82 FR 28398) final regulations under section
6221(b) providing rules for electing out of the centralized partnership
audit regime.
On February 2, 2018, the Treasury Department and the IRS published
in the Federal Register (83 FR 4868) a notice of proposed rulemaking
(REG-118067-17) (February 2018 NPRM) proposing rules for adjusting tax
attributes under the centralized partnership audit regime. Written
comments were received in response to the February 2018 NPRM. However,
no hearing was requested or held.
On March 23, 2018, Congress enacted the TTCA, which made a number
of technical corrections to the rules under the centralized partnership
audit regime. The amendments under the TTCA 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 9, 2018, the Treasury Department and the IRS published in
the Federal Register (83 FR 39331) final regulations under section 6223
providing rules relating to partnership representatives and final
regulations under Sec. 301.9100-22 providing rules for electing into
the centralized partnership audit regime for taxable years beginning on
or after November 2, 2015 and before January 1, 2018. Corresponding
temporary regulations under Sec. 301.9100-22T were also withdrawn.
In light of the technical corrections made by the TTCA, to the
extent regulations have not already been finalized, this document
withdraws the regulations proposed in the June 2017 NPRM, the November
2017 NPRM, the December 2017 NPRM, and the February 2018 NPRM
(collectively, the prior NPRMs) and proposes regulations reflecting the
technical corrections made by the TTCA. The regulations proposed in
this document also include clarifications, unrelated to the TTCA as
discussed in the Explanation of Provisions section of this preamble. In
addition, certain regulations have been reordered and renumbered,
typographical errors have been corrected, nonsubstantive editorial
changes have been made, and the applicability date provisions in the
regulations have been revised to replace references to Sec. 301.9100-
22T with references to Sec. 301.9100-22. Finally, the assumed highest
rate of tax for corporations in the examples for all applicable periods
is now 20 percent to more closely reflect the corporate tax rate in
effect under section 11 (as amended by section 13001 of ``[a]n Act to
provide for the reconciliation pursuant to titles II and V of the
concurrent resolution on the budget for fiscal year 2018,'' Public Law
115-97 (the ``Act'')).
Although this document withdraws the prior NPRMs, the Explanation
of Provisions sections contained in the preambles of the withdrawn
NPRMs remain relevant. Therefore, to the extent not inconsistent with
the Explanation of Provisions section of this preamble or the preamble
to the portions of the proposed regulations that have already been
finalized, those Explanation of Provision sections are incorporated by
reference in this document. Federal Register citations are provided to
assist with locating the relevant section of the preamble in the prior
NPRMs. The prior NPRMs are also included in the rulemaking docket for
this notice of proposed rulemaking on www.regulations.gov.
This document does not address written comments that were submitted
in response to the regulations proposed in the prior NPRMs or respond
to any statements made during the public hearing held on September 18,
2017. Except to the extent that the written comments relate to the
final regulations under section 6221(b) and section 6223, such comments
and any comments received in response to this notice of proposed
rulemaking will be addressed when the regulations proposed in this
document are finalized.
Explanation of Provisions
1. Scope of the Centralized Partnership Audit Regime and Partnership-
Related Item
Section 6221(a) provides for the determination of certain
adjustments at the partnership level under the centralized partnership
audit regime. Prior to amendment by the TTCA, section 6221(a) provided
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, any tax
attributable thereto shall be assessed and collected, and the
applicability of any penalty, addition to tax, or additional amount
which relates to an adjustment to any such item or share shall be
determined at the partnership level. Prior to amendment by the TTCA,
section 6241(a)(2) provided that the term ``partnership adjustment''
meant 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 201(c)(2) of the TTCA amended section 6221(a) by replacing
the phrase ``items of income, gain, loss, deduction, or credit of a
partnership for a partnership taxable year (and any partner's
distributive share thereof)'' with the phrase ``a partnership-related
item.'' Section 6221(a) now provides that any adjustment to a
partnership-related item and the applicability of any penalty, addition
to tax, or additional amount which relates to an adjustment to any
partnership-related item shall be determined at the partnership level.
Additionally, section 6221(a) provides that any tax attributable to an
adjustment to a partnership-related item shall be assessed and
collected at the partnership level.
Section 201(a) of the TTCA amended section 6241(2) to provide that
the term ``partnership adjustment'' means any adjustment to a
partnership-related item, and the term ``partnership-related item''
means any item or amount with respect to the partnership (without
regard to whether or not such item or amount appears on the
partnership's return and including an imputed underpayment and any item
or amount relating to any transaction with, basis in, or liability of,
the partnership) which is relevant (determined without regard to
subchapter C of chapter 63) in determining the tax liability of any
person under chapter 1 of the Code
[[Page 41956]]
(chapter 1) and any partner's distributive share thereof.
By eliminating the reference to items of income, gain, loss,
deduction, or credit of a partnership, and instead referring to
partnership-related items, which is broadly defined, the amendments by
the TTCA clarify that the scope of the centralized partnership audit
regime is not narrower than the scope of the partnership audit
procedures under TEFRA. Joint Comm. on Taxation, JCX-6-18, Technical
Explanation of the Revenue Provisions of the House Amendment to the
Senate Amendment to H.R. 1625 (Rules Committee Print 115-66), 37 (2018)
(JCX-6-18). Rather, the centralized partnership audit regime is
intended to have a scope sufficient to address those items that would
have been considered partnership items, affected items, and
computational adjustments under TEFRA, including the regulations. Id.
A. Proposed Sec. 301.6221(a)-1
Proposed rules under Sec. 301.6221(a)-1 were previously published
in the Federal Register (82 FR 27372-73) in the June 2017 NPRM and the
November NPRM (82 FR 56776) (former proposed Sec. 301.6221(a)-1).
Former proposed Sec. 301.6221(a)-1(a) provided 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. Former proposed Sec.
301.6221(a)-1(b)(1)(i) defined the phrase ``items of income, gain,
loss, deduction or credit'' to mean 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 IRS for the partnership's taxable year, and any
information in the partnership's books and records for the taxable
year. In addition, former proposed Sec. 301.6221(a)-1(b)(1)(ii)
provided that any factors that needed to be taken into account to
determine or allocate the tax treatment of items adjusted under the
centralized partnership audit regime were also to be determined at the
partnership level. Former proposed Sec. 301.6221(a)-1(b)(2) also
addressed items included within the phrase ``partner's distributive
share.'' Because the TTCA's amendment of the scope of the centralized
partnership audit regime is accomplished by adding a new defined term--
``partnership-related item''--the majority of the rules under former
proposed Sec. 301.6221(a)-1(b) that addressed the scope of what is
adjusted at the partnership level are now incorporated into proposed
Sec. 301.6241-6 which defines the term ``partnership-related item.''
Proposed Sec. 301.6221(a)-1(a) now provides the general rule that,
except as otherwise provided under the centralized partnership audit
regime, any adjustments to partnership-related items and the
applicability of any penalty, addition to tax, or additional amount
that relates to an adjustment to any such items are determined at the
partnership level. In addition, proposed Sec. 301.6221(a)-1(a)
provides that any chapter 1 tax attributable to an adjustment to a
partnership-related item is assessed and collected at the partnership
level. See section 13 of the preamble for a discussion of special
enforcement matters pertaining to partnership-related items that may be
adjusted outside of the centralized partnership audit regime.
Proposed Sec. 301.6221(a)-1(a) further provides that any
consideration necessary to make a determination at the partnership
level under the centralized partnership audit regime is made at the
partnership level. This would include the period of limitations on
making adjustments under section 6235 as well as any facts necessary to
calculate any imputed underpayment under section 6225, except as
otherwise provided under the centralized partnership audit regime.
These determinations previously constituted factors described under
former proposed Sec. 301.6221(a)-1(b)(1)(ii)(F) and (I).
B. Proposed Sec. 301.6241-6
Proposed Sec. 301.6241-6 defines the term ``partnership-related
item.'' Proposed Sec. 301.6241-6(a) provides the general rule that a
partnership-related item is any item or amount with respect to the
partnership which is relevant in determining the tax liability of any
person under chapter 1 and any partner's distributive share of any such
item or amount.
Proposed Sec. 301.6241-6(b) provides that an item or amount is
with respect to a partnership without regard to whether or not such
item or amount appears on the partnership return. An item or amount is
with respect to a partnership if: The item or amount is shown or
reflected, or required to be shown, or reflected, on a return of the
partnership; the item or amount is in the partnership's books and
records; the item or amount is an imputed underpayment; the item or
amount relates to any transaction with, basis in, or liability of the
partnership; or the item or amount relates to a transaction under
section 707(a)(2), 707(b), or 707(c).
Under proposed Sec. 301.6241-6(b)(4) and (7), an item or amount
that relates to any transaction with, or liability of, the partnership,
is with respect to a partnership only if the item or amount relates to
a transaction or liability between the partnership and a partner acting
in its capacity as a partner or an indirect partner (as defined in
proposed Sec. 301.6241-1(a)(4)) acting in its capacity as an indirect
partner. Accordingly, an item or amount that relates to any transaction
with or liability of the partnership is not with respect to the
partnership if the item or amount is reported (or reportable) solely by
a person other than the partnership, a partner not acting in its
capacity as a partner, or an indirect partner not acting in its
capacity as an indirect partner (except for transactions under section
707). Proposed Sec. 301.6241-6(b)(8) provides that any determination
necessary to make an adjustment to an item or amount described in
proposed Sec. 301.6241-6(b)(1) through (b)(7) is also an item or
amount with respect to the partnership.
Proposed Sec. 301.6241-6(c) provides that the determination of
whether an item or amount is relevant in determining the tax liability
of any person under chapter 1 is made without regard to the provisions
of the centralized partnership audit regime. Proposed Sec. 301.6241-
6(c) also clarifies that an item or amount of a partnership is relevant
in determining the liability of any person under chapter 1 without
regard to whether such item or amount, or adjustment to such item or
amount, has an effect on the tax liability of any particular person
under chapter 1. Section 6241(2)(B)(i) does not limit whether an item
is relevant in determining tax liability under chapter 1 to whether the
item is relevant to determining the tax liability of a partner of the
partnership under chapter 1. Rather, the statutory language refers to
liability under chapter 1 of ``any person.'' An item or amount is a
partnership-related item if the item or amount is relevant in
determining any person's liability under chapter 1 if the item might
have any effect on any person's liability under chapter 1 regardless of
whether it actually does have such an effect. Consequently, the IRS is
not required to determine if an adjustment would have an actual effect
on any person's chapter 1 liability under the Code.
Proposed Sec. 301.6241-6(d) provides a list of examples of
partnership-related items. These examples are largely the same as the
items described in former proposed Sec. 301.6221(a)-1(b)(1) with a few
minor revisions. First, the
[[Page 41957]]
references to ``foreign,'' ``tax,'' and ``Sec. 1.704-
1(b)(4)(viii)(b)'' in the example regarding creditable expenditures
were removed to clarify that partnership-related item includes any
creditable expenditures, not just a creditable foreign tax expenditure.
Also, the ``including . . .'' phrase from each example was removed to
be consistent with the broad scope of the centralized partnership audit
regime and does not reflect a substantive change. No inference should
be drawn from the removal of that language.
Proposed Sec. 301.6241-6(e) provides examples that illustrate the
rules under proposed Sec. 301.6241-6.
2. Partner's Return Must Be Consistent With Partnership Return
Prior to enactment of the TTCA, section 6222 provided that a
partner shall 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. Section
201(c) of the TTCA amended section 6222 to provide that a partner shall
treat on the partner's return ``any partnership-related item'' in a
manner which is consistent with the treatment of such item on the
partnership return.
A. Proposed Sec. 301.6222-1
Proposed rules under Sec. 301.6222-1 were previously published in
the Federal Register (82 FR 27375-78) in the June 2017 NPRM (former
proposed Sec. 301.6222-1). For an explanation of the rules under
former proposed 301.6222-1, see 82 FR 27345-46.
Former proposed Sec. 301.6222-1(a) provided 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. The
reference in former proposed Sec. 301.6222-1(a) to ``each item of
income, gain, loss, deduction, or credit attributable to a
partnership'' has been replaced with a reference to ``any partnership-
related item'' to reflect the statutory change to section 6222(a). In
addition, references throughout former proposed Sec. 301.6222-1 to the
term ``item'' have been replaced with references to the term
``partnership-related item,'' as appropriate.
3. Imputed Underpayment, Modification of Imputed Underpayment, and
Adjustments That Do Not Result in an Imputed Underpayment
Section 6225 provides rules governing the determination of the
imputed underpayment, modification of the imputed underpayment, and the
treatment of adjustments that do not result in an imputed underpayment.
Section 202(c) of the TTCA amended section 6225(a) to reflect the new
term ``partnership-related item'' and to provide that in the case of
adjustments to partnership-related items that result in an imputed
underpayment the partnership shall pay an amount equal to the imputed
underpayment in the adjustment year as provided in section 6232. In the
case of adjustments that do not result in an imputed underpayment, such
adjustments shall be taken into account by the partnership in the
adjustment year.
Section 202(a) of the TTCA amended section 6225(b)(1) to provide
that the Secretary shall determine any imputed underpayment with
respect to any reviewed year by appropriately netting all partnership
adjustments to such reviewed year and applying the highest rate of tax
in effect for that year under section 1 or 11. Section 202(a) of the
TTCA also amended section 6225(b)(2) to provide that in the case of any
adjustment that reallocates the distributive share of any item from one
partner to another, such adjustment shall be taken into account by
disregarding so much of such adjustment as results in a decrease in the
amount of the imputed underpayment.
Section 202(a) of the TTCA also added paragraphs (b)(3) and (b)(4)
to section 6225. Section 6225(b)(3) provides that partnership
adjustments for any reviewed year shall first be separately determined
(and netted as appropriate) within each category of items that are
required to be taken into account separately under section 702(a) or
other provision of the Code. Section 6225(b)(4) provides if any
adjustment would (but for section 6225(b)(4)) result in a decrease in
the amount of the imputed underpayment, and could be subject to any
additional limitation under the provisions of the Code (or not allowed,
in whole or in part, against ordinary income) if such adjustment were
taken into account by any person, such adjustment shall not be taken
into account when appropriately netting partnership adjustments under
section 6225(b)(1)(A) except to the extent otherwise provided by the
Secretary.
Section 202(b) of the TTCA amended several provisions relating to
modifications of imputed underpayments. Sections 6225(c)(3), (c)(4)(A),
and (c)(5)(A)(i), which previously referred to the ``portion of the
imputed underpayment,'' were amended to refer to the ``portion of the
adjustment.'' This amendment clarifies that modifications under
sections 6225(c)(3), (c)(4), and (c)(5) result in disregarding the
portion of the partnership adjustment affected by the modification,
rather than the portion of the imputed underpayment. Section 202(c) of
the TTCA also added section 6225(c)(9), which provides that the
Secretary shall establish procedures under which the adjustments
described in section 6225(a)(2)--adjustments that do not result in an
imputed underpayment--may be modified in such manner as the Secretary
determines appropriate.
Section 203 of the TTCA amended section 6225(c)(2) relating to the
procedures for partners to take adjustments into account during
modification. Section 6225(c)(2)(A) governs the filing of amended
returns by partners. Section 6225(c)(2)(B) provides for an alternative
procedure to the filing of amended returns. Section 6225(c)(2)(C)
provides rules for adjustments that reallocate the distributive share
of any item from one partner to another. Section 6225(c)(2)(D) provides
that sections 6501 and 6511 shall not apply in certain situations
related to amended returns and the alternative procedure to filing
amended returns. Section 6225(c)(2)(E) provides that any adjustments to
tax attributes that occur as a result of a modification under section
6225(c)(2) are binding on the partners and the partnership. Section
6225(c)(2)(F) provides rules for tiered structures, including defining
the term ``relevant partner'' to mean any partner in the chain of
ownership of any partnerships that are partners in the partnership
requesting modification.
A. Proposed Sec. Sec. 301.6225-1, 301.6225-2, and 301.6225-3
Proposed rules under Sec. Sec. 301.6225-1, 301.6225-2, and
301.6225-3 were previously published in the Federal Register in the
June 2017 NPRM (82 FR 27382-91), the November 2017 NPRM (82 FR 56776),
and in the December 2017 NPRM (82 FR 60154) (collectively, former
proposed Sec. Sec. 301.6225-1, 301.6225-2, and 301.6225-3). For an
explanation of the rules under former proposed Sec. Sec. 301.6225-1,
301.6225-2, and 301.6225-3, see 82 FR 27350-58, 82 FR 56766-75, and 82
FR 60152-53.
[[Page 41958]]
Proposed Sec. 301.6225-1 has been reorganized to clarify the
process for determining an imputed underpayment. This reorganization,
when compared to former proposed Sec. 301.6225-1 (1) more clearly
describes the steps necessary to determine an imputed underpayment and
adjustments that do not result in an imputed underpayment; (2)
consolidates rules regarding adjustments that do not result in an
imputed underpayment; and (3) relocates rules regarding creditable
expenditures to more clearly explain how to account for creditable
expenditures in the determination of the imputed underpayment.
Proposed Sec. 301.6225-1(b) addresses the calculation of the
imputed underpayment. Due to the number of adjustments that could be
made based on the definition of partnership-related item, the IRS will
need to address circumstances in which multiple partnership-related
items are adjusted to address a single issue or transaction in the
administrative proceeding. Adjusting multiple partnership-related items
that relate to the same issue or transaction could result in an imputed
underpayment that double-counts some of the adjustments even though, if
the partnership and partners had properly reported the item, one or
more adjustments would have been subsumed by another item. To prevent
double-counting the individual adjustments as inputs into the imputed
underpayment, proposed Sec. 301.6225-1(b)(4) provides that the IRS may
treat adjustments that would otherwise be double-counted as zero for
purposes of determining the imputed underpayment.
Proposed Sec. 301.6225-1(c) describes the different groupings in
which adjustments are placed for purposes of determining an imputed
underpayment. These groupings are the reallocation grouping, the credit
grouping, the creditable expenditure grouping, and the residual
grouping. Proposed Sec. 301.6225-1(c)(1) provides authority for the
IRS to alter the manner in which adjustments are grouped to
appropriately reflect the facts and circumstances.
Proposed Sec. 301.6225-1(c)(2) defines the term ``reallocation
adjustment'' and provides that in general reallocation adjustments are
placed in the reallocation grouping. Under proposed Sec. 301.6225-
1(c)(3), however, reallocation adjustments to credits are placed in the
credit grouping, and under Sec. 301.6225-1(c)(4), reallocation
adjustments to creditable expenditures are placed in the creditable
expenditure grouping, similar to the rule under former proposed Sec.
301.6225-1(d)(2)(iv). Proposed Sec. 301.6225-1(c)(2)(ii) provides that
each reallocation adjustment results in two separate adjustments--one
positive adjustment and one negative adjustment. Proposed Sec.
301.6225-1(c)(6) provides similar rules for recharacterization
adjustments.
Proposed Sec. 301.6225-1(c)(5)(ii) provides rules for how to
account for adjustments to partnership-related items that are not
allocated by the partnership to its partners under section 704(b).
Proposed Sec. 301.6225-1(d)(2)(iii)(B) provides that adjustments to
such items, solely for purposes of determining an imputed underpayment,
are treated as a positive adjustment to income to the extent
appropriate. The Treasury Department and the IRS request comments
regarding how to treat recharacterization and reallocation adjustments
related to items that are not allocated under section 704(b).
To incorporate the additions of sections 6225(b)(3) and (b)(4),
proposed Sec. 301.6225-1(d)(1) provides that when the IRS determines a
negative adjustment (as defined in proposed Sec. 301.6225-
1(d)(2)(ii)), all partnership adjustments are placed into subgroupings
based on whether the adjusted items are required to be taken into
account separately under section 702 and other provisions of the Code.
Proposed Sec. 301.6225-1(d)(1) provides authority for the IRS to alter
the manner in which adjustments are subgrouped to appropriately reflect
the facts and circumstances.
Proposed Sec. 301.6225-1(d)(2) provides for the treatment of
certain partnership adjustments and defines the terms negative
adjustment and positive adjustment. A negative adjustment is defined as
an adjustment that is a decrease in an item of income, treated as a
decrease in an item of income, or that is an increase in an item of
credit. A positive adjustment is an adjustment that is not a negative
adjustment. Proposed Sec. 301.6225-1(d)(3) requires that positive and
negative adjustments resulting from reallocation adjustments and
recharacterization adjustments be placed into separate subgroupings.
Proposed Sec. 301.6225-1(e) provides rules for appropriately
netting adjustments within each grouping or subgrouping and provides
that adjustments are not netted between groupings or subgroupings. The
statutory changes referencing section 702(a) and other provisions of
the Code and the general inability to net negative adjustments result
in restrictions on netting in these proposed rules that are broader
than the restrictions described in former proposed Sec. 301.6225-1.
The examples in the proposed rules have been revised to reflect these
broader restrictions on netting.
Proposed Sec. 301.6225-1(f) provides rules related to determining
whether adjustments are adjustments that do not result in an imputed
underpayment. If the adjustments do not result in an imputed
underpayment, such adjustments are taken into account in accordance
with Sec. 301.6225-3.
Proposed Sec. 301.6225-1(g) provides the IRS may create multiple
imputed underpayments for a particular tax year. Proposed Sec.
301.6225-1(g)(2)(iii)(B) allows a particular adjustment that does not
result in an imputed underpayment to be associated with a particular
imputed underpayment. This rule ensures that adjustments that are
appropriately associated with the imputed underpayment will be taken
into account along with the other adjustments underlying the imputed
underpayment if an election under section 6226 is made with respect to
that imputed underpayment. For example, a reallocation or
recharacterization adjustment generally results in more than one
adjustment. In the case of a reallocation adjustment, there are
adjustments that affect at least two partners. In a recharacterization
adjustment, there is an adjustment to correct the characterization and
an adjustment disallowing the incorrect characterization. As a result,
if an adjustment that does not result in an imputed underpayment is due
to a reallocation or recharacterization adjustment and one side of the
adjustment is used to calculate a specific imputed underpayment, the
other side of the adjustment, which is an adjustment that does not
result in an imputed underpayment, is associated with that specific
imputed underpayment.
The IRS may also determine that other adjustments that do not
result in an imputed underpayment should be associated with a specific
imputed underpayment. An adjustment that does not result in an imputed
underpayment and that is not associated with a particular specific
imputed underpayment is associated with the general imputed
underpayment.
Proposed Sec. 301.6225-2 provides guidance on procedures to modify
the imputed underpayment. Former Sec. 301.6225-2(b) provided that the
effect of modification was determined by considering how the
modification changed the relevant portion of the adjustment. This
approach to modification is consistent with the amendments to section
6225(c). Accordingly, proposed Sec. 301.6225-2(b)
[[Page 41959]]
reflects the rule that modification affects the portion of an
adjustment.
Proposed Sec. 301.6225-2(b)(3)(iv) provides rules on rate
modification in the case of special allocations. Those rules generally
mirror the statutory rule under section 6225(c)(4)(B)(ii). The rule in
the statute is complex compared with other rate modifications in that
they require a valuation analysis. The Treasury Department and the IRS
request comments on ways to implement these rules efficiently.
Proposed Sec. 301.6225-2(d)(2) provides rules regarding amended
returns and the alternative procedure to filing amended returns.
Proposed Sec. 301.6225-2(d)(2) provides that a partnership may satisfy
the requirements of amended return modification by submitting all the
information required for amended return modification and the partners
paying any amount that would be due if the partners had filed amended
returns. The Treasury Department and the IRS request comments on how
best to implement the alternative procedure to filing amended returns.
Former proposed Sec. 301.6225-2(d)(2)(viii) provided that partners
could raise a reasonable cause defense under section 6664(c) (or other
partner-level defense as described in former proposed Sec. 301.6226-
3(i)(3)) with an amended return in modification. Proposed Sec.
301.6225-(d)(2)(viii) now provides that such partner-level defenses
should be raised through a claim for refund that is submitted outside
of the modification process. This rule is similar to the current rule
regarding partner-level defenses related to adjustments that are taken
into account by partners under section 6226. See proposed Sec.
301.6226-3(d)(3).
Section 6225(c)(6) grants the Secretary authority to ``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 and appropriate to carry out the
purposes of this section.'' The Treasury Department and the IRS have
elected to use this authority in two circumstances that were not
included in former proposed Sec. 301.6225-2. First, the Treasury
Department and the IRS have concluded that the references to the
adjustment year in section 6225(c)(5) make the implementation of
section 6225(c)(5) unworkable. No partner would qualify as a specified
partner until the adjustment year, but at any time during the
administrative proceeding that is relevant to modification, the
adjustment year does not yet exist. As a result, the only time this
type of modification could be used would be in the case of an AAR
because in that case, the adjustment year is the year in which the AAR
is filed. In order for modification under section 6225(c)(5) to be
administrable, proposed Sec. 301.6225-2(d)(5)(iv) provides that a
``qualified relevant partner'' is a person that meets the definition of
a specified partner but in a year that can be determined at the time
modification is requested. The definition of a specified passive
activity loss has also been changed to clarify that the years at issue
do not have to be the adjustment year.
Second, the Treasury Department and the IRS are also exercising the
authority under section 6225(c)(6) to add a modification for
partnerships with partners entitled to benefits under an income tax
treaty. Proposed Sec. 301.6225-2(d)(9) allows modification if a
relevant partner would have qualified for a reduction or exemption from
tax with respect to a particular item under an income tax treaty with
the United States. The Treasury Department and the IRS request comments
on this type of modification.
Proposed Sec. 301.6225-2(e) provides rules for modification of
certain types of adjustments that do not result in an imputed
underpayment (as defined in proposed Sec. 301.6225-1(f)). Proposed
Sec. 301.6225-2(e) limits the ability to modify such adjustments to
certain types of modification. The Treasury Department and the IRS
request comments on whether the list of allowed modifications under
proposed Sec. 301.6225-2(e) is sufficient.
Lastly, proposed Sec. 301.6225-2 adopts the term ``relevant
partner'' to describe any direct or indirect partner in the partnership
seeking modification. See section 6225(c)(2)(F) and proposed Sec.
301.6225-2(a).
Proposed Sec. 301.6225-3 provides rules regarding adjustments that
do not result in in an imputed underpayment. The changes in the TTCA
comport with former proposed Sec. 301.6225-3, which required that the
partnership take the adjustments that do not result in an imputed
underpayment into account as separately stated or non-separately stated
adjustments as appropriate.
B. Proposed Sec. 301.6225-4
Proposed rules under Sec. 301.6225-4 were previously published in
the Federal Register (83 FR 4868-82) in the February 2018 NPRM (former
proposed Sec. 301.6225-4). For an explanation of the rules under
former proposed Sec. 301.6225-4, see 82 FR 4877.
Proposed Sec. 301.6225-4 sets forth rules under which a
partnership and its partners must adjust specified tax attributes to
take into account partnership adjustments and the partnership's payment
of an imputed underpayment. Changes have been made throughout former
proposed Sec. 301.6225-4 to conform to the changes to the definition
of ``tax attribute'' under proposed Sec. 301.6241-1(a)(10). See
section 11.A of this preamble regarding the change to the definition of
``tax attribute.'' In addition, the definition of ``specified tax
attributes'' in proposed Sec. 301.6225-4(a)(2) now includes earnings
and profits under section 312 in response to comments received
concerning the effect of partnership adjustments on a corporate
partner's earnings and profits.
4. 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 an imputed
underpayment. Under section 6226, the partnership may elect to have its
reviewed year partners take into account adjustments made by the IRS
and pay any tax due as a result of those adjustments. If this election
is made, the reviewed year partners must pay any chapter 1 tax
resulting from taking into account the adjustments, and the partnership
is not required to pay the imputed underpayment.
Section 206(d) of TTCA amended section 6226(a) to clarify that if a
partnership makes a valid election under section 6226 with respect to
an imputed underpayment, no assessment of such imputed underpayment,
levy, or proceeding in any court for the collection of such imputed
underpayment shall be made against such partnership.
Section 206(e) of the TTCA amended section 6226(b)(1) to provide
that when a partner takes into account the adjustments, the partner's
chapter 1 tax is adjusted by the aggregate of the ``correction
amounts'' determined under section 6226(b)(2). After amendment by the
TTCA, the correction amounts under section 6226(b)(2) are defined as
the amounts by which the partner's chapter 1 tax would increase ``or
decrease'' for the partner's first affected year if the partner's share
of the adjustments were taken into account for that year. The
correction amounts are also the amount by which the partner's chapter 1
tax would increase ``or decrease'' by reason of the adjustment to tax
attributes for any intervening years. See section 6226(b)(2).
Section 204(a) of the TTCA added to the Code section 6226(b)(4),
which provides that a partnership or S corporation that receives a
statement under section 6226(a)(2) must file a
[[Page 41960]]
partnership adjustment tracking report with the IRS and furnish
statements under rules similar to the rules of section 6226(a)(2). If
the partnership or S corporation fails to furnish such statements, the
partnership or S corporation must compute and pay an imputed
underpayment under rules similar to the rules of section 6225. A
partnership that is a partner must file the partnership adjustment
tracking report, and furnish statements or pay an imputed underpayment,
notwithstanding any election out of the centralized partnership audit
regime under section 6221(b) by the partnership for the tax year that
includes the end of the reviewed year of the audited partnership. The
term ``audited partnership'' means the partnership in the chain of
ownership that originally made the election under section 6226. See
section 6226(b)(4)(D).
A. Proposed Sec. Sec. 301.6226-1, 301.6226-2, and 301.6226-3
Proposed rules under Sec. Sec. 301.6226-1, 301.6226-2, and
301.6226-3 were previously published in the Federal Register in the
June 2017 NPRM (82 FR 27391-97), the November 2017 NPRM (82 FR 56778-
79), and the December 2017 NPRM (82 FR 60155-61) (collectively, former
proposed Sec. Sec. 301.6226-1, 301.6226-2, and 301.6226-3). For an
explanation of the rules under former proposed Sec. Sec. 301.6226-1,
301.6226-2, and 301.6226-3, see 82 FR 27358-66, 82 FR 56769-71, and 82
FR 60148-51.
Former proposed Sec. 301.6226-1(b)(2) provided that if a
partnership makes a valid election in accordance with proposed Sec.
301.6226-1, the partnership is not liable for the imputed underpayment
to which the election relates. To reflect the statutory change to
section 6226(a), language has been added to proposed Sec. 301.6226-
1(b)(2) to clarify that if a partnership makes a valid election under
section 6226 with respect to an imputed underpayment, the IRS may not
assess such imputed underpayment, levy, or bring a proceeding in any
court for the collection of that imputed underpayment against such
partnership. A similar change has also been made to proposed Sec.
301.6226-1(c)(2) (regarding invalid elections) to clarify that if a
final determination is made that a purported election under section
6226 is invalid, the IRS may assess the imputed underpayment with
respect to which the election was made against the partnership without
regard to the limitations under section 6232(b).
Former proposed Sec. 301.6226-3 provided that a reviewed year
partner that is furnished a statement under section 6226(a)(2) is
required to pay any additional chapter 1 tax (additional reporting year
tax) that results from taking into account the partnership adjustments
on that statement. As mentioned above in this section of the preamble,
section 206(e) of the TTCA amended section 6226(b) to provide that
decreases, as well as increases, in chapter 1 tax that result from
taking into account partnership adjustments are used in computing a
partner's additional reporting year tax. Section 206(e) of the TTCA
also replaced the term ``adjustment amount'' with ``correction
amount.'' Accordingly, proposed Sec. 301.6226-3 now refers to
``correction amount'' instead of ``adjustment amount,'' as appropriate,
and now provides that a reviewed year partner's chapter 1 tax for the
reporting year may be increased or decreased by the additional
reporting year tax. The additional reporting year tax is the sum of the
correction amounts for the first affected year and any correction
amounts for the intervening years. Under proposed Sec. 301.6226-
3(b)(2) and (3), the correction amounts are the amounts by which the
partner's chapter 1 tax for the taxable year would be increased or
decreased if the partner's taxable income for that year were recomputed
by taking into account, in the case of the first affected year, the
partner's share of the partnership adjustments reflected on the
statement furnished to the partner or, in the case of any intervening
year, any change to tax attributes of the partner resulting from the
changes in the first affected year. A correction amount for the first
affected year or any intervening year may be less than zero and may be
used to offset any correction amounts from any other year in computing
the additional reporting year tax. The examples under proposed Sec.
301.6226-3(h) illustrate situations in which a correction amount may be
less than zero.
Furthermore, the additional reporting year tax may be less than
zero and may offset other taxes owed by the partner on the partner's
reporting year return. Accordingly, any references to the additional
reporting year tax as a ``liability'' have been removed from former
proposed Sec. 301.6226-3 to account for situations in which the
additional reporting year tax is less than zero.
Section 6226(c)(2) provides that interest in the case of a section
6226 election is determined at the partner level, from the due date of
the return for the taxable year to which the increase in chapter 1 tax
is attributable, and at the underpayment rate under section 6621(a)(2)
(substituting 5 percent for 3 percent). As discussed above in this
section of the preamble, the TTCA amended section 6226(b) to provide
that both increases and decreases in chapter 1 tax are used in
computing a partner's additional reporting year tax. However, the TTCA
did not similarly amend the reference to ``increases'' in section
6226(c)(2) with the result that interest only applies to the increases
in the chapter 1 tax that would have resulted from taking into account
the partnership adjustments under section 6226. No provision under the
centralized partnership audit regime provides for interest in the case
of a decrease in chapter 1 tax that would have resulted in the first
affected year or any intervening year if the adjustments were taken
into account in those years. Accordingly, proposed Sec. 301.6226-
3(c)(1) provides that interest on the correction amounts determined
under proposed Sec. 301.6226-3(b) is only calculated for taxable years
for which there is a correction amount greater than zero, that is,
taxable years for which there would have been an increase in chapter 1
tax if the adjustments were taken into account.
Proposed Sec. 301.6226-3(c)(1) further provides that for purposes
of calculating interest on the correction amounts, any correction
amount that is less than zero does not offset any correction amount
that is greater than zero. Although those amounts may offset when
determining the additional reporting year tax (as described in proposed
Sec. 301.6226-3(b)), allowing the same offset for purposes of
calculating interest is inconsistent with section 6226(c)(2), which
provides that interest is determined with respect to any increase
determined under section 6226(b)(2).
Proposed Sec. 301.6226-3(d)(3) has also been clarified to provide
that if a partner wants to raise a partner-level defense to any
penalty, addition to tax, or additional amount, a partner must first
pay the penalty, addition to tax, or additional amount and file a claim
for refund for the reporting year in order to raise the defense.
As discussed above in this section of the preamble, section 204(a)
of the TTCA amended section 6226(b) to provide that partnerships and S
corporations that are direct or indirect partners in an audited
partnership and that receive statements under 6226(a)(2) must file
partnership adjustment tracking reports with the IRS and furnish
statements to their owners under rules similar to section 6226. If no
statements are furnished, the partnership or S corporation must
[[Page 41961]]
compute and pay an imputed underpayment.
Former proposed Sec. 301.6226-3(e)(1) provided that a pass-through
partner (as defined in proposed Sec. 301.6241-1(a)(5)) that was
furnished a statement described in proposed Sec. 301.6226-2 (including
a statement as described in former proposed Sec. 301.6226-3(e)(3))
must take into account the adjustments reflected on that statement by
either furnishing statements to its partners or by paying an amount
calculated like an imputed underpayment. Any statements furnished under
those provisions were treated as statements described in proposed Sec.
301.6226-2, and any pass-through partner receiving a statement under
former proposed Sec. 301.6226-3(e)(3) was required to also take the
adjustments reflected on the statement into account by furnishing
statements to its own partners or paying an amount calculated like an
imputed underpayment. See former proposed Sec. 301.6226-3(e)(3)(i) and
(iv).
Although the rules under former proposed Sec. 301.6226-3(e) were
largely consistent with the rules under section 6226(b)(4), some
changes were needed to conform the two sets of rules. First, proposed
Sec. 301.6226-3(a)(1) now provides that the rules under proposed Sec.
301.6226-3(a)(1) apply to a reviewed year partner except to the extent
otherwise provided in proposed Sec. 301.6226-3. Second, proposed Sec.
301.6226-3(e) now includes a requirement that the pass-through partner
must file a partnership adjustment tracking report. Third, proposed
Sec. 301.6226-3(e) provides a default rule that a pass-through partner
must furnish statements to its own partners in accordance with proposed
Sec. 301.6226-3(e)(3). If a pass-through partner fails to furnish
statements in accordance with proposed Sec. 301.6226-3(e)(3), the
pass-through partner must compute and pay an imputed underpayment.
Additionally, language referring to a pass-through partner ``taking
into account'' the adjustments under former proposed Sec. 301.6226-
3(e) was removed to more closely align with the statutory language in
section 6226(b)(4). Fourth, proposed Sec. 301.6226-3(e) defines and
refers to the term ``audited partnership,'' which proposed Sec.
301.6226-3(e)(1) defines as the partnership that made the election
under Sec. 301.6226-1. See section 6226(b)(4)(D). Lastly, proposed
Sec. 301.6226-3(e)(4) provides that the amount a pass-through partner
must compute and pay, if it does not furnish statements to its
partners, is an ``imputed underpayment.'' See section
6226(b)(4)(A)(ii)(II).
Because under proposed Sec. 301.6226-3(e), pass-through partners
compute and pay an ``imputed underpayment,'' rather than calculating
correction amounts under proposed Sec. 301.6226-3(b), references in
former proposed Sec. 301.6226-3(b) to amended returns filed by
indirect partners as part of modification have been deleted. Pass-
through partners computing an imputed underpayment under proposed Sec.
301.6226-3(e) may account for modifications submitted by their indirect
partners, but non-pass-through partners calculating correction amounts
under proposed Sec. 301.6226-3(b) cannot. Accordingly, the references
in former proposed Sec. 301.6226-3(b) to amended returns filed by
indirect partners were removed.
To reflect the change to the definition of ``tax attribute'' under
proposed Sec. 301.6241-1(a)(10) (see section 11.A. of this preamble),
proposed Sec. Sec. 301.6226-2 and 301.6226-3 now only refer to the tax
attributes of the partner. For example, proposed Sec. Sec. 301.6226-
2(e) and 301.6226-3(e)(3)(iii) no longer require that the audited
partnership report any changes to partnership tax attributes on the
statements furnished to its partners under section 6226(a)(2).
Therefore, when a partner computes the partner's correction amount for
any intervening year, the partner calculates the amount by which the
partner's chapter 1 tax for any intervening year would increase or
decrease if any tax attribute of that partner (for example, a net
operating loss carryover or capital loss carryover) has been adjusted
after taking into account the partner's share of the adjustments in the
first affected year.
Finally, references to ``items'' or ``items of income, gain, loss,
deduction, or credit'' throughout former Sec. Sec. 301.6226-1, 6226-2,
and 6226-3 have been replaced with references to ``partnership-related
items.''
B. Revisions to the Regulations Under Section 6226 Unrelated to the
TTCA Amendments
In addition to the changes needed to conform to the amendments by
the TTCA, some additional changes have been made to former proposed
Sec. Sec. 301.6226-1, 6226-2, and 6226-3. First, proposed Sec.
301.6226-1(b)(2) now provides that only those adjustments that do not
result in an imputed underpayment which are associated with an imputed
underpayment for which an election under section 6226 is made are
included in the reviewed year partner's share of the partnership
adjustments reported to the partner. Any adjustments that do not result
in an imputed underpayment which are not associated with an imputed
underpayment for which an election under section 6226 is made are taken
into account under section 6225. This change was necessary to clarify
which partnership adjustments are pushed out in the case of multiple
imputed underpayments where the push out election is not made with
respect to all imputed underpayments. See proposed Sec. 301.6225-1(g)
for rules regarding the treatment of adjustments that do not result in
an imputed underpayment in the context of specific imputed
underpayments.
Second, under proposed Sec. 301.6226-1(c)(1), an election under
section 6226 is only valid if all the provisions under proposed Sec.
301.6226-1 (regarding making the election) and Sec. 301.6226-2
(regarding the furnishing of statements) are satisfied, and an election
made under section 6226 is valid until the IRS determines that the
election is invalid. The rule that an election is valid until the IRS
determines it is invalid was moved from former proposed Sec. 301.6226-
1(c)(2) to proposed Sec. 301.6226-1(c)(1) to clarify that an election
that does not fully satisfy the requirements of proposed Sec. Sec.
301.6226-1 and 301.6226-2 is valid unless the IRS determines that the
purported election is invalid. For example, if a partnership makes an
election in accordance with proposed Sec. 301.6226-1 but fails to
furnish statements to its partners, that election is valid until the
IRS determines otherwise.
In addition, the word ``final'' was removed from before the word
``determination'' in proposed Sec. 301.6226-1(c)(2) when referring to
a determination made by the IRS that a purported election under section
6226 is invalid. The removal of the word ``final'' clarifies that the
IRS may determine that an election is invalid and assess and collect
the imputed underpayment to which the purported election related
without first being required to make a proposed or initial
determination of invalidity. Although nothing in the regulations
precludes the IRS from first notifying the partnership of a potential
problem with an election before determining the election is invalid,
proposed Sec. 301.6226-1(c)(2) provides that the IRS may determine
that an election is invalid even if the partnership has corrected the
statements required to be filed and furnished in accordance with
proposed Sec. 301.6226-2(d)(3) and also provides that the IRS is not
obligated to require the correction of any errors prior to determining
an election is invalid.
[[Page 41962]]
Third, several changes were made to clarify that the partnership
must provide correct information in order to make a valid election
under section 6226 and in order for statements to be properly furnished
either under proposed Sec. 301.6226-2 or proposed Sec. 301.6226-
3(e)(3). Proposed Sec. 301.6226-1(c)(4)(ii) requires the partnership
to provide correct information in its election, and proposed Sec.
301.6226-2(e) and proposed Sec. 301.6226-3(e)(3)(iii) require that the
statements filed and furnished with the IRS include correct
information. Additionally, proposed Sec. 301.6226-2(d)(3) provides
that if the IRS cannot determine whether the statements filed and
furnished by the partnership are correct because of a failure by the
partnership to comply with any requirements (such as filing a
partnership adjustment tracking report), the IRS may, but is not
obligated to, require the partnership to provide additional information
to substantiate the statements. Proposed Sec. 301.6226-2(d)(2) extends
the rules governing corrections of errors in statements to statements
furnished by pass-through partners under proposed Sec. 301.6226-
3(e)(3) and to provide that, if consent of the IRS is required for a
correction, that corrected statements may not be furnished until the
IRS provides consent.
Fourth, duplicative language regarding the definition of the
extended due date for the adjustment year of the audited partnership
was removed from former proposed Sec. 301.6226-3(e)(3)(ii) and
(e)(4)(ii).
Fifth, in proposed Sec. 301.6226-3(g), the word ``grantor'' has
been added between the words ``wholly-owned'' and ``trusts'' to clarify
that ``wholly-owned trusts'' means ``wholly-owned grantor trusts.''
Sixth, the phrase ``an entity described in Sec. 301.7701-
2(c)(2)(i)'' in former proposed Sec. 301.6226-3(j) was changed to ``a
wholly-owned entity disregarded as separate from its owner for Federal
tax purposes in the reviewed year'' to conform to the definition of
disregarded entity under proposed Sec. 301.6241-1(a)(4).
Seventh, proposed Sec. 301.6226-3(c)(2) now provides that interest
on any penalties, additions to tax, or additional amounts is calculated
from each applicable taxable year until the penalty, addition to tax,
or additional amount is paid. Former proposed Sec. 301.6226-3(c)(2)
provided that interest was calculated from the first affected year.
Under proposed Sec. 301.6226-3(d)(2), partners calculate any
penalties, additions to tax, or additional amounts that relate to the
partnership adjustments at the partner level. Because the adjustments
could create tax effects in more than just the first affected year (for
example, as a result of changes to tax attributes in an intervening
year), a penalty, addition to tax, or additional amount might likewise
result in more than just the first affected year. Accordingly, proposed
Sec. 301.6226-3(c)(2) provides that interest on penalties, additions
to tax, and additional amounts runs from the applicable taxable year
(that is, the particular tax year to which the penalty, addition to
tax, or additional amount relates).
Finally, certain errors were corrected in the examples under
proposed Sec. 301.6226-3(h). Examples 2 through 4 and 6 through 9
under former proposed Sec. 301.6226-3(h) incorrectly listed the last
day to file a petition under section 6234 as the date the adjustments
became final, and examples 6 through 9 incorrectly referred to former
proposed Sec. 301.6226-1(b) as support for this rule. Under proposed
Sec. 301.6226-2(b), partnership adjustments become finally determined
on 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. The examples under proposed
Sec. 301.6226-3(h) now reflect that the adjustments become final on
the day after the last day to file a petition under section 6234 to be
consistent with the rule under Sec. 301.6226-2(b), and incorrect
references to Sec. 301.6226-1(b) in Examples 6 through 9 under former
proposed Sec. 301.6226-3(h) have been replaced with correct references
to Sec. 301.6226-2(b).
Proposed Sec. 301.6226-4
Proposed rules under Sec. Sec. 301.6226-4 were previously
published in the Federal Register in the February 2018 NPRM (83 FR
4868) (former proposed Sec. 301.6226-4). For an explanation of the
rules under former proposed Sec. 301.6226-4, see 83 FR 4874.
Proposed Sec. 301.6226-4 sets forth rules for adjusting reviewed
year partners' tax attributes to take into account partnership
adjustments when a partnership makes an election under section 6226. To
reflect the addition of section 6226(b)(4), proposed Sec. 301.6226-
3(e)(4) now provides that a reviewed year partner that is a pass-
through partner must pay an imputed underpayment if the pass-through
partner does not furnish statements. In addition, changes have been
made throughout former proposed Sec. 301.6226-4 to conform to the
change to the definition of ``tax attribute'' under proposed Sec.
301.6241-1(a)(10). See section 11.A of this preamble. These changes
reflect that the adjustments to tax attributes taken into account by a
partner should be consistent, regardless of whether the partner files
an amended return during modification, participates in the alternative
procedure to filing an amended return, or receives a statement under
section 6226. Accordingly, the proposed regulations under section 6226
have been revised to refer only to the tax attributes of the partner in
the intervening years. Additionally, clarifying changes were made in
proposed Sec. 301.6226-4(b) to conform to the terminology used in
proposed Sec. 301.6226-3. Lastly, an incorrect cross-reference in
former proposed Sec. 301.6226-4(c)(4)(iii) has been replaced with the
correct cross-reference.
5. Administrative Adjustment Requests
Section 6227 provides a mechanism for a partnership to file an AAR
to correct errors on a partnership return for a prior year. Prior to
amendment by the TTCA, section 6227(a) provided that 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 or any partnership taxable year. Section 201(c) of the TTCA
amended section 6227(a) by striking ``items of income, gain, loss,
deduction, or credit of the partnership'' and inserting ``partnership-
related items.''
Prior to amendment by the TTCA, section 6227(b) provided that any
adjustment requested in an AAR is taken into account for the
partnership taxable year in which the AAR is made. Section 206(p) of
the TTCA amended section 6227(b) by striking ``is made'' both places it
appears and inserting ``is filed.''
Prior to amendment by the TTCA, section 6227(b)(1) provided that if
an adjustment results in an imputed underpayment, the adjustment may be
determined and taken into account by the partnership 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 206(p) of the TTCA amended section 6227(b)(1) by striking
the reference to ``paragraphs (2), (6), and (7)'' of section 6225(c)
(relating to
[[Page 41963]]
modification) and inserting ``paragraphs (2), (7), and (9)'' of section
6225(c). As a result, section 6227(b)(1) provides that adjustments
requested in an AAR are taken into account by the partnership under
rules similar to section 6225 (except for sections 6225(c)(2), (7), and
(9)). As amended by TTCA, section 6225(c)(2) provides rules allowing
for amended returns and an alternative procedure to filing amended
returns for purposes of modification, section 6225(c)(7) provides that
information required to be submitted for purposes of modification be
submitted within 270 days from the date on which the notice of a
proposed partnership adjustment is mailed under section 6231, and
section 6225(c)(9) provides for modification with respect to
adjustments that do not result in an imputed underpayment.
Lastly, section 206(f) of the TTCA added section 6227(d) to provide
that the Secretary shall issue regulations or other guidance which
provide for the proper coordination of section 6227 and section 905(c).
A. Proposed Sec. Sec. 301.6227-1, 301.6227-2, and 301.6227-3
Proposed rules under Sec. Sec. 301.6227-1, 301.6227-2, and
301.6227-3 were previously published in the Federal Register (82 FR
27397-99) in the June 2017 NPRM, November 2017 NPRM (82 FR 56779), and
December 2017 NPRM (82 FR 60161) (collectively, former proposed
Sec. Sec. 301.6227-1, 301.6227-2, and 301.6227-3). For an explanation
of the rules under former proposed Sec. Sec. 301.6227-1, 301.6227-2,
and 301.6227-3, see 82 FR 27366-69, 82 FR 56769, and 82 FR 60151.
Former proposed Sec. 301.6227-1(a) provided that 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
or if the partner is a partnership-partner filing an AAR under former
proposed Sec. 301.6227-3(c). Proposed Sec. 301.6227-3(c), however,
does not provide for the filing of an AAR by a partnership-partner.
Rather, under proposed Sec. 301.6227-3(c), a partnership-partner takes
into account adjustments requested in an AAR by the partnership in
which it is a partner by following the rules under proposed Sec.
301.6226-3(e) (except to the extent otherwise provided). Proposed Sec.
301.6227-1(a) therefore is changed to remove the reference to
partnership-partners, and now only refers to partners filing AARs in
their capacity as a partnership representative.
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 rules under proposed Sec. 301.6225-1. Under
proposed Sec. 301.6227-2(a)(2), in the case of an AAR, a partnership
may reduce an imputed underpayment as a result of certain modifications
permitted under proposed Sec. 301.6225-2. Under former proposed Sec.
301.6227-2(a)(2), these modifications included modifications that
relate to tax-exempt partners (proposed Sec. 301.6225-2(d)(3)), rate
modification (proposed Sec. 301.6225-2(d)(4)), modification related to
certain passive losses of publicly traded partnerships (proposed Sec.
301.6225-2(d)(5)), modification applicable to qualified investment
entities described in section 860 (proposed Sec. 301.6225-2(d)(7)),
and other modifications to the extent permitted under future IRS
guidance (proposed Sec. 301.6225-2(d)(10)). Proposed Sec. 301.6227-
2(a)(2) adopts this same list of modifications and adds modifications
related to the composition of the groupings that factor into the
calculation of the imputed underpayment (proposed Sec. 301.6225-
2(d)(6)(ii)) and modifications related to tax treaties (proposed Sec.
301.6225-2(d)(9)).
Proposed Sec. 301.6227-2(a)(2) provides that other types of
modification, such as modification under proposed Sec. 301.6225-
2(d)(2) with respect to amended returns, including the alternative
procedure to filing amended returns, and modification under proposed
Sec. 301.6225-2(d)(8) with respect to closing agreements, are not
available in the case of an AAR. Modifications with respect to
adjustments that do not result in an imputed underpayment also are also
not available in the case of an AAR.
Former proposed Sec. 301.6227-2(a)(2)(i) provided that a
partnership did not need to seek IRS approval prior to modifying an
imputed underpayment that results from adjustments requested in an AAR.
Section 6227(b)(1) does not explicitly carve out section
6225(c)(8),which states that any modification to the imputed
underpayment made under section 6225(c) shall be made only upon
approval of such modification by the Secretary. Section 6227(b)(1) does
provide, however, that partnerships take into account adjustments
requested in an AAR under rules similar to the rules under section
6225. In proposing rules similar to the rules under section 6225 for
the purposes of requesting an AAR and taking into account adjustments,
the Treasury Department and the IRS have determined it is more
efficient and beneficial for both the IRS and for partnerships to be
able to apply modifications when filing an AAR without first securing
approval of permitted modifications. Accordingly, although any
modifications in connection with an AAR are subject to IRS approval,
the rules under proposed Sec. 301.6227-2(a)(2)(i) provide that the
partnership is not required to obtain the approval from the IRS before
applying modifications when calculating the amount of the imputed
underpayment the partnership needs to pay when filing the AAR. Proposed
Sec. 301.6227-2(a)(2)(ii) also provides, however, that modifications
to an imputed underpayment resulting from adjustments requested in an
AAR may not be applied by the partnership if the AAR that is filed does
not include notification to the IRS of the modification, a description
of the effect 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.
Under proposed Sec. 301.6227-3, a reviewed year partner that
receives a statement described in proposed Sec. 301.6227-1(d) must
treat that statement as if it were provided under section 6226(a)(2).
Former proposed Sec. 301.6227-3(b)(1) also provided that the
restriction in former 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. Proposed
Sec. 301.6227-3(b)(1) no longer needs to address that restriction
because the restriction in former proposed Sec. 301.6226-3(b)(1) no
longer exists. Therefore, the exception in former proposed Sec.
301.6227-3(b)(1) has been eliminated. Additionally, the provision in
former proposed Sec. 301.6227-3(b)(2), stating that when the
additional reporting tax results in being less than zero the partner
may reduce his chapter 1 tax for the reporting year, is moved to
proposed Sec. 301.6227-3(b)(1).
Former proposed Sec. 301.6227-1 included a reserved paragraph
regarding notice of change to amounts of creditable foreign tax
expenditures. Proposed Sec. 301.6227-1 also reserves this same
paragraph and does not contain rules to coordinate sections 6227 and
905(c). The Treasury Department and the IRS seek comments regarding the
coordination of sections 6227 and 905(c) for consideration in future
guidance.
Lastly, the reference to ``items of income, gain, loss, deduction,
or credit of the partnership'' in former proposed Sec. 301.6227-1(a)
has been replaced with
[[Page 41964]]
a reference to ``partnership-related items.''
B. Revisions to the Regulations Under Section 6227 Unrelated to the
TTCA Amendments
Proposed Sec. 301.6227-1(a) now coordinates the rules regarding
the filing of an AAR and the revocation of a designation of the
partnership representative under Sec. 301.6223-1. Former proposed
Sec. 301.6227-1(a) provided that the partnership may not file an AAR
solely for the purpose of allowing the partnership to change the
designation of a partnership representative. Proposed Sec. 301.6227-
1(a) now adds that when the partnership changes the designation of the
partnership representative or the appointment of a designated
individual in conjunction with the filing of an AAR, the change in
designation or appointment is treated as occurring prior to the filing
of the AAR.
Former proposed Sec. 301.6227-1(b) provided that an AAR may not be
filed after a notice of administrative proceeding (NAP) has been
mailed. To account for situations in which the IRS mails a NAP, but
then withdraws it, proposed Sec. 301.6227-1(b) now provides that an
AAR may not be filed after a NAP has been mailed, except when the NAP
has been withdrawn under proposed Sec. 301.6231-1(f).
Additions were also made in proposed Sec. 301.6227-3(c) to clarify
the rules for pass-through partners, unrelated to the changes made by
the TTCA. First, proposed Sec. 301.6227-3(c)(1) provides that when a
pass-through partner takes into account adjustments requested in an AAR
in accordance with proposed Sec. 301.6226-3(e), the pass-through
partner must provide the information described in proposed Sec.
301.6227-3(c)(3) as opposed to the information in described in proposed
Sec. 301.6226-3(e)(3)(iii) when furnishing statements to its partners.
Second, under proposed Sec. 301.6227-3(c)(1), a pass-through partner
that computes and pays an imputed underpayment in accordance with
proposed Sec. 301.6226-3(e)(4) may not take into account any
modifications. Third, proposed Sec. 301.6227-3(c)(4) provides that
when a pass-through partner furnishes a statement to an affected
partner under proposed Sec. 301.6227-3(c), the affected partner must
treat that statement as if it were a statement described in proposed
Sec. 301.6227-3(a) that was furnished to such affected partner.
6. Notices of Proceedings and Adjustments
Section 6231(a) provides that the Secretary shall mail to the
partnership and to the partnership representative a notice of any
administrative proceeding initiated at the partnership level, notice of
any proposed partnership adjustment resulting from that proceeding
(NOPPA), and notice of any final partnership adjustment (FPA). Prior to
amendment by the TTCA, section 6231(a) also provided that any FPA shall
be mailed no earlier than 270 days after the date on which the NOPPA is
mailed. Such notices shall be sufficient if mailed to the last known
address of the partnership and the partnership representative, even if
the partnership has terminated its existence. See section 6231(a) flush
language (prior to amendment by the TTCA).
Prior to amendment by the TTCA, the statute did not limit the
period for the IRS to propose adjustments under the centralized
partnership audit regime. Section 206(h) of the TTCA amended section
6231 to address this issue. As amended, section 6231(b)(1) provides
that any NOPPA shall not be mailed later than the date determined under
section 6235(a)(1), which is generally the date that is 3 years after
the later of: (1) The date on which the partnership return for the
taxable year was filed, (2) the return due date for the taxable year,
or (3) the date on which the partnership filed an AAR with respect to
the taxable year.
Section 206(h) of the TTCA makes a conforming amendment to section
6231(a) to reflect the addition of the period of limitations to made
partnership adjustments. Prior to amendment, section 6231(a) provided
that ``Such notices shall be sufficient if mailed to the last known
address of the partnership representative or the partnership (even if
the partnership has terminated its existence).'' The amendment replaced
the words ``Such notices'' with ``Any notice of final partnership
adjustment.''
Section 201(c) of the TTCA also makes a conforming amendment to
section 6231(a) by striking the phrase ``all items of income, gain,
loss, deduction, or credit of the partnership'' and inserting ``all
partnership-related items.''
A. Proposed Sec. 301.6231-1
Proposed rules under Sec. 301.6231-1 were previously published in
the Federal Register (82 FR 60161-62) in the December 2017 NPRM (former
proposed Sec. 301.6231-1). For an explanation of the rules under
former proposed Sec. 301.6231-1, see 82 FR 60151-52.
Although not required by statute, former proposed Sec. 301.6231-
1(b)(1) provided a period of limitations for making partnership
adjustment. That section provided that a NOPPA may not be mailed after
the expiration of the period described in section 6235(a)(1), including
any extensions of that period and after applying any of the special
rules in section 6235(c) (providing additional time for situations
where no return is filed, fraud, and other specified reasons).
Former proposed Sec. 301.6231-1(c) provided that NAPs, NOPPAs, and
FPAs are sufficient if mailed to the last known address of the
partnership and the partnership representative. As discussed above in
this section of the preamble, section 6231(a) now provides that any FPA
is sufficient if mailed to the last known address of the partnership
and the partnership representative. The Treasury Department and the IRS
have determined that while the last known address requirement under
section 6231(a) only applies to a notice of final partnership
adjustment, the IRS will also mail the NAP and the NOPPA to the last
known address of the partnership and the partnership representative.
Accordingly, because the rules under former proposed Sec.
301.6231-1(b)(1) and (c) are consistent with the statutory changes to
section 6231(a), those rules are unchanged. The only change to former
proposed Sec. 301.6231-1 was to replace references to ``item of
income, gain, loss, deduction, or credit'' and to a ``partner's
distributive share'' in former proposed Sec. 301.6231-1(a)(1) with a
reference to ``partnership-related item''.
7. Assessment, Collection, and Payment of Imputed Underpayments
Section 6232(a) provides rules for the assessment, collection, and
payment of imputed underpayments. Section 206(g) of the TTCA amended
section 6232(a) to clarify that the assessment of any imputed
underpayment is not subject to the deficiency procedures under
subchapter B of chapter 63 of the Code and to clarify that in the case
of an AAR, the underpayment may be assessed when the AAR is filed. See
JCX-6-18, at 48.
Section 6232(b) provides limitations on the assessment of an
imputed underpayment. Section 206(g) of the TTCA amended section
6232(b) to correct a reference to ``assessment of a deficiency'' to now
refer to ``assessment of an imputed underpayment.'' Section 206(p) of
the TTCA also amends section
[[Page 41965]]
6232(b) to strike the reference to ``this chapter'' and replace it with
``this subtitle (other than subchapter B of this chapter).''
Section 205 of the TTCA added a new subsection (f) to section 6232
to provide a mechanism for collection of tax due in the case of a
failure of a partnership or S corporation to pay an imputed
underpayment or specified similar amount. Under section 6232(f)(1), if
any amount of any imputed underpayment to which section 6225 applies or
any specified similar amount as defined in section 6232(f)(2) has not
been paid by the date which is 10 days after the date on which the
Secretary provides notice and demand for such payment, the Secretary
may assess upon each partner of the partnership a tax equal to such
partner's proportionate share of such amount.
Under section 6232(f)(2), the term ``specified similar amount''
means the amount determined under section 6226(b)(4)(ii)(II) and any
amount assessed upon a partner under section 6232(f)(1)(B) that is a
partnership or an S corporation. Section 206(g)(2)(B) of the TTCA
amended section 6232(b) to provide that the limitations on assessment
with respect to an imputed underpayment do not apply in the case of a
specified similar amount defined in section 6232(f)(2).
The Treasury Department and the IRS are not proposing rules under
section 6232(f) at this time. The Treasury Department and the IRS
request comments with respect to section 6232(f), including the
determination of a partner's proportionate share of the unpaid amount,
for consideration with respect to future guidance.
A. Proposed Sec. 301.6232-1
Proposed rules under Sec. 301.6232-1 were previously published in
the Federal Register (82 FR 60162-63) in the December 2017 NPRM (former
proposed Sec. 301.6232-1). For an explanation of the rules under
former proposed Sec. Sec. 301.6232-1, see 82 FR 60152.
Former proposed Sec. 301.6232-1(a) provided that because the
centralized partnership audit regime under subchapter C of chapter 63
applies to an assessment of an imputed underpayment, the deficiency
procedures under subchapter B of chapter 63 do not apply. Former
proposed Sec. 301.6232-1(b) provided that the IRS may assess an
underpayment reflected on an AAR on the date the AAR is filed. Former
proposed Sec. 301.6232-1(c) provided limitations on assessment of the
imputed underpayment, except as otherwise provided in Sec. 301.6232-1.
Because the rules under former proposed Sec. 301.6232-1(a) and (b) are
consistent with the statutory changes to section 6232(a), those rules
are unchanged.
Proposed Sec. 301.6232-1(c) is generally the same as former
proposed Sec. 301.6232-1(c). However, changes were made to take into
account section 206(g)(2)(B) of TTCA, providing that the limitations on
assessment do not apply to specified similar amounts, and section
206(p) of TTCA, providing that the limitations on assessments under
proposed Sec. 301.6232-1(c) apply except as otherwise provided in
subtitle F of the Code (other than deficiency procedures under
subchapter B of chapter 63).
With respect to former proposed Sec. 301.6232-1(d), the reference
to ``items of income, gain, loss, deduction, or credit'' in former
proposed Sec. 301.6232-1(d)(1)(i) was replaced with a reference to
``partnership-related items.''
8. Interest and Penalties Related to Imputed Underpayments
Section 6233 provides rules related to interest and penalties with
respect to imputed underpayments. Section 206(i) of the TTCA amended
section 6233 by adding a new subsection (c), which provides a cross-
reference to section 6603 for rules allowing deposits to suspend the
running of interest on potential underpayments.
A. Proposed Sec. Sec. 301.6233(a)-1 and 301.6233(b)-1
Proposed rules under Sec. Sec. 301.6233(a)-1 and 301.6233(b)-1
were previously published in the Federal Register (82 FR 60163-65) in
the December 2017 NPRM (former proposed Sec. Sec. 301.6233(a)-1 and
301.6233(b)-1). For an explanation of the rules under former proposed
Sec. Sec. 301.6233(a)-1 and 301.6233(b)-1, see 82 FR 60152-53.
Proposed Sec. 301.6233(a)-1 provides rules for determining
interest and penalties from the reviewed year, and proposed Sec.
301.6233(b)-1 provides rules for determining interest and penalties
from the adjustment year. Neither former proposed Sec. 301.6233(a)-1
nor former proposed Sec. 301.6233(b)-1 provided rules regarding
deposits to suspend the running of interest on underpayments. The
Treasury Department and the IRS are not proposing rules regarding the
interaction of the deposit rules under section 6603 and the interest
rules under section 6233. However, the Treasury Department and the IRS
request comments for consideration in future guidance regarding the
interaction between section 6603 and the interest rules under section
6233.
Former proposed Sec. 301.6233(a)-1(c)(2)(ii)(C) provided a
definition of ``negative adjustment'' and defined that term through
reference to ``items of income, gain, loss, deduction, or credit.''
Proposed Sec. 301.6225-1 now uses the term ``negative adjustment'' and
the phrase ``items of income, gain, loss, deduction, or credit'' has
been removed from subchapter C of chapter 63. To reflect these changes,
proposed Sec. 301.6233(a)-1(c)(2)(ii)(C) now provides that a
``decreasing adjustment'' is ``an adjustment to a partnership-related
item that resulted in a decrease to the imputed underpayment.'' Example
3 under proposed Sec. 301.6233(a)-1(c)(3) also reflects changes to
former proposed Sec. Sec. 301.6225-1 and 301.6225-2.
Former proposed Sec. 301.6233(a)-1(c)(2)(ii), regarding how to
calculate the portion of the imputed underpayment to which a penalty
applies, referred to ``non-credit partnership adjustments'' and
``credit adjustments.'' Under proposed Sec. 301.6225-1(e)(3)(iii)
certain adjustments to creditable expenditures are treated as an
adjustment to a credit and may impact the calculation of the imputed
underpayment. To properly account for such adjustments when determining
the portion of an imputed underpayment subject to a penalty, the term
``non-credit partnership adjustment'' was changed to ``a partnership
adjustment that is not an adjustment to a credit or treated as an
adjustment to a credit,'' and the term ``credit adjustment'' changed to
``an adjustment to a credit or treated as an adjustment to a credit.''
Former proposed Sec. 301.6233(a)-1(c)(2)(iii)(B), regarding the
application of the substantial understatement penalty under section
6662(d)(1)(A)(i) to imputed underpayments, provided that taxable income
meant the net ordinary business income or loss of the partnership. The
reference to ``ordinary business'' failed to account for other sources
of income of the partnership that are appropriate to consider for
purposes of the substantial understatement penalty. Therefore, proposed
Sec. 301.6233(a)-1(c)(2)(iii)(B) now provides that for purposes of
determining the amount of tax required to be shown on the return it is
the net income or loss of the partnership that is treated as taxable
income. See Page 5 of Form 1065, Return of Partnership Income.
Former proposed Sec. 301.6233(a)-1(c)(2)(v), pertaining to
reasonable cause and good faith defenses, provided that
[[Page 41966]]
partner-level defenses may not be raised in a proceeding of the
partnership except as provided under the modification procedures
pertaining to amended returns and partner closing agreements. For
clarity, this provision has been moved to proposed Sec. 301.6233(a)-
1(c)(1). Furthermore, the provision allowing partner-level defenses to
penalties to be raised under the modification procedures has been
removed. A partner may raise a partner-level defense by filing a claim
for refund under procedures existing outside of the centralized
partnership audit regime or through an agreement with the IRS regarding
an adjustment to a partnership-related item.
9. Judicial Review of Partnership Adjustments
Section 6234(a) provides that within 90 days after the date on
which an FPA is mailed under section 6231 with respect to any
partnership taxable year, the partnership may file a petition for
readjustment for such taxable year with the Tax Court, the district
court in which the partnership's principal place of business is
located, or the Court of Federal Claims. Prior to amendment by the
TTCA, section 6234(b)(1) provided that a petition for readjustment
under section 6234 may be filed in a district court of the United
States or the Court of Federal Claims only if the partnership filing
the petition deposits with the Secretary, on or before the date the
petition is filed, the amount of the imputed underpayment. Section
206(j) of the TTCA amended section 6234(b)(1) to clarify that the
amount of the jurisdictional deposit that the partnership must make in
order to file a readjustment petition in a district court or the Court
of Federal Claims is the amount of (as of the date of the filing of the
petition) the imputed underpayment, penalties, additions to tax, and
additional amounts with respect to the imputed underpayment. See JCX-6-
18, at 49.
A. Proposed Sec. 301.6234-1
Proposed rules under Sec. 301.6234-1 were previously published in
the Federal Register (82 FR 60165-66) in the December 2017 NPRM (former
proposed Sec. 301.6234-1). For a further explanation of the rules
under former proposed Sec. 301.6234-1, see 82 FR 60153.
Former proposed Sec. 301.6234-1(b) provided that a partnership may
file a petition for a readjustment of any partnership adjustment in a
district court or the Court of Federal Claims ``only if the partnership
filing the petition deposits with the [IRS], on or before the date the
petition is filed, the amount of any imputed underpayment resulting
from the partnership adjustment.''
To reflect the amendment to section 6234(b)(1) made by section
206(j) of the TTCA regarding the amount of the deposit, proposed Sec.
301.6234-1(b) now provides that amount required to be deposited is the
amount (as of the date of the filing of the petition) of any imputed
underpayment and any penalties, additions to tax, and additional
amounts with respect to such imputed underpayment.
To account for the possibility that multiple imputed underpayments
may be reflected in an FPA, proposed Sec. 301.6234-1(b) also now
provides that the partnership must only deposit the amount of any
imputed underpayment to which the petition for readjustment relates and
the amount of any penalties, additions to tax, and additional amounts
with respect to such imputed underpayment.
10. Period of Limitations on Making Adjustments
Section 6235 provides the period of limitations on making
adjustments under the centralized partnership audit regime. Under
section 6235(a), the general rule is that no adjustment for any
partnership taxable year may be made after the later of three specified
dates. Section 206(k) of the TTCA amended section 6235(a) by inserting
``or section 905(c)'' after ``Except as otherwise provided in this
section.'' The amendment makes clear that the period of limitations on
making adjustments under the centralized partnership audit regime does
not limit the period for notification of the Secretary and
redetermination of tax under section 905(c) with respect to foreign tax
redeterminations.
In addition, section 206(k) of the TTCA amended section 6235 by
striking paragraph (d), which provided for a suspension of the period
on making adjustments when the Secretary mails an FPA. That provision
was similar to a provision that existed under TEFRA, but the provision
has no effect on making adjustments under the centralized partnership
audit regime. See JCX-6-18, at 49-50.
A. Proposed Sec. 301.6235-1
Proposed rules under Sec. 301.6235-1 were previously published in
the Federal Register (82 FR 60166-67) in the December 2017 NPRM (former
proposed Sec. 301.6235-1). For an explanation of the rules under
former proposed Sec. 301.6235-1, see 82 FR 60153-54.
Proposed Sec. 301.6235-1(a) now reflects the amendments to section
6235 to provide an exception for section 905(c) and to remove the
reference to section 6235(d).
11. Definitions and Special Rules
A. Proposed Sec. 301.6241-1
Proposed rules under Sec. 301.6241-1 were previously published in
the Federal Register (82 FR 27399-400) in the June 2017 NPRM (former
proposed Sec. 301.6241-1). For an explanation of the rules under
former proposed Sec. 301.6241-1, see 82 FR 27369.
Former proposed Sec. 301.6241-1(a)(1) defined 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). Section 206(p) of the TTCA amended section 6227
to provide that an AAR is ``filed,'' as opposed to ``made.'' To reflect
this amendment, proposed Sec. 301.6241-1(a)(1) now provides that an
AAR is ``filed'' and not ``made.''
Former proposed Sec. 301.6241-1(a)(3) defined the term ``imputed
underpayment'' as the amount determined under Sec. 301.6225-1. Because
an imputed underpayment may also be computed and paid pursuant to
proposed Sec. 301.6226-3(e)(4) (relating to pass-through partners) as
well as under proposed Sec. 301.6227-2 and Sec. 301.6227-3(c)
(relating to AARs), proposed Sec. 301.6241-1(a)(3) now refers to
imputed underpayments determined under those provisions. Proposed Sec.
301.6241-1(a)(3) was also clarified to provide that an imputed
underpayment calculated under section 6225 is calculated under section
6225 and the regulations thereunder.
Proposed Sec. 301.6241-1(a)(4) now provides that the term
``indirect partner'' includes a person that holds an interest in the
partnership through a wholly owned entity that is disregarded as
separate from its owner for Federal income tax purposes, such as a
disregarded entity or grantor trust. This change from the language in
the former proposed regulations clarifies that a partnership may seek
modification under proposed Sec. 301.6225-2 based on indirect partners
holding an interest through a disregarded entity or grantor trust.
Proposed Sec. 301.6241-1(a)(6) now provides that the term
``partnership adjustment'' means any adjustment to a partnership-
related item (as defined in
[[Page 41967]]
proposed Sec. 301.6241-6), and such term includes a portion of a
partnership adjustment.
Former proposed Sec. 301.6241-1(a)(10) defined a tax attribute as
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
or that can affect the amount of tax due in any taxable year. As
discussed in section 4.A. of this preamble, section 203(a) of the TTCA
amended section 6225 to provide an alternative procedure to filing
amended returns during modification under which a partner agrees to
take into account adjustments to the tax attributes ``of such
partner''. Section 6225(c)(2)(B)(ii). To reflect the amendment to
section 6225(c)(2)(B) regarding tax attributes of a partner, the phrase
``with respect to a partnership or a partner'' was removed from the
definition of tax attribute under former proposed Sec. 301.6241-
1(a)(10). The reference to ``items of income, gain, loss, deduction, or
credit'' in former proposed Sec. 301.6241-1(a)(10) was also replaced
with a reference to ``partnership-related item.''
B. Proposed Sec. 301.6241-2
Proposed rules under Sec. 301.6241-2 were previously published in
the Federal Register (82 FR 27400) in the June 2017 NPRM (former
proposed Sec. 301.6241-2). Former proposed Sec. 301.6241-2 provided
for coordination between Title 11 of the United States Code, which
deals with bankruptcy, and the centralized partnership audit regime.
Because the amendments by the TTCA did not affect section 6241(6), the
rules under former proposed Sec. 301.6241-2 are unchanged. For an
explanation of the rules under former proposed Sec. 301.6241-2, see 82
FR 27369-70.
C. Proposed Sec. 301.6241-3
Proposed rules under Sec. 301.6241-3 were previously published in
the Federal Register (82 FR 27400-02) in the June 2017 NPRM (former
proposed Sec. 301.6241-3). For an explanation of the rules under
former proposed Sec. 301.6241-3, see 82 FR 27370-71.
Former proposed Sec. 301.6241-3(a)(3) provided that the rules
requiring former partners to take into account adjustments of a
partnership which the IRS determined had ceased to exist did not apply
to the former partners of a partnership that had elected out of the
centralized partnership audit regime under section 6221(b). Because
under section 6226(b)(4) a partnership-partner that has elected out of
the centralized partnership audit regime may be liable for an imputed
underpayment in the case of a push out election, proposed Sec.
301.6241-3(a)(3) now provides that the rules under proposed Sec.
301.6241-3 apply to a partnership-partner and its former partners,
regardless of whether the partnership-partner has elected out of the
centralized partnership audit regime. Accordingly, under proposed Sec.
301.6241-3(a)(3), the former partners of any partnership that may be
liable for an imputed underpayment, including a partnership-partner
that has elected out of the centralized partnership audit regime, will
be required to take into account a partnership adjustment if the IRS
determines that such partnership ceased to exist before the partnership
adjustment had taken effect. Example 2 under proposed Sec. 301.6241-
3(f) illustrates this rule.
Former proposed Sec. 301.6241-3(b)(2)(i) provided 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 has 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. To reflect
the amendment to section 708 by the Act to eliminate technical
terminations, the reference to section 708(b)(1)(B) was removed from
former proposed Sec. 301.6241-3(b)(2)(i). In addition, a rule was
added to former proposed Sec. 301.6241-3(b)(2)(i) to provide that a
partnership also does not cease to exist solely because it furnished
statements in accordance with proposed Sec. 301.6226-3(e)(3). This
change clarifies that partnership-partners that properly furnish
statements in accordance with proposed Sec. 301.6226-3(e)(3) (and
therefore are not liable for an imputed underpayment) are treated the
same as an audited partnership who made a valid election under section
6226.
Additional clarifications were made to proposed Sec. 301.6241-3.
First, the phrase ``any amounts'' in former proposed Sec. 301.6241-
3(a)(2) was replaced with the phrase ``any unpaid amounts.'' This
clarification was made to eliminate the implication that the
partnership was not liable for the original amount due and to clarify
that if the IRS determines that a partnership has ceased to exist, the
partnership is no longer liable for any remaining unpaid amounts due
under subchapter C of chapter 63, meaning that if the partnership had
made a prior payment, the IRS can retain that payment. Second, former
proposed Sec. 301.6241-3(b)(2)(iii) provided that the IRS may not
determine that a partnership has ceased to exist after the expiration
of the period of limitations on collection. Proposed Sec. 301.6241-
3(b)(2)(iii) now provides that the period relevant to this
determination is the period of limitations on collection with respect
to the imputed underpayment that was assessed against the partnership
that ceased to exist. Finally, prior references to section 708(b)(1)(A)
in former proposed Sec. 301.6241-3(b)(2), (d)(2), and (f) were changed
to refer to section 708(b)(1) to reflect the amendment to section 708
made by the Act.
D. Proposed Sec. 301.6241-4
Proposed rules under Sec. 301.6241-4 were previously published in
the Federal Register (82 FR 27402) in the June 2017 NPRM (former
proposed Sec. 301.6241-4). For an explanation of the rules under
former proposed Sec. 301.6241-4, see 82 FR 27371.
Former proposed Sec. 301.6241-4 provided that payments made by a
partnership under the centralized partnership audit regime, including
payment of any imputed underpayment and any amount under proposed Sec.
301.6226-3, were not deductible to the partnership. Because the payment
amount for a partnership-partner in the case of a push out election is
referred to as an imputed underpayment, reference to any amount under
Sec. 301.6226-3 in former proposed Sec. 301.6241-4 became superfluous
and thus was removed.
E. Proposed Sec. 301.6241-5
Proposed rules under Sec. 301.6241-5 were previously published in
the Federal Register (82 FR 27402) in the June 2017 NPRM (former
proposed Sec. 301.6241-5). For an explanation of the rules under
former proposed Sec. 301.6241-5, see 82 FR 27371.
Former proposed Sec. 301.6241-5 provided rules for extending the
centralized partnership audit regime to entities filing partnership
returns. References in former proposed Sec. 301.6241-5(a) to ``items
of income, gain, loss, deduction, or credit'' and ``partner's
distributive share'' were replaced with a reference to ``partnership-
related item.'' Proposed Sec. 301.6241-5(c) now also reflects the fact
that certain business arrangements, which may not be classified as
entities, can file partnership returns to make an election under
section 761(a). Under proposed Sec. 301.6241-5(c), the centralized
partnership audit regime does not apply in that case notwithstanding
the filing of a partnership return.
[[Page 41968]]
12. Coordination With Other Chapters of the Code
Section 201(b) of the TTCA added section 6241(9) to the Code
regarding the coordination of the centralized partnership audit regime
with chapters of the Code other than chapter 1. Section 6241(9)(A)
provides that the centralized partnership audit regime shall not apply
with respect to any tax imposed (including any amount required to be
deducted or withheld) under chapter 2, 2A, 3, or 4 of subtitle A of the
Code, except that any partnership adjustment determined under the
centralized partnership audit regime for purposes of chapter 1 shall be
taken into account for purposes of determining any such tax to the
extent that such adjustment is relevant to such determination. Section
6241(9)(B) provides that in the case of any tax imposed (including any
amount required to be deducted or withheld) under chapters 3 and 4 of
the Code, which is determined with respect to a partnership adjustment,
such tax shall be so determined with respect to the reviewed year and
shall be so imposed (or so required to be deducted or withheld) with
respect to the adjustment year.
Section 201(b) also added section 6501(c)(12) to the Code regarding
the statute of limitation on assessment of taxes under chapter 2 or 2A
which are attributable to any partnership adjustment. Section
6501(c)(12) provides in the case of any partnership adjustment
determined under the centralized partnership audit regime, the period
for assessment of any tax imposed under chapter 2 or 2A of the Code
which is attributable to such adjustment shall not expire before the
date that is one year after one of two events. In the case of an
adjustment pursuant to the decision of a court in a proceeding brought
under section 6234, the period for assessment shall not expire before
the date that is one year after the decision becomes final. In any
other case, the period for assessment shall not expire before the date
that is one year after 90 days after the date on which the FPA is
mailed under section 6231.
A. Proposed Sec. 301.6241-7
Former proposed Sec. 301.6221(a)-1(d) provided that nothing in
subchapter C of chapter 63 precluded the IRS from making any adjustment
to an item of a partnership (as described in the prior version of Sec.
301.6221(a)-1(b)) outside of the centralized partnership audit regime
for purposes of determining tax imposed by provisions of the Code other
than chapter 1. Accordingly, under former proposed Sec. 301.6221(a)-
1(d), the IRS was not precluded from examining a partnership's
compliance with its obligations under chapters 3 and 4 (or any other
chapter of the Code other than chapter 1) in a proceeding outside of
the centralized partnership audit regime. Former proposed Sec.
301.6221(a)-1(f) provided examples to illustrate this concept.
The rules contained in former proposed Sec. 301.6221(a)-1(d), and
the examples in former proposed Sec. 301.6221(a)-1(f), are consistent
with section 6241(9)(A). However, given that these concepts are now
codified in section 6241, the rules and examples under former proposed
Sec. 301.6221(a)-1(d) and (f) are now under proposed Sec. 301.6241-
7(a)(1) and (2). References to ``items of income, gain, loss,
deduction, or credit'' were replaced with references to ``partnership-
related item'' as defined under proposed Sec. 301.6241-6. Other
editorial changes were made to reflect revisions to former proposed
Sec. 301.6221(a)-1.
Proposed Sec. 301.6241-7(a)(1) provides that the centralized
partnership audit regime does not apply with respect to any tax imposed
(including any amount required to be deducted or withheld) under any
chapter of the Code other than chapter 1, including chapter 2, 2A, 3,
or 4 of the Code. Accordingly, for purposes of determining taxes under
chapters of the Code other than chapter 1, the IRS may make adjustments
to partnership-related items in proceedings not subject to the
centralized partnership audit regime. However, to the extent an
adjustment to a partnership-related item or a determination made under
the centralized partnership audit regime is relevant in determining tax
outside of chapter 1, such adjustment or determination must be taken
into account in determining that non-chapter 1 tax. Proposed Sec.
301.6241-7(a)(2) provides examples to illustrate these concepts.
Proposed Sec. 301.6241-7(b) provides rules for coordinating the
centralized partnership audit regime with chapters 3 and 4 of the Code.
Proposed Sec. 301.6241-7(b)(1) restates the rule in section 6241(9)(B)
regarding the timing of withholding for tax imposed under chapters 3
and 4 that is determined with respect to a partnership adjustment.
Proposed Sec. 301.6241-7(b)(2) defines the terms chapter 3, chapter 4,
and amount subject to withholding.
Former proposed Sec. Sec. 301.6225-1(a)(4) and 301.6226-2(h)
provided rules to coordinate the collection of tax in the case of
partnership adjustments to amounts subject to withholding under
chapters 3 and 4, including rules for when the partnership pays an
imputed underpayment resulting from such an adjustment and rules for
when the partnership makes the election under section 6226 with respect
to such an imputed underpayment. These rules now fall within proposed
Sec. 301.6241-7(b)(3) and (b)(4). Proposed Sec. 301.6241-7(b)(4) now
provides that a partnership required to pay tax under chapter 3 or
chapter 4 when it makes an election under section 6226 is required to
pay the tax before the due date of the partnership return for the
adjustment year (without regard to extension).
13. Other Amendments by the TTCA to the Centralized Partnership Audit
Regime
Section 206(l) of the TTCA amended section 6241 by adding a new
provision, section 6241(11), providing for the treatment of special
enforcement matters. Under section 6241(11), in the case of
partnership-related items which involve special enforcement matters,
the Secretary may prescribe regulations pursuant to which the
centralized partnership audit regime (or any portion thereof) does not
apply to such items, and that such items are subject to special rules
(including rules related to assessment and collection) as the Secretary
determines to be necessary for the effective and efficient enforcement
of the Code. For purposes of section 6241(11), the term ``special
enforcement matters'' means: (1) Failure to comply with the
requirements of section 6226(b)(4)(A)(ii) (regarding the requirement
for a pass-through partner to furnish statements or compute and pay an
imputed underpayment); (2) assessments under section 6851 (relating to
termination assessments of income tax) or section 6861 (relating to
jeopardy assessments of income, estate, gift, and certain excise
taxes); (3) criminal investigations; (4) indirect methods of proof of
income; (5) foreign partners or partnerships; and (6) other matters
that the Secretary determines by regulation present special enforcement
considerations. Rules under this provision may be provided in future
guidance. The Treasury Department and the IRS are considering proposing
rules under section 6241(11)(B)(vi) (dealing with other matters that
present special enforcement considerations) which allow certain
partnership-related items reported solely by persons other than the
partnership to be adjusted outside the centralized partnership audit
regime. The Treasury Department and the IRS request comments on this
provision, including whether there are
[[Page 41969]]
any additional special enforcement considerations that should be
addressed through regulations.
Section 206(m) of the TTCA amended section 6241 by adding a new
provision, section 6241(12), to clarify that a U.S. shareholder of a
controlled foreign corporation (CFC) which is a partner of a
partnership shall be treated as a partner of such partnership for
purposes of the centralized partnership audit regime. The U.S.
shareholder's distributive share of the partnership is the U.S.
shareholder's pro rata share of the CFC's Subpart F income determined
under rules similar to section 951(a)(2). Similarly, a taxpayer that
makes a Qualified Electing Fund (QEF) election with respect to a
passive foreign investment company (PFIC) that is a partner in a
partnership shall be treated as a partner of such partnership. In this
case, a taxpayer's distributive share of the partnership is the
taxpayer's pro rata share of the PFIC's ordinary earnings and net
capital gain determined under rules similar to section 1293(b).
Consequently, in both circumstances, the U.S. shareholder of a CFC and
the taxpayer of a PFIC will be treated as the adjustment year partner
or reviewed year partner under the centralized partnership audit
regime, where applicable. Regulatory authority was also given to issue
regulations or other guidance as necessary or appropriate to carry out
the purpose of the provision, including regulations which apply the
rule in similar circumstances or with respect to similarly situated
persons. Consequently, in both circumstances, the U.S. shareholder of a
CFC and the taxpayer of a PFIC will be treated as the adjustment year
partner or reviewed year partner under proposed Sec. Sec. 301.6241-
1(a)(2) and 301.6241-1(a)(9) where applicable.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations.
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 website at www.irs.gov.
Comments and Public Hearing
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 rules. All comments will be
available at www.regulations.gov or upon request.
A public hearing has been scheduled for October 9, 2018, beginning
at 10 a.m. in the Auditorium of the Internal Revenue Building, 1111
Constitution Avenue NW, Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance. In
addition, 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 more 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 an outline of
the topics to be discussed and the time to be devoted to each topic by
October 1, 2018. Submit a signed paper or electronic copy of the
outline as prescribed in this preamble under the ADDRESSES heading. A
period of 10 minutes will be allotted 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, Steven L. Karon, and Brittany Harrison 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
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Withdrawal of Notices of Proposed Rulemaking and Partial Withdrawal of
Notice of Proposed Rulemaking
Accordingly, under the authority of 26 U.S.C. 7805, the notices of
proposed rulemaking (REG-119337-17, REG-120232-17, REG-120233-17, and
REG-118067-17) that were published in the Federal Register on November
30, 2017 (82 FR 56765), December 19, 2017 (82 FR 27071), and February
2, 2018 (83 FR 4868) are withdrawn. Also under the authority of 26
U.S.C. 7805, 301.6221(a)-1, 301.6222-1, 301.6225-1, 301.6225-2,
301.6225-3, 301.6225-4, 301.6226-1, 301.6226-2, 301.6226-3, 301.6226-4,
301.6227-1, 301.6227-2, 301.6227-3 of the notice of proposed rulemaking
(REG-136118-15) published in the Federal Register on June 14, 2017 (82
FR 27334) is withdrawn.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as
follows:
PART 1--INCOME TAX
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.704-1 is amended by:
0
1. Adding paragraph (b)(1)(viii).
0
2. Adding a sentence to the end of paragraph (b)(2)(iii)(a).
0
3. Adding paragraphs (b)(2)(iii)(f), (b)(2)(iv)(i)(4), and (b)(4)(xi)
through (xv).
The additions read as follows:
Sec. 1.704-1 Partner's distributive share.
* * * * *
(b) * * *
(1) * * *
(viii) Items relating to a final determination under the
centralized partnership audit regime--(a) In general. Certain items of
income, gain, loss, deduction or credit may result from a final
determination under subchapter C of chapter 63 of the Internal Revenue
Code (subchapter C of chapter 63) (relating to the centralized
partnership audit regime). Special rules
[[Page 41970]]
under section 704(b) and Sec. 1.704-1(b) apply to these items that
take into account that the item relates to the reviewed year (as
defined in Sec. 301.6241-1(a)(8) of this chapter) but occurs in the
adjustment year (as defined in Sec. 301.6241-1(a)(1) of this chapter).
See paragraphs (b)(2)(iii)(a) and (f), (b)(2)(iv)(i)(4), and (b)(4)(xi)
through (xv) of this section.
(b) Successors--(1) In general. In the case of a transfer or
liquidation of a partnership interest subsequent to a reviewed year, a
successor has the meaning provided in paragraph (b)(1)(viii)(b) of this
section. In the case of a subsequent transfer by a successor of a
partnership interest, the principles of paragraph (b)(1)(viii)(b) of
this section will also apply to the new successor.
(2) Identifiable transferee partner. Except as otherwise provided
in paragraph (b)(1)(viii)(b)(3) of this section, in the case of a
transfer of all or part of a partnership interest during or subsequent
to the reviewed year, a successor is the partner to which the reviewed
year transferor partner's capital account carried over (or would carry
over if the partnership maintained capital accounts) under paragraph
(b)(2)(iv)(l) of this section (an identifiable transferee partner).
(3) Unidentifiable transferee partner. If, after exercising
reasonable diligence, the partnership cannot determine an identifiable
transferee partner under paragraph (b)(1)(viii)(b)(2) of this section,
each partner in the adjustment year that is not an identifiable
transferee partner and was not a partner in the reviewed year, (an
unidentifiable transferee partner) is a successor to the extent of the
proportion of its interest in the partnership to the total interests of
unidentifiable transferee partners in the partnership (considering all
facts and circumstances).
(4) Liquidation of partnership interest. In the case of a
liquidation of a partner's entire interest in the partnership during or
subsequent to the reviewed year, the successors to the liquidated
partner are certain adjustment year partners (as defined in Sec.
301.6241-1(a)(2) of this chapter) as provided in this paragraph
(b)(1)(viii)(b)(4). The determination of the extent to which the
adjustment year partners are treated as successors under this section
must be made in a manner that reflects the extent to which the
adjustment year partners' interests in the partnership increased as a
result of the liquidating distribution (considering all facts and
circumstances).
(2) * * *
(iii) * * *
(a) * * * Notwithstanding any other sentence of this paragraph
(b)(2)(iii)(a), an allocation of any of the following will be
substantial only if the allocation is described in paragraph
(b)(2)(iii)(f) of this section: an expenditure for any payment required
to be made by a partnership under subchapter C of chapter 63 (relating
to the centralized partnership audit regime), adjustments reflected on
a statement furnished to a pass-through partner (as defined in Sec.
301.6241-1(a)(5) of this chapter) under Sec. 301.6226-3(e)(4) of this
chapter, or interest, penalties, additions to tax, or additional
amounts described in section 6233.
* * * * *
(f) Certain expenditures under the centralized partnership audit
regime--(1) In general. The economic effect of an allocation of an
expenditure for any payment required to be made by a partnership under
subchapter C of chapter 63 (as described in Sec. 301.6241-4(a) of this
chapter) is substantial only if the expenditure is allocated in the
manner described in this paragraph (b)(2)(iii)(f). For partnerships
with allocations that do not satisfy paragraph (b)(2)(ii) of this
section, see paragraph (b)(4)(xi) of this section.
(2) Expenditures for imputed underpayments or similar amounts.
Except as otherwise provided, an expenditure for an imputed
underpayment, as defined in Sec. 301.6241-1(a)(3) of this chapter, is
allocated to the reviewed year partner (or its successor, as defined in
paragraph (b)(1)(viii)(b) of this section) in proportion to the
allocation of the notional item (as described in Sec. 301.6225-4(b) of
this chapter) to which the expenditure relates, taking into account
modifications under Sec. 301.6225-2 of this chapter attributable to
that partner.
(3) Interest, penalties, additions to tax, or additional amounts
described in section 6233. An expenditure for interest, penalties,
additions to tax, or additional amounts as determined under section
6233 (or penalties and interest described in Sec. 301.6226-3(e)(4)(iv)
of this chapter) is allocated to the reviewed year partner (or its
successor, as defined in paragraph (b)(1)(viii)(b) of this section) in
proportion to the allocation of the portion of the imputed underpayment
with respect to which the penalty applies or related notional item to
which it relates (whichever is appropriate), taking into account
modifications under Sec. 301.6225-2 of this chapter attributable to
that partner.
(4) Imputed underpayments unrelated to notional items. In the case
of an imputed underpayment that results from a partnership adjustment
for which no notional items are created under Sec. 301.6225-4(b)(2) of
this chapter, the expenditure must be allocated to the reviewed year
partner (or its successor, as defined in paragraph (b)(1)(viii)(b) of
this section) that would have borne the economic benefit or burden of
the partnership adjustment if the partnership and its partners had
originally reported in a manner consistent with the partnership
adjustment that resulted in the imputed underpayment with respect to
the reviewed year.
(iv) * * *
(i) * * *
(4) Certain expenditures under the centralized partnership audit
regime. Notwithstanding paragraph (b)(2)(iv)(i)(1) of this section, the
economic effect of an allocation of an expenditure for any payment
required to be made by a partnership under subchapter C of chapter 63
(as described in Sec. 301.6241-4(a) of this chapter) is substantial
only if the expenditure is allocated in the manner described in
paragraph (b)(2)(iii)(f) of this section. For partnerships with
allocations that do not satisfy paragraph (b)(2)(ii) of this section,
see paragraph (b)(4)(xii) of this section.
* * * * *
(4) * * *
(xi) Notional items under the centralized partnership audit regime.
An allocation of a notional item (as described in Sec. 301.6225-
4(b)(3) of this chapter) does not have substantial economic effect
within the meaning of paragraph (b)(2) of this section. However, the
allocation of a notional item of income or gain described in Sec.
301.6225-4(b)(3)(ii) and (iv) of this chapter, or expense or loss
described in Sec. 301.6225-4(b)(3)(iii) and (v) of this chapter, will
be deemed to be in accordance with the partners' interests in the
partnership if the notional item is allocated in the manner in which
the corresponding actual item would have been allocated in the reviewed
year under the rules of this section, treating successors (as defined
in paragraph (b)(1)(viii)(b) of this section) as reviewed year
partners. Additionally, the allocation of a notional item of expense or
loss described in Sec. 301.6225-4(b)(3)(iv) of this chapter, or a
notional item of income or gain described in Sec. 301.6225-4(b)(3)(v)
of this chapter, will be deemed to be in accordance with the partners'
interests in the partnership if the notional item is allocated to the
reviewed year partners (or their successors as defined in paragraph
(b)(1)(viii)(b) of this section) in the
[[Page 41971]]
manner in which the excess item was allocated in the reviewed year.
(xii) Certain section 705(a)(2)(B) expenditures under the
centralized partnership audit regime. An allocation of an expenditure
for any payment required to be made by a partnership under subchapter C
of chapter 63 (relating to the centralized partnership audit regime and
as described in Sec. 301.6241-4(a) of this chapter) will be deemed to
be in accordance with the partners' interests in the partnership, as
provided in paragraph (b)(3) of this section, only if the expenditure
is allocated in the manner described in paragraph (b)(2)(iii)(f) of
this section and if the partners' distribution rights are reduced by
the partners' shares of the imputed underpayment.
(xiii) Partnership adjustments that do not result in an imputed
underpayment under the centralized partnership audit regime. An
allocation of an item arising from a partnership adjustment that does
not result in an imputed underpayment (as defined in Sec. 301.6225-
1(f) of this chapter) does not have substantial economic effect within
the meaning of paragraph (b)(2) of this section. However, the
allocation of such an item will be deemed to be in accordance with the
partners' interests in the partnership if allocated in the manner in
which the item would have been allocated in the reviewed year under the
rules of this section, treating successors as defined in paragraph
(b)(1)(viii)(b) of this section as reviewed year partners.
(xiv) Partnership adjustments subject to an election under section
6226. An allocation of an item arising from a partnership adjustment
that results in an imputed underpayment for which an election is made
under Sec. 301.6226-1 of this chapter does not have substantial
economic effect within the meaning of paragraph (b)(2) of this section.
However, the allocation of such an item will be deemed to be in
accordance with the partners' interests in the partnership if allocated
in the adjustment year (as defined in Sec. 301.6241-1(a)(1) of this
chapter) in the manner in which the item would have been allocated
under the rules of this section (or otherwise taken into account under
subtitle A of the Code) in the reviewed year (as defined in Sec.
301.6241-1(a)(8) of this chapter), followed by any intervening years
(as defined in Sec. 301.6226-3(b)(3) of this chapter), concluding with
the reporting year (as defined in Sec. 301.6226-3(a) of this chapter).
(xv) Substantial economic effect under sections 168(h) and
514(c)(9)(E)(i)(ll). An allocation described in paragraphs (b)(4)(xi)
through (xiv) of this section will be deemed to have substantial
economic effect for purposes of sections 168(h) and 514(c)(9)(E)(i)(ll)
if the allocation is deemed to be in accordance with the partners'
interests in the partnership under the applicable rules set forth in
paragraphs (b)(4)(xi) through (xiv) of this section.
* * * * *
0
Par. 3. Section 1.705-1 is amended by adding paragraph (a)(10) to read
as follows:
Sec. 1.705-1 Determination of basis of partner's interest.
(a) * * *
(10) For rules relating to determining the adjusted basis of a
partner's interest in a partnership following a final determination
under subchapter C of chapter 63 of the Internal Revenue Code (relating
to the centralized partnership audit regime), see Sec. Sec. 301.6225-4
and 301.6226-4 of this chapter.
* * * * *
0
Par. 4. Section 1.706-4 is amended by redesignating paragraphs
(e)(2)(viii) through (xi) as paragraphs (e)(2)(ix) through (xii),
respectively, and adding a new paragraph (e)(2)(viii) to read as
follows:
Sec. 1.706-4 Determination of distributive share when a partner's
interest varies.
* * * * *
(e) * * *
(2) * * *
(viii) Any item arising from a final determination under subchapter
C of chapter 63 of the Internal Revenue Code (relating to the
centralized partnership audit regime) with respect to a partnership
adjustment resulting in an imputed underpayment for which no election
is made under Sec. 301.6226-1 of this chapter or for which a pass-
through partner (as defined in Sec. 301.6241-1(a)(5)) pays an imputed
underpayment under Sec. 301.6226-3(e)(4).
* * * * *
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 5. The authority citation for part 301 continues to read in part
as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 6. Section 301.6221(a)-1 is added to read as follows:
Sec. 301.6221(a)-1 Determination at partnership level.
(a) In general. Except as otherwise provided under subchapter C of
chapter 63 of the Internal Revenue Code (subchapter C of chapter 63)
and the regulations thereunder, any adjustment to a partnership-related
item (as defined in Sec. 301.6241-6) is determined, any tax imposed by
chapter 1 of subtitle A of the Internal Revenue Code (Code)
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 partnership-related item is determined at the
partnership level under subchapter C of chapter 63. Any consideration
necessary to make a determination at the partnership level under
subchapter C of chapter 63, including the period of limitations on
making partnership adjustments under section 6235 or facts necessary to
calculate an imputed underpayment under section 6225, is also made at
the partnership level except as otherwise provided under subchapter C
of chapter 63 and the regulations thereunder. For rules relating to
assessment and collection in a proceeding involving inconsistent
treatment of a partnership-related item, see Sec. 301.6222-1; in the
case of modification under section 6225(c), see Sec. 301.6225-2; in
the case of an election under section 6226, see Sec. 301.6226-3. For
rules relating to tax imposed (including any amount required to be
deducted or withheld) by chapter 2, 2A, 3 or 4 of subtitle A of the
Code, see section 6241(9) and Sec. 301.6241-7. For rules relating to
special enforcement matters, see Sec. 301.6241-8.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 7. 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 partnership-related items--(1) In
general. The treatment of partnership-related items (as defined in
Sec. 301.6241-6) on a partner's return must be consistent with the
treatment of such items on the partnership return in all respects,
including the amount, timing, and characterization of such items. A
partner has not satisfied the requirement of this paragraph (a) if the
treatment of the partnership-related item on the partner's return is
consistent with how such 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
[[Page 41972]]
filed. For rules relating to the election to be treated as having
reported the inconsistency where the partner treats a partnership-
related 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 partnership-related
items of 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 a
partnership-related item 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 a partnership-related item on a
partnership return includes--
(i) The treatment of such 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 such 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
$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
partnership-related 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) and
Sec. 301.6232-1(d).
(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,
[[Page 41973]]
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
partnership-related items and the effect of inconsistent treatment) do
not apply to partnership-related 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 partnership-related item is treated inconsistently.
(2) Coordination with section 6223. Paragraph (c)(1) of this
section is not applicable to a partnership-related 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 a partnership-related 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 a partnership-related 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 such
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 a partnership-related 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 to
one partnership-related item does not report the inconsistent treatment
of another partnership-related 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 such 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 a partnership-related
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 partnership-
related 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 partnership-related items. 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
[[Page 41974]]
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 a partnership-related
item if the partner--
(i) Demonstrates that the treatment of such 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 partnership-related 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 the partnership-related 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 partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22 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.
301.9100-22 is in effect.
0
Par 8. Section 301.6225-1 is added to read as follows:
Sec. 301.6225-1 Partnership Adjustment by the Internal Revenue
Service.
(a) Imputed underpayment based on partnership adjustments--(1) In
general. In the case of any partnership adjustments (as defined in
Sec. 301.6241-1(a)(6)) by the Internal Revenue Service (IRS), if the
adjustments result in an imputed underpayment (as determined in
accordance with paragraph (b) of this section), the partnership must
pay an amount equal to such imputed underpayment in accordance with
paragraph (a)(2) of this section. If the adjustments do not result in
an imputed underpayment (as described in paragraph (f) of this
section), such adjustments must be taken into account by the
partnership in the adjustment year (as defined in Sec. 301.6241-
1(a)(1)) in accordance with Sec. 301.6225-3. Partnership adjustments
may result in more than one imputed underpayment pursuant to paragraph
(g) of this section. Each imputed underpayment determined under this
section is based solely on partnership adjustments with respect to a
single taxable year.
(2) Partnership pays the imputed underpayment. An imputed
underpayment (determined in accordance with paragraph (b) of this
section and included in a notice of final partnership adjustment (FPA)
under section 6231(a)(3)) must be paid by the partnership in the same
manner as if the imputed underpayment were a tax imposed for the
adjustment year in accordance with Sec. 301.6232-1. The FPA 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 FPA under section 6232(d)(2). See Sec. 301.6232-1(d)(2). For the
alternative to payment of the imputed underpayment by the partnership,
see Sec. 301.6226-1. If a partnership pays an imputed underpayment,
the partnership's expenditure for the imputed underpayment is 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.
(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(a)(2) is
determined in accordance with paragraph (b) 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 change the amount of an
imputed underpayment set forth in the NOPPA and determined in
accordance with paragraph (b) of this section. Only the partnership
adjustments set forth in a NOPPA are taken into account for purposes of
determining an imputed underpayment under this section and any
modification under Sec. 301.6225-2.
(b) Determination of an imputed underpayment--(1) In general. In
the case of any partnership adjustment by the IRS, an imputed
underpayment is determined by--
(i) Grouping the partnership adjustments in accordance with
paragraph (c) of this section and, if appropriate, subgrouping such
adjustments in accordance with paragraph (d) of this section;
(ii) Netting the adjustments in accordance with paragraph (e) of
this section;
(iii) Calculating the total netted partnership adjustment in
accordance with paragraph (b)(2) of this section;
(iv) Multiplying the total netted partnership adjustment by the
highest rate of Federal income tax in effect for
[[Page 41975]]
the reviewed year under section 1 or 11; and
(v) Increasing or decreasing the product that results under
paragraph (b)(1)(iv) of this section by--
(A) Any amounts treated under paragraph (e)(3)(ii) of this section
as net positive adjustments (as defined in paragraph (e)(4)(i) of this
section); and
(B) Any net negative adjustments (as defined in paragraph
(e)(4)(ii) of this section), except net negative adjustments resulting
from reallocation adjustments to credits as described in paragraph
(d)(3)(ii) of this section and creditable tax expenditures described in
paragraph (e)(3)(iii) of this section.
(2) Calculation of the total netted partnership adjustment. For
purposes of determining an imputed underpayment under paragraph (b)(1)
of this section, the total netted partnership adjustment is the sum of
all net positive adjustments in the reallocation grouping described in
paragraph (c)(2) of this section and the residual grouping described in
paragraph (c)(5) of this section.
(3) Adjustments to items for which tax has been collected under
chapters 3 and 4. A partnership adjustment is disregarded for purposes
of calculating the total netted partnership adjustment under paragraph
(b)(2) of this section to the extent that the IRS has collected the tax
required to be withheld under chapter 3 or chapter 4 (as defined in
Sec. 301.6241-7(b)(2)(ii) and (iii)) that is attributable to the
partnership adjustment. See Sec. 301.6241-7(b)(3) for rules that apply
when a partnership pays an imputed underpayment that includes a
partnership adjustment to an amount subject to withholding (as defined
in Sec. 301.6241-7(b)(2)(i)) under chapter 3 or chapter 4 for which
such tax has not yet been collected.
(4) Treatment of adjustment as zero for purposes of calculating the
imputed underpayment. If the effect of a partnership adjustment under
chapter 1 of subtitle A of the Internal Revenue Code (Code) to any
person is reflected in another adjustment taken into account under this
section, the IRS may treat an adjustment as zero solely for purposes of
calculating the imputed underpayment.
(c) Grouping of partnership adjustments--(1) In general. To
determine an imputed underpayment under paragraph (b) of this section,
partnership adjustments are placed into one of four groupings. These
groupings are the reallocation grouping described in paragraph (c)(2)
of this section, the credit grouping described in paragraph (c)(3) of
this section, the creditable expenditure grouping described in
paragraph (c)(4) of this section, and the residual grouping described
in paragraph (c)(5) of this section. Adjustments in groupings may be
placed in subgroupings, as appropriate, in accordance with paragraph
(d) of this section. The IRS may, in its discretion, group adjustments
in a manner other than the manner described in this paragraph (c) when
such grouping would appropriately reflect the facts and circumstances.
For requests to modify the groupings, see Sec. 301.6225-2(d)(6).
(2) Reallocation grouping--(i) In general. Any adjustment that
allocates or reallocates a partnership-related item to and from a
particular partner or partners is a reallocation adjustment. Except in
the case of an adjustment to a credit (as described in paragraph (c)(3)
of this section) or to a creditable expenditure (as described in
paragraph (c)(4) of this section), reallocation adjustments are placed
in the reallocation grouping. Adjustments that reallocate a credit to
and from a particular partner or partners are placed in the credit
grouping (see paragraph (c)(3) of this section), and adjustments that
reallocate a creditable expenditure to and from a particular partner or
partners are placed in the creditable expenditure grouping (see
paragraph (c)(4) of this section).
(ii) Each reallocation adjustment results in at least two separate
adjustments. Each reallocation adjustment generally results in at least
two separate adjustments. One adjustment reverses the effect of the
improper allocation of a partnership-related item, and the other
adjustment effectuates the proper allocation of the partnership-related
item. Generally, a reallocation adjustment results in one positive
adjustment (as defined in paragraph (d)(2)(iii) of this section) and
one negative adjustment (as defined in paragraph (d)(2)(ii) of this
section).
(3) Credit grouping. Each adjustment to a partnership-related item
that is reported or could be reported by a partnership as a credit on
the partnership's return, including a reallocation adjustment, is
placed in the credit grouping.
(4) Creditable expenditure grouping--(i) In general. Each
adjustment to a creditable expenditure, including a reallocation
adjustment to a creditable expenditure, is placed in the creditable
expenditure grouping.
(ii) Adjustment to a creditable expenditure--(A) In general. For
purposes of this section, an adjustment to a partnership-related item
is treated as an adjustment to a creditable expenditure if any person
could take the item that is adjusted (or item as adjusted if the item
was not originally reported by the partnership) as a credit. See Sec.
1.704-1(b)(4)(ii) of this chapter. For instance, if the adjustment is a
reduction of qualified research expenses, the adjustment is to a
creditable expenditure for purposes of this section because any person
allocated the qualified research expenses by the partnership could
claim a credit with respect to their allocable portion of such expenses
under section 41, rather than a deduction under section 174.
(B) Creditable foreign tax expenditures. The creditable expenditure
grouping includes each adjustment to a creditable foreign tax
expenditure (CFTE) as defined in Sec. 1.704-1(b)(4)(viii)(b) of this
chapter, including any reallocation adjustment to a CFTE.
(5) Residual grouping--(i) In general. Any adjustment to a
partnership-related item not described in paragraph (c)(2), (3), or (4)
of this section is placed in the residual grouping.
(ii) Adjustments to partnership-related items that are not
allocated under section 704(b). The residual grouping includes any
adjustment to a partnership-related item that derives from an item that
would not have been required to be allocated by the partnership to a
reviewed year partner under section 704(b).
(6) Recharacterization adjustments--(i) Recharacterization
adjustment defined. An adjustment that changes the character of a
partnership-related item is a recharacterization adjustment. For
instance, an adjustment that changes a loss from ordinary to capital or
from active to passive is a recharacterization adjustment.
(ii) Grouping recharacterization adjustments. A recharacterization
adjustment is placed in the appropriate grouping as described in
paragraphs (c)(2) through (5) of this section.
(iii) Recharacterization adjustments result in two partnership
adjustments. In general, a recharacterization adjustment results in at
least two separate adjustments in the appropriate grouping under
paragraph (c)(6)(ii) of this section. One adjustment reverses the
improper characterization of the partnership-related item, and the
other adjustment effectuates the proper characterization of the
partnership-related item. A recharacterization adjustment results in
two adjustments regardless of whether the amount of the partnership-
related item is being adjusted. Generally, recharacterization
adjustments result in one positive
[[Page 41976]]
adjustment and one negative adjustment.
(d) Subgroupings--(1) In general. If any partnership adjustment
within any grouping described in paragraph (c) of this section is a
negative adjustment, the adjustments within that grouping are
subgrouped in accordance with this paragraph (d). If all partnership
adjustments within the groupings are positive adjustments, this
paragraph (d) does not apply, and no adjustment within the groupings is
subgrouped in accordance with this paragraph (d). The IRS may, in its
discretion, subgroup adjustments in a manner other than the manner
described in this paragraph (d) when such subgrouping would
appropriately reflect the facts and circumstances. For requests to
modify the subgroupings, see Sec. 301.6225-2(d)(6).
(2) Definition of negative adjustments and positive adjustments--
(i) In general. For purposes of this section, partnership adjustments
made by the IRS are treated as follows:
(A) An increase in an item of gain is treated as an increase in an
item of income;
(B) A decrease in an item of gain is treated as a decrease in an
item of income;
(C) An increase in an item of loss or deduction is treated as a
decrease in an item of income; and
(D) A decrease in an item of loss or deduction is treated as an
increase in an item of income.
(ii) Negative adjustment. A negative adjustment is any adjustment
that is a decrease in an item of income, a partnership adjustment
treated under paragraph (d)(2)(i) of this section as a decrease in an
item of income, or an increase in an item of credit.
(iii) Positive adjustment--(A) In general. A positive adjustment is
any adjustment that is not a negative adjustment as defined in
paragraph (d)(2)(ii) of this section.
(B) Treatment of adjustments that cannot be allocated under section
704(b). For purposes of determining an imputed underpayment under this
section, an adjustment described in paragraph (c)(5)(ii) of this
section that could result in an increase in income or decrease in a
loss, deduction, or credit for any person without regard to any
particular person's specific circumstances is treated as a positive
adjustment to income to the extent appropriate.
(3) Subgrouping rules--(i) In general. Except as otherwise provided
in this paragraph (d)(3), an adjustment is subgrouped according to how
the adjustment would be required to be taken into account separately
under section 702(a) or any other provision of the Code or regulations
applicable to the adjusted partnership-related item. For purposes of
creating subgroupings under this section, if any adjustment could be
subject to any preference, limitation, or restriction under the Code
(or not allowed, in whole or in part, against ordinary income) if taken
into account by any person, the adjustment is placed in a separate
subgrouping from all other adjustments within the grouping. A negative
adjustment that is not otherwise required to be placed in its own
subgrouping under this paragraph (d)(3) must be placed in the same
subgrouping as another adjustment if the negative adjustment and the
other adjustment would have been properly netted at the partnership
level and such netted amount would have been required to be allocated
to the partners of the partnership as a single partnership-related item
for purposes of section 702(a) or other provision of the Code and
regulations.
(ii) Subgrouping reallocation adjustments--(A) Reallocation
adjustments in the reallocation grouping. Each positive adjustment and
each negative adjustment resulting from a reallocation adjustment as
described in paragraph (c)(2)(ii) of this section is placed in its own
separate subgrouping within the reallocation grouping. For instance, if
the reallocation adjustment reallocates a deduction from one partner to
another partner, the decrease in the deduction (positive adjustment)
allocated to the first partner is placed in a subgrouping within the
reallocation grouping separate from the increase in the deduction
(negative adjustment) allocated to the second partner. If a particular
partner or group of partners has two or more reallocation adjustments
allocable to such partner or group, such adjustments may be subgrouped
in accordance with paragraph (d)(3)(i) of this section and netted in
accordance with paragraph (e) of this section.
(B) Reallocation adjustments in the credit grouping. In the case of
a reallocation adjustment to a credit, which is placed in the credit
grouping pursuant to paragraph (c)(3) of this section, the decrease in
credits allocable to one partner or group of partners is treated as a
positive adjustment, and the increase in credits allocable to another
partner or group of partners is treated as a negative adjustments. Each
positive adjustment and each negative adjustment resulting from a
reallocation adjustment to credits is placed in its own separate
subgrouping within the credit grouping.
(iii) Subgroupings within the creditable expenditure grouping--(A)
In general. Each adjustment in the creditable expenditure grouping
described in paragraph (c)(4) of this section is subgrouped in
accordance with this paragraph (d)(3)(iii).
(B) Subgroupings for adjustments to CFTEs. Each adjustment to a
CFTE is subgrouped based on the separate category of income to which
the CFTE relates in accordance with section 904(d) and the regulations
thereunder, and to account for any different allocation of the CFTE
between partners. Two or more adjustments to CFTEs are included within
the same subgrouping only if each adjustment relates to CFTEs in the
same separate category, and each adjusted partnership-related item
would be allocated to the partners in the same ratio had those items
been properly reflected on the partnership return for the reviewed
year.
(C) Other creditable expenditures. [Reserved]
(iv) Subgrouping recharacterization adjustments. Each positive
adjustment and each negative adjustment resulting from a
recharacterization adjustment as described in paragraph (c)(6) of this
section is placed in its own separate subgrouping within the residual
grouping. If a particular partner or group of partners has two or more
recharacterization adjustments allocable to such partner or group, such
adjustments may be subgrouped in accordance with paragraph (d)(3)(i) of
this section and netted in accordance with paragraph (e) of this
section.
(e) Netting adjustments within each grouping or subgrouping--(1) In
general. All adjustments within a subgrouping determined in accordance
with paragraph (d) of this section are netted in accordance with this
paragraph (e) to determine whether there is a net positive adjustment
(as defined in paragraph (e)(4)(i) of this section) or net negative
adjustment (as defined in paragraph (e)(4)(ii) of this section) for
that subgrouping. If paragraph (d) of this section does not apply
because a grouping only includes positive adjustments, all adjustments
in that grouping are netted in accordance with this paragraph (e). For
purposes of this paragraph (e), netting means summing all adjustments
together within each grouping or subgrouping, as appropriate.
(2) Limitations on netting adjustments. Positive adjustments and
negative adjustments may only be netted against each other if they are
in the same grouping or subgrouping in accordance with the rules in
paragraphs
[[Page 41977]]
(c) and (d) of this section. An adjustment in one grouping or
subgrouping may not be netted against an adjustment in any other
grouping or subgrouping. Adjustments from one taxable year may not be
netted against adjustments from another taxable year.
(3) Results of netting adjustments within groupings or
subgroupings--(i) Groupings other than the credit and creditable
expenditure groupings. Except as described in paragraphs (e)(3)(ii) and
(iii) of this section, each net positive adjustment (as defined in
paragraph (e)(4)(i) of this section) with respect to a particular
grouping or subgrouping that results after netting the adjustments in
accordance with this paragraph (e) is included in the calculation of
the total netted partnership adjustment under paragraph (b)(2) of this
section. Each net negative adjustment (as defined in paragraph
(e)(4)(ii) of this section) with respect to a grouping or subgrouping
that results after netting the adjustments in accordance with this
paragraph (e) is excluded from the calculation of the total netted
partnership adjustment under paragraph (b)(2) of this section.
Adjustments underlying a net negative adjustment described in the
preceding sentence are adjustments that do not result in an imputed
underpayment (as described in paragraph (f) of this section).
(ii) Credit grouping. Any net positive adjustment or net negative
adjustment in the credit grouping (including any such adjustment with
respect to a subgrouping within the credit grouping) is excluded from
the calculation of the total netted partnership adjustment. A net
positive adjustment or net negative adjustment described in this
paragraph (e)(3)(ii) is taken into account under paragraph (b)(1)(v) of
this section, except for negative adjustments to credits resulting from
a reallocation adjustment that were placed in a separate subgrouping
pursuant to paragraph (d)(3)(ii)(B) of this section. A negative
adjustment to a credit placed in its separate subgrouping under
paragraph (d)(3)(ii)(B) of this section is treated as an adjustment
that does not result in an imputed underpayment in accordance with
paragraph (f)(1)(i) of this section.
(iii) Treatment of creditable expenditures--(A) Creditable foreign
tax expenditures. A net decrease to a CFTE in any CFTE subgrouping (as
described in paragraph (d)(3)(iii)(B) of this section) is treated as a
net positive adjustment described in paragraph (e)(3)(ii) of this
section. A net increase to a CFTE in any CFTE subgrouping is treated as
a net negative adjustment described in paragraph (e)(3)(i) of this
section.
(B) Other creditable expenditures. [Reserved]
(4) Net positive adjustment and net negative adjustment defined--
(i) Net positive adjustment. A net positive adjustment means an amount
that is greater than zero which results from netting adjustments within
a grouping or subgrouping in accordance with this paragraph (e). A net
positive adjustment includes a positive adjustment that was not netted
with any other adjustment. A net positive adjustment includes a net
decrease in an item of credit.
(ii) Net negative adjustment. A net negative adjustment means any
amount which results from netting adjustments within a grouping or
subgrouping in accordance with this paragraph (e) that is not a net
positive adjustment (as defined in paragraph (e)(4)(i) of this
section). A net negative adjustment includes a negative adjustment that
was not netted with any other adjustment.
(f) Partnership adjustments that do not result in an imputed
underpayment--(1) In general. Except as otherwise provided in paragraph
(e) of this section, a partnership adjustment does not result in an
imputed underpayment if--
(i) After grouping, subgrouping, and netting the adjustments as
described in paragraphs (c), (d), and (e) of this section, the result
of netting with respect to any grouping or subgrouping that includes a
particular partnership adjustment is a net negative adjustment (as
described in paragraph (e)(4)(ii) of this section); or
(ii) The calculation under paragraph (b)(1) of this section results
in an amount that is zero or less than zero.
(2) 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 (b)(2) of this section) is
taken into account by the partnership in the adjustment year in
accordance with Sec. 301.6225-3. If the partnership makes an election
pursuant to section 6226 with respect to an imputed underpayment, the
adjustments that do not result in that imputed underpayment that are
associated with that imputed underpayment (as described in paragraph
(g)(2)(iii)(B) of this section) are taken into account by the reviewed
year partners in accordance with Sec. 301.6226-3.
(g) 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 facts and circumstances and 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
(described in paragraph (d)(2)(ii) of this section) and a specific
imputed underpayment (described in paragraph (d)(2)(iii) of this
section). Each type of imputed underpayment is separately calculated in
accordance with 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 (f) of this
section) that are not taken into account to determine a specific
imputed underpayment under paragraph (g)(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 (g)(2)(iii) of this section,
if any, and all adjustments that do not result in that general imputed
underpayment (as described in paragraph (e) of this section) are
associated with that general imputed underpayment.
(iii) Specific imputed underpayment--(A) In general. The IRS may,
in its discretion, designate a specific imputed underpayment with
respect to adjustments to a partnership-related 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 or on such other basis as the IRS determines properly
reflects the facts and circumstances. 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
[[Page 41978]]
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
(g)(2)(iii)(A) 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 grouping and netting result in net negative
adjustments and are disregarded in calculating the specific imputed
underpayment.
(B) Adjustments that do not result in an imputed underpayment
associated with a specific imputed underpayment. If the IRS designates
a specific imputed underpayment, the IRS will designate which
adjustments that do not result in an imputed underpayment, if any, are
appropriate to associate with that specific imputed underpayment. If
the adjustments underlying that specific imputed underpayment are
reallocation adjustments or recharacterization adjustments, the net
negative adjustment that resulted from the reallocation or
recharacterization is associated with the specific imputed
underpayment. Any adjustments that do not result in an imputed
underpayment that are not associated with a specific imputed
underpayment under this paragraph (d)(2)(iii)(B) are associated with
the general imputed underpayment.
(h) 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). Pursuant to paragraph (c)
of this section, the adjustments are both in the residual grouping.
The <$10> adjustment to the ordinary deduction would result in a
decrease in the imputed underpayment if netted with the $5
adjustment to ordinary income. Because the <$10> adjustment to the
ordinary deduction might be limited if taken into account by any
person, it is grouped in a separate subgrouping from the $5
adjustment to ordinary income. The total netted partnership
adjustment is $5, which results in an imputed underpayment of $2.
The <$10> adjustment to the ordinary deduction is a net negative
amount and is an adjustment that does not result in an imputed
underpayment which is taken into account by Partnership in the
adjustment year in accordance with Sec. 301.6225-3.
Example 2. The facts are the same as Example 1 of this paragraph
(h), except that the <$10> adjustment would not be limited if taken
into account by any of its partners (direct or indirect). The IRS
may, in its discretion, group the $5 adjustment and the <$10>
adjustment together in the residual grouping. As a result, the $5
and the <$10> adjustments are netted under paragraph (e) of this
section. Such netting results in a net negative adjustment (as
defined under paragraph (e)(4)(ii)) in the residual grouping of <$5>
under paragraph (e) of this section. Pursuant to paragraph (f) of
this section, the <$5> net negative adjustment is an adjustment that
does not result in an imputed underpayment. Therefore, since the
only net adjustment is an adjustment that does not result in an
imputed underpayment, there is no imputed underpayment.
Example 3. 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 Partnership's 2019 taxable
year, the IRS determines that ordinary income is $500 ($200
adjustment), long-term capital gain is $200 ($75 adjustment), long-
term capital loss is <$25> ($50 adjustment), the depreciation
deduction is <$70> ($30 adjustment), and the tax credit is $3 ($2
adjustment). Pursuant to paragraph (c) of this section, the tax
credit is in the credit grouping under paragraph (c)(3) of this
section. The remaining adjustments are part of the residual grouping
under paragraph (c)(5) of this section. Pursuant to paragraph (d)(2)
of this section, all of the adjustments in the residual grouping are
positive adjustments. Because there are no negative adjustments,
there is no need for further subgrouping within the residual
grouping. Under paragraph (b)(2), the adjustments in the residual
grouping are summed for a total netted partnership adjustment of
$355. Under paragraph (b)(1)(iv) of this section, the total netted
partnership adjustment is multiplied by 40 percent (highest tax rate
in effect), which results in $142. Under paragraph (b)(1)(iv) of
this section, the $142 is increased by the $2 credit adjustment,
resulting in an imputed underpayment of $144.
Example 4. 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. There are no other
adjustments for the 2019 taxable year. This recharacterization
adjustment results in two adjustments in the residual grouping
pursuant to paragraph (c)(6) of this section: an increase in
ordinary income of $125 ($125 adjustment) as well as a decrease of
long-term capital gain of $125 (<$125> adjustment). The decrease in
long-term capital gain is a negative adjustment under paragraph
(d)(2)(ii) of this section and the increase in ordinary income is a
positive adjustment under paragraph (d)(2)(iii) of this section.
Under paragraph (d)(3)(i) of this section, the adjustment to long-
term capital gain is placed in a subgrouping separate from the
adjustment to ordinary income because the reduction of long-term
capital gain is required to be taken into account separately
pursuant to section 702(a). The $125 decrease in long-term capital
gain is a net negative adjustment in the long-term capital
subgrouping and as a result is an adjustment that does not result in
an imputed underpayment under paragraph (f) of this section. The
$125 increase in ordinary income results in a net positive
adjustment under paragraph (e)(4)(i) of this section. Because the
ordinary subgrouping is the only subgrouping resulting in a net
positive adjustment, $125 is the total netted partnership adjustment
under paragraph (b)(2) of this section. Under paragraph (b)(1)(iv)
of this section, $125 is multiplied by 40 percent resulting in an
imputed underpayment of $50.
Example 5. Partnership reported a $100 deduction for certain
expenses on its 2019 partnership return and an additional $100
deduction with respect to the same type of 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
the 2019 residual grouping). For 2020, the IRS determines that
Partnership should have reported a deduction of $125 with respect to
these expenses (<$25> adjustment in the 2020 residual grouping).
There are no other adjustments for the 2019 and 2020 partnership
taxable years. Pursuant to paragraph (e)(2) of this section, the
adjustments for 2019 and 2020 are not netted with each other. The
2019 adjustment of $25 is the only adjustment for that year and a
net positive adjustment under paragraph (e)(4)(i) of this section,
and therefore the total netted partnership adjustment for 2019 is
$25 pursuant to paragraph (b)(2) of this section. The $25 total
netted partnership adjustment is multiplied by 40 percent resulting
in an imputed underpayment of $10 for
[[Page 41979]]
Partnership's 2019 taxable year. The $25 increase in the deduction
for 2020 a net negative adjustment under paragraph (e)(4)(ii) of
this section is an adjustment that does not result in an imputed
underpayment for that year. Therefore, there is no imputed
underpayment for 2020.
Example 6. On its partnership return for the 2020 taxable year,
Partnership reported ordinary income of $100 and a capital gain of
$50. 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
instead of $50 and that Partnership should have recognized an
additional $10 in ordinary income. In the NOPPA mailed by the IRS,
the IRS may determine pursuant to paragraph (g) 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.
Example 7. On its partnership return for the 2020 taxable year,
Partnership reported a recourse liability of $100. During an
administrative proceeding with respect to Partnership's 2020 taxable
year, the IRS determines that the $100 recourse liability should
have been reported as a $100 nonrecourse liability. Under paragraph
(d)(2)(iii)(B), the adjustment to the character of the liability
results in a $100 increase in income because such recharacterization
of a liability could result in up to $100 in taxable income if taken
into account by any person. The $100 increase in income is a
positive adjustment in the residual grouping under paragraph
(c)(5)(ii) of this section. There are no other adjustments for the
2020 partnership taxable year. The $100 positive adjustment is
treated as a net positive adjustment under paragraph (e)(4)(i) of
this section, and the total netted partnership adjustment under
paragraph (b)(2) of this section is $100. Pursuant to paragraph
(b)(1) of this section, the total netted partnership adjustment is
multiplied by 40 percent for an imputed underpayment of $40.
Example 8. Partnership reports on its 2019 partnership return
$400 of CFTEs in the general category under section 904(d). The IRS
initiates an administrative proceeding with respect to Partnership's
2019 taxable year and determines that the amount of CFTEs was $300
instead of $400 (<$100> adjustment to CFTEs). No other adjustments
are made for the 2019 taxable year. The <$100> adjustment to CFTEs
is placed in the creditable expenditure grouping described in
paragraph (c)(4) of this section. Pursuant to paragraph (e)(3)(iii)
of this section, the decrease to CFTEs in the creditable expenditure
grouping is treated as a positive adjustment to (decrease in)
credits in the credit grouping under paragraph (c)(3) of this
section. Because no other adjustments have been made, the $100
decrease in credits produces an imputed underpayment of $100 under
paragraph (b)(1) of this section.
Example 9. Partnership reports on its 2019 partnership return
$400 of CFTEs in the passive category under section 904(d). The IRS
initiates an administrative proceeding with respect to Partnership's
2019 taxable year and determines that the CFTEs reported by
Partnership were general category instead of passive category CFTEs.
No other adjustments are made. Under the rules in paragraph (c)(6)
of this section, an adjustment to the category of a CFTE is treated
as two separate adjustments: An increase to general category CFTEs
of $400 and a decrease to passive category CFTEs of $400. Both
adjustments are included in the creditable expenditure grouping
under paragraph (c)(4) of this section, but they are included in
separate subgroupings. Therefore, the two amounts do not net.
Instead, the $400 increase to CFTEs in the general category
subgrouping is treated as a net negative adjustment under paragraph
(e)(3)(iii)(A) of this section and is an adjustment that does not
result in an imputed underpayment under paragraph (f) of this
section. The decrease to CFTEs in the passive category subgrouping
of the creditable expenditure grouping results in a decrease in
CFTEs. Therefore, pursuant to paragraph (e)(3)(iii)(A) of this
section, it is treated as a decrease in credits in the credit
grouping under paragraph (c)(3) of this section, which results in an
imputed underpayment of $400 under paragraph (b)(1) of this section.
Example 10. Partnership has two partners, A and B. Under the
partnership agreement, $100 of the CFTE is specially allocated to A
for the 2019 taxable year. The IRS initiates an administrative
proceeding with respect to Partnership's 2019 taxable year and
determines that $100 of CFTE should be reallocated from A to B.
Because the adjustment reallocates a creditable expenditure,
paragraph (c)(4) of this section provides that it is included in the
creditable expenditure grouping rather than the reallocation
grouping. The partnership adjustment is a <$100> adjustment to
general category CFTE allocable to A and an increase of $100 to
general category CFTE allocable to B. Pursuant to paragraph
(d)(3)(iii) of this section, the <$100> adjustment to general
category CFTE and the increase of $100 to general category CFTE are
included in separate subgroupings in the creditable expenditure
grouping. The $100 increase in general category CFTEs, B-allocation
subgrouping, is a net negative adjustment, which does not result in
an imputed underpayment and is therefore taken into account by the
partnership in the adjustment year in accordance with Sec.
301.6225-3. The net decrease to CFTEs in the general-category, A-
allocation subgrouping, is treated as a decrease to credits in the
credit grouping under paragraph (c)(3) of this section, resulting in
an imputed underpayment of $100 under paragraph (b)(1) of this
section.
Example 11. Partnership has two partners, A and B. Partnership
owns two entities, DE1 and DE2, that are disregarded as separate
from their owner for Federal tax purposes and are operating in and
paying taxes to foreign jurisdictions. The partnership agreement
provides that all items from DE1 and DE2 are allocable to A and B in
the following manner. Items related to DE1: To A 75% and to B 25%.
Items related to DE2: To A 25% and to B 75%. On Partnership's 2018
return, Partnership reports CFTEs in the general category of $300,
$100 with respect to DE1 and $200 with respect to DE2. Partnership
allocates the $300 of CFTEs $125 and $175 to A and B respectively.
During an administrative proceeding with respect to Partnership's
2018 taxable year, the IRS determines that Partnership understated
the amount of creditable foreign tax paid by DE2 by $40 and
overstated the amount of creditable foreign tax paid by DE1 by $80.
No other adjustments are made. Because the two adjustments each
relate to CFTEs that are subject to different allocations, the two
adjustments are in different subgroupings under paragraph
(d)(3)(iii)(B) of this section. The adjustment reducing the CFTEs
related to DE1 results in a decrease in CFTEs within that
subgrouping and under paragraph (e)(3)(iii)(A) of this section is
treated as a decrease in credits in the credit grouping under
paragraph (c)(3) of this section and results in an imputed
underpayment of $80 under paragraph (b)(1) of this section. The
increase of $40 of general category CFTE related to the DE2
subgrouping results in an increase in CFTEs within that subgrouping
and is treated as a net negative adjustment, which does not result
in an imputed underpayment and is taken into account in the
adjustment year in accordance with Sec. 301.6225-3.
(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. 301.9100-22 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 301.6225-2 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(a)(2) 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 in
paragraph (c) of
[[Page 41980]]
this section. A partnership may request 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(f)(1)(ii)) as described in paragraph (e) of this section. Only the
partnership representative may request modification under this section.
See section 6223 and Sec. 301.6223-2 for rules regarding the binding
authority of the partnership representative. For purposes of this
section, the term relevant partner means any person for whom
modification is requested by the partnership that is--
(1) A reviewed year partner (as defined in Sec. 301.6241-1(a)(9)),
including any pass-through partner (as defined in Sec. 301.6241-
1(a)(5)), except for any reviewed year partner that is a wholly-owned
entity disregarded as separate from its owner for Federal tax purposes,
or
(2) An indirect partner (as defined in Sec. 301.6241-1(a)(4))
except for any indirect partner that is a wholly-owned entity
disregarded as separate from its owner for Federal tax purposes.
(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. 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). See paragraph (e) of this section for the
effect of modification on adjustments that do not result in an imputed
underpayment. A modification may increase or decrease an imputed
underpayment by affecting the extent to which adjustments factor into
the determination of the imputed underpayment (as described in
paragraph (b)(2) of this section), the tax rate that is applied in
calculating the imputed underpayment (as described in paragraph (b)(3)
of this section), and the number and composition of imputed
underpayments, including the placement of adjustments in groupings and
subgroupings (if applicable) (as described in paragraph (b)(4) of this
section), as well as to the extent of other modifications allowed under
rules provided in forms, instructions, or other guidance prescribed by
the IRS (as described in paragraph (b)(5) of this section). If a
partnership requests more than one modification under this section,
modifications are taken into account in the following order:
(i) Modifications that affect the extent to which an adjustment
factors into the determination of the imputed underpayment under
paragraph (b)(2) of this section;
(ii) Modification of the number and composition of imputed
underpayments under paragraph (b)(4) of this section;
(iii) Modifications that affect the tax rate under paragraph (b)(3)
of this section.
(2) Modifications that affect partnership adjustments for purposes
of determining the imputed underpayment. If the IRS approves
modification with respect to a partnership adjustment, such partnership
adjustment is excluded from the determination of the imputed
underpayment as determined under Sec. 301.6225-1(b). This paragraph
(b)(2) applies to modifications under--
(i) Paragraph (d)(2) of this section (amended returns and the
alternative procedure to filing amended returns);
(ii) Paragraph (d)(3) of this section (tax exempt status);
(iii) Paragraph (d)(5) of this section (specified passive activity
losses);
(iv) Paragraph (d)(7) of this section (qualified investment
entities);
(v) Paragraph (d)(8) of this section (closing agreements), if
applicable;
(vi) Paragraph (d)(9) of this section (tax treaty modifications),
if applicable; and
(vii) Paragraph (d)(10) of this section (other modifications), if
applicable.
(3) Modifications that affect the tax rate--(i) In general. If the
IRS approves a modification with respect to the tax rate applied to a
partnership adjustment, such modification results in a reduction in tax
rate applied to the total netted partnership adjustment with respect to
the partnership adjustments in accordance with this paragraph (b)(3). A
modification of the tax rate does not affect how the partnership
adjustment factors into the calculation of the total netted partnership
adjustment. This paragraph (b)(3) applies to modifications under--
(A) Paragraph (d)(4) of this section (rate modification);
(B) Paragraph (d)(8) of this section (closing agreements), if
applicable;
(C) Paragraph (d)(9) of this section (tax treaty modifications), if
applicable; and
(D) Paragraph (d)(10) of this section (other modifications), if
applicable.
(ii) Determination of the imputed underpayment in the case of rate
modification. Except as described in paragraph (b)(3)(iv) of this
section, in the case of an approved modification described under
paragraph (b)(3)(i) of this section, the imputed underpayment is the
sum of the total netted partnership adjustment consisting of the net
positive adjustments not subject to rate reduction under paragraph
(b)(3)(i) of this section (taking into account any approved
modifications under paragraph (b)(2) of the section), 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 paragraph (b)(4)
of this section). The total netted partnership adjustment not subject
to rate reduction under paragraph (b)(3)(i) of this section (taking
into account any approved modifications under paragraph (b)(2) of the
section) is determined by multiplying the partnership adjustments
included in the total netted partnership adjustment that are not
subject to rate modification under paragraph (b)(3)(i) of this section
(including 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(b)(1)(iv)).
(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) Determine each relevant partner's distributive share of the
partnership adjustments subject to an approved modification under
paragraph (b)(3)(i) of this section based on how each adjustment
subject to rate modification would be properly allocated under section
702 to such relevant partner in the reviewed year (as defined in Sec.
301.6241-1(a)(8)).
(B) Multiply each partnership adjustment determined under paragraph
(b)(3)(iii)(A) of this section by the tax rate applicable to such
adjustment based on the approved modification described under paragraph
(b)(3)(i) 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 modification described under
paragraph (b)(3)(i) of this section.
(iv) Rate modification in the case of special allocations. If an
imputed underpayment results from adjustments to more than one
partnership-related item and any relevant partner for whom modification
described under paragraph (b)(3)(i) of this section is approved has a
distributive share of such items that is not the same with respect to
all such items, the imputed underpayment as modified based on the
modification types described under paragraph (b)(3)(i) of this section
is determined as described in paragraphs (b)(3)(ii) and (iii) of this
section except that each relevant partner's distributive share is
[[Page 41981]]
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 approved modification under
paragraphs (d)(2) and (3) and (d)(5) through (10) of this section with
respect to any relevant partner. Upon request by the IRS, the
partnership may be required to provide the relevant 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) Modification of the number and composition of imputed
underpayments. Once approved by the IRS, a modification under paragraph
(d)(6) of this section affects the manner in which adjustments are
placed into groupings and subgroupings (as described in Sec. 301.6225-
1(c) and (d)) or whether the IRS designates one or more specific
imputed underpayments (as described in Sec. 301.6225-1(g)). If the IRS
approves a request for modification under this paragraph (b)(4), the
imputed underpayment and any specific imputed underpayment affected by
or resulting from the modification is determined according to the rules
of Sec. 301.6225-1 subject to any other modifications approved by the
IRS under this section.
(5) Other modifications. The effect of other modifications
described in paragraph (d)(10) of this section, including the order
that such modification will be taken into account for purposes of
paragraph (b)(1) of this section, may be set forth 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, and include the information required by,
the forms, instructions, and other guidance prescribed by the IRS. The
partnership representative must submit any request for modification and
all relevant information (including information required under
paragraphs (c)(2) and paragraph (d) of this section) to the IRS within
the time described in paragraph (c)(3) of this section. The IRS will
notify the partnership representative in writing of the approval or
denial, in whole or in part, of any request for modification. 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 are 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
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 to provide information the IRS
determines is necessary to substantiate a request for modification
within the time restrictions described in paragraph (c) of this
section.
(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 partnership's
structure, allocations, ownership, and ownership changes, its relevant
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 a relevant partner that is an indirect partner, the
partnership representative must provide to the IRS any information that
the IRS may require relevant to any pass-through partner through which
the relevant partner holds its interest in the partnership. For
instance, if the partnership requests modification with respect to an
amended return filed by a relevant 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 relevant 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 the IRS grants an extension of time, 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. The IRS may, in its
discretion, grant a request for extension of the 270-day period
described in paragraph (c)(3)(i) of this section provided the
partnership submits such request to the IRS, in the form and manner
prescribed by forms, instructions, or other guidance, before expiration
of such period, as extended by any prior extension granted under this
paragraph (c)(3)(ii).
(iii) Expiration of the 270-day period by agreement. The 270-day
period described in paragraph (c)(3)(i) of this section (including any
extensions under paragraph (c)(3)(ii) of this section) expires as of
the date the partnership 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(b)(2)(A); Sec. 301.6231-1(b)(2).
(4) Approval of modification by the IRS. Notification of approval
will be provided to the partnership 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 before expiration of the 270-day period in
paragraph (c)(3)(i) of this section plus any extension granted by the
IRS under paragraph (c)(3)(ii) of this section.
(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 relevant partner provided all of the partnership
[[Page 41982]]
adjustments properly allocable to such relevant partner are taken into
account and any amount due is paid in accordance with this paragraph
(d)(2) of this section. Only adjustments to partnership-related items
or adjustments to a relevant partner's tax attributes affected by
adjustments to partnership-related items may be taken into account on
an amended return under paragraph (d)(2) of this section. A partnership
may request a modification for purposes of this paragraph (d)(2) by
submitting a modification request based on the alternative procedure to
filing amended returns as described in paragraph (d)(2)(x) of this
section. The partnership may not request an additional modification of
any imputed underpayment for a partnership taxable year under this
section with respect to any relevant partner that files an amended
return (or utilizes the alternative procedure to filing amended
returns) under paragraph (d)(2) of this section or with respect to any
partnership adjustment allocated to such relevant partner.
(ii) Requirements for approval of a modification request based on
amended return. Except as otherwise provided under alternative
procedures described in paragraph (d)(2)(x) of this section, an amended
return modification request under this paragraph (d)(2) will not be
approved unless the provisions of this paragraph (d)(2)(ii) are
satisfied.
(A) Full payment required. An amended return modification request
under paragraph (d)(2) of this section will not be approved unless the
relevant partner filing the amended return has paid all tax, penalties,
additions to tax, additional amounts, and interest due as a result of
taking into account the adjustments in the first affected year (as
defined in Sec. 301.6226-3(b)(2)) and all modification years (as
described in paragraph (d)(2)(ii)(B) of this section) at the time such
return is filed with the IRS.
(B) Amended returns for all relevant taxable years must be filed.
Modification under paragraph (d)(2) of this section will not be
approved by the IRS unless a relevant 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)) of the relevant partner is affected
by reason of taking into account the relevant partner's distributive
share of all partnership adjustments 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 the relevant partner's tax
attributes of taking into account the relevant partner's distributive
share of the partnership adjustments in the first affected year.
(C) Amended returns for partnership adjustments that reallocate
distributive shares. Except as described in this paragraph
(d)(2)(ii)(C), in the case of a partnership adjustment that reallocates
the distributive share of any partnership-related 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 file
amended returns in accordance with paragraph (d)(2) of this section and
all such returns are approved by the IRS for modification purposes. The
IRS may determine that the requirements of this paragraph (d)(2)(ii)(C)
are satisfied even if not all relevant partners affected by such
adjustment file amended returns provided the remaining relevant
partners affected by the reallocation take into account their
distributive share of the adjustment through other modifications
approved by the IRS (including the alternative procedures to filing
amended returns under paragraph (d)(2)(x) of this section) or if a
pass-through partner takes into account the relevant adjustments in
accordance with paragraph (d)(2)(vi) of this section. For instance, in
the case of an adjustment that reallocates a loss from one partner to
another, the IRS may determine that the requirements of this paragraph
(d)(2)(ii)(C) have been satisfied if one affected relevant partner
files an amended return taking into account the adjustment and the
other affected relevant partner signs a closing agreement with the IRS
taking into account the adjustments.
(iii) Form and manner for filing amended returns. A relevant
partner must file all amended returns required for modification under
paragraph (d)(2) of this section with the IRS in accordance with forms,
instructions, and other guidance prescribed by the IRS. Except as
otherwise provided under alternative procedures described in paragraph
(d)(2)(x) of this section, 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 each relevant partner signed
under penalties of perjury by such partner stating that all of the
amended returns 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) Period of limitations. Generally, the period of limitations
under sections 6501 and 6511 do not apply to an amended return filed
under this paragraph (d)(2) provided the amended return otherwise meets
the requirements of paragraph (d)(2) of this section.
(v) Amended returns in the case of adjustments allocated through
certain pass-through partners. A request for modification related to an
amended return of a relevant partner that is an indirect partner
holding its interest in the partnership through a pass-through partner
that could be subject to tax under chapter 1 on the partnership
adjustments that are properly allocated to such pass-through partner
will not be approved unless the partnership--
(A) Establishes that the pass-through partner is not subject to
chapter 1 tax on the adjustments that are properly allocated to such
pass-through partner; or
(B) Requests modification with respect to the adjustments resulting
in chapter 1 tax for the pass-through partner, including full payment
of such chapter 1 tax for the first affected year and all modification
years under paragraph (d)(2) of this section or in accordance with
forms, instructions, or other guidance prescribed by the IRS.
(vi) Amended returns in the case of pass-through partners--(A)
Pass-through partners may file amended returns. A relevant partner that
is a pass-through partner, including a partnership-partner (as defined
in Sec. 301.6241-1(a)(7)) that has a valid election under section
6221(b) in effect for a partnership taxable year, may, in accordance
with forms, instructions, and other guidance provided by the IRS and
solely for purposes of modification under paragraph (d)(2) of this
section, take into account its share of the partnership adjustments and
determine and pay an amount calculated in the same manner as the amount
computed under Sec. 301.6226-3(e)(4)(iii) subject to paragraph
(d)(2)(vi)(B) of this section.
(B) Modifications with respect to upper-tier partners of the pass-
through partner. In accordance with forms, instructions, and other
guidance provided by the IRS, for purposes of determining and
calculating the amount a pass-through partner must pay under paragraph
(d)(2)(vi)(A) of this section, the pass-through partner may take into
account modifications with respect to its direct and indirect partners
to the extent that such modifications are
[[Page 41983]]
requested by the partnership requesting modification and approved by
the IRS under this section.
(vii) Limitations on amended returns--(A) In general. A relevant
partner may not file an amended return with respect to partnership
adjustments or with respect to an imputed underpayment except as
described in paragraph (d)(2) of this section.
(B) Further amended returns restricted. If a relevant 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.
(viii) Penalties. The applicability of any penalties, additions to
tax, or additional amounts that relate to an adjustment to a
partnership-related item is determined at the partnership level in
accordance with section 6221(a). However, the amount of penalties,
additions to tax, and additional amounts a relevant partner must pay
under paragraph (d)(2)(ii)(A) of this section for the first affected
year and for any modification year is based on the underpayment or
understatement of tax, if any, reflected on the amended return filed by
the relevant partner under this paragraph (d)(2). For instance, if
after taking into account the adjustments, the return of the relevant
partner for the first affected year or any modification year reflects
an underpayment or an understatement that falls below the applicable
threshold for the imposition of a penalty under section 6662(d), no
penalty would be due from that relevant partner for such year. A
relevant partner may raise a partner-level defense (as described in
Sec. 301.6226-3(d)(3)) by first paying the penalty, addition to tax,
or additional amount with the amended return filed under this paragraph
(d)(2) and then filing a claim for refund in accordance with forms,
instructions, and other guidance.
(ix) Effect on tax attributes binding. Any adjustments to the tax
attributes of any relevant partner which are affected by modification
under paragraph (d)(2) of this section are binding on the relevant
partner with respect to the first affected year and all modification
years (as defined in paragraph (d)(2)(ii)(B) of this section). A
failure to adjust any tax attribute in accordance with this paragraph
(d)(2)(ix) is a failure to treat a partnership-related item in a manner
which is consistent with the treatment of such item on the partnership
return within the meaning of section 6222. The provisions of section
6222(c) and Sec. 301.6222-1(c) (regarding notification of inconsistent
treatment) do not apply with respect to tax attributes under this
paragraph (d)(2)(ix).
(x) Alternative procedure to filing amended returns--(A) In
general. A partnership may satisfy the requirements of paragraph (d)(2)
of this section by submitting on behalf of a relevant partner, in
accordance with forms, instructions, and other guidance provided by the
IRS, all information and payment of any tax, penalties, additions to
tax, additional amounts, and interest that would be required to be
provided if the relevant partner were filing an amended return under
paragraph (d)(2) of this section, except as otherwise provided in
relevant forms, instructions, and other guidance provided by the IRS. A
relevant partner for which the partnership seeks modification under
this paragraph (d)(2)(x) must agree to take into account, in accordance
with forms, instructions, and other guidance provided by the IRS,
adjustments to any tax attributes of such relevant partner. A
modification request submitted in accordance with the alternative
procedure under this paragraph (d)(2)(x) is not a claim for refund with
respect to any person.
(B) Modifications with respect to reallocation adjustments. A
submission made in accordance with this paragraph (d)(2)(x) with
respect to any relevant partner is treated as if such relevant partner
filed an amended return for purposes of paragraph (d)(2)(ii)(C) of this
section (regarding the requirement that all relevant partners affected
by a reallocation must file an amended return to be eligible to for the
modification under paragraph (d)(2) of this section) provided the
submission is with respect to the first affected year and all
modification years of such relevant partner as required under paragraph
(d)(2) of this section.
(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 relevant 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 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 for the reviewed year with respect to adjustments
that are attributable to a relevant partner that is a C corporation and
adjustments with respect to capital gains or qualified dividends that
are attributable to a relevant 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 for the reviewed year 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 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)) that is a relevant partner, the imputed underpayment
is determined without regard to the adjustment that the partnership
demonstrates would be reduced by 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) or qualified relevant partner (as defined in paragraph
(d)(5)(iv) of this section).
(ii) Specified passive activity loss. A specified passive activity
loss carryover amount for any specified partner or qualified relevant
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--
(A) At the end of the first affected year (affected year loss); or
(B) At the end of either--
(1) The specified partner's taxable year in which or with which the
adjustment year (as defined in
[[Page 41984]]
Sec. 301.6241-1(a)(1)) of the partnership ends, reduced to the extent
any such partner has utilized any portion of its affected 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 other year; or
(2) The most recent year for which the publicly traded partnership
has filed a return under section 6031.
(iii) Specified partner. A specified partner is a person that for
each taxable year beginning with the first affected year through the
person'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;
(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) Qualified relevant partner. A qualified relevant partner is a
relevant partner that meets the three requirements to be a specified
partner (as described in paragraphs (d)(5)(iii)(A), (B), and (C) of
this section) for each year beginning with the first affected year
through described in paragraph (d)(5)(ii)(B)(2) of this section.
(v) 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. In the case of a qualified
relevant partner, the partnership must report, in accordance with
forms, instructions, or other guidance prescribed by the IRS, to each
qualified relevant partner the amount of that qualified relevant
partner's reduction of its suspended passive loss carryovers at the end
of the taxable year for which the partnership's next return is due to
be filed under section 6031 to be taken into account by the qualified
relevant partner on the partner's return for the year that includes the
end of the partnership's taxable year for which the partnership's next
return is due to be filed under section 6031. The reduction in
suspended passive loss carryovers as reported to a specified partner
under this paragraph (d)(5)(v) 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--(i) In general. A partnership may request modification
of the number or composition of any imputed underpayment included in
the NOPPA by requesting that the IRS include one or more partnership
adjustments in a particular grouping or subgrouping (as described in
Sec. 301.6225-1(c) and (d)) or specific imputed underpayments (as
described in Sec. 301.6225-1(g)) different from the grouping,
subgrouping, or imputed underpayment set forth in the NOPPA. For
example, a partnership may request under this paragraph (d)(6) that one
or more partnership adjustments taken into account to determine a
general imputed underpayment set forth in the NOPPA be taken into
account to determine a specific imputed underpayment.
(ii) Request for particular treatment regarding limitations or
restrictions. A modification request under paragraph (d)(6) of this
section includes a request that one or more partnership adjustments be
treated as if no limitations or restrictions under Sec. 301.6225-1(d)
apply and as a result such adjustments may be subgrouped with other
adjustments.
(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 relevant partner where the
modification is based on deficiency dividends distributed as described
in section 860(f) by a relevant 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 under this paragraph (d)(7) 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) Closing agreements. A partnership may request modification
based on a closing agreement entered into by the IRS and the
partnership or any relevant partner, or both if appropriate, pursuant
to section 7121. If modification under this paragraph (d)(8) is
approved by the IRS, any partnership adjustment that is taken into
account under such closing agreement and for which any required payment
under the closing agreement is made will not be taken into account in
determining the imputed underpayment under Sec. 301.6225-1. Generally,
the IRS will not approve any additional modification under this section
with respect to a relevant partner to which a modification under this
paragraph (d)(8) has been approved.
(9) Tax treaty modifications. A partnership may request a
modification under this paragraph (d)(9) with respect to a relevant
partner's distributive share of an adjustment to a partnership-related
item if the relevant partner--
(i) Was a foreign person who would have qualified, under an income
tax treaty with the United States, for a reduction or exemption from
tax with respect to such partnership-related item in the reviewed year;
(ii) Would have derived the item (within the meaning of Sec.
1.894-1(d) of this chapter) had it been taken into account properly in
the partnership's reviewed year return; and
(iii) Is not otherwise prevented under the income tax treaty with
the United States from claiming such reduction or exemption with
respect to the reviewed year at the time the modification under this
paragraph (d)(9) is requested.
(10) Other modifications. A partnership may request a modification
not otherwise described in paragraph (d)
[[Page 41985]]
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) Modification of adjustments that do not result in an imputed
underpayment. A partnership may request modification of adjustments
that do not result in an imputed underpayment (as described in Sec.
301.6225-1(f)(1)(ii)) using modifications described in paragraph (d)(2)
of this section (amended returns and the alternative procedure to
filing amended returns), paragraph (d)(6) of this section (number and
composition of the imputed underpayment), paragraph (d)(8) of this
section (closing agreements), or, if applicable, paragraph (d)(10) of
this section (other modifications).
(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, each partnership and its
relevant partners are calendar year taxpayers, all relevant 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. Partnership has two partners during its 2019
partnership taxable year: P and S. P is a partnership, and S is an S
Corporation. P has four partners during its 2019 partnership taxable
year: A, C, T and DE. A is an individual, C is a C Corporation, T is
a trust, and DE is a wholly-owned entity disregarded as separate
from its owner for Federal tax purposes. The owner of DE is B, an
individual. T has two beneficiaries during its 2019 taxable year: F
and G, both individuals. S has 3 shareholders during its 2019
taxable year: H, I, and J, all individuals. For purposes of this
section, if Partnership requests modification with respect to A, B,
C, F, G, H, I, and J, those persons are all relevant partners (as
defined in paragraph (a) of this section). P, S, and DE are not
relevant partners (as defined in paragraph (a) of this section)
because DE is a wholly-owned entity disregarded as separate from its
owner for Federal tax purposes and modification was not requested
with respect to P and S.
Example 2. The IRS initiates an administrative proceeding with
respect to Partnership's 2019 taxable year. 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, an individual, held a 20 percent interest in
Partnership during 2019. Partnership timely requests modification
under paragraph (d)(2) of this section based on A's 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 the tax rate
applicable to A for the 2019 tax year. No tax attribute in any other
taxable year of A is affected by A's taking into account A's share
of the partnership adjustment for 2019. In accordance with paragraph
(d)(2)(iii) of this section, Partnership's partnership
representative provides the IRS with documentation demonstrating
that A filed the 2019 return and paid all tax and interest due. The
IRS approves the modification and, in accordance with paragraph
(b)(2) of this section, the $20 increase in ordinary income
allocable to A 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 $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 3. The IRS initiates an administrative proceeding with
respect to Partnership's 2019 taxable year. Partnership has two
equal partners during its entire 2019 taxable year: An individual,
A, and a partnership-partner, B. During all of 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 proposing 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
timely requests modification under paragraph (d)(3) of this section
with respect to B's partner, C, a tax-exempt entity. In accordance
with paragraph (d)(3)(iii) of this section, Partnership's
partnership representative provides the IRS with documentation
substantiating to the IRS's satisfaction that C held a 25 percent
indirect interest in Partnership through its interest in B during
the 2019 taxable year, that C was a tax-exempt entity defined in
paragraph (d)(3)(ii) of this section during the 2019 taxable year,
and that C was not subject to tax with respect to its entire
distributive share of the partnership adjustment allocated to B
(which is $25 (50 percent x 50 percent x $100)). The IRS approves
the modification and, in accordance with paragraph (b)(2) of this
section, the $25 increase in ordinary income allocated to C, through
B, 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).
Example 4. The facts are the same as in Example 3 of this
paragraph (f), except $10 of the $25 of the adjustment allocated to
C is unrelated business taxable income (UBTI) as defined in section
512 because it is debt-financed income within the meaning of section
514 (no section 512 UBTI modifications apply) 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 $15 of the $25 of ordinary income allocated to
C that is not UBTI. Therefore, only a modification of $15 ($25 less
$10) of the total $100 partnership adjustment may be approved by the
IRS under paragraph (d)(3) of this section and, in accordance with
paragraph (b)(2) of this section, excluded when determining 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 $85 ($100 less $15), and the imputed
underpayment is reduced to $34 (total netted partnership adjustment
of $85, after modification, multiplied by 40 percent).
Example 5. The facts are the same as in Example 3 of this
paragraph (f), except that Partnership also timely requests
modification under paragraph (d)(2) with respect to an amended
return filed by B, and, in accordance with (d)(2)(iii) of this
section, Partnership's partnership representative provides the IRS
with documentation demonstrating that B filed the 2019 return and
paid all tax and interest due. B reports 50 percent of the
partnership adjustments ($50) on its amended return, and B
calculates an amount under paragraph (d)(2)(vi)(A) of this section
and Sec. 301.6226-3(e)(4)(iii) that, pursuant to paragraph
(d)(2)(vi)(B) of this section, takes into account the modification
under paragraph (d)(3) approved by the IRS with respect to B's
partner C, a tax-exempt entity. B makes a payment pursuant to
paragraph (d)(2)(ii)(A) of this section, and the IRS approves the
requested modification. 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 6. The facts are the same as in Example 3 of this
paragraph (f), except that in addition to the modification with
respect to tax-exempt entity C, which reduced the imputed
underpayment by excluding from the determination of the imputed
underpayment $25 of the $100 partnership adjustment reflected in the
NOPPA, Partnership timely requests modification under paragraph
(d)(2) of this section with respect to an amended return filed by
individual D, and, in accordance with (d)(2)(iii) of this section,
Partnership's partnership representative provides the IRS with
documentation demonstrating that D filed the 2019 return and paid
all tax and interest due. D's amended return for D's 2019 taxable
year takes into account D's share of the partnership adjustment (50
percent of B's 50 percent interest in Partnership, or $25) and D
paid the tax and interest due as a result of taking into account D's
share of the partnership adjustment in accordance with
[[Page 41986]]
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. The 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 7. The IRS initiates an administrative proceeding with
respect to Partnership's 2019 taxable year. All of Partnership's
partners during its 2019 taxable year are individuals. The IRS mails
a NOPPA to Partnership for the 2019 taxable year proposing three
partnership adjustments. The first partnership adjustment is an
increase to ordinary income of $75 for 2019. The second partnership
adjustment is an increase in the depreciation deduction allowed for
2019 of $25, which under Sec. 301.6225-1(d)(2)(i) is treated as a
$25 decrease in income. The third adjustment is an increase in long-
term capital gain of $10 for 2019. In accordance with Sec.
301.6225-1, the total netted partnership adjustment is $85 ($75
increase in ordinary income + $10 increase in long-term capital
gain), resulting in an imputed underpayment of $34 ($85 multiplied
by 40 percent). The $25 decrease in income as a result of the
increase in depreciation is an adjustment that does not result in an
imputed underpayment under Sec. 301.6225-1(f). Under the
partnership agreement in effect for Partnership's 2019 taxable year,
the long-term capital gain and the increase in depreciation is
specially allocated to B and the increase in ordinary income is
specially allocated to A. Partnership requests a modification under
paragraph (d)(6) of this section to determine a specific imputed
underpayment with respect to the $75 adjustment to ordinary income
allocated to A. The specific imputed underpayment is with respect to
$75 of the increase in income specially allocated to A and the
general imputed underpayment is with respect to $10 of the increase
in capital gain and the $25 increase in depreciation deduction
specially allocated to B. If the modification is approved by the
IRS, the specific imputed underpayment is $30 ($75 multiplied by 40
percent), the general imputed underpayment is $4 ($10 multiplied by
40 percent), and the increase in depreciation of $25 remains an
adjustment that does not result in an imputed underpayment under
Sec. 301.6225-1(f) and is associated with the general imputed
underpayment.
Example 8. Partnership has two reviewed year partners, C1 and
C2, both of which are C corporations. The IRS mails to Partnership a
NOPPA with two adjustments, both based on rental real estate
activity. The first adjustment is an increase of rental real estate
income of $100 attributable to Property A. The second adjustment is
an increase of rental real estate loss of $30 attributable to
Property B. The Partnership did not treat the leasing arrangement
with respect to Property A and Property B as an appropriate economic
unit for purposes of section 469. If the $100 increase in income
attributable to Property A and the $30 increase in loss attributable
to Property B were included in the same subgrouping and netted, then
taking the $30 increase in loss into account would result in a
decrease in the amount of the imputed underpayment. Also, the $30
increased loss might be limited or restricted if taken into account
by any person under the passive activity rules under section 469.
For instance, under section 469, rental activities of the two
properties could be treated as two activities, which could limit a
partner's ability to claim the loss. In addition to the potential
limitations under section 469, there are other potential limitations
that might apply if the $30 loss were taken into account by any
person. Therefore, in accordance with Sec. 301.6225-1(d), the two
adjustments are placed in separate subgroupings within the residual
grouping, the total netted partnership adjustment is $100, the
imputed underpayment is $40 ($100 x 40 percent), and the $30
increase in loss is an adjustment that does not result in an imputed
underpayment under Sec. 301.6225-1(f). Partnership requests
modification under paragraph (d)(6) of this section, substantiating
to the satisfaction of the IRS that C1 and C2 are publicly traded C
corporations, and therefore, the passive activity loss limitations
under section 469 of the Code do not apply. Partnership also
substantiates to the satisfaction of the IRS that no other
limitation or restriction applies that would prevent the grouping of
the $100 with the $30 loss. The IRS approves Partnership's
modification request and places the $100 of income and the $30 loss
into the subgrouping in the residual grouping under the rules
described in Sec. 301.6225-1(c)(5). Under Sec. 301.6225-1(e),
because the two adjustments are in one subgrouping, they are netted
together, resulting in a total netted partnership adjustment of $70
($100 plus <$30>) and an imputed underpayment of $28 ($70 x 40
percent). After modification, there are not adjustments treated as
an adjustment that does not result in an imputed underpayment under
Sec. 301.6225-1(f) because the $30 loss is now netted with the $100
of income.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 10. 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(f)) 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 (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 a partnership-related item
that is an item of income or loss.
(2) Separately stated items. In the case of a partnership
adjustment to partnership-related 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 an adjustment to a partnership-related
item that is reported or could be reported by a partnership as a credit
on the partnership's 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
reallocates a partnership-related item to or from a particular partner
or partners that also does not result in an imputed underpayment
pursuant to Sec. 301.6225-1(f) 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.
(5) Adjustments taken into account by partners as part of the
modification process. If, as part of modification under Sec. 301.6225-
2, a relevant partner (as defined in Sec. 301.6225-2(a)) takes into
account a partnership adjustment that would not result in an imputed
underpayment, and the IRS approves the modification, such partnership
adjustment is not taken into account by the partnership in the
adjustment year in accordance with Sec. 301.6225-1(a).
[[Page 41987]]
(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 associated with such imputed
underpayment as described in Sec. 301.6225-1(g) 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 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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 11. Section 301.6225-4 is added to read as follows:
Sec. 301.6225-4 Effect of a partnership adjustment on specified tax
attributes of partnerships and their partners.
(a) Adjustments to specified tax attributes--(1) In general. When
there is a partnership adjustment (as defined in Sec. 301.6241-
1(a)(6)), the partnership and its adjustment year partners (as defined
in Sec. 301.6241-1(a)(2)) generally must adjust their specified tax
attributes (as defined in paragraph (a)(2) of this section) in
accordance with the rules in this section. For a partnership adjustment
that results in an imputed underpayment (as defined in Sec. 301.6241-
1(a)(3)), specified tax attributes are generally adjusted by making
appropriate adjustments to the book value and basis of partnership
property under paragraph (b)(2) of this section, creating notional
items based on the partnership adjustment under paragraph (b)(3) of
this section, allocating those notional items as described in paragraph
(b)(5) of this section, and determining the effect of those notional
items for the partnership and its reviewed year partners (as defined in
Sec. 301.6241-1(a)(9)) or their successors (as defined in Sec. 1.704-
1(b)(1)(viii)(b) of this chapter) under paragraph (b)(6) of this
section. Paragraph (c) of this section describes how to treat an
expenditure 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) including any imputed underpayment. Paragraph (d) of
this section describes adjustments to tax attributes of a partnership
and its partners in the case of a partnership adjustment that does not
result in an imputed underpayment (as described in Sec. 301.6225-
1(f)).
(2) Specified tax attributes. Specified tax attributes are the tax
basis and book value of a partnership's property, amounts determined
under section 704(c), adjustment year partners' bases in their
partnership interests, adjustment year partners' capital accounts
determined and maintained in accordance with Sec. 1.704-1(b)(2) of
this chapter, and earnings and profits under section 312.
(3) Timing. Adjustments to specified tax attributes under this
section are made in the adjustment year (as defined in Sec. 301.6241-
1(a)(1)). Thus, to the extent that an adjustment to a specified tax
attribute under this section is reflected on a federal tax return, the
partnership adjustment is generally first reflected on any return filed
with respect to the adjustment year.
(4) Effect of other sections. The determination of specified tax
attributes under this section is not conclusive as to tax attributes of
a partnership or its partners determined under other sections of the
Internal Revenue Code (Code), including the subchapter C of chapter 63.
For example, a partnership that files an administrative adjustment
request (AAR) under section 6227 adjusts partnership tax attributes as
appropriate. Further, to the extent a partner or partnership
appropriately adjusted its tax attributes prior to a final
determination under subchapter C of chapter 63 with respect to a
partnership adjustment (for example, in the context of an amended
return modification described in Sec. 301.6225-2(d)(2), the
alternative procedure to filing amended returns as described in Sec.
301.6225-2(d)(2)(x), or a closing agreement described in Sec.
301.6225-2(d)(8)), those tax attributes are not adjusted under this
section. Similarly, to the extent a partner filed a return inconsistent
with the treatment of items on a partnership return, a reviewed year
partner (or its successor) does not adjust its tax attributes to the
extent the partner's prior return was consistent with the partnership
adjustment. For the rules regarding consistent treatment by partners,
see Sec. 301.6222-1.
(5) Election under section 6226--(i) In general. Except as
otherwise provided in paragraph (a)(5)(ii) of this section, tax
attributes of a partnership and its partners are adjusted for a
partnership adjustment that results in an imputed underpayment with
respect to which an election is made under Sec. 301.6226-1 in
accordance with Sec. 301.6226-4, and not the rules of this section.
(ii) Pass-through partners and indirect partners. A pass-through
partner (as defined in Sec. 301.6241-1(a)(5)) that is a partnership
and pays an imputed underpayment under Sec. 301.6226-3(e)(4) treats
its share of each partnership adjustment reflected on the relevant
statement as a partnership adjustment described in paragraph (a)(1) of
this section, treats the imputed underpayment under Sec. 301.6226-
3(e)(4)(iii) as an imputed underpayment determined under Sec.
301.6225-1 for purposes of Sec. 1.704-1(b)(2)(iii)(a) and (f) of this
chapter, treats items arising from an adjustment that does not result
in an imputed underpayment as an item under paragraph (d) of this
section, and finally treats amounts with respect to any penalties,
additions to tax, and additional amounts and interest computed as an
amount described in Sec. 1.704-1(b)(2)(iii)(f)(3) of this chapter.
(6) Reflection of economic arrangement. This section and the rules
in Sec. 1.704-1(b)(1)(viii), (b)(2)(iii)(a) and (f), (b)(2)(iv)(i)(4),
and (b)(4)(xi), (xii), (xiii), (xiv), and (xv) of this chapter must be
interpreted in a manner that reflects the economic arrangement of the
parties and the principles of subchapter K of the Code, taking into
account the rules of the centralized partnership audit regime.
(b) Adjusting specified tax attributes in the case of a partnership
adjustment that results in an imputed underpayment--(1) In general.
This paragraph (b) applies with respect to each partnership adjustment
that was taken into account in the determination of the imputed
underpayment under Sec. 301.6225-1, except to the extent partner or
partnership tax attributes were already adjusted as part of the
partnership adjustment.
(2) Book value and basis of partnership property. Partnership-level
specified tax attributes must be adjusted under this paragraph (b)(2).
Specifically, the partnership must make appropriate adjustments to the
book value and basis of property to take into account any partnership
adjustment. No adjustments are made with respect to property that was
held by the partnership in the reviewed year but is no longer held by
the partnership in the adjustment year. Amounts determined under
section 704(c) must also be adjusted to take into account the
partnership adjustment.
(3) Creation of notional items based on partnership adjustment--(i)
In general. In order to give appropriate effect to each partnership
adjustment for
[[Page 41988]]
partner-level specified tax attributes, notional items are created with
respect to each partnership adjustment, except as provided in paragraph
(b)(4) of this section.
(ii) Increase in income or gain. In the case of a partnership
adjustment that is an increase to income or gain, a notional item of
income or gain is created in an amount equal to the partnership
adjustment.
(iii) Increase in expense or loss. In the case of a partnership
adjustment that is an increase to an expense or a loss, a notional item
of an expense or loss is created in an amount equal to the partnership
adjustment.
(iv) Decrease in income or gain. In the case of a partnership
adjustment that is a decrease to income or gain, a notional item of
expense or loss is created in an amount equal to the partnership
adjustment.
(v) Decrease in expense or loss. In the case of a partnership
adjustment that is a decrease to an expense or to a loss, a notional
item of income or gain is created in an amount equal to the partnership
adjustment.
(vi) Credits. If a partnership adjustment reflects a net increase
or net decrease in credits as determined in accordance with Sec.
301.6225-1, the partnership may have one or more notional items of
income, gain, loss, or deduction that reflects the change in the item
that gives rise to the credit, and those items are treated as items in
paragraph (b)(3)(ii), (iii), (iv), or (v) of this section. For example,
if a partnership adjustment is to a credit, a notional item of
deduction may be created when appropriate. See section 280C.
(4) Situations in which notional items are not created--(i) In
general. In the case of a partnership adjustment described in this
paragraph (b)(4), or when the creation of a notional item would
duplicate a specified tax attribute or an actual item already taken
into account, notional items are not created. Nevertheless, in these
situations specified tax attributes are adjusted for the partnership
and its reviewed year partners or their successors (as defined in Sec.
1.704-1(b)(i)(viii)(b) of this chapter) in a manner that is consistent
with how the partnership adjustment would have been taken into account
under the partnership agreement in effect for the reviewed year taking
into account all facts and circumstances. See Sec. 1.704-
1(b)(2)(iii)(f)(4) of this chapter for rules for allocating the
expenditure for an imputed underpayment in these circumstances.
(ii) Adjustments for non-section 704(b) items. Notional items are
not created for a partnership adjustment that does not derive from
items that would have been allocated in the reviewed year under section
704(b). See paragraph (e) of this section, Example 5.
(iii) Section 705(a)(2)(B) expenditures. Notional items are not
created for a partnership adjustment that is a change of an item of
deduction to a section 705(a)(2)(B) expenditure.
(iv) Tax-exempt income. Notional items are not created for a
partnership adjustment to an item of income of a partnership exempt
from tax under subtitle A of the Code.
(5) Allocation of the notional items. Notional items are allocated
to the reviewed year partners or their successors under Sec. 1.704-
1(b)(4)(xi) of this chapter.
(6) Effect of notional items--(i) In general. The partnership
creates notional items of income, gain, loss, deduction, or credit in
order to make appropriate adjustments to specified tax attributes. See
paragraph (e), Example 1 of this section.
(ii) Partner capital accounts. For purposes of capital accounts
determined and maintained in accordance with Sec. 1.704-1(b)(2) of
this chapter, a notional item of income, gain, loss, deduction or
credit is treated as an item of income, gain, loss, deduction or credit
(including for purposes of determining book value). Similar adjustments
may be appropriate for partnerships that do not determine and maintain
capital accounts in accordance with Sec. 1.704-1(b)(2) of this
chapter.
(iii) Partner's basis in its interest--(A) In general. Except as
otherwise provided, the basis of a partner's interest in a partnership
is adjusted (but not below zero) to reflect any notional item allocated
to the partner by treating the notional item as an item described in
section 705(a).
(B) Special basis rules. The basis of a partner's interest in a
partnership is not adjusted for any notional items allocated to the
partner--
(1) When a partner that is not a tax-exempt entity (as defined in
Sec. 301.6225-2(d)(3)(ii)) is a successor under Sec. 1.704-
1(b)(1)(viii)(b) of this chapter to a reviewed year tax-exempt partner,
to the extent that the IRS approved a modification under Sec.
301.6225-2 because the tax-exempt partner was not subject to tax; or
(2) When the notional item would be allocated to a successor that
is related (within the meaning of sections 267(b) or 707(b)) to the
reviewed year partner, the successor acquired its interest from the
reviewed year partner in a transaction (or series of transactions) in
which not all gain or loss is recognized during an administrative
adjustment proceeding with respect to the partnership's reviewed year
under subchapter C of chapter 63, and a principal purpose of the
interest transfer (or transfers) was to shift the economic burden of
the imputed underpayment among the related parties.
(c) Determining a partner's share of an expenditure for any payment
required to be made by a partnership under subchapter C of chapter 63.
Payment by a partnership of any amount required to be paid under
subchapter C of chapter 63 as described in Sec. 301.6241-4(a) is
treated as an expenditure described in section 705(a)(2)(B). Rules for
determining whether the economic effect of an allocation of these
expenses is substantial are provided in Sec. 1.704-1(b)(2)(iii)(f) of
this chapter and rules for determining whether an allocation of these
expenses is deemed to be in accordance with the partners' interests in
the partnership are provided in Sec. 1.704-1(b)(4)(xii) of this
chapter.
(d) Adjusting tax attributes for a partnership adjustment that does
not result in an imputed underpayment. The rules under subchapter K of
the Code apply in the case of a partnership adjustment that does not
result in an imputed underpayment. See Sec. 301.6225-3(c).
Accordingly, tax attributes (as defined in Sec. 301.6241-1(a)(10)) of
a partnership and its partners are adjusted under those rules. An item
arising from a partnership adjustment that does not result in an
imputed underpayment (as defined in Sec. 301.6225-1(f)) is allocated
under Sec. 1.704-1(b)(4)(xiii) of this chapter.
(e) Examples. The following examples illustrate the rules of this
section. For purposes of these examples, unless otherwise stated,
Partnership is subject to the provisions of subchapter C of chapter 63,
Partnership and its partners are calendar year taxpayers, all partners
are U.S. persons, and the highest rate of income tax in effect for all
taxpayers is 20 percent for all relevant periods.
Example 1. (i) In 2019, A, B, and C are individuals that form
Partnership. A contributes Whiteacre, which is unimproved land with
an adjusted basis of $400 and a fair market value of $1,000, and B
and C each contribute $1,000 in cash. The partnership agreement
provides that all income, gain, loss, and deduction will be
allocated in equal \1/3\ shares among the partners. The partnership
agreement also provides that the partners' capital accounts will be
determined and maintained in accordance with Sec. 1.704-1(b)(2)(iv)
of this chapter, distributions in liquidation of the partnership (or
any partner's interest) will be made in accordance with the
partners' positive capital account balances, and any partner with a
deficit
[[Page 41989]]
balance in his capital account following the liquidation of his
interest must restore that deficit to the partnership (as provided
in Sec. 1.704-1(b)(2)(ii)(b)(2) and (3) of this chapter).
(ii) Upon formation, Partnership has the following assets and
capital accounts:
----------------------------------------------------------------------------------------------------------------
Partnership Outside
basis Book Value basis Book Value
----------------------------------------------------------------------------------------------------------------
Cash......................... $2,000 $2,000 $2,000 A $400 $1,000 $1,000
Whiteacre.................... 400 1,000 1,000 B 1,000 1,000 1,000
.............. ......... ......... C 1,000 1,000 1,000
----------------------------------------------------------------------------------
Totals................... 2,400 3,000 3,000 .......... 2,400 3,000 3,000
----------------------------------------------------------------------------------------------------------------
(iii) In 2019, Partnership makes a $120 payment for Asset that
it treats as a deductible expense on its partnership return.
----------------------------------------------------------------------------------------------------------------
Partnership Outside
basis Book Value basis Book Value
----------------------------------------------------------------------------------------------------------------
Cash......................... $1,880 $1,880 $1,880 A $360 $960 $1,000
Whiteacre.................... 400 1,000 1,000 B 960 960 1,000
Asset........................ 0 0 120 C 960 960 1,000
----------------------------------------------------------------------------------
Totals................... 2,280 2,880 3,000 .......... 2,280 2,880 3,000
----------------------------------------------------------------------------------------------------------------
(iv) Partnership does not file an AAR for 2020. In 2021 (the
adjustment year) it is finally determined that Partnership's $120
expenditure was not allowed as a deduction in 2019 (the reviewed
year), but rather was the acquisition of an asset for which cost
recovery deductions are unavailable. Accordingly, the IRS makes a
partnership adjustment that disallows the entire $120 deduction,
which results in an imputed underpayment of $48 ($120 x 40 percent).
Partnership did not request modification under Sec. 301.6225-2.
Partnership pays the $48 imputed underpayment.
(v) Partnership first determines its tax attribute adjustments
resulting from the partnership adjustment by applying paragraph (b)
of this section. Pursuant to paragraph (b)(2) of this section,
Partnership must re-state the basis and book value of Asset to $120.
Further, pursuant to paragraph (b)(3)(v) of this section, a $120
notional item of income is created. The $120 item of notional income
is allocated in equal shares ($40) to A, B, and C in 2021 under
Sec. 1.704-1(b)(4)(xi) of this chapter. Accordingly, in 2021
Partnership increases the capital accounts of A, B, and C by $40
each, and increases A, B, and C's outside bases by $40 each under
paragraph (b)(6)(ii) and (iii) of this section, respectively.
(vi) As described in paragraph (c) of this section,
Partnership's payment of the $48 imputed underpayment is treated as
an expenditure described in section 705(a)(2)(B) under Sec.
301.6241-4. Under Sec. 1.704-1(b)(4)(xii) of this chapter,
Partnership determines each partner's properly allocable share of
this expenditure in 2021 by allocating the expenditure in proportion
to the allocations of the notional item to which the expenditure
relates. Accordingly, each of A, B, and C have a properly allocable
share of $16 each, which is the same proportion (\1/3\ each) in
which A, B, and C share the $120 item of notional income. Thus, A, B
and C's capital accounts are each decreased by $16 in 2021 and A, B
and C's outside bases are each decreased by $16 in 2021. The
allocation of the expenditure under the partnership agreement has
economic effect under Sec. 1.704-1(b)(2)(ii) of this chapter and,
because the allocation of the expenditure is determined in
accordance with Sec. 1.704-1(b)(2)(iii)(f) of this chapter, the
economic effect of these allocations is deemed to be substantial.
(vii) The payment is also reflected by a $48 decrease in
partnership cash for book purposes under Sec. 1.704-1(b)(4)(ii) of
this chapter. Therefore, in 2021, A's basis in Partnership is $384
and his capital account is $984. B and C each have a basis and
capital account of $984.
----------------------------------------------------------------------------------------------------------------
Partnership Outside
basis Book Value basis Book Value
----------------------------------------------------------------------------------------------------------------
Cash......................... $1,832 $1,832 $1,832 A $384 $984 $984
Whiteacre.................... 400 1,000 1,000 B 984 984 984
Asset........................ 120 120 120 C 984 984 984
----------------------------------------------------------------------------------
Totals................... 2,352 2,952 2,952 .......... 2,352 2,952 2,952
----------------------------------------------------------------------------------------------------------------
Example 2. (i) The facts are the same as in Example 1 of this
paragraph (e), except the IRS approves modification under Sec.
301.6225-2(d)(3) with respect to A, which is a tax-exempt entity,
and under Sec. 301.6225-2(d)(4) with respect to C, which is a
corporation subject to a tax rate of 20 percent. These modifications
reduce Partnership's overall imputed underpayment from $48 to $30.
(ii) As in Example 1 of this paragraph (e), Partnership
determines its tax attribute adjustments resulting from the
partnership adjustment by applying paragraph (b) of this section.
Pursuant to paragraph (b)(3)(v) of this section, a $120 notional
item of income is created. The $120 item of notional income is
allocated in equal shares ($40) to A, B, and C in 2021 under Sec.
1.704-1(b)(4)(xi) of this chapter. Accordingly, in 2021 Partnership
increases the capital accounts of A, B, and C by $40 each, and
increases A, B, and C's outside bases by $40 each under paragraph
(b)(6)(ii) and (iii) of this section, respectively.
(iii) However, the modifications affect how Partnership must
allocate the imputed underpayment expenditure among A, B, and C in
2021 (the adjustment year) pursuant to Sec. 1.704-1(b)(2)(iii)(f)
of this chapter. Specifically, Partnership allocates the $24
expenditure in 2021 in proportion to the allocation of the notional
item to which it relates (which is \1/3\ each as in Example 1 of
this paragraph (e)), but it must also take into account
modifications attributable to each partner. Accordingly, B's
allocation is $16 (its share of the imputed underpayment, for which
no modification occurred), and A and C have properly allocable
shares of $0 and $8, respectively (their shares, taking into account
modification). Thus, A's capital account is decreased by $0, B's
capital account is decreased by $16, and C's capital
[[Page 41990]]
account is decreased by $8 in 2021 and their respective outside
bases are decreased by the same amounts in 2021.
(iv) The payment is also reflected by a $24 decrease in
partnership cash for book purposes. Therefore, in 2021, A's basis in
Partnership is $400 and his capital account is $1000, B's basis and
capital account are both $984, and C's basis and capital account are
both $992.
----------------------------------------------------------------------------------------------------------------
Partnership Outside
basis Book Value basis Book Value
----------------------------------------------------------------------------------------------------------------
Cash......................... $1,856 $1,856 $1,856 A $400 $1,000 $1,000
Whiteacre.................... 400 1,000 1,000 B 984 984 984
Asset........................ 120 120 120 C 992 992 992
----------------------------------------------------------------------------------
Totals................... 2,376 2,976 2,976 .......... 2,376 2,976 2,976
----------------------------------------------------------------------------------------------------------------
Example 3. The facts are the same as in Example 1 of this
paragraph (e). However, in 2020, C transfers its entire interest in
Partnership to D (an individual) for cash. Under Sec. 1.704-
1(b)(2)(iv)(l) of this chapter, C's capital account carries over to
D. In 2021, the year the IRS determines that Partnership's $120
expense is not allowed as a deduction, D is C's successor under
Sec. 1.704-1(b)(1)(viii)(b)(2) of this chapter with respect to
specified tax attributes and the payment of the imputed underpayment
treated as an expenditure under section 705(a)(2)(B).
Example 4. The facts are the same as in Example 1 of this
paragraph (e), except that the partnership agreement provides that
the section 705(a)(2)(B) expenditure for imputed underpayments made
by the partnership are specially allocated to A (all other items
continue to be allocated in equal shares). Accordingly, in 2021, the
section 705(a)(2)(B) expenditure is allocated entirely to A, which
reduces its capital account by $48, which has economic effect under
Sec. 1.704-1(b)(2)(ii) of this chapter. However, the economic
effect of this allocation is not substantial under Sec. 1.704-
1(b)(2)(iii)(a) of this chapter because it is not allocated in the
manner described in Sec. 1.704-1(b)(2)(iii)(f) of this chapter. The
allocation will also not be deemed to be in accordance with the
partners' interests in the partnership under Sec. 1.704-1(b)(3)(ix)
of this chapter because it is not allocated pursuant to the rules
under Sec. 1.704-1(b)(4)(xii) of this chapter.
Example 5. (i) In 2019, Partnership has two partners, A and B.
Both A and B have a $0 basis in their interests in Partnership.
Further, Partnership has a $200 liability as defined in Sec. 1.752-
1(a)(4) of this chapter. The liability is treated as a nonrecourse
liability as defined in Sec. 1.752-1(a)(2) of this chapter so that
A and B both are treated as having a $100 share of the liability
under Sec. 1.752-3 of this chapter. In 2021 (the adjustment year),
the IRS determines that the liability was inappropriately classified
as a nonrecourse liability, should have been classified as a
recourse liability as defined in Sec. 1.752-1(a)(1) of this
chapter, and that A should have no share of the recourse liability
under Sec. 1.752-2 of this chapter. The recharacterization of the
liability from nonrecourse to recourse and the decrease in A's share
of partnership liabilities are adjustments that are not allocated
under section 704(b) under Sec. 301.6225-1(c)(5)(ii). As a result
of the adjustments, the IRS includes in the residual grouping $100
of increased income to account for the cumulative effects of these
adjustments to reflect the $100 decrease in A's share of partnership
liabilities under Sec. Sec. 1.752-1(c) and 1.731-1(a)(1)(i) of this
chapter and determines an imputed underpayment of $40 ($100 x 40
percent). Partnership does not request modification under Sec.
301.6225-2. Partnership pays the $40 imputed underpayment.
(ii) Pursuant to paragraph (b)(4)(ii) of this of this section,
notional items are not created with respect to this partnership
adjustment. Instead, under paragraph (b)(4)(i) of this section,
specified tax attributes are adjusted in a manner that is consistent
with how the partnership adjustment would have been taken into
account under the partnership agreement in effect for the reviewed
year taking into account all facts and circumstances. In this case,
no specified tax attributes are adjusted.
(iii) However, because A would have borne the economic burden of
the partnership adjustment if the partnership and its partners had
originally reported in a manner consistent with the partnership
adjustment, the $40 imputed underpayment section 705(a)(2)(B)
expenditure is allocated to A under Sec. 1.704-1(b)(2)(iii)(f)(4)
of this chapter.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 12. 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 this section is no longer liable for the imputed
underpayment (as defined in Sec. 301.6241-1(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
(as described in Sec. 301.6225-1(g)), 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 (as defined in Sec.
301.6241-1(a)(9)) 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 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. If an election is made under this section, any 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 (and no assessment of tax, levy, or proceeding in any
court for the collection of such imputed underpayment may be made
against such partnership). Any adjustments that do not result in an
imputed underpayment described in Sec. 301.6225-1(f) that are
associated with an imputed underpayment (as described in Sec.
301.6225-1(g)) for which an election under this section is made are not
taken into account by the partnership in the adjustment year (as
defined in Sec. 301.6241-1(a)(1)) and instead each reviewed year
partners' share of the adjustment determined in accordance with Sec.
301.6226-2(f) must be included on the statement described in Sec.
301.6226-2.
(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
[[Page 41991]]
and Sec. 301.6226-2 (regarding statements filed with the Internal
Revenue Service (IRS) and furnished to reviewed year partners) are
satisfied. However, an election under this section is valid until the
IRS determines that the election is invalid. 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
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, the IRS may assess the imputed underpayment
against the partnership (without regard to the limitations under
section 6232(b)), and the partnership must pay the imputed underpayment
under section 6225 and any penalties and interest under section 6233.
An election under this section may be determined to be invalid even if
a correction is made in accordance with Sec. 301.6226-2(d)(2) or if a
correction is not made as required in accordance with Sec. 301.6226-
2(d)(3). However, the IRS has no obligation to require correction of
errors discovered by the IRS and may determine an election to be
invalid without providing an opportunity to correct under Sec.
301.6226-2(d)(3).
(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 the following correct information--
(A) The name, address, and 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 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 and the applicability of 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 any partnership-related items (as
defined in Sec. 301.6241-6) 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 partnership-related 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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 13. 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))
associated with 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 to each reviewed year partner 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 this
paragraph (b).
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 sells his interest in Partnership
and informs 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 setting forth a single imputed
underpayment. Partnership makes a timely election under section 6226
in accordance with Sec. 301.6226-1 with respect to the imputed
underpayment 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
[[Page 41992]]
because unknown to Partnership, A had moved. After undertaking
reasonable diligence to obtain the correct address of A, Partnership
is unable to ascertain the correct address. Therefore, pursuant to
paragraph (b)(2) of this section, Partnership properly furnished the
statement to A when it mailed the statement to 456 Broad St.
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. Because the statement was returned as undeliverable
and Partnership did not undertake reasonable diligence to obtain the
correct address for A, 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 setting forth a
single imputed underpayment. Partnership makes a timely election
under section 6226 in accordance with Sec. 301.6226-1 with respect
to the imputed underpayment. 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 prescribed by the IRS.
(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 and Sec. 301.6226-3(e)(3)(ii)),
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 and Sec. 301.6226-3(e)(3)(ii)), 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. The
partnership may not furnish corrected statements unless it receives
consent of the IRS to make the correction.
(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 and Sec. 301.6226-3(e)(3) or the IRS cannot determine whether
the statements furnished or filed by the partnership are correct
because of a failure by the partnership to comply with any requirement
under this section or Sec. 301.6226-3(e), the IRS may require the
partnership to correct such errors in accordance with paragraph (d)(1)
of this section or to provide additional information as necessary.
Failure by the partnership to correct an error or to provide
information when required by the IRS may be treated by the IRS as a
failure to properly furnish correct statements to partners and file the
correct statements with the IRS as described in paragraphs (b) and (c)
of this section or in Sec. 301.6226-3(e)(3). Whether the IRS requires
the partnership to correct any errors discovered by the IRS or provide
additional information is discretionary on the part of the IRS and the
IRS is under no obligation to require the partnership to provide
additional information or to correct any errors discovered or brought
to the IRS's attention at any time.
(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 correct
information:
(1) The name and 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 approved by the IRS with respect to the reviewed
year partner (or with respect to any 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);
(6) The applicability of any penalty, addition to tax, or
additional amount determined at the partnership level that relates to
any adjustments allocable to the reviewed year partner and the
adjustments to which the penalty, addition to tax, or additional amount
relates, the section of the Internal Revenue Code (Code) under which
each penalty, addition to tax, or additional amount is imposed, and the
applicable rate of each penalty, addition to tax, or additional amount
determined at the partnership level;
(7) The date the statement is furnished to the reviewed year
partner;
(8) The partnership taxable year to which the adjustments relate;
and
(9) Any other information required by forms, instructions, and
other guidance prescribed by the IRS.
(f) Determination of each partner's share of adjustments--(1)
Adjustments and other amounts--(i) In general. Except as described in
paragraphs (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 are reported to the reviewed year partner in the same
manner as each adjusted partnership-related item was originally
allocated to the reviewed year partner on the partnership return for
the reviewed year.
(ii) Adjusted partnership-related 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 partnership-
[[Page 41993]]
related item was not reported on the partnership return for the
reviewed year, each reviewed year partner's share of the adjustments
must be determined in accordance with how such partnership-related
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 a partnership-related item to a
specific partner or in a specific manner, including a reallocation of
such 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. Any modifications
approved by the IRS with respect to the reviewed year partner (or with
respect to any 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) under Sec. 301.6225-2 are disregarded for
purposes of determining each partner's share of the adjustments under
paragraph (f)(1) of this section.
(g) Coordination with other provisions under subtitle A of the
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 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. A partnership that
makes an election under Sec. 301.6226-1 with respect to an imputed
underpayment must pay the amount of tax required to be withheld under
chapter 3 or chapter 4, if any, in accordance with Sec. 301.6241-
7(b)(4).
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 14. Section 301.6226-3 is added to read as follows:
Sec. 301.6226-3 Adjustments taken into account by partners.
(a) Effect of taking adjustments into account on tax imposed by
chapter 1. Except as otherwise provided in this section, 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, or
if the additional reporting year tax is less than zero, decreased by
such amount. The additional reporting year tax is the aggregate of the
correction amounts (determined in accordance with paragraph (b) of this
section). In addition to being liable for the additional reporting year
tax, a reviewed year partner must also calculate and pay for the
reporting year any penalties, additions to tax, and additional amounts
(as determined under paragraph (d) of this section). Finally, a
reviewed year partner must also calculate and pay for the reporting
year any interest (as determined under paragraph (c) of this section).
(b) Determining the aggregate of the correction amounts--(1) In
general. For purposes of paragraph (a) of this section, the aggregate
of the correction amounts is the sum of the correction amounts
described in paragraphs (b)(2) and (3) of this section. A correction
amount under paragraph (b)(2) or (3) of this section may be less than
zero, and any correction amount that is less than zero may reduce any
other correction amount with the result that the aggregate of the
correction amounts under this paragraph (b)(1) may also be less than
zero. However, see paragraphs (c) and (d) of this section requiring a
separate determination of interest and penalties, additions to tax, and
additional amounts on the correction amount for each applicable taxable
year (as defined in paragraph (c)(1) of this section) without regard to
the correction amount for any other applicable taxable year.
(2) Correction amount for the first affected year--(i) In general.
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 or
decrease 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.
(ii) Calculation of the correction amount for the first affected
year. The correction amount is the amount of 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 less 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, or alternative
to an amended return submitted, under section 6225(c)(2) by 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), less
(C) The amount of rebates made (as defined in Sec. 1.6664-2(e) of
this chapter).
(iii) Definition of the correction amount for the first affected
year. The 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 (or alternatives)); 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--(i) In general.
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 or decrease 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))
of the partner under this paragraph (b)(3).
[[Page 41994]]
(ii) Calculation of the correction amount for the intervening
years. The correction amount for each intervening year is the amount of
chapter 1 tax that would have been imposed for the intervening year if
any tax attribute of the partner 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 of the partner for the
intervening year had been adjusted, after taking into account any
adjustments to tax attributes of the partner in any prior intervening
year(s)) exceeds less 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, or alternative
to an amended return submitted, under section 6225(c)(2) by a 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), less
(C) The amount of rebates made (as defined in Sec. 1.6664-2(e) of
this chapter).
(iii) Definition of the correction amount for the intervening
years. The 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 (or alternatives)); 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 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 (3) of this section, and interest on such
correction amounts under paragraph (c) 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.
(c) 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 in which there was a correction amount greater than zero at the
rate set forth in paragraph (c)(3) 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 (c)(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 greater than zero). For purposes of
calculating interest under this paragraph (c), a correction amount
under paragraph (b)(2) or (3) of this section for an applicable taxable
year that is less than zero does not reduce the correction amount for
any other applicable taxable year.
(2) Interest on penalties. Interest on any penalties, additions to
tax, or additional amounts determined under paragraph (d) of this
section is calculated at the rate set forth in paragraph (c)(3) of this
section from the due date (without extension) of the reviewed year
partner's return for the applicable taxable year until the amount is
paid.
(3) Rate of interest. For purposes of paragraph (c) 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).
(d) Penalties--(1) Applicability determined at the partnership
level. In the case of a partnership that makes an election under
section 6226, the applicability of any penalty, addition to tax, and
additional amount that relates to an adjustment to any partnership-
related item is determined at the partnership level in accordance with
section 6221(a). The partnership's reviewed year partners are liable
for such penalties, additions to tax, and additional amounts as
determined under paragraph (d)(2) of this section.
(2) Amount calculated at partner level. A reviewed year partner
calculates the amount of any penalty, addition to tax, or additional
amount relating to the partnership adjustments taken into account under
paragraph (b)(1) of this section as if the correction amount were an
underpayment or understatement of the reviewed year partner for the
first affected year or intervening year, as applicable. The calculation
of any penalty, addition to tax, or additional amount is based on the
characteristics of, and facts and circumstances applicable to, the
reviewed year partner for the first affected year or intervening year,
as applicable after taking into account the partnership adjustments
reflected on the statement. If after taking into account the
partnership adjustments in accordance with this section, the reviewed
year partner does not have an underpayment, or has an understatement
that falls below the applicable threshold for the imposition of a
penalty, no penalty is due from that reviewed year partner under this
paragraph (d)(2). For penalties in the case of a pass-through partner
that makes a payment under paragraph (e)(4) of this section, see
paragraph (e)(4)(iv) of this section.
(3) Partner-level defenses to penalties. A reviewed year partner
claiming that a penalty, addition to tax, or additional amount that
relates to a partnership adjustment reflected on a statement described
in Sec. 301.6226-2 (or paragraph (e)(3) of this section) is not due
because of a partner-level defense must first pay the penalty and file
a claim for refund for the reporting year. Partner-level defenses are
limited to those that are personal to the reviewed year partner (for
example, a reasonable cause and good faith defense under section
6664(c) that is based on the facts and circumstances applicable to the
partner).
(e) Pass-through partners--(1) In general. Except as provided in
paragraph (e)(6) of this section, if a pass-through partner (as defined
in Sec. 301.6241-1(a)(5)) is furnished a statement described in Sec.
301.6226-2 (including a statement described in paragraph (e)(3) of this
section) with respect to adjustments of a partnership that made an
election under Sec. 301.6226-1 (audited partnership), the pass-through
partner must file with the IRS a partnership adjustment tracking report
in accordance with forms, instructions, or other guidance prescribed by
the IRS on or before the due date described in paragraph (e)(3)(ii) of
this section, and file and furnish statements in accordance with
paragraph (e)(3) of this section. The pass-through partner must
[[Page 41995]]
comply with paragraph (e) of this section with respect to each
statement furnished to the pass-through partner.
(2) Failure to file and furnish required documents--(i) Failure to
timely file and furnish statements. If any pass-through partner fails
to timely file and furnish correct statements in accordance with
paragraph (e)(3) of this section, the pass-through partner must compute
and pay an imputed underpayment, as well as any penalties, additions to
tax, additional amounts, and interest with respect to the adjustments
reflected on the statement furnished to the pass-through partner in
accordance with paragraph (e)(4) of this section. The IRS may assess
such imputed underpayment against such pass-through partner without
regard to the limitations under section 6232(b). See Sec. 301.6232-
1(c)(2). A failure to furnish statements in accordance with paragraph
(e)(3) of this section is treated as a failure to timely pay an imputed
underpayment required under paragraph (e)(4)(i) of this section, unless
the pass-through partner computes and pays an imputed underpayment in
accordance with paragraph (e)(4) of this section. See section 6651(i).
(ii) Failures relating to partnership adjustment tracking report.
Failure to timely file the partnership adjustment tracking report as
required in paragraph (e)(1) of this section, or filing such report
without showing the information required under paragraph (e)(1) of this
section, is subject to the penalty imposed by section 6698.
(3) Furnishing statements to partners--(i) In general. A pass-
through partner described in paragraph (e)(1) of this section must
furnish a statement that includes the items required by paragraph
(e)(3)(iii) of this section to each partner that held an interest in
the pass-through partner at any time during the taxable year of the
pass-through partner to which the adjustments in the statement
furnished to the pass-through partner relate (affected partner). The
statements described in this paragraph (e)(3) must be filed with the
IRS by the due date prescribed in paragraph (e)(3)(ii) of this section.
Except as otherwise provided in paragraphs (e)(3)(ii), (iii), and (v)
of this section, the rules applicable to statements described in Sec.
301.6226-2 are applicable to statements described in this paragraph
(e)(3).
(ii) Time for filing and furnishing the statements. The pass-
through partner must file with the IRS and furnish to its affected
partners the statements described in paragraph (e)(3) of this section
no later than the extended due date for the return for the adjustment
year (as defined in Sec. 301.6241-1(a)(1)) of the audited partnership.
For purposes of this section, the extended due date is the extended due
date under section 6081 regardless of whether the audited partnership
is required to file a return for the adjustment year or timely files a
request for an extension under section 6081 and the regulations
thereunder.
(iii) Contents of statements. Each statement described in paragraph
(e)(3) of this section must include the following correct information--
(A) The name and taxpayer identification number (TIN) of the
audited partnership;
(B) The adjustment year of the audited partnership;
(C) The extended due date for the return for the adjustment year of
the audited partnership (as described in paragraph (e)(3)(ii) of this
section);
(D) The date on which the audited partnership furnished its
statements required under Sec. 301.6226-2(b);
(E) The name and TIN of the partnership that furnished the
statement to the pass-through partner if different from the audited
partnership;
(F) The name and TIN of the pass-through partner;
(G) The pass-through partner's taxable year to which the
adjustments reflected on the statements described in paragraph (e)(3)
of this section relates;
(H) The name and TIN of the affected partner to whom the statement
is being furnished;
(I) The current or last address of the affected partner that is
known to the pass-through partner;
(J) The affected partner's share of items as originally reported to
such partner under section 6031(b) and, if applicable, section 6227,
for the taxable year to which the adjustments reflected on the
statement furnished to the pass-through partner relate;
(K) The affected partner's share of partnership adjustments
determined under Sec. 301.6226-2(f)(1) as if the affected partner were
the reviewed year partner and the pass-through partner were the
partnership;
(L) Modifications approved by the IRS with respect to the affected
partner that holds its interest in the audited partnership through the
pass-through partner;
(M) The applicability of any penalties, additions to tax, or
additional amounts that relate to any adjustments allocable to the
affected partner and the adjustments allocated to the affected partner
to which such penalties, additions to tax, or additional amounts
relate, the section of the Internal Revenue Code under which each
penalty, addition to tax, or additional amount is imposed, and the
applicable rate of each penalty, addition to tax, or additional amount;
and
(N) Any other information required by forms, instructions, and
other guidance prescribed by the IRS.
(iv) Affected partner must take into account the adjustments. A
statement furnished to an affected partner in accordance with paragraph
(e)(3) of this section is treated as if it were a statement described
in Sec. 301.6226-2. An affected partner that is a pass-through partner
must take into account the adjustments reflected on such a statement in
accordance with this paragraph (e). An affected partner that is not a
pass-through partner must take into account the adjustments reflected
on such a statement in accordance with this section by treating
references to ``reviewed year partner'' as ``affected partner''. For
purposes of this paragraph (e)(3)(iv), an affected partner that is not
a pass-through partner takes into account the adjustments in accordance
with this section by determining its reporting year based on the date
upon which the audited partnership furnished its statements to its
reviewed year partners (as described in paragraph (a) of this section).
No addition to tax under section 6651 related to any additional
reporting year tax will be imposed if an affected partner that is not a
pass-through partner reports and pays the additional reporting year tax
within 30 days of the extended due date for the return for the
adjustment year of the audited partnership (as described in paragraph
(e)(3)(ii) of this section).
(v) Adjustments subject to chapters 3 and 4. If a pass-through
partner furnishes statements to its affected partners in accordance
with paragraph (e)(3) of this section, the pass-through partner must
comply with the requirements of Sec. 301.6241-7(b)(4), and an affected
partner must comply with the requirements of paragraph (f) of this
section. For purposes of applying both Sec. 301.6241-7(b)(4) and
paragraph (f) of this section, as appropriate, references to the
``partnership'' should be replaced with references to the ``pass-
through partner''; references to the ``reviewed year partner'' should
be replaced with references to the ``affected partner''; references to
the statement required under paragraph (a) of this section and its due
date should be replaced with references to the statement required under
paragraph (e)(3) of this section and its due date described in
paragraph (e)(3)(ii) of this section; references to the ``reporting
year'' should be read in accordance with paragraph (e)(3)(iv) of this
section; and references to the partnership return should be read as
[[Page 41996]]
references to the return for the adjustment year of the audited
partnership as described in paragraph (e)(3)(ii) of this section.
(4) Pass-through partner pays an imputed underpayment--(i) In
general. If a pass-through partner described in paragraph (e)(1) of
this section does not furnish statements in accordance with paragraph
(e)(3) of this section, the pass-through partner must compute and pay
an imputed underpayment determined under paragraph (e)(4)(iii) of this
section. The pass-through partner must also pay any penalties,
additions to tax, additional amounts, and interest as determined under
paragraph (e)(4)(iv) of this section. A failure to timely pay an
imputed underpayment required under this paragraph (e)(4) is subject to
penalty under section 6651(i).
(ii) Time of payment. A pass-through partner must file a
partnership adjustment tracking report and compute and pay the imputed
underpayment and any penalties, additions to tax, additional amounts,
and interest, as described in paragraph (e)(4)(i) of this section, in
accordance with forms, instructions, and other guidance no later than
the extended due date for the return for the adjustment year of the
audited partnership.
(iii) Computation of the imputed underpayment. The imputed
underpayment under paragraph (e)(4)(i) of this section is computed in
the same manner as an imputed underpayment under section 6225 and Sec.
301.6225-1, except that adjustments reflected on the statement
furnished to the pass-through partner under Sec. 301.6226-2 are
treated as partnership adjustments (as defined in Sec. 301.6241-
1(a)(6)) for the first affected year. Any modification approved by the
IRS under Sec. 301.6225-2 with respect to the pass-through partner
(including any modifications with respect to a relevant partner (as
defined in Sec. 301.6225-2(a)) that holds its interest in the audited
partnership through its interest in the pass-through partner) reflected
on the statement furnished to the pass-through partner under Sec.
301.6226-2 (or paragraph (e)(3) of this section) is taken into account
in calculating the imputed underpayment under this paragraph
(e)(4)(iii). Any modification that was not approved by the IRS under
Sec. 301.6225-2 may not be taken into account in calculating the
imputed underpayment under this paragraph (e)(4)(iii).
(iv) Penalties and interest--(A) Penalties. A pass-through partner
must compute and pay any applicable penalties, additions to tax, and
additional amounts on the imputed underpayment calculated under
paragraph (e)(4)(iii) of this section as if such amount were an imputed
underpayment for the pass-through partner's first affected year. See
Sec. 301.6233(a)-1(c).
(B) Interest. A pass-through partner must pay interest on the
imputed underpayment calculated under paragraph (e)(4)(iii) of this
section in accordance with paragraph (c) of this section as if such
imputed underpayment were an imputed underpayment due for the first
affected year.
(v) Adjustments that do not result in an imputed underpayment.
Adjustments taken into account under paragraph (e)(4) of this section
that do not result in an imputed underpayment (as defined in Sec.
301.6225-1(f)) are taken into account by the pass-through partner in
accordance with Sec. 301.6225-3 in the taxable year of the pass-
through partner that includes the date the imputed underpayment
required under paragraph (e)(4)(i) of this section is paid. If, after
making the computation described in paragraph (e)(4)(iii) of this
section, no imputed underpayment exists and therefore no payment is
required under paragraph (e)(4)(i) of this section, the adjustments
that did not result in an imputed underpayment are taken into account
by the pass-through partner in accordance with Sec. 301.6225-3 in the
taxable year of the pass-through partner that includes the date the
statement described in Sec. 301.6226-2 (or paragraph (e)(3) of this
section) is furnished to the pass-through partner.
(vi) Coordination with chapters 3 and 4. If a pass-through partner
pays an imputed underpayment described in paragraph (e)(4)(i) of this
section, Sec. 301.6241-7(b)(3) applies to the pass-through partner by
substituting ``pass-through partner'' for ``partnership'' where Sec.
301.6241-7(b)(3) refers to the partnership that pays the imputed
underpayment.
(5) Treatment of pass-through partners that are not partnerships--
(i) S corporations. For purposes of this paragraph (e), an S
corporation is treated as a partnership and its shareholders are
treated as partners.
(ii) Trusts and estates. Except as provided in paragraph (g) of
this section, for purposes of paragraph (e) of this section, a trust
and its beneficiaries, and an estate and its beneficiaries are treated
in the same manner as a partnership and its partners.
(6) Pass-through partners subject to chapter 1 tax. A pass-through
partner that is subject to tax under chapter 1 of the Code on the
adjustments (or a portion of the adjustments) reflected on the
statement furnished to such partner under Sec. 301.6226-2 (or
paragraph (e)(3) of this section) takes the adjustments into account
under this paragraph (e)(6) when the pass-through partner calculates
and pays the additional reporting year tax as determined under
paragraph (b) of this section and furnishes statements to its partners
in accordance with paragraph (e)(3) of this section. Notwithstanding
the prior sentence, a pass-through partner is only required to include
on a statement under paragraph (e)(3) of this section the adjustments
that would be required to be included on statements furnished to owners
or beneficiaries under sections 6037 and 6034A, as applicable, if the
pass-through partner had correctly reported the items for the year to
which the adjustments relate. If the pass-through partner fails to
comply with the requirements of this paragraph (e)(6), the pass-through
partner must compute and pay an imputed underpayment, as well as any
penalties, additions to tax, additional amounts, and interest with
respect to the adjustments reflected on the statement furnished to such
partner in accordance with paragraph (e)(4) of this section.
(f) Partners subject to withholding under chapters 3 and 4. A
reviewed year partner that is subject to withholding under Sec.
301.6241-7(b)(4) must file an income tax return for the reporting year
to report its additional reporting year tax and its share of any
penalties, additions to tax, additional amounts, and interest
(notwithstanding any filing exception in Sec. 1.6012-1(b)(2)(i) or
Sec. 1.6012-2(g)(2)(i) of this chapter). The amount of tax paid by a
partnership under Sec. 301.6241-7(b)(4) is allowed as a credit under
section 33 to the reviewed year partner to the extent that the tax is
allocable to the reviewed year partner (within the meaning of Sec.
1.1446-3(d)(2) of this chapter) or is actually withheld from the
reviewed year partner (within the meaning of Sec. 1.1464-1(a) or Sec.
1.1474-3 of this chapter). The credit is allowed against the reviewed
year partner's income tax liability for its reporting year. The
reviewed year partner must substantiate the credit by attaching the
applicable Form 1042-S, ``Foreign Person's U.S. Source Income Subject
to Withholding,'' or Form 8805, ``Foreign Partner's Information
Statement of Section 1446 Withholding Tax,'' to its income tax return
for the reporting year, as well as satisfying any other requirements
prescribed by the IRS in forms and instructions.
(g) Treatment of disregarded entities and wholly-owned grantor
trusts. In the case of a reviewed year partner that is a wholly-owned
entity disregarded as
[[Page 41997]]
separate from its owner for Federal tax purposes in the reviewed year
or a trust that is wholly owned by only one person in the reviewed
year, whether the grantor or another person, and where the trust
reports the owner's information to payors under Sec. 1.671-
4(b)(2)(i)(A) of this chapter and that is furnished a statement
described in Sec. 301.6226-2 (or paragraph (e)(3) of this section),
the owner of the disregarded entity or wholly-owned grantor trust must
take into account the adjustments reflected on that statement in
accordance with this section as if the owner were the reviewed year
partner.
(h) Examples. The following examples illustrate the rules of this
section. For purposes of these examples, each partnership is subject to
subchapter C of chapter 63 of the Code, each partnership and partner
has a calendar year taxable year, no modifications are requested by any
partnership under Sec. 301.6225-2 (unless otherwise stated), no
penalties, additions to tax, or additional amounts are determined at
the partnership level (unless otherwise stated), all persons are U.S.
persons (unless otherwise stated), the highest rate of income tax in
effect for is 40 percent for all relevant periods, the highest rate of
income tax in effect for corporations is 20 percent for all relevant
periods, and the highest rate of tax for individuals for capital gains
is 15 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 determining that a 20 percent accuracy-related penalty under
section 6662(b) applies to the disallowance of the charitable
contribution, and setting forth a single imputed underpayment with
respect to such adjustments. 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 applicability of the penalty. The
decision regarding Partnership's 2020 tax year becomes final on
December 15, 2025. Pursuant to Sec. 301.6226-2(b), the partnership
adjustments are finally determined on December 15, 2025. On February
2, 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
that a 20 percent accuracy-related penalty under section 6662(b)
applies. A must pay the additional reporting year tax as determined
in accordance with paragraph (b) of this section, in addition to A's
penalties 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 or decreased
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 correction amounts is the correction amount for
2020, A's first affected year. In addition to the aggregate of the
correction amounts being added to the chapter 1 tax that A owes for
2026, the reporting year, A must calculate a 20 percent accuracy-
related penalty on A's underpayment attributable to the $100
adjustment to the charitable contribution, as well as interest on
the correction amount for the first affected year and the penalty
determined in accordance with paragraph (c) 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 penalty from April 15, 2021, the due date of A's 2020
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 paragraph (b) of this section,
which is the correction amount for 2020, plus the accuracy-related
penalty determined in accordance with paragraph (d) of this section,
and interest determined in accordance with paragraph (c) of this
section on the correction amount for 2020 and the penalty.
Example 2. On its partnership return for the 2020 tax year,
Partnership reported an ordinary loss of $500. On June 1, 2023, the
IRS mails an FPA to Partnership for the 2020 taxable year
determining that $300 of the $500 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 (as a result of the disallowance of the
recharacterization of $300 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 in long-term capital
loss for 2020 which does not result in an imputed underpayment under
Sec. 301.6225-1(f). 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
long-term capital loss that does not result in an imputed
underpayment. Rather, the $300 long-term capital loss is taken into
account by the reviewed year partners. The time to file a petition
expires on August 30, 2023. Pursuant to Sec. 301.6226-2(b), the
partnership adjustments become finally determined on August 31,
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. The statement also shows an adjustment to
B's allocable share of the ordinary loss in the amount of <$75>,
resulting in a corrected ordinary loss allocated to B of $50 for
taxable year 2020 ($125 originally allocated to B less $75 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 (B's share of the adjustment that did not
result in the imputed underpayment with respect to Partnership). B
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 reduction in ordinary loss and an increase of $75
in long-term capital loss) for the 2020 taxable year. B determines
the amount by which his chapter 1 tax for 2020 would have increased
or decreased if the $75 adjustment to ordinary loss and the $75
adjustment to long-term capital loss from Partnership were taken
into account for that year. Second, B determines if there is any
increase or decrease 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 correction 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 (c) of
this section.
Example 3. On its partnership return for the 2020 tax year,
Partnership, a domestic partnership, reported U.S. source dividend
income of $2,000. On June 1, 2023, the IRS mails an FPA to
Partnership for Partnership's
[[Page 41998]]
2020 year increasing the amount of U.S. source dividend income to
$4,000 and determining that a 20 percent accuracy-related penalty
under section 6662(b) applies to the increase in U.S. source
dividend income. 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 does not
file a petition for readjustment under section 6234. The time to
file a petition expires on August 30, 2023. Pursuant to Sec.
301.6226-2(b), the partnership adjustments become finally determined
on August 31, 2023. On September 30, 2023, Partnership files the
statements described under Sec. 301.6226-2 with the IRS and
furnishes to partner C, a nonresident alien individual who was a
partner in Partnership during 2020 (and remains a partner in
Partnership in 2023), a statement described in Sec. 301.6226-2. C
had a 50 percent interest in Partnership during all of 2020 and was
allocated 50 percent of all items from Partnership for that year.
The statement shows C's share of U.S. source dividend income
reported on Partnership's return for the reviewed year of $1,000 and
an adjustment to U.S. source dividend income of $1,000. In addition,
the statement reports that a 20 percent accuracy-related penalty
under section 6662(b) applies. Under Sec. 301.6241-7(b)(4)(i),
because the additional $1,000 in U.S. source dividend income
allocated to C is an amount subject to withholding (as defined in
Sec. 301.6241-7(b)(2)), Partnership must pay the amount of tax
required to be withheld on the adjustment. See Sec. Sec. 1.1441-
1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter. Under Sec.
301.6241-7(b)(4)(ii), Partnership may reduce the amount of
withholding tax it must pay because it has valid documentation from
2020 that establishes that C was entitled to a reduced rate of
withholding in 2020 on U.S. source dividend income of 10 percent
pursuant to a treaty. Partnership withholds $100 of tax from C's
distributive share, remits the tax to the IRS, and files the
necessary return and information returns required by Sec. 1.1461-1
of this chapter. On his 2023 return, C must report the additional
reporting year tax determined in accordance with paragraph (b) of
this section, the accuracy-related penalty determined in accordance
with paragraph (d) of this section, and interest determined in
accordance with paragraph (c) of this section on the correction
amount for the first affected year, the correction amount for any
intervening year, and the penalty. Under paragraph (f) of this
section, C may claim the $100 withholding tax paid by Partnership
pursuant to Sec. 301.6241-7(b)(4)(i) as a credit under section 33
against C's income tax liability on his 2023 return.
Example 4. On its partnership return for the 2020 tax year,
Partnership reported ordinary income of $100 and a long-term capital
gain of $40. 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 long-term
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
long-term capital gain should have been allocated equally to all
four partners and that Partnership should have recognized an
additional $10 in ordinary income. On June 1, 2023, the IRS mails an
FPA to Partnership reflecting the reallocation of the $40 long-term
capital gain so that F, G, and H each have $10 increase in long-term
capital gain and E has a $30 reduction in long-term capital gain for
2020. In addition, the FPA reflects the partnership adjustment
increasing ordinary income by $10. 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
long-term capital gain allocated to F, G, and H. In addition, the
FPA reflects a $30 partnership adjustment that does not result in an
imputed underpayment, that is, the reduction of $30 in long-term
capital gain with respect to E that is associated with the specific
imputed underpayment in accordance with Sec. 301.6225-
1(g)(2)(iii)(B). 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 long-
term 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. 301.6226-2(b), the partnership
adjustments become finally determined on August 31, 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 long-term capital gain.
The statements for F, G, and H each reflect a partnership adjustment
of an additional $10 of long-term capital gain for 2020. The
statement for E reflects a partnership adjustment of a reduction of
$30 of long-term capital gain for 2020. All partners must report the
additional reporting year tax as determined in accordance with
paragraph (b) of this section in the partners' reporting year, which
is 2023. They compute their additional reporting year tax as
follows. First, they determine the correction amount for the first
affected year (the 2020 taxable year) by taking into account their
share of the partnership adjustments for the 2020 taxable year. They
each determine the amount by which their chapter 1 tax for 2020
would have increased or decreased if the adjustment to long-term
capital gain from Partnership were taken into account for that year.
Second, they determine if there is any increase or decrease in
chapter 1 tax for any intervening year as a result of the adjustment
to the long-term capital gain for 2020. Their aggregate of the
correction amounts is the sum of the correction amount for 2020,
their first affected year and any correction amounts for any
intervening years. They are 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 (c) of
this section.
Example 5. On its partnership return for the 2020 taxable year,
Partnership reported a long-term capital loss of $500. 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 $200 of the reported $500
long-term capital loss, the only adjustment. Accordingly, the
imputed underpayment reflected in the NOPPA is $80 ($200 x 40
percent). F, a C corporation partner with a 50 percent interest in
Partnership, received 50 percent of all long-term 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 ($100 reduction in
long-term 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 pays additional tax (and
interest) for these years because the reduction in long-term capital
loss for 2020 affected the tax due from F for 2021 and 2022. See
Sec. 301.6225-2(d)(2). The reduction of the long-term capital loss
in 2020 did not affect any other taxable year of F. This is the only
modification requested. 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 long-term capital loss in the amount of $200. 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 long-term capital loss. Therefore, the imputed
underpayment in the FPA is $40 ($100 x 40 percent). 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 upholds the
determinations in the FPA and the decision regarding Partnership's
2020 tax year becomes final on December 15, 2025. Pursuant to Sec.
301.6226-2(b), 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 long-term capital loss adjustment for the reviewed year of
$100, as well as the $100 long-term capital loss taken into account
by F as part of the amended return modification. Accordingly, in
accordance with paragraph (b) of this section, when F computes its
correction amounts for the first affected year (the 2020 taxable
year) and the intervening years (the 2021 through 2026 taxable
years), F computes any increase
[[Page 41999]]
or decrease in chapter 1 tax for those years using the returns for
the 2020, 2021, and 2022 taxable years as amended during the
modification process.
Example 6. Partnership has two equal partners for the 2020 tax
year: I (an individual) and J (a partnership). For the 2020 tax
year, J has two equal partners--K and L--both individuals. On June
1, 2023, the IRS mails an FPA to Partnership for Partnership's 2020
year increasing Partnership's ordinary income by $500,000 and
asserting an imputed underpayment of $200,000. 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 does not file a petition for
readjustment under section 6234. The time to file a petition expires
on August 30, 2023. Pursuant to Sec. 301.6226-2(b), the partnership
adjustments become finally determined on August 31, 2023. Therefore,
Partnership's adjustment year is 2023, the due date of the
adjustment year return is March 15, 2024 and the extended due date
for the adjustment year return is September 16, 2024. On October 12,
2023, Partnership timely files with the IRS statements described in
Sec. 301.6226-2 and timely furnishes statements to its partners
reflecting their share of the partnership adjustments as finally
determined in the FPA. The statements to I and J each reflect a
partnership adjustment of $250,000 of ordinary income. I takes its
share of the adjustments reflected on the statements furnished by
Partnership into account on I's return for the 2023 tax year in
accordance with paragraph (b) of this section. On April 1, 2024, J
files the adjustment tracking report and files and furnishes
statements to K and L reflecting each partner's share of the
adjustments reflected on the statements Partnership furnished to J.
K and L must take their share of adjustments reflected on the
statements furnished by J into account on their returns for the 2023
tax year in accordance with paragraph (b) of this section by
treating themselves as reviewed year partners for purposes of that
paragraph.
Example 7. On its partnership return for the 2020 tax year,
Partnership reported that it placed Asset, which had a depreciable
basis of $210,000, into service in 2020 and depreciated Asset over 5
years, using the straight-line method. Accordingly, Partnership
claimed depreciation of $42,000 in each year related to Asset.
Partnership has two equal partners for the 2020 tax year: M (a
partnership) and N (an S corporation). For the 2020 tax year, N has
one shareholder, O, who is an individual. On June 1, 2023, the IRS
mails an FPA to Partnership for Partnership's 2020 year. In the FPA,
the IRS determines that Asset should have been depreciated over 7
years instead of 5 years and adjusts the depreciation for the 2020
tax year to $30,000 instead of $42,000 resulting in a $12,000
adjustment. This adjustment results in an imputed underpayment of
$4,800 ($12,000 x 40 percent). 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 does not file a petition for readjustment under section 6234.
The time to file a petition expires on August 30, 2023. Pursuant to
Sec. 301.6226-2(b), the partnership adjustments become finally
determined on August 31, 2023. On October 12, 2023, Partnership
timely 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. The
statements to M and N reflect a partnership adjustment of $6,000 of
ordinary income for the 2020 tax year. On February 1, 2024, N takes
the adjustments into account under paragraph (e)(3) of this section
by filing an adjustment tracking reporting and issuing a statement
to O reflecting her share of the adjustments reported to N on the
statement it received from Partnership. M does not furnish
statements and instead chooses to calculate and pay an imputed
underpayment under paragraph (e)(4) of this section equal to $1,200
($6,000 x 40 percent) on the adjustments reflected on the statement
it received from Partnership plus interest on the amount calculated
in accordance with paragraph (e)(4)(iv)(B) of this section. On her
2023 return, O properly takes the adjustments into account under
this section. Therefore, O reports and pays the additional reporting
year tax determined in accordance with paragraph (b) of this
section, which is the correction amount for 2020 plus any correction
amounts for 2021 and 2022 (if the adjustments in 2020 resulted in
any changes to the tax attributes of O in those years), and pays
interest determined in accordance with paragraph (c) of this section
on the correction amounts for each of those years.
Example 8. On its partnership return for the 2020 tax year,
Partnership reported $1,000 of ordinary loss. Partnership has two
equal partners for the 2020 tax year: P and Q, both S corporations.
For the 2020 tax year, P had one shareholder, R, an individual. For
the 2020 tax year, Q had two shareholders, S and T, both
individuals. On June 1, 2023, the IRS mails an FPA to Partnership
for Partnership's 2020 year determining $500 of the $1,000 of
ordinary loss should be recharacterized as $500 of long-term capital
loss and $500 of the ordinary loss should be disallowed. The FPA
asserts an imputed underpayment of $400 ($1,000 x 40 percent) with
respect to the $1,000 reduction to ordinary loss and reflecting an
adjustment that does not result in an imputed underpayment of a $500
capital loss. 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 does not
file a petition for readjustment under section 6234. The time to
file a petition expires on August 30, 2023. Pursuant to Sec.
301.6226-2(b), the partnership adjustments become finally determined
on August 31, 2023. On October 12, 2023, Partnership timely 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. The statements to P
and Q each reflect a partnership adjustment of a $500 increase in
ordinary income and a $250 increase in capital loss in accordance
with Sec. 301.6225-3(b)(6). P takes the adjustments into account
under paragraph (e)(3) of this section by timely filing an
adjustment tracking reporting and furnishing a statement to R. Q
timely filed an adjustment tracking report but chooses not to
furnish statements and instead must calculate and pay an imputed
underpayment under paragraph (e)(4) of this section as well as
interest on the imputed underpayment determined under paragraph
(e)(4)(iv)(B) of this section on the imputed underpayment. After
applying the rules set forth in Sec. 301.6225-1, Q calculates the
imputed underpayment that it is required to pay of $200 ($500
adjustment to ordinary income x 40 percent). Q also has one
adjustment that does not result in an imputed underpayment--the $250
increase to capital loss. On its 2023 return, Q reports and
allocates the $250 capital loss to its shareholders for its 2023
taxable year as a capital loss as provided in Sec. 301.6225-3. Q
must file the adjustment tracking report and pay the amounts due
under paragraph (e)(4) of this section no later than September 15,
2024, the extended due date of Partnership's return for the 2023
year, which is the adjustment year.
Example 9. On its partnership return for the 2020 tax year,
Partnership reported a $1,000 long-term capital gain on the sale of
Stock. Partnership has two equal partners for the 2020 tax year: U
(an individual) and V (a partnership). For the 2020 tax year, V has
two equal partners: W (an individual) and X (a partnership). For the
2020 tax year, X has two equal partners: Y and Z, both of which are
C corporations. On June 1, 2023, the IRS mails a NOPPA to
Partnership for Partnership's 2020 year proposing a $500 increase in
the long-term capital gain from the sale of Stock and an imputed
underpayment of $200 ($500 x 40 percent). On July 17, 2023,
Partnership timely submits a request to modify the rate used in
calculating the imputed underpayment under Sec. 301.6225-2(d)(4).
Partnership submits sufficient information demonstrating that $375
of the $500 adjustment is allocable to individuals (50 percent of
the $500 adjustment allocable to U and 25 percent of the $500
adjustment allocable to W) and the remaining $125 is allocable to C
corporations (the indirect partners Y and Z). The IRS approves the
modification and the imputed underpayment is reduced to $81.25
(($375 x 15 percent) + ($125 x 20 percent)). See Sec. 301.6225-
2(b)(3). No other modifications are requested. On February 28, 2024,
the IRS mails an FPA to Partnership for Partnership's 2020 year
determining a $500 increase in the long-term capital gain on the
sale of Stock and asserting an imputed underpayment of $81.25 after
taking into account the approved modifications. 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 does not file a petition for
readjustment under section 6234. The time to file a petition expires
on May 28, 2024. Pursuant to Sec. 301.6226-2(b), the partnership
adjustments become finally determined on May 29, 2024. On July 26,
2024, Partnership timely files with the IRS
[[Page 42000]]
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. The statements to U and V each
reflect a partnership adjustment of a $250 increase in long-term
capital gain. V timely files the adjustment tracking report but
fails to furnish statements and therefore must calculate and pay an
imputed underpayment under paragraph (e)(4) of this section as well
as interest on the imputed underpayment determined under paragraph
(e)(4)(iv)(B) of this section. On February 3, 2025, V pays an
imputed underpayment of $43.75 (($125 x 20 percent for the
adjustments allocable to X) + ($125 x 15 percent for the adjustments
allocable to W)) which takes into account the rate modifications
approved by the IRS with respect to Y and Z. V must also pay any
interest on the amount as determined in accordance with paragraph
(e)(4)(iv)(B) of this section. V must file the adjustment tracking
report and pay the amounts due under paragraph (e)(4) of this
section no later than September 15, 2025, the extended due date of
Partnership's return for the 2024 year, which is the adjustment
year.
(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. 301.9100-22 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. 301.9100-22 is in effect.
0
Par. 15. Section 301.6226-4 is added to read as follows:
Sec. 301.6226-4 Effect of a partnership adjustment on tax attributes
of partnerships and their partners.
(a) Adjustments to tax attributes--(1) In general. When a
partnership adjustment (as defined in Sec. 301.6241-1(a)(6)) is taken
into account by the reviewed year partners (as defined in Sec.
301.6241-1(a)(9)) or affected partners (as described in Sec. 301.6226-
3(e)(3)(i)) pursuant to an election made by a partnership under Sec.
301.6226-1, the partnership and its reviewed year partners or affected
partners must adjust their tax attributes (as defined in Sec.
301.6241-1(a)(10)) in accordance with the rules in this section.
(2) Application to pass-through partners and indirect partners. To
the extent a pass-through partner (as defined in Sec. 301.6241-
1(a)(5)) pays an imputed underpayment under Sec. 301.6226-
3(e)(4)(iii), such pass-through partner and its affected partners or
their successors must make adjustments to their tax attributes in
accordance with the rules in Sec. 301.6225-4.
(3) Allocation of partnership adjustments. Partnership adjustments
are allocated to the reviewed year partners or affected partners under
Sec. 1.704-1(b)(4)(xiv) of this chapter.
(b) Adjusting tax attributes of a partnership and its partners when
an election under section 6226 is made. For partnership adjustments
that are taken into account by the reviewed year partners or affected
partners because an election is made under Sec. 301.6226-1, the
partnership adjustments to be taken into account by each partner are
determined under Sec. 301.6226-2(f). Accordingly, the reviewed year
partners or affected partners must take into account the partnership
adjustments as reflected on the statements described in Sec. 301.6226-
2 or Sec. 301.6226-3(e)(3) in accordance with Sec. 301.6226-3. The
reviewed year partners or affected partners and the partnership adjust
partnership tax attributes affected by reason of an adjustment
reflected on the statements described in Sec. 301.6226-2 or Sec.
301.6226-3(e)(3) with respect to the reviewed year (as defined in Sec.
301.6241-1(a)(8)), except to the extent partner or partnership tax
attributes were already adjusted as part of the partnership adjustment.
Additionally, reviewed year partners or affected partners adjust their
partner tax attributes that are affected by the adjustments reflected
on the statements described in Sec. 301.6226-2 or Sec. 301.6226-
3(e)(3), but these adjustments to partner tax attributes are calculated
with respect to each year beginning with the first affected year (as
defined in Sec. 301.6226-3(b)(2)(i)), followed by any intervening
years (as defined in Sec. 301.6226-3(b)(3)(i)), concluding with the
reporting year (as defined in Sec. 301.6226-3(a)).
(c) Example. The following example illustrates the rules of this
section. For purposes of this example, Partnership is subject to the
provisions of subchapter C of chapter 63 of the Internal Revenue Code,
Partnership and its partners are calendar year taxpayers, all partners
are U.S. persons, and the highest rate of income tax in effect for all
taxpayers is 40 percent for all relevant periods.
Example. (i) In 2021, J, K and L form Partnership by each
contributing $500 in exchange for partnership interests that share
all items of income, gain, loss and deduction in identical shares.
Partnership immediately purchases Asset on January 1, 2021 for
$1,500, which it depreciates using the straight-line method with a
10-year recovery period beginning in 2021 ($150) so that each
partner has a $50 distributive share of the depreciation, resulting
in an outside basis of $450 for each partner. Accordingly, at the
end of 2022, J, K and L have an outside basis and capital account of
$400 each ($500 less $50 of their respective allocable shares of
depreciation in 2021 and $50 in 2022).
----------------------------------------------------------------------------------------------------------------
Partnership Outside
basis Book Value basis Book Value
----------------------------------------------------------------------------------------------------------------
Asset........................ $1200 $1200 $1500 J $400 $400 $500
.............. ......... ......... K 400 400 500
.............. ......... ......... L 400 400 500
----------------------------------------------------------------------------------
Totals................... 1200 1200 1500 .......... 1200 1200 1500
----------------------------------------------------------------------------------------------------------------
(ii) The IRS initiates an administrative proceeding with respect
to Partnership's 2021 taxable year (reviewed year) and in 2023
(adjustment year) finally determines that Asset should have been
depreciated with a 20-year recovery period beginning in 2021,
resulting in a $75 partnership adjustment that results in an imputed
underpayment. The IRS does not initiate an administrative proceeding
with respect to Partnership's 2022 taxable year, and Partnership
does not file an administrative adjustment request for that taxable
year. Partnership makes an election under Sec. 301.6226-1 with
respect to the imputed underpayment. Therefore, J, K and L each are
furnished a statement described in Sec. 301.6226-2 by Partnership
reflecting the $25 income adjustment for 2021.
(iii) Tax attributes of the partners must be adjusted to reflect
the $75 partnership adjustment reflected on the statements described
in Sec. 301.6226-2 that is taken into account in equal shares ($25)
by J, K, and L with respect to 2021. Specifically, J, K and L's
outside bases and capital accounts must be increased $25 each with
respect to the 2021 tax year. As a result, J, K and L each have an
outside basis and capital account of $425 ($400 plus $25 of income
realized with respect to 2021). Asset's basis and book value must
also be changed in 2023. Thus, after adjusting tax attributes of the
partners to take into account the election under Sec. 301.6226-1
and taking into account other activities of Partnership in 2023,
accounts are stated as follows:
[[Page 42001]]
----------------------------------------------------------------------------------------------------------------
Partnership Outside
basis Book Value basis Book Value
----------------------------------------------------------------------------------------------------------------
Asset........................ $1275 $1275 $1500 J $425 $425 $500
.............. ......... ......... K 425 425 500
.............. ......... ......... L 425 425 500
----------------------------------------------------------------------------------
Totals................... 1275 1275 1500 .......... 1275 1275 1500
----------------------------------------------------------------------------------------------------------------
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 16. 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 any partnership-related item
(as defined in Sec. 301.6241-6) 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 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 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. In addition, a partnership may not file an AAR solely for
the purpose of changing the designation of a partnership representative
or changing the appointment of a designated individual. See Sec.
301.6223-1 (regarding designation of the partnership representative).
When the partnership changes the designation of the partnership
representative (or appointment of the designated individual) in
conjunction with the filing of an AAR in accordance with Sec.
301.6223-1(e), the change in designation (or appointment) is treated as
occurring prior to the filing of the AAR.
(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). Except as provided in Sec.
301.6231-1(f), an AAR may not 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 prescribed by the IRS, 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 correct information:
(i) The name and 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
partnership-related item was originally allocated to the reviewed year
partner on the partnership return for the reviewed year.
(ii) Adjusted partnership-related 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 partnership-
related item was not reported on the partnership return for the
reviewed year, each reviewed year partner's share
[[Page 42002]]
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 a partnership-related 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
partnership-related 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 partnership-related 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 and the
regulations thereunder, 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 partnership-related item,
including any partnership-related 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 (i)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 17. 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 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 apply modifications to 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)(6)(ii) (regarding
limitations or restrictions in the grouping of adjustments), Sec.
301.6225-2(d)(7) (regarding certain qualified investment entities),
Sec. 301.6225-2(d)(9) (regarding tax treaty modifications), 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 applying modifications to 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 applying modifications to the
amount of any imputed underpayment under paragraph (a)(1) of this
section reported on the AAR; and
(ii) As part of the AAR filed with the IRS in accordance with
forms, instructions, and other guidance prescribed by the IRS, 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 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
by the due date of the partnership return for the adjustment year,
interest is determined in accordance with section 6233(b)(2).
(3) Coordination with chapters 3 and 4--(i) Coordination when
partnership pays an imputed underpayment. If a partnership pays an
imputed underpayment resulting from adjustments requested in an AAR
under paragraph (b)(1) of this section, the rules in Sec. 301.6241-
7(b)(3) apply to treat the partnership as having paid the amount
required to be withheld under chapter 3 or chapter 4 (as defined in
Sec. 301.6241-7(b)(2)).
(ii) Coordination when partnership elects to have adjustments taken
into account by reviewed year partners. If a partnership elects under
paragraph (c) of this section to have its reviewed year partners take
into account adjustments
[[Page 42003]]
requested in an AAR, the rules in Sec. 301.6226-2(g)(3) apply to the
partnership, and the rules in Sec. 301.6226-3(f) apply to the reviewed
year partners that take into account the adjustments pursuant to Sec.
301.6227-3.
(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 liable for,
nor 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 election is made under
this paragraph (c), modifications applied 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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 18. 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(d) must take into account adjustments reflected in the
statement in the reviewed year partner's 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. Except as provided in paragraph (c)
of this section, 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 report and 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. A
reviewed year partner may, in accordance with Sec. 301.6226-3(a),
reduce chapter 1 tax for the reporting year where the additional
reporting year tax is less than zero. For purposes of paragraph (b) of
this section, the rule under Sec. 301.6226-3(c)(3) (regarding the
increased rate of interest) does not apply. 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) 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 year taxpayers and A is not claiming
any refundable tax credit in 2020. The only adjustment shown on the
statement is an increase in ordinary loss. 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)(2), except A's chapter 1 tax for 2022 (without regard
to any additional reporting year tax) is $75. Applying the rules in
paragraph (b)(1) 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--(1) In
general. Except as provided in this paragraph (c), if a statement
described in paragraph (a) of this section (including a statement
described in this paragraph (c)(1)) is furnished to a reviewed year
partner that is a pass-through partner (as defined in Sec. 301.6241-
1(a)(5)), the pass-through partner must take into account the
adjustments reflected on that statement in accordance with Sec.
301.6226-3(e) by treating the partnership that filed the AAR as the
partnership that made an election under Sec. 301.6226-1. A pass-
through partner that furnishes statements in accordance with Sec.
301.6226-3(e)(3) must provide the information described in paragraph
(c)(3) of this section in lieu of the information described in Sec.
301.6226-3(e)(3)(iii) on the statements the pass-through partner
furnishes to its partners. A pass-through partner that computes and
pays an imputed underpayment in accordance with Sec. 301.6226-
3(e)(4)(iii) may not apply any modifications to the amount of imputed
underpayment. For purposes of this paragraph (c)(1), the statement
furnished to the pass-through partner by the partnership filing the AAR
is treated as if it were a statement issued under section 6226(a)(2)
and described in Sec. 301.6226-2.
(2) Adjustments that do not result in an imputed underpayment. If
the adjustments requested in an AAR do not result in an imputed
underpayment (as described in Sec. 301.6227-2(d)), Sec. 301.6226-
3(e)(2) does not apply. The pass-through partner must take into account
the adjustments reflected on the statement described in paragraphs (a)
or (c)(1) of this section in accordance with Sec. 301.6226-3(e)(3),
except that the pass-
[[Page 42004]]
through partner must provide the information described in paragraph
(c)(3) of this section in lieu of the information described in Sec.
301.6226-3(e)(3)(iii) on the statements the pass-through partner
furnishes to its partners.
(3) Contents of statements. Each statement described in paragraph
(c)(1) or (2) of this section must include the following correct
information--
(i) The name and taxpayer identification number (TIN) of the
partnership that filed the AAR with respect to the adjustments
reflected on the statements described in paragraph (c)(1) of this
section;
(ii) The adjustment year (as defined in Sec. 301.6241-1(a)(1)) of
the partnership described in paragraph (c)(3)(i) of this section;
(iii) The extended due date for the return for the adjustment year
of the partnership described in paragraph (c)(3)(i) of this section (as
described in Sec. 301.6226-3(e)(3)(ii));
(iv) The date on which the partnership described in paragraph
(c)(3)(i) of this section furnished its statements required under Sec.
301.6227-2(d);
(v) The name and TIN of the partnership that furnished the
statement to the pass-through partner if different from the partnership
described in paragraph (c)(3)(i) of this section;
(vi) The name and TIN of the pass-through partner;
(vii) The pass-through partner's taxable year to which the
adjustments set forth in the statement described in paragraph (c)(1) of
this section relate;
(viii) The name and TIN of the affected partner (as defined in
Sec. 301.6226-3(e)(3)(i)) to whom the statement is being furnished;
(ix) The current or last address of the affected partner that is
known to the pass-through partner;
(x) The affected partner's share of items as originally reported to
such partner under section 6031(b) and, if applicable, section 6227,
for the taxable year to which the adjustments reflected on the
statement furnished to the pass-through partner relate;
(xi) The affected partner's share of partnership adjustments
determined under Sec. 301.6227-1(e)(2) as if the affected partner were
the reviewed year partner and the partnership were the pass-through
partner;
(xii) Any other information required by forms, instructions, and
other guidance prescribed by the IRS.
(4) Affected partners must take into account the adjustments. A
statement furnished to an affected partner in accordance with paragraph
(c)(1) or (2) of this section is to be treated by the affected partner
as if it were a statement described in paragraph (a) of this section.
The affected partner must take into account its share of the
adjustments reflected on such a statement in accordance with this
section by treating references to ``reviewed year partner'' as
``affected partner.'' When taking into account the adjustments as
described in Sec. 301.6226-3(e)(3)(iv), the rules under Sec.
301.6226-3(c)(3) (regarding the increased rate of interest) do not
apply.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 19. Section 301.6231-1 is added to read as follows:
Sec. 301.6231-1 Notice of proceedings and adjustments.
(a) Notices to which this section applies. In the case of any
administrative proceeding under subchapter C of chapter 63 of the
Internal Revenue Code (subchapter C of chapter 63), including an
administrative proceeding with respect to an administrative adjustment
request (AAR) filed by a partnership under section 6227, the following
notices must be mailed to the partnership and the partnership
representative (as described in section 6223 and Sec. 301.6223-1)--
(1) Notice of any administrative proceeding initiated at the
partnership level with respect to an adjustment of any partnership-
related item (as defined in Sec. 301.6241-6) for any partnership
taxable year under subchapter C of chapter 63 (notice of administrative
proceeding (NAP));
(2) Notice of any proposed partnership adjustment resulting from an
administrative proceeding under subchapter C of chapter 63 (notice of
proposed partnership adjustment (NOPPA)); and
(3) Notice of any final partnership adjustment resulting from an
administrative proceeding under subchapter C of chapter 63 (notice of
final partnership adjustment (FPA)).
(b) Time for mailing notices--(1) Notice of proposed partnership
adjustment. A NOPPA is timely if it is mailed before the expiration of
the period for making adjustments under section 6235(a)(1) (including
any extensions under section 6235(b) and any special rules under
section 6235(c)).
(2) Notice of final partnership adjustment. An FPA may not be
mailed earlier than 270 days after the date on which the NOPPA is
mailed unless the partnership agrees, in writing, with the Internal
Revenue Service (IRS) to waive the 270-day period. See Sec. 301.6225-
2(c)(3)(iii) for the effect of a waiver under this paragraph (b)(2) on
the 270-period for requesting a modification under section 6225(c). See
Sec. 301.6232-1(d)(2) for the rules regarding a waiver of the
limitations on assessment under Sec. 301.6232-1(c).
(c) Last known address. A notice described in paragraph (a) of this
section is sufficient if mailed to the last known address of the
partnership representative and the partnership (even if the partnership
or partnership representative has terminated its existence).
(d) Notice mailed to partnership representative--(1) In general. A
notice described in paragraph (a) of this section will be treated as
mailed to the partnership representative if the notice is mailed to the
partnership representative that is reflected in the IRS records as of
the date the letter is mailed.
(2) No partnership representative in effect. In any case in which
no partnership representative designation is in effect in accordance
with Sec. 301.6223-1(f), a notice described in paragraph (a) of this
section mailed to ``PARTNERSHIP REPRESENTATIVE'' at the last known
address of the partnership satisfies the requirements of this section.
(e) Restrictions on additional FPAs after petition filed. The IRS
may mail more than one FPA to any partnership for any partnership
taxable year. However, except in the case of fraud, malfeasance, or
misrepresentation of a material fact, the IRS may not mail an FPA to a
partnership with respect to a partnership taxable year after the
partnership has filed a timely petition for readjustment under section
6234 with respect to an FPA issued with respect to such partnership
taxable year.
(f) Withdrawal of NAP or NOPPA. The IRS may, without consent of the
partnership, withdraw any NAP or NOPPA. A NAP or NOPPA that has been
withdrawn by the IRS has no effect for purposes of subchapter C of
chapter 63. For instance, if the IRS withdraws a NAP with respect to a
partnership taxable year, the prohibition under section 6227(c) on
filing an AAR after the mailing of a NAP no longer applies with respect
to such taxable year.
(g) Rescission of FPA. The IRS may, with the consent of the
partnership, rescind any FPA. An FPA that is
[[Page 42005]]
rescinded is not an FPA for purposes of subchapter C of chapter 63, and
the partnership cannot bring a proceeding under section 6234 with
respect to such FPA.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 20. Section 301.6232-1 is added to read as follows:
Sec. 301.6232-1 Assessment, collection, and payment of imputed
underpayment.
(a) In general. An imputed underpayment determined under subchapter
C of chapter 63 of the Internal Revenue Code (Code) is assessed and
collected in the same manner as if the imputed underpayment were a tax
imposed by subtitle A of the Code for the adjustment year (as defined
in Sec. 301.6241-1(a)(1)) except that the deficiency procedures under
subchapter B of chapter 63 of the Code do not apply to an assessment of
an imputed underpayment. Accordingly, no notice under section 6212 is
required for, and the restrictions under section 6213 do not apply to,
the assessment of any imputed underpayment. See paragraph (c) of this
section for limitations on assessment and paragraph (d) of this section
for exceptions to restrictions on adjustments.
(b) Payment of the imputed underpayment. Upon receipt of notice and
demand from the Internal Revenue Service (IRS), an imputed underpayment
must be paid by the partnership at the place and time stated in the
notice. In the case of an adjustment requested in an administrative
adjustment request (AAR) under section 6227(b)(1) that is taken into
account by the partnership under Sec. 301.6227-2(b), payment of the
imputed underpayment is due on the date the AAR is filed. The IRS may
assess the amount of the imputed underpayment reflected on the AAR on
the date the AAR is filed. For interest with respect to an imputed
underpayment, see Sec. 301.6233(a)-1(b).
(c) Limitation on assessment--(1) In general. Except as otherwise
provided by this section or subtitle F of the Code (except for
subchapter B of chapter 63), no assessment of an imputed underpayment
may be made (and no levy or proceeding in any court for the collection
of an imputed underpayment may be made, begun, or prosecuted) before--
(i) The close of the 90th day after the day on which a notice of a
final partnership adjustment (FPA) under section 6231(a)(3) was mailed;
and
(ii) If a petition for readjustment is filed under section 6234
with respect to such FPA, the decision of the court has become final.
(2) Specified similar amount. The limitations under paragraph
(c)(1) of this section do not apply in the case of a specified similar
amount as defined in section 6232(f)(2).
(d) Exceptions to restrictions on adjustments and assessments--(1)
Adjustments treated as mathematical or clerical errors--(i) In general.
A notice to a partnership that, on account of a mathematical or
clerical error appearing on the partnership return or as a result of a
failure by a partnership-partner (as defined in Sec. 301.6241-1(a)(7))
to comply with section 6222(a), the IRS has adjusted or will adjust
partnership-related items (as defined in Sec. 301.6241-6) to correct
the error or to make the items consistent under section 6222(a) and has
assessed or will assess any imputed underpayment (determined in
accordance with Sec. 301.6225-1) resulting from the adjustment is not
considered an FPA under section 6231(a)(3). A petition for readjustment
under section 6234 may not be filed with respect to such notice. The
limitations under section 6232(b) and paragraph (c) of this section do
not apply to an assessment under this paragraph (d)(1)(i). For the
definition of mathematical or clerical error generally, see section
6213(g)(2). For application of mathematical or clerical error in the
case of inconsistent treatment by a partner that fails to give notice,
see Sec. 301.6222-1(b).
(ii) Request for abatement--(A) In general. Except as provided in
paragraph (d)(1)(ii)(B) of this section, a partnership that is mailed a
notice described in paragraph (d)(1)(i) of this section may file with
the IRS, within 60 days after the date of such notice, a request for
abatement of any assessment of an imputed underpayment specified in
such notice. Upon receipt of the request, the IRS must abate the
assessment. Any subsequent assessment of an imputed underpayment with
respect to which abatement was made is subject to the provisions of
subchapter C of chapter 63 of the Code, including the limitations under
paragraph (c) of this section.
(B) Adjustments with respect to inconsistent treatment by a
partnership-partner. If an adjustment that is the subject of a notice
described in paragraph (d)(1)(i) of this section is due to the failure
of a partnership-partner to comply with section 6222(a), paragraph
(d)(1)(ii)(A) of this section does not apply, and abatement of any
assessment specified in such notice is not available. However, prior to
assessment, a partnership-partner that has failed to comply with
section 6222(a) may correct the inconsistency by filing an
administrative adjustment request under section 6227 or filing an
amended partnership return and furnishing amended statements, as
appropriate.
(iii) Partnerships that have an election under section 6221(b) in
effect. In the case of a partnership-partner that has an election under
section 6221(b) in effect for the reviewed year (as defined in Sec.
301.6241-1(a)(8)), any tax resulting from an adjustment due to the
partnership-partner's failure to comply with section 6222(a) may be
assessed with respect to the reviewed year partners (as defined in
Sec. 301.6241-1(a)(9)) of the partnership-partner (or indirect
partners of the partnership-partner, as defined in Sec. 301.6241-
1(a)(4)). Such tax may be assessed in the same manner as if the tax
were on account of a mathematical or clerical error appearing on the
reviewed year partner's or indirect partner's return, except that the
procedures under section 6213(b)(2) for requesting an abatement of such
assessment do not apply.
(2) Partnership may waive limitations. A partnership may at any
time by a signed notice in writing filed with the IRS waive the
limitations under paragraph (c) of this section (whether or not an FPA
under section 6231(a)(3) has been mailed by the IRS at the time of the
waiver).
(e) Limit on amount of imputed underpayment where no proceeding is
begun. If no proceeding under section 6234 is begun with respect to an
FPA under section 6231(a)(3) before the close of the 90th day after the
day on which such FPA was mailed, the amount for which the partnership
is liable under section 6225 with respect to such FPA cannot exceed the
amount determined in such FPA.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 21. Section 301.6233(a)-1 is added to read as follows:
[[Page 42006]]
Sec. 301.6233(a)-1 Interest and penalties determined from reviewed
year.
(a) Interest and penalties with respect to the reviewed year.
Except to the extent provided in section 6226(c) and the regulations
thereunder, in the case of a partnership adjustment (as defined in
Sec. 301.6241-1(a)(6)) for a reviewed year (as defined in Sec.
301.6241-1(a)(8)), a partnership is liable for--
(1) Interest computed in accordance with paragraph (b) of this
section; and
(2) Any penalty, addition to tax, or additional amount as provided
under paragraph (c) of this section.
(b) Computation of interest with respect to partnership adjustments
for the reviewed year. The interest imposed on an imputed underpayment
resulting from partnership adjustments for the reviewed year is the
interest that would be imposed under chapter 67 of the Internal Revenue
Code (Code) if the imputed underpayment were treated as an underpayment
of tax for the reviewed year. The interest imposed on an imputed
underpayment under this paragraph (b) begins on the day after the due
date of the partnership return (without regard to extension) for the
reviewed year and ends on the earlier of--
(1) The date prescribed for payment (as described in Sec.
301.6232-1(b));
(2) The due date of the partnership return (without regard to
extension) for the adjustment year (as defined in Sec. 301.6241-
1(a)(1)); or
(3) The date the imputed underpayment is fully paid.
(c) Penalties with respect to partnership adjustments for the
reviewed year--(1) In general. In accordance with section 6221(a), the
applicability of any penalties, additions to tax, and additional
amounts that relate to an adjustment to any partnership-related item
for the reviewed year is determined at the partnership level as if the
partnership had been an individual subject to tax imposed by chapter 1
of subtitle A of the Code for the reviewed year, and the imputed
underpayment were an actual underpayment of tax or understatement for
such year. Nothing in this paragraph (c)(1) affects the application of
any penalty, addition to tax, or additional amount that may apply to
the partnership or to any reviewed year partner (as defined in Sec.
301.6241-1(a)(9)) or to any indirect partner (as defined in Sec.
301.6241-1(a)(4)) that is unrelated to an adjustment to a partnership-
related item under subchapter C of chapter 63 of the Code. A partner-
level defense (as described in Sec. 301.6226-3(d)(3)) may not be
raised in a proceeding of the partnership.
(2) Coordination with accuracy-related and fraud penalty
provisions--(i) In general. In the case of penalties imposed under
section 6662, section 6662A, and section 6663 with respect to
partnership adjustments in accordance with paragraph (c)(1) of this
section, the rules described in paragraphs (c)(2)(ii), (iii), (iv), and
(v) of this section apply.
(ii) Determining the portion of the imputed underpayment to which a
penalty applies--(A) In general. In the case of penalties imposed under
section 6662, section 6662A, and section 6663, paragraph (c)(2)(ii) of
this section applies if--
(1) There is at least one adjustment with respect to which no
penalty has been imposed and at least one adjustment with respect to
which a penalty has been imposed; or
(2) There are at least two adjustments with respect to which
penalties have been imposed and the penalties have different rates.
(B) Calculating the portion of the imputed underpayment to which
the penalty applies. In computing the portion of an imputed
underpayment to which a penalty applies, adjustments that do not result
in the imputed underpayment (as described in Sec. 301.6225-1(f)) are
not taken into account. The portion of an imputed underpayment to which
a penalty applies is calculated as follows--
(1) All the partnership adjustments that resulted in the imputed
underpayment are grouped together according to whether they are
adjustments with respect to which a penalty has been imposed and, if
so, according to rate of penalty. Decreasing adjustments as defined in
paragraph (c)(2)(ii)(C) of this section are grouped in accordance with
paragraphs (c)(2)(ii)(D) and (E) of this section.
(2) Within each grouping described in paragraph (c)(2)(ii)(B)(1) of
this section, multiply the portion of each partnership adjustment that
is not an adjustment to a credit or treated as an adjustment to a
credit under Sec. 301.6225-1(e)(3)(iii) by the rate that applied to
such portion when calculating the imputed underpayment. See Sec. Sec.
301.6225-1(b)(1)(iv), 301.6225-2(b)(3).
(3) Within each grouping, add the amounts that were calculated
under paragraph (c)(2)(ii)(B)(2) of this section.
(4) Within each grouping, increase or decrease the amounts that
were calculated under paragraph (c)(2)(ii)(B)(3) of this section by any
adjustments to credits (or adjustments treated as adjustments to
credits under Sec. 301.6225-1(e)(3)(iii)).
(C) Decreasing adjustments. An adjustment to a partnership-related
item that resulted in a decrease to the imputed underpayment is a
decreasing adjustment.
(D) Grouping of decreasing adjustments. Decreasing adjustments are
grouped under paragraph (c)(2)(ii)(B)(1) of this section in the
following order--
(1) First, decreasing adjustments are grouped with partnership
adjustments with respect to which no penalties have been imposed until
the amount of the adjustments remaining in this group is zero in
accordance with paragraph (c)(2)(ii)(E) of this section;
(2) Second, decreasing adjustments remaining after application of
paragraph (c)(2)(ii)(D)(1) of this section (taking into account
application of paragraph (c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with respect to which a penalty has been
imposed at a 20 percent rate;
(3) Third, decreasing adjustments remaining after application of
paragraph (c)(2)(ii)(D)(2) of this section (taking into account
application of paragraph (c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with respect to which a penalty has been
imposed at a 30 percent rate;
(4) Fourth, decreasing adjustments remaining after application of
paragraph (c)(2)(ii)(D)(3) of this section (taking into account
application of paragraph (c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with respect to which a penalty has been
imposed at a 40 percent rate;
(5) Fifth, decreasing adjustments remaining after application of
paragraph (c)(2)(ii)(D)(4) of this section (taking into account
application of paragraph (c)(2)(ii)(E) of this section) are grouped
with partnership adjustments with respect to which a penalty has been
imposed at a 75 percent rate.
(E) Decreasing adjustments that reduce a grouping to zero. If, when
allocating the decreasing adjustments under paragraph (c)(2)(ii)(D) of
this section, the amount calculated in paragraph (c)(2)(ii)(B) of this
section for a particular grouping equals zero, any remaining decreasing
adjustments (or portion thereof) that would otherwise reduce the amount
to less than zero are allocated to the next grouping in sequential
order under paragraph (c)(2)(ii)(D) of this section.
(F) Fraud penalties under section 6663. If any portion of an
imputed underpayment is determined by the IRS to be attributable to
fraud, the entire imputed underpayment is treated as attributable to
fraud. This paragraph (c)(2)(ii)(F) does not apply to any portion of
the imputed underpayment the partnership establishes by a
[[Page 42007]]
preponderance of the evidence is not attributable to fraud.
(iii) Substantial understatement penalty under section 6662(d)--(A)
In general. For purposes of application of the penalty under section
6662(d) (substantial understatement of income tax), the imputed
underpayment is treated as an understatement under section 6662(d)(2).
To determine whether an imputed underpayment treated as an
understatement under this paragraph (c)(3)(iii)(A) is a substantial
understatement under section 6662(d)(1), the rules of section
6662(d)(1)(A) apply by treating the amount described in paragraph
(c)(2)(iii)(B) of this section as the tax required to be shown on the
return for the taxable year under section 6662(d)(1)(A)(i).
(B) Amount of tax required to be shown on the return. The amount
described in this paragraph (c)(2)(iii)(B) is the tax that would result
by treating the net income or loss of the partnership for the reviewed
year, reflecting any partnership adjustments as finally determined, as
taxable income described in section 1(c) (determined without regard to
section 1(h)).
(iv) Reportable transaction understatement under section 6662A. For
purposes of application of the penalty under section 6662A (reportable
transaction understatement penalty), the portion of an imputed
underpayment attributable to an item described under section
6662A(b)(2) is treated as a reportable transaction understatement under
section 6662A(b).
(v) Reasonable cause and good faith. For purposes of determining
whether a partnership satisfies the reasonable cause and good faith
exception under section 6664(c) or (d) with respect to a penalty under
section 6662, section 6662A, or section 6663, the partnership is
treated as the taxpayer. See Sec. 1.6664-4 of this chapter.
Accordingly, the facts and circumstances taken into account to
determine whether the partnership has established reasonable cause and
good faith are the facts and circumstances applicable to the
partnership.
(3) Examples. The following examples illustrate the rules of
paragraph (c) of this section. For purposes of these examples, each
partnership has a calendar taxable year, and the highest tax rate in
effect for all taxpayers is 40 percent for all relevant periods.
Example 1. One adjustment with respect to which a penalty is
imposed. In an administrative proceeding with respect to
Partnership's 2018 partnership return, the IRS determines that
Partnership understated ordinary income by $100. The $100
understatement is due to negligence or disregard of rules or
regulations under section 6662(c), and a 20-percent accuracy-related
penalty applies under section 6662(a). The IRS also determines that
Partnership understated long-term capital gain by $300, but no
penalty applies with respect to that adjustment. Partnership does
not request modification of the imputed underpayment under section
6225 and does not raise any penalty defenses prior to issuance of
the notice of final partnership adjustment (FPA). In the FPA, the
IRS determines that the imputed underpayment is $160 (($100 + $300)
x 40 percent). In determining the penalty, the $100 adjustment (to
which the 20-percent penalty relates) is grouped separately from the
$300 adjustment (to which no penalty applies). The portion of the
imputed underpayment to which the 20-percent penalty applies is $40
($100 x 40 percent), and the penalty is $8 ($40 x 20 percent).
Example 2. More than one adjustment with respect to which the
same rate of penalty is imposed. The facts are the same as in
Example 1 of this paragraph (c)(3), except that the IRS determines
that Partnership also overstated its credits by $10. The
overstatement of credits is due to negligence or disregard of rules
or regulations under section 6662(c), and a 20-percent accuracy-
related penalty applies under section 6662(a). Because the
Partnership did not request modification, the imputed underpayment
is $170 (($100 + $300) x 40 percent) + $10). In determining the
penalty, the $10 credit adjustment and the $100 understatement of
income, both of which are adjustments with respect to which the 20-
percent accuracy-related penalty is imposed, are grouped together.
Accordingly, the portion of the imputed underpayment to which the
20-percent accuracy-related penalty applies is $50 (($100 x 40
percent) + $10), and the penalty is $10 ($50 x 20 percent).
Example 3. Decreasing adjustment. The facts are the same as in
Example 2 of this paragraph (c)(3), except that there is also an
adjustment that reduces ordinary income by $50. In calculating the
imputed underpayment under Sec. 301.6225-1 and Sec. 301.6225-2,
the partnership demonstrates to the satisfaction of the IRS that the
$50 decrease to ordinary income is appropriately netted with the
$100 increase in ordinary income. Therefore, the $50 reduction in
ordinary income is an adjustment that resulted in the imputed
underpayment and therefore a decreasing adjustment described in
paragraph (c)(2)(ii)(C) of this section. Because Partnership did not
request any further modifications, the imputed underpayment is $150
(($100-$50) + $300) x 40 percent) + $10). To determine the portion
of the imputed underpayment to which the 20-percent accuracy-related
penalty applies, the $50 reduction to ordinary income is grouped
with the $300 adjustment to long-term capital gain (in accordance
with paragraph (c)(2)(ii)(D) of this section). Accordingly, the
portion of the imputed underpayment to which the 20-percent
accuracy-related penalty applies is $50 (($100 x 40 percent) + $10),
and the penalty is $10 ($50 x 20 percent).
Example 4. Two adjustments with respect to which penalties of
different rates have been imposed. The facts are the same as in
Example 3 of this paragraph (c)(3), except that the $300 adjustment
to long-term capital gain is due to a gross valuation misstatement.
A 40-percent accuracy-related penalty under section 6662(a) and (h)
applies to the portion of the imputed underpayment attributable to
the gross valuation misstatement. The imputed underpayment is $150
(($100-$50) + $300) x 40 percent) + $10). Under paragraph
(c)(2)(ii)(B) of this section, the adjustment to long-term capital
gain (the adjustment to which the 40-percent penalty relates) and
the adjustments to ordinary income and credits (the adjustments to
which the 20-percent penalty relates) are grouped separately. In
accordance with paragraph (c)(2)(ii)(D) of this section, because all
partnership adjustments other than the decreasing adjustment are
subject to penalties, the $50 reduction in ordinary income (the
decreasing adjustment) is allocated to the grouping of adjustments
with respect to which the 20-percent penalty is imposed. The amount
described under paragraph (c)(2)(ii)(B) of this section with respect
to the 20-percent penalty grouping is $30 (($100 x 40 percent)-($50
x 40 percent) + $10). Therefore, the portion of the imputed
underpayment to which the 20 percent accuracy-related penalty
applies is $30 and the penalty is $6 ($30 x 20 percent). The portion
of the imputed underpayment to which the 40-percent gross valuation
misstatement penalty applies is $120 ($300 x 40 percent), and the
penalty is $48 ($120 x 40 percent). The accuracy-related penalty
under section 6662(a) is $54.
Example 5. Modification with respect to tax-exempt partner. The
IRS initiates an administrative proceeding with respect to
Partnership's 2019 taxable year. Partnership has four equal partners
during its 2019 taxable year: two partners are partnerships, A and
B; one partner is a tax-exempt entity, C; and the fourth partner is
an individual, D. The IRS timely mails a notice of proposed
partnership adjustment (NOPPA) to Partnership for its 2019 taxable
year proposing a single partnership adjustment increasing
Partnership's ordinary income by $400,000. The $400,000 increase in
income is due to negligence or disregard of rules or regulations
under section 6662(c). A 20-percent accuracy-related penalty under
section 6662(a) and (c) applies to the portion of the imputed
underpayment attributable to the negligence or disregard of the
rules or regulations. In the NOPPA, the IRS determines an imputed
underpayment of $160,000 ($400,000 x 40 percent) and that the 20-
percent penalty applies to the entire imputed underpayment. The
penalty is $32,000 ($160,000 x 20 percent). Partnership requests
modification under Sec. 301.6225-2(d)(3) (regarding tax-exempt
partners) with respect to the amount of additional income allocated
to C, and the IRS approves the request. After modification of the
imputed underpayment, the imputed underpayment is $120,000
(($400,000-$100,000) x 40 percent), and the penalty is $24,000
($120,000 x 20 percent).
Example 6. Amended return modification. The facts are the same
as in Example 5 of this paragraph (c)(3), except in addition to the
[[Page 42008]]
modification with respect to C's tax-exempt status, Partnership
requests a modification under Sec. 301.6225-2(d)(2) (regarding
amended returns) with respect to the $100,000 of additional income
allocated to D. In accordance with the rules under Sec. 301.6225-
2(d)(2), D files an amended return for D's 2019 taxable year taking
into account $100,000 of additional ordinary income. In addition, in
accordance with Sec. 301.6225-2(d)(2)(viii), D takes into account
on D's return the 20-percent accuracy-related penalty for negligence
or disregard of rules or regulations that relates to the ordinary
income adjustment. D's tax attributes for other taxable years are
not affected. The IRS approves the modification. As a result,
Partnership's total netted partnership adjustment under Sec.
301.6225-1(b)(2) is $200,000 ($400,000 less $100,000 allocable to C
and $100,000 taken into account by D). The imputed underpayment,
after modification, is $80,000 ($200,000 x 40 percent), and the
penalty is $16,000 ($80,000 x 20 percent).
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 22. Section 301.6233(b)-1 is added to read as follows:
Sec. 301.6233(b)-1 Interest and penalties with respect to the
adjustment year return.
(a) Interest and penalties with respect to failure to pay imputed
underpayment on the date prescribed. In the case of any failure to pay
an imputed underpayment on the date prescribed for such payment (as
described in Sec. 301.6232-1(b)), a partnership is liable for--
(1) Interest as determined under paragraph (c) of this section; and
(2) Any penalty, addition to tax, or additional amount as
determined under paragraph (d) of this section.
(b) Imputed underpayments to which this section applies. This
section applies to the portion of an imputed underpayment determined by
the IRS under section 6225(a)(1), or an imputed underpayment resulting
from adjustments requested by a partnership in an administrative
adjustment request under section 6227, that is not paid by the date
prescribed for payment under Sec. 301.6232-1(b).
(c) Interest. Interest determined under this paragraph (c) is the
interest that would be imposed under chapter 67 of the Internal Revenue
Code (Code) by treating any unpaid amount of the imputed underpayment
as an underpayment of tax imposed for the adjustment year (as defined
in Sec. 301.6241-1(a)(1)). The interest under this paragraph (c)
begins on the date prescribed for payment (as described in Sec.
301.6232-1(b)) and ends on the date payment of the imputed underpayment
is made.
(d) Penalties. If a partnership fails to pay an imputed
underpayment by the date prescribed for payment (as described in Sec.
301.6232-1(b)), section 6651(a)(2) applies to such failure, and any
unpaid amount of the imputed underpayment is treated as if it were an
underpayment of tax for purposes of part II of subchapter A of chapter
68 of the Code. For purposes of this section, the penalty under
6651(a)(2) is applied by treating the unpaid amount of the imputed
underpayment as the unpaid amount shown as tax on a return required
under subchapter A of chapter 61 of the Code.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 23. Section 301.6234-1 is added to read as follows:
Sec. 301.6234-1 Judicial review of partnership adjustment.
(a) In general. Within 90 days after the date on which a notice of
a final partnership adjustment (FPA) under section 6231(a)(3) with
respect to any partnership taxable year is mailed, a partnership may
file a petition for a readjustment of any partnership adjustment (as
defined in Sec. 301.6241-1(a)(6)) reflected in the FPA for such
taxable year (without regard to whether an election under section 6226
has been made with respect to any imputed underpayment (as defined in
Sec. 301.6241-1(a)(3)) reflected in such FPA) with--
(1) The Tax Court;
(2) The district court of the United States for the district in
which the partnership's principal place of business is located; or
(3) The Court of Federal Claims.
(b) Jurisdictional requirement for bringing action in district
court or Court of Federal Claims. A petition for readjustment under
this section with respect to any partnership adjustment may be filed in
a district court of the United States or the Court of Federal Claims
only if the partnership filing the petition deposits with the Internal
Revenue Service (IRS), on or before the date the petition is filed, the
amount of (as of the date of the filing of the petition) any imputed
underpayment (as shown on the FPA) and any penalties, additions to tax,
and additional amounts with respect to such imputed underpayment. If
there is more than one imputed underpayment reflected in the FPA, the
partnership must deposit the amount of each imputed underpayment to
which the petition for readjustment relates and the amount of any
penalties, additions to tax, and additional amounts with respect to
each such imputed underpayment.
(c) Treatment of deposit as payment of tax. Any amount deposited in
accordance with paragraph (b) of this section, while deposited, will
not be treated as a payment of tax for purposes of the Internal Revenue
Code (Code). Notwithstanding the preceding sentence, an amount
deposited in accordance with paragraph (b) of this section will be
treated as a payment of tax for purposes of chapter 67 of the Code
(relating to interest). Interest will be allowed and paid in accordance
with section 6611.
(d) Effect of decision dismissing action. If an action brought
under this section is dismissed other than by reason of a rescission of
the FPA under section 6231(d) and Sec. 301.6231-1(g), the decision of
the court dismissing the action is considered as its decision that the
FPA is correct.
(e) Amount deposited may be applied against assessment. If the
limitations on assessment under section 6232(b) and Sec. 301.6232-1(c)
no longer apply with respect to an imputed underpayment for which a
deposit under paragraph (b) of this section was made, the IRS may apply
the amount deposited against any such imputed underpayment that is
assessed.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 24. Section 301.6235-1 is added to read as follows:
Sec. 301.6235-1 Period of limitations on making adjustments.
(a) In general. Except as provided in section 6235(c), section
905(c) or paragraph (b) of this section (regarding extensions), no
partnership adjustment (as defined in Sec. 301.6241-1(a)(6)) for
[[Page 42009]]
any partnership taxable year may be made after the later of the date
that is--
(1) Three years after the latest of--
(i) The date on which the partnership return for such taxable year
was filed;
(ii) The return due date (as defined in section 6241(3)) for the
taxable year; or
(iii) The date on which the partnership filed an administrative
adjustment request with respect to such taxable year under section
6227; or
(2) The date described in paragraph (b) of this section with
respect to a request for modification; or
(3) The date described in paragraph (c) of this section with
respect to a notice of proposed partnership adjustment.
(b) Modification requested under section 6225(c)--(1) In general.
For purposes of paragraph (a)(2) of this section, in the case of any
request for modification of any imputed underpayment under section
6225(c), the date by which the Internal Revenue Service (IRS) may make
a partnership adjustment is the date that is 270 days (plus the number
of days of an extension of the period for requesting modification (as
described in Sec. 301.6225-2(c)(3)(i)) agreed to by the IRS under
section 6225(c)(7) and Sec. 301.6225-2(c)(3)(ii)) after the date on
which everything required to be submitted to the IRS pursuant to
section 6225(c) is so submitted.
(2) Date on which everything is required to be submitted--(i) In
general. For purposes of paragraph (b)(1) of this section, the date on
which everything required to be submitted to the IRS pursuant to
section 6225(c) is so submitted is the earlier of--
(A) The date the period for requesting modification ends (including
extensions) as described in Sec. 301.6225-2(c)(3)(i) and (ii); or
(B) The date the period for requesting modification expires as a
result of a waiver of the prohibition on mailing a notice of final
partnership adjustment (FPA) under Sec. 301.6231-1(b)(2). See Sec.
301.6225-2(c)(3)(iii).
(ii) Incomplete submission has no effect. A determination by the
IRS that the information submitted as part of a request for
modification is incomplete has no effect on the applicability of
paragraph (b)(2) of this section.
(c) Notice of proposed partnership adjustment. For purposes of
paragraph (a)(3) of this section, the date by which the IRS may make a
partnership adjustment is the date that is 330 days (plus the number of
days of an extension of the modification period (as described in Sec.
301.6225-2(c)(3)(i)) agreed to by the IRS under section 6225(c)(7) and
Sec. 301.6225-2(c)(3)(ii)) after the date the last notice of proposed
partnership adjustment (NOPPA) under section 6231(a)(2) is mailed,
regardless of whether modification is requested by the partnership
under section 6225(c).
(d) Extension by agreement. The periods described in paragraphs
(a), (b), and (c) of this section (including any extension of those
periods pursuant to this paragraph (d)) may be extended by an
agreement, in writing, entered into by the partnership and the IRS
before the expiration of such period.
(e) Examples. The following examples illustrate the rules of this
section. For purposes of these examples, each partnership has a
calendar taxable year.
Example 1. Partnership timely files its partnership return for
the 2020 taxable year on March 1, 2021. On September 1, 2023,
Partnership files an administrative adjustment request (AAR) under
section 6227 with respect to its 2020 taxable year. As of September
1, 2023, the IRS has not initiated an administrative proceeding
under subchapter C of chapter 63 of the Internal Revenue Code with
respect to Partnership's 2020 taxable year. Therefore, as of
September 1, 2023, under paragraph (a)(1) of this section, the
period for making partnership adjustments with respect to
Partnership's 2020 taxable year expires on September 1, 2026.
Example 2. Partnership timely files its partnership return for
the 2020 taxable year on the due date, March 15, 2021. On February
1, 2023, the IRS mails to Partnership and the partnership
representative of Partnership (PR) a notice of administrative
proceeding under section 6231(a)(1) with respect to Partnership's
2020 taxable year. Assuming no AAR has been filed with respect to
Partnership's 2020 taxable year and the IRS has not yet mailed a
NOPPA under section 6231(a)(2) with respect to Partnership's 2020
taxable year, the period for making partnership adjustments for
Partnership's 2020 taxable year expires on the date determined under
paragraph (a)(1) of this section, March 15, 2024.
Example 3. The facts are the same as in Example 2 of this
paragraph (e), except that on June 1, 2023, pursuant to Sec.
301.6235-1(d), PR signs an agreement extending the period for making
partnership adjustments under section 6235(a)(1) for Partnership's
2020 taxable year to December 31, 2025. In addition, on June 2,
2025, the IRS mails to Partnership and PR a timely NOPPA under
section 6231(a)(2). Pursuant to Sec. 301.6225-2(c)(3)(i), the
period for requesting modification expires on February 27, 2026 (270
days after June 2, 2025, the date the NOPPA is mailed), but PR does
not submit a request for modification on or before this date. Under
paragraph (c) of this section, the date for purposes of paragraph
(a)(3) of this section is April 28, 2026, the date that is 330 days
from the mailing of the NOPPA. Because April 28, 2026 is later than
the date under paragraph (a)(1) of this section (December 31, 2025,
as extended under paragraph (d) of this section), and because no
modification was requested, paragraph (a)(2) of this section is not
applicable, April 28, 2026 is the date on which the period for
making partnership adjustments expires under section 6235.
Example 4. The facts are the same as in Example 3 of this
paragraph (e), except that PR notifies the IRS that Partnership will
be requesting modification. On January 5, 2026, PR and the IRS agree
to extend the period for requesting modification pursuant to section
6225(c)(7) and Sec. 301.6225-2(c)(3)(ii) for 45 days--from February
27, 2026 to April 13, 2026. PR submits the request for modification
to the IRS on April 13, 2026. Therefore, the date determined under
paragraph (b) of this section is February 22, 2027, which is 270
days after the date everything required to be submitted was so
submitted pursuant to paragraph (b)(2) of this section plus the
additional 45-day extension of the period for requesting
modification agreed to by PR and the IRS. Because February 22, 2027
is later than the date under paragraph (a)(1) of this section
(December 31, 2025, as extended under paragraph (d) of this section)
and the date under paragraph (a)(3) of this section (June 12, 2026,
which is 330 days from the date the NOPPA was mailed plus the 45-day
extension under section 6225(c)(7)), February 22, 2027 is the date
on which the period for making partnership adjustments expires under
section 6235.
Example 5. The facts are the same as in Example 4 of this
paragraph (e), except that PR does not request an extension of the
period for requesting modification. On February 1, 2026, PR submits
a request for modification and PR, and the IRS agree in writing to
waive the prohibition on mailing an FPA pursuant to Sec. 301.6231-
1(b)(2). Pursuant to Sec. 301.6225-2(c)(3)(iii), the period for
requesting modification expires as of February 1, 2026, rather than
February 27, 2026. Accordingly, under paragraph (b)(2) of this
section, the date on which everything required to be submitted
pursuant to section 6225(c) is so submitted is February 1, 2026, and
the 270-day period described in paragraph (b)(1) of this section
begins to run on that date. Therefore, the date for purposes of
paragraph (a)(2) of this section is October 29, 2026, which is 270
days after February 1, 2026, the date on which everything required
to be submitted under section 6225(c) is so submitted. Because
October 29, 2026 is later than the date under paragraph (a)(1) of
this section (December 31, 2025, as extended under paragraph (d) of
this section) and the date under paragraph (a)(3) of this section
(April 28, 2026), October 29, 2026 is the date on which the period
for making partnership adjustments expires under section 6235.
Example 6. The facts are the same as in Example 5 of this
paragraph (e), except PR completes its submission of information to
support a request for modification on July 1, 2025, but does not
execute a waiver pursuant to Sec. 301.6231-1(b)(2). Therefore,
pursuant to paragraph (b)(2) of this section, February 26, 2026, the
date the period requesting modification expires, is the date on
which everything required to be submitted pursuant to section
6225(c) is so submitted. As a result, the 270-day period described
in
[[Page 42010]]
paragraph (b)(1) of this section expires on November 23, 2026.
Because November 23, 2026 is later than the date under paragraph
(a)(1) of this section (December 31, 2025, as extended under
paragraph (d) of this section) and the date under paragraph (a)(3)
of this section (April 28, 2026), November 23, 2026 is the date on
which the period for making partnership adjustments expires under
section 6235.
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 25. 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 filed; or
(iii) In any other case, a notice of final partnership adjustment
is mailed under section 6231 or, if the partnership waives the
restrictions under section 6232(b) (regarding limitations on
assessment), 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. Except as otherwise provided in this
paragraph (a)(3), the term imputed underpayment means the amount
determined in accordance with section 6225 and the regulations
thereunder. In the case of an election under section 6226, the term
imputed underpayment means the amount determined in accordance with
Sec. 301.6226-3(e)(4). In the case of an administrative adjustment
request, the term imputed underpayment means the amount determined in
accordance with Sec. 301.6227-2 or Sec. 301.6227-3(c).
(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) or through a wholly-owned entity disregarded as separate from
its owner for Federal tax purposes.
(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 wholly-owned trust disregarded as separate from its owner for
Federal tax purposes), and a decedent's estate. For purposes of this
paragraph (a)(5), a pass-through entity is not a wholly-owned entity
disregarded as separate from its owner for Federal tax purposes.
(6) Partnership adjustment. The term partnership adjustment means
any adjustment to a partnership-related item (as defined in Sec.
301.6241-6) and includes any portion of a partnership adjustment.
(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 the
amount or timing of a partnership-related item (as defined in Sec.
301.6241-6) 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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 26. 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.
[[Page 42011]]
(2) Election under Sec. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 27. 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 (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 unpaid amounts resulting
from a partnership adjustment. A partnership that ceases to exist is no
longer liable for any unpaid amounts resulting from a partnership
adjustment required to be taken into account by a former partner under
this section.
(3) Application of this section to partnership-partners. This
section applies to a partnership-partner and its former partners,
regardless of whether the partnership-partner has an election under
section 6221(b) in effect for any relevant partnership taxable year.
(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), 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 amount due 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 the partnership has--
(A) A valid election under section 6226 and the regulations
thereunder in effect with respect to any imputed underpayment (as
defined in Sec. 301.6241-1(a)(3));
(B) Received a statement under section 6226(a)(2) (or Sec.
301.6226-3(e)) and has furnished statements to its partners in
accordance with Sec. 301.6226-3(e)(3); or
(C) 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), 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 assessment
made against the partnership for 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 (as defined in paragraph (d) of this section) 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) (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
[[Page 42012]]
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 each partnership is subject to
the provisions of subchapter C of chapter 63 of the Code (unless
otherwise stated).
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 June 2, 2025, 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, the 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 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 P, a
partnership. G, a partnership that has an election under section
6221(b) in effect for the 2020 taxable year, is a partner of P
during 2020 and for every year thereafter. On February 3, 2025, the
IRS mails P an FPA that determines partnership adjustments that
result in a single imputed underpayment. P does not timely file a
petition under section 6234 and does not make a timely election
under section 6226. On May 6, 2025, the IRS mails P notice and
demand for payment of the amount due resulting from the adjustments
determined in the FPA. P does not make a payment. On September 1,
2025, the IRS determines P ceases to exist for purposes of this
section because the IRS has determined that P does not have the
ability to pay under paragraph (b)(2)(i) of this section. G
terminated under section 708(b)(1) on December 31, 2024. On
September 1, 2025, 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 P 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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 28. 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)), or
interest, penalties, additions to tax, or additional amounts with
respect to an imputed underpayment, 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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 29. 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 entity filing the partnership return
was not a partnership for such taxable year. Accordingly, any
partnership-related item (as defined in Sec. 301.6241-6) 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
[[Page 42013]]
partnership return is treated as if it were filed by an entity.
(c) Exceptions. Paragraph (a) of this section does not apply to--
(1) 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) 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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 30. Section 301.6241-6 is added to read as follows:
Sec. 301.6241-6 Partnership-related Item.
(a) In general. The term partnership-related item means--
(1) Any item or amount with respect to the partnership (as
described in paragraph (b) of this section) which is relevant in
determining the tax liability of any person under chapter 1 of subtitle
A of the Internal Revenue Code (chapter 1) (as described in paragraph
(c) of this section), and
(2) Any partner's distributive share of any such item or amount.
(b) Item or amount with respect to the partnership. For purposes of
this section, an item or amount is with respect to the partnership
without regard to whether or not such item or amount appears on the
partnership return. An item or amount is with respect to the
partnership if--
(1) The item or amount is shown or reflected, or required to be
shown or reflected, on a return of the partnership under section 6031,
the regulations thereunder, or the forms and instructions prescribed by
the Internal Revenue Service (IRS) for the partnership's taxable year;
(2) The item or amount is in the partnership's books or records;
(3) The item or amount is an imputed underpayment;
(4) The item or amount relates to a transaction with the
partnership by a partner acting in its capacity as a partner or by an
indirect partner (as defined in Sec. 301.6241-1(a)(4)) acting its
capacity as an indirect partner;
(5) The item or amount relates to a transaction that is described
in section 707(a)(2), 707(b), or 707(c);
(6) The item or amount relates to basis in the partnership;
(7) The item or amount relates to a liability of the partnership
that is reported or reportable by a partner acting in its capacity as a
partner or an indirect partner acting in its capacity as an indirect
partner, including such partner or indirect partner's share of the
liability; or
(8) Any legal or factual determinations necessary to make an
adjustment to an item or amount described in paragraphs (b)(1) through
(7) of this section, such as a determination regarding--
(i) The validity of any election made by the partnership,
(ii) The partnership's accounting practices and methods;
(iii) Whether a partnership exists for tax purposes and whether
multiple partnerships should be treated as a single partnership;
(iv) Whether any items or transactions of the partnership lack
economic substance or should otherwise be disregarded, collapsed,
recharacterized, or attributed to other persons;
(v) Whether a partnership terminates under section 708(b)(1) or 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); or
(vi) The type of partnership interest held by any partner.
(c) Relevant in determining the tax liability of any person under
chapter 1. For purposes of this section, an item or amount is relevant
in determining the tax liability of any person under chapter 1 without
regard to application of subchapter C of chapter 63 of the Internal
Revenue Code (subchapter C of chapter 63) and without regard to whether
such item or amount, or adjustment to such item or amount, has an
effect on the tax liability of any particular person under chapter 1.
(d) Examples of partnership-related items. The term partnership-
related item includes--
(1) The character, timing, source, and amount of the partnership's
income, gain, loss, deductions, and credits;
(2) The character, timing, and source of the partnership's
activities;
(3) The character, timing, source, value, and amount of any
contributions to, and distributions from, the partnership;
(4) 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;
(5) The amount and character of partnership liabilities and any
changes to those liabilities from the preceding tax year;
(6) The category, timing, and amount of the partnership's
creditable expenditures;
(7) Any item or amount resulting from a partnership termination;
(8) Any item or amount relating to an election under section 754;
(9) Partnership allocations and any special allocations; and
(10) Whether any person is a partner in the partnership.
(e) Examples. The following examples illustrate the provisions of
this section. For purposes of these examples, Partnership is subject to
the provisions of subchapter C of chapter 63 and all taxpayers are
calendar year taxpayers.
Example 1. Partnership enters into a transaction with A to
purchase widgets for $100 in taxable year 2020. A is not a partner
of Partnership or an indirect partner of Partnership. The
transaction is not a transaction described in 707(a)(2), 707(b), or
707(c). Partnership pays A $100 for the widgets. Any deduction or
expense of the Partnership for the purchase of the widgets is an
item or amount that relates to a transaction with Partnership and is
relevant to determining the liability of any person under chapter 1
pursuant to paragraph (c) of this section. Therefore, the deduction
or expense is a partnership-related item. However, the income to A
resulting from the transaction with Partnership is not an item or
amount with respect to Partnership under paragraph (b) of this
section because although the amount of income relates to a
transaction with Partnership, the amount of income is reported or
reportable by A, and A is not a partner (direct or indirect) of
Partnership. Accordingly, the amount of income reportable by A is
not a partnership-related item.
Example 2. B loans Partnership $100 in Partnership's 2020
taxable year. Partnership makes an interest payment to B in 2020 of
$5. B is a partner in Partnership in the 2020 taxable year, but B
loaned the $100 to Partnership in a capacity other than B's capacity
as a partner. Partnership's liability relating to the loan by B to
Partnership and the $5 of interest expense paid by the Partnership
are items or amounts that relates to a transaction with or liability
of Partnership and are relevant to determining the liability of any
person under chapter 1 pursuant to paragraph (c) of this section.
However, the treatment of the loan by B and the amount of interest
income received by B are not items or amounts with respect to
Partnership under paragraph (b) of this section because although
they relate to a transaction with or liability of Partnership, the
loan and interest income are reportable by B, and B was not acting
in his capacity as a partner when he loaned the $100 to Partnership.
Accordingly, the loan as treated by B and the amount of interest
income to B is not a partnership-related item.
[[Page 42014]]
(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. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 31. Section 301.6241-7 is added to read as follows:
Sec. 301.6241-7 Coordination with Other Chapters of the Internal
Revenue Code.
(a) Coordination with other chapters--(1) In general. Subchapter C
of chapter 63 of the Internal Revenue Code (subchapter C of chapter 63)
only applies to tax imposed by chapter 1 of the Internal Revenue Code
(Code) and not to any tax imposed (including any amount required to be
deducted or withheld) under any chapter of the Code other than chapter
1 of the Code (chapter 1), including chapter 2, 2A, 3, or 4 of the
Code. Accordingly, for purposes of determining taxes imposed under
chapters of the Code other than chapter 1, the Internal Revenue Service
(IRS) may make an adjustment to any partnership-related item (as
defined in Sec. 301.6241-6) in a proceeding that is not under
subchapter C of chapter 63. To the extent an adjustment or
determination is made under subchapter C of chapter 63 for purposes of
chapter 1 and is relevant in determining tax imposed under a chapter of
the Code other than chapter 1, such adjustment or determination must be
taken into account for purposes of determining such tax.
(2) Examples. The following examples illustrate the rules of this
paragraph (a) as applied to cases in which a partnership has a
withholding obligation under chapter 3 or chapter 4 with respect to
income that the partnership earns. For purposes of these examples, each
partnership is subject to the provisions of subchapter C of chapter 63
of the Code, and the partnership and its partners are calendar year
taxpayers.
Example 1. Partnership, a partnership created or organized in
the United States, has two equal partners, A and B. A is a
nonresident alien who is a resident of Country A, and B is a U.S.
citizen. In 2018, Partnership earned $200 of U.S. source royalty
income. Partnership was required to withhold 30 percent of the gross
amount of the royalty income allocable to A unless Partnership had
documentation that it could rely on to establish that A was entitled
to a reduced rate of withholding. See Sec. Sec. 1.1441-1(b)(1) and
1.1441-5(b)(2)(i)(A) of this chapter. Partnership withheld $15 from
the $100 of royalty income allocable to A based on its incorrect
belief that A is entitled to a reduced rate of withholding under the
U.S.-Country A Income Tax Treaty. In 2020, the IRS determines in an
examination of Partnership's Form 1042, Annual Withholding Tax
Return for U.S. Source Income of Foreign Persons, that Partnership
should have withheld $30 instead of $15 on the $100 of royalty
income allocable to A because Partnership failed to obtain
documentation from A establishing a valid treaty claim for a reduced
rate of withholding. The tax imposed on Partnership for its failure
to withhold on that income, however, is not a tax imposed by chapter
1. Rather, it is a tax imposed by chapter 3, which is not a
partnership-related item under Sec. 301.6241-6. Therefore, in
accordance with section 6221(a), the adjustment to increase
Partnership's withholding tax liability by $15 is not determined
under subchapter C of chapter 63, and instead must be determined as
part of the Form 1042 examination.
Example 2. Partnership, a partnership created or organized in
the United States, has two equal partners, A and B. A is a
nonresident alien who is a resident of Country A, and B is a U.S.
citizen. In 2018, Partnership earned $100 of U.S. source dividend
income. Partnership was required to report the dividend income on
its 2018 Form 1065, U.S. Return of Partnership Income, and withhold
30 percent of the gross amount of the dividend income allocable to A
unless Partnership had documentation that it could rely on to
establish that A was entitled to a reduced rate of withholding. See
Sec. Sec. 1.1441-1(b)(1) and 1.1441-5(b)(2)(i)(A) of this chapter.
In 2020, in an examination of Partnership's Form 1042, the IRS
determines that Partnership earned but failed to report the $100 of
U.S. source dividend income in 2018. The adjustment to increase
Partnership's dividend income by $100 is an adjustment to a
partnership-related item. The tax imposed on Partnership for its
failure to withhold on that income, however, is not a tax imposed by
chapter 1; rather, it is a tax imposed by chapter 3. Pursuant to
Sec. 301.6221(a)-1(a), only chapter 1 tax attributable to
adjustments to partnership-related items is assessed under
subchapter C of chapter 63. Therefore, because the tax imposed with
respect to the adjustment is a chapter 3 tax, under paragraph (a)(1)
of this section, the IRS may determine, assess, and collect chapter
3 tax attributable to an adjustment to a partnership-related item
without conducting a proceeding under subchapter C of chapter 63.
Accordingly, the IRS may determine the chapter 3 tax in the
examination of Partnership's Form 1042 by adjusting Partnership's
withholding tax liability by an additional $15 for failing to
withhold on the $50 of dividend income allocable to A. However, the
IRS must initiate an administrative proceeding under subchapter C of
chapter 63 to make any adjustments for purposes of chapter 1
attributable to the income. If the IRS subsequently initiates an
administrative proceeding under subchapter C of chapter 63 and makes
an adjustment to the same item of income, the portion of the
dividend income allocable to A will be disregarded in the
calculation of the total netted partnership adjustment to the extent
that the chapter 3 tax has been collected with respect to such
income. See Sec. 301.6225-1(b)(3).
(b) Coordination with chapters 3 and 4--(1) In general. In the case
of any tax imposed under chapter 3 or chapter 4 that is determined with
respect to a partnership adjustment determined under subchapter C of
chapter 63 for purposes of chapter 1, such tax is determined with
respect to the reviewed year (as defined in Sec. 301.6241-1(a)(8)) and
is imposed (or required to be deducted and withheld) with respect to
the adjustment year (as defined in Sec. 301.6241-1(a)(1)).
(2) Definitions. The following definitions apply for purposes of
this paragraph (b) and the regulations under subchapter C of chapter
63.
(i) Amount subject to withholding. The term amount subject to
withholding means an amount subject to withholding (as defined in Sec.
1.1441-2(a) of this chapter), a withholdable payment (as defined in
Sec. 1.1473-1(a) of this chapter), or the allocable share of
effectively connected taxable income (as computed under Sec. 1.1446-
2(b) of this chapter).
(ii) Chapter 3. The term chapter 3 means sections 1441 through 1464
of subtitle A of the Code, but does not include section 1443(b).
(iii) Chapter 4. The term chapter 4 means sections 1471 through
1474 of subtitle A of the Code.
(3) Partnership pays an imputed underpayment. If a partnership pays
an imputed underpayment (as determined under Sec. 301.6225-1(b)) and
the total netted partnership adjustment (as calculated under Sec.
301.6225-1(b)(2)) includes a partnership adjustment to an amount
subject to withholding, the partnership is treated as having paid (at
the time that the imputed underpayment is paid) the amount required to
be withheld with respect to that partnership adjustment under chapter 3
or chapter 4 for purposes of applying Sec. Sec. 1.1463-1 and 1.1474-4
of this chapter. See Sec. 301.6225-1(b)(3) for the coordination rule
that applies for calculating an imputed underpayment when an adjustment
is made to an amount subject to withholding for which tax has been
collected under chapter 3 or chapter 4.
(4) Partnership makes an election under section 6226 with respect
to an imputed underpayment--(i) In general. A partnership that makes an
election under Sec. 301.6226-1 with respect to an imputed underpayment
must pay the amount of tax required to be withheld under chapter 3 or
chapter 4 on the amount of any adjustment set forth in
[[Page 42015]]
the statement described in Sec. 301.6226-2(a) to the extent that it is
an adjustment to an amount subject to withholding, and the IRS has not
already collected tax attributable to the adjustment under chapter 3 or
chapter 4. The partnership must pay the amount due under this paragraph
(b)(4)(i) on or before the due date of the partnership return for the
adjustment year (without regard to extension), and must make the
payment in the manner prescribed by the IRS in forms, instructions, and
other guidance. For the rules governing partners subject to the taxes
imposed by chapters 3 and 4 when the partner receives a statement under
Sec. 301.6226-2, see Sec. 301.6226-3(f). See Sec. 301.6226-
3(e)(3)(v) for the application of the rules of this paragraph (b)(4) to
pass-through partners (as defined in Sec. 301.6241-1(a)(5)).
(ii) Reduced rate of tax. A partnership may reduce the amount of
tax it is required to pay under paragraph (b)(4)(i) of this section to
the extent that it can associate valid documentation from a reviewed
year partner pursuant to the regulations under chapter 3 or chapter 4
(other than pursuant to Sec. 1.1446-6 of this chapter) with the
portion of the adjustment that would have been subject to a reduced
rate of tax in the reviewed year. For this purpose, the partnership may
rely on documentation that the partnership possesses that is valid with
respect to the reviewed year (determined without regard to the
expiration after the reviewed year of any validity period prescribed in
Sec. 1.1441-1(e)(4)(ii), Sec. 1.1446-1(c)(2)(iv)(A), or Sec. 1.1471-
3(c)(6)(ii) of this chapter), or new documentation that the partnership
obtains from the reviewed year partner that includes a signed affidavit
stating that the information and representations associated with the
documentation are accurate with respect to the reviewed year.
(iii) Reporting requirements. A partnership required to pay tax
under paragraph (b)(4)(i) of this section must file the appropriate
return and issue information returns as required by regulations under
chapter 3 or chapter 4. For return and information return requirements,
see Sec. 1.1446-3(d)(1)(iii); Sec. 1.1461-1(b), (c); Sec. 1.1474-
1(c), (d) of this chapter. The partnership must file the return and
issue information returns for the year that includes the date on which
the partnership pays the tax required to be withheld under paragraph
(b)(4)(i) of this section. The partnership must report the information
on the return and information returns in the manner prescribed by the
IRS in forms, instructions, and other guidance.
(iv) Partners subject to withholding. A reviewed year partner that
is subject to withholding under paragraph (b)(4)(i) of this section
must follow the rules under Sec. 301.6226-3(f).
(c) Applicability date--(1) In general. Except as provided in
paragraph (c)(2) of this section, this section applies to partnership
taxable years beginning after December 31, 2017.
(2) Election under Sec. 301.9100-22 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.
301.9100-22 is in effect.
0
Par. 32. Section 301.6241-8 is added to read as follows:.
Sec. 301.6241-8 Treatment of special enforcement matters--[Reserved]
Douglas W. O'Donnell,
Acting Deputy Commissioner for Service and Enforcement.
[FR Doc. 2018-17614 Filed 8-13-18; 4:15 pm]
BILLING CODE 4830-01-P
